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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number: 333-80532
SUSQUEHANNA MEDIA CO.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2722964
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 E. Market Street, York, PA 17401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 848-5500
Securities Registered Pursuant To Section 12(b) of The Act: None
Securities Registered Pursuant To Section 12(g) of The Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and 2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X]
-----------------------------
As of March 29, 2000, there were 1,100,000 shares of Common Stock
outstanding all of which was held by Susquehanna Pfaltzgraff Co., the Company's
parent.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS............................................1
PART I..........................................................................................2
Item 1. Business..........................................................................2
Item 2. Properties.......................................................................24
Item 3. Legal Proceedings................................................................24
Item 4. Submission of Matters to a Vote of Security Holders..............................24
PART II........................................................................................25
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............25
Item 6. Selected Financial Data...........................................................26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........................33
Item 8. Financial Statements and Supplementary Data.......................................34
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.......................................................................56
PART III.......................................................................................57
Item 10. Directors and Executive Officers of the Registrant.................................57
Item 11. Executive Compensation.............................................................58
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................59
Item 13. Certain Relationships and Related Transactions.....................................61
PART IV........................................................................................64
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................64
</TABLE>
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements, including
statements about our acquisitions and business strategy, our expected financial
position and operating results, and our financing plans and similar matters. We
have based these forward-looking statements largely on our current expectations
and projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to
risks, uncertainties and assumptions about Susquehanna Media, including, among
other things:
o General economic and business conditions, both nationally and in our markets.
o Our acquisition opportunities and our ability to successfully integrate future
acquisitions.
o Our ability to generate income and cash flow from future advertising revenues.
o Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition.
o Competition from other radio stations, media forms and communication service
providers.
o Anticipated trends in our business, including those described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
o The impact our debt service obligations may have on our cash flow and the way
we operate our business.
o Existing and future regulations affecting our business, including radio
licensing and ownership rules and cable television regulations.
o Renewal of our cable franchises.
o Programming costs.
In addition, the words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect" and similar expressions, as they
relate to Susquehanna Media or our management, are intended to identify
forward-looking statements. All forward-looking statements attributable to us or
to persons acting on our behalf are expressly qualified in their entirety by
this cautionary statement. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this Form 10-K might not
transpire.
<PAGE>
PART I
Item 1. Business
OVERVIEW OF SUSQUEHANNA MEDIA
Susquehanna Media was incorporated in 1993 as an intermediate cable and
radio broadcasting holding company subsidiary of Susquehanna Pfaltzgraff.
Susquehanna Pfaltzgraff was founded in 1941 by Louis J. Appell, Sr. to own and
operate WSBA-AM, our flagship radio station in York, Pennsylvania. In 1954, The
Pfaltzgraff Co., a leading manufacturer of ceramic dinnerware, was merged into
Susquehanna Pfaltzgraff. The Pfaltzgraff Co. had been owned by the family of
Mrs. Louis J. Appell, Sr. We entered the cable television business in 1965 when
we were awarded the franchise to operate in York, Pennsylvania.
We are a diversified communications company with operations in radio
broadcasting and cable television. We are the largest privately owned radio
broadcaster and the 10th largest radio broadcaster overall in the United States
based on 1999 revenues. We own and operate 15 FM and 8 AM stations that serve
four of the nation's ten largest radio markets (San Francisco, Dallas, Houston
and Atlanta), as well as three other significant markets (Cincinnati,
Indianapolis and York, Pennsylvania). We are also the 23rd largest cable
multiple system operator in the United States with seven cable systems serving
approximately 187,000 subscribers as of December 31, 1999.
We also provide Internet access and enhanced services to residential
and business customers under the tradename "BlazeNet." The services include (i)
Internet access via telephone dial-up service or cable modem, (ii) website
creation, hosting and maintenance, and (iii) local and wide area network design,
construction and operation.
RADIO BROADCASTING
Our radio broadcasting business focuses on acquiring, developing and
operating radio stations in the 40 largest markets in the United States. We have
over 50 years of experience operating radio properties and currently own
stations serving the demographically attractive and fast-growing San Francisco,
Dallas, Houston and Atlanta markets, four of the top ten radio markets in the
United States. Our radio stations offer a broad range of programming formats,
such as country, top 40, adult contemporary, oldies, rock, and sports and talk
radio, each targeted to a specific demographic audience within a market. We
believe that our large market radio presence and variety of programming formats
makes us attractive to a diverse base of local and national advertisers and
enables us to capitalize on our ratings to generate higher market revenue share.
Our business strategy for radio includes the following key elements
intended to establish leadership positions in the markets we serve and to
enhance our operating and financial performance:
o FOCUS ON LARGE MARKETS. We generate approximately 79% of our
radio revenue from the ten largest markets in the United
States and more than 94% from top 40 markets and intend to
continue focusing on large markets.
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o EMPLOY TARGETED PROGRAMMING AND MARKET RESEARCH. We seek to
maximize station operating performance through extensive
market research, innovative programming, and distinctive
marketing campaigns.
o EMPHASIZE SALES AND MARKETING. We place great emphasis on
being familiar with our listening audience and their lifestyle
characteristics in order to match effectively the audience's
demographics with the specific target audiences of our
advertisers.
o DECENTRALIZE MANAGEMENT. We decentralize much of our operating
to regional and local levels. Each of our regional and local
station groups is managed by a team of experienced
broadcasters who understand the musical tastes, demographics
and competitive opportunities of the particular market.
o SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. In addition to
continuing rapid internal growth, we intend to pursue
acquisition opportunities that would allow us to continue to
compete more effectively for advertising revenues and to
increase our growth rate of revenues and cash flow.
THE RADIO BROADCASTING INDUSTRY
The radio broadcasting industry is characterized by the following key
factors:
SIGNIFICANT GROWTH. The sale of advertising time to local and national
spot advertisers and to national network advertisers is the primary source of
revenues for radio stations. Local and national spot advertising is generally
used to target the market where our station is located or to cover regions
larger than the markets where our station is located. National network
advertising is included in national syndicated programming aired on our
stations. The growth in total radio advertising revenue tends to be fairly
stable, growing over the last 25 years at an 8.9% compound annual rate, compared
to a gross domestic product growth rate of 7.8%.
BROAD MARKET COVERAGE. According to the Radio Advertising Bureau's
Radio Marketing Guide and Fact Book for Advertisers 1999, each week radio
reaches approximately 96% of all Americans over the age of 12. More than
one-half of all radio listening occurs outside the home, and three out of four
adults are reached by car radio each week. The average listener spends
approximately three hours and 11 minutes per day listening to radio. The highest
portion of radio listening occurs during the morning, particularly between the
time a listener wakes up and the time he reaches work. This "morning drive time"
period reaches more than 80% of people over 12 years of age, and as a result,
radio advertising sold during this period achieves premium advertising rates.
LOW COST ADVERTISING. The cost to reach a thousand listeners, or
impressions, is the benchmark for comparing different media with different reach
and frequency aspects. Radio is recognized by the advertising community for its
ability to generate a high frequency of commercial impressions cost efficiently.
This is caused by its low cost per minute, or low cost per rating point.
Stations are generally classified by their on-air format, such as country, adult
contemporary, oldies and news/talk. A station's format and style of presentation
enables it to efficiently target certain demographics. By capturing a specific
share of a market's radio listening audience, with particular concentration in a
targeted demographic, a station is able to market its broadcasting time to
enable advertisers to maximize their reach for each dollar of advertising
expenditures.
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RADIO PROPERTIES
Susquehanna Radio Corp. operates radio stations in San Francisco,
Dallas, Houston and Atlanta, all of which are top ten markets, as well as radio
stations in Cincinnati, Indianapolis and York, Pennsylvania. The following table
sets forth certain information regarding our radio stations and their respective
markets. The table excludes WABZ-FM in Albemarle, North Carolina and KIKT-FM and
KGVL-AM in Greenville, Texas, which are owned by us but operated by third
parties under a time brokerage agreement. Market rank by revenue is based upon
market revenue size of the primary radio market served by the station among all
radio markets in the United States, as reported in Duncan's Radio Market Guide.
Station rank and audience share are based upon a station's share of its primary
demographic target for the period Monday through Sunday, 6 a.m. to 12 midnight
by market, as reported by Arbitron in Summer 1999. Combined market revenue share
represents our share of the total radio advertising revenue from the market, as
reported in Duncan's Radio Market Guide. Combined market revenue rank represents
our rank in the market as measured by the amount of its radio advertising
revenue from the market, as reported in Duncan's Radio Market Guide.
<TABLE>
<CAPTION>
Station
Station Audience
Market Rank Share In Combined
Rank Station Primary In Primary Primary Market Combined
By Programming Year Demographic Demographic Demographic Revenue Market
Market And Stations Revenue Format Acquired Target Target Target Share Revenue Rank
- ------------------- ------- ----------- -------- ---------- ----------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
San Francisco, CA. 4 18.8% 3
KFOG/KFFG-FM(1). Adult Album 1983/1995 M 25-49 3 4.5%
Altermative
KNBR-AM......... Sports/Talk 1989 M 25-54 1 6.0
KSAN-FM......... Classic Rock 1997 M 25-44 20+ 1.9
KTCT-AM......... Sports/Talk 1997 M 25-44 22+ 1.6
Dallas/Ft. Worth, TX. 5 11.5 4
KTCK/KTBK-AM(1). Sports/Talk 1996 M 25-44 4 6.6
KPLX-FM......... Country 1974 M 25-44 9+ 3.8
KLIF/KKLF-AM(1). Talk 1980/1998 M 35-54 10+ 3.3
KKMR/KMRR-FM(1). Adult Album 1996/1998 M 25-44 15+ 2.4
Alternative
Atlanta, GA....... 7 6.0 7
WNNX-FM......... Modern Rock 1974 M 18-34 3 10.4
WHMA-FM......... Country 1997 -- -- --
(Anniston, AL)(2)
WHMA-AM......... Sports/Talk 1997 -- -- --
(Anniston, AL)(2)
Houston, TX....... 8 7.0 5
KRBE-FM......... Contemporary 1986 W 18-44 2 8.9
Hit Radio
Cincinnati, OH.... 19 9.5 4
WRRM-FM......... Adult 1972 W 35-54 2 9.9
Contemporary
WMOJ-FM(3)...... Rhythmic 1997 W 35-54 3 9.2
Oldies
Indianapolis, IN. 30 24.2 3
WFMS-FM......... Country 1972 W 35-54 1 15.3
WGLD-FM......... Oldies 1993 A 35-54 3 8.5
WGRL-FM......... Young 1997 W 18-34 13+ 1.6
York, PA.......... 103 49.4 1
WARM-FM......... Adult 1962 W 25-54 1 13.1
Contemporary
WSBA-AM......... Talk 1942 M 35-64 12+ 2.5
</TABLE>
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(1) These stations are simulcast and have been combined for market rank and
ratings.
(2) Both of these stations are located in Anniston, Alabama and do not
currently broadcast in the Atlanta market. We have pending before the
Federal Communications Commission (FCC) a petition proposing to move
WHMA-FM closer to the Atlanta market.
(3) This station was converted to a rhythmic oldies format on April 30, 1999.
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MARKET OVERVIEWS
We own and operate radio stations in the following markets:
SAN FRANCISCO. We have operated in the San Francisco market since 1983
and currently own three FM and two AM stations in the area. We own KNBR-AM, one
of the original 50,000 watt, clear channel AM licenses, which provides clear
reception throughout northern California and inland as far as eastern Nevada.
The station is currently programmed with a sports talk format and has the
broadcast rights to the San Francisco Giants and the Golden State Warriors.
KFOG/KFFG-FM and KNBR-AM are ranked 3rd and 1st in their respective target
demographics.
DALLAS/FT. WORTH. We have been operating in the Dallas/Ft. Worth market
since 1974 and currently own three FM and four AM stations in the area. KTCK-AM
and KTBK-AM, which are programmed with a sports talk format and are simulcast,
are ranked 4th in the market among males 25 to 44 and have the broadcast rights
to the Dallas Mavericks.
HOUSTON. We entered the Houston market when we acquired KRBE-FM in
1986, which serves the Houston market with a top 40 radio format. KRBE-FM has
been a dominant radio station in Houston since the 1970s and is ranked 2nd among
women 18 to 44 and 2nd overall. This station attracts over 800,000 different
listeners each week.
ATLANTA. Atlanta represents one of the most desirable radio broadcast
markets in the country, with only 16 FM and 23 total radio stations serving the
market. We entered the Atlanta market in 1974 with the acquisition of WNNX-FM,
which is programmed with modern rock and ranked 3rd among men 18 to 34. In 1997,
we acquired WHMA-FM/AM in Anniston, Alabama, whose FM station is formatted as
country and whose AM station is programmed with a sports format. We are pursuing
a long-term strategy to obtain FCC approval to move the FM station closer to the
Atlanta market.
CINCINNATI. We have operated in Cincinnati since 1972 and currently own
two FM stations in the market. WRRM-FM, which is programmed with adult
contemporary, is the sole adult contemporary station in the market and is ranked
2nd among women 35 to 54. WMOJ-FM, which is programmed as a rhythmic oldies
station, is a strong contender, placing 3rd among women 35 to 54.
INDIANAPOLIS. We have operated in Indianapolis since 1972 and currently
own three FM stations in the market. WFMS-FM, which is programmed with
contemporary country, is the top ranked station among women 35 to 54 and has
ranked either 1st or 2nd in the entire market since 1992.
YORK. We have operated in York since 1942 and currently own two
stations in the market. WARM-FM, which is programmed with an adult contemporary
format, is the dominant station among women 25 to 54. WSBA-AM, which is
programmed with news and sports, is the AM ratings leader in York.
ADVERTISING
Most of our radio revenues are generated from the sale of local,
regional and national advertising for broadcast on our radio stations. In 1999,
approximately 81% of our radio revenues were generated from the sale of local
and regional advertising. We generate additional radio revenues by marketing our
proprietary database of listeners, selling print advertising and sponsoring
local events. These important
5
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and growing sources of revenue supplement our traditional advertising
revenues without increasing on-air commercial time.
Each radio station's local sales staff solicits advertising either
directly from local advertisers or indirectly through advertising agencies. We
employ personnel in each of our markets to produce commercials for advertisers.
National ad sales are made by a firm specializing in such sales in exchange for
a commission from us based on our gross revenue from the advertising sold.
Regional advertising sales, which we define as sales in regions surrounding our
markets to companies that advertise in our markets, are generally made by our
local sales staff.
We estimate the optimum number of advertisements available for sale by
a station for a particular time period. The number of advertisements that can be
broadcast without jeopardizing listening levels (and resulting ratings) is
limited in part by the programming format of a particular station. We seek to
maximize revenue by managing on-air inventory of advertising time and adjusting
prices to local market conditions and to our ability, through our marketing
efforts, to provide advertisers with an effective means of reaching a targeted
demographic group. Each of our stations has a general target level of on-air
inventory that it makes available for advertising. This target level may be
different at different times of the day but tends to remain stable over time.
Much of our selling activity is based on demand for our on-air inventory, and in
general, we respond to this demand by varying prices rather than varying our
target inventory level for a particular station. As a result, most changes in
revenue are explained by demand-driven pricing changes rather than changes in
available inventory.
We believe that radio is one of the most efficient and cost-effective
means for advertisers to reach specific demographic groups. Advertising rates
charged by radio stations are based primarily on:
o a station's share of audiences in the demographic groups targeted by
advertisers;
o the number of stations in the market competing for the same demographic
groups;
o the supply of and demand for radio advertising time; and
o certain qualitative factors.
Rates are generally highest during morning and afternoon commuting
hours. A station's listenership is reflected in ratings surveys that estimate
the number of listeners tuned to the station and the time they spend listening.
Each station's ratings are used by its advertisers and advertising
representatives in connection with advertising sales and are used by us to chart
audience growth, set advertising rates and adjust programming. The radio
broadcast industry's principal rating agency is Arbitron, which publishes
periodic ratings surveys for significant domestic radio markets. They are our
primary source of ratings data.
COMPETITION
The radio broadcasting industry is very competitive. The success of
each of our stations depends largely upon its audience ratings and its share of
the overall advertising revenues within its market. Our audience ratings and
advertising revenue are subject to change, and any adverse change in a
particular market affecting advertising expenditures or an adverse change in the
relative market positions of the stations located in a particular market could
have a material adverse effect on the revenues of our radio
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stations located in that market. There can be no assurance that any one
or all of our radio stations will be able to maintain or increase current
audience ratings or advertising revenue market share.
Our stations compete for listeners and advertising revenues directly
with other radio stations within their respective markets. Radio stations
compete for listeners primarily on the basis of program content that appeals to
a particular demographic group. By building a strong listener base comprised of
specific demographic groups in each of its markets, we are able to attract
advertisers seeking to reach those listeners. Radio stations periodically change
their formats to compete directly with other stations for listeners and
advertisers. Another station's decision to convert to a format similar to that
of one of our radio stations in the same geographic area or launch an aggressive
promotional campaign may result in lower ratings and advertising revenue,
increased promotion and other expenses and, accordingly, lower our broadcast
cash flow.
Factors that are material to a radio station's competitive position
include management experience, the station's local audience rank in its market,
transmitter power, assigned frequency, audience characteristics, local program
acceptance and the number and characteristics of other radio stations in the
market area. We attempt to improve our competitive position in each of our
markets by extensively researching our stations' programming, by implementing
advertising campaigns aimed at the demographic groups for which our stations
program and by managing our sales efforts to attract a larger share of
advertising dollars for each individual station. In selling advertising,
however, we compete with many organizations that have substantially greater
financial and other resources.
Recent changes in the Communications Act and the FCC's rules and
policies permit increased ownership and operation of multiple local radio
stations. As a result, organizations are acquiring and operating larger blocks
of radio stations. We compete with these organizations, as well as other radio
station groups, to purchase additional stations. Some of these groups are owned
or operated by companies that have substantially greater financial and other
resources.
Although the radio broadcasting industry is highly competitive, and
competition is enhanced to some extent by changes in existing radio station
formats and upgrades of power, certain regulatory limitations on market entry
exist. The operation of a radio broadcast station requires a license from the
FCC, and the number of radio stations that an entity can operate in a given
market is limited by the availability of FM and AM radio frequencies allotted or
assigned by the FCC to communities in that market, as well as by the FCC's
multiple ownership rules regulating the number of stations that may be owned and
controlled by a single entity. See "Regulation --Federal Regulation of Radio
Broadcasting."
In addition to other radio stations, we compete for advertising
revenues with other media, including newspapers, broadcast television, cable
television, magazines, direct mail, coupons and outdoor advertising. The radio
broadcasting industry also competes with new media technologies, such as the
delivery of audio programming by cable television systems and by satellite
digital audio radio services. Digital audio radio services may deliver by
satellite to nationwide and regional audiences, multi-channel, multi-format,
digital radio services with sound quality equivalent to compact discs. The
delivery of information through the presently unregulated Internet also could
create a new form of competition. Despite the introduction of new technologies
for the delivery of entertainment and information, including television
broadcasting, cable television, audio tapes and compact discs, the radio
broadcasting industry historically has grown. A growing population and greater
availability of radios, particularly car and portable radios, have contributed
to this growth. There can be no assurance, however, that the introduction of new
media technology will not have an adverse effect on the radio broadcasting
industry.
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CABLE TELEVISION
We entered the cable television industry in 1965 when we were awarded
the franchise to operate in York, Pennsylvania. Our cable systems currently
serve approximately 187,000 subscribers as of December 31, 1999 through 15
signal receiving and transmitting facilities in Pennsylvania, Mississippi,
Maine, Illinois and Indiana. We own, develop and operate geographically
clustered cable television systems in small and medium-sized communities. We
believe that these systems are less susceptible to competition and subscriber
turnover than urban cable television systems and result in more predictable
revenue and cash flow.
Our business strategy for cable television includes the following key
elements intended to enhance our operating and financial performance:
o BUILD STRATEGIC CLUSTERS. We have pursued the development and
acquisition of cable television systems in communities that
are within close proximity to our existing systems to maximize
operating efficiencies.
o FOCUS ON CUSTOMER SATISFACTION. To maximize customer
satisfaction, we strive to provide reliable, high-quality
service offerings, superior customer service and attractive
programming choices at reasonable rates.
o CONTINUE UPGRADE OF TECHNICAL FACILITIES. We seek to provide
reliable, high-quality cable television services to our
customers. To achieve this goal we are expanding and upgrading
our cable systems to increase channel capacity, enhance signal
quality, improve technical reliability and reduce the number
of signal receiving and transmitting facilities in existing
systems.
o DEVELOP NEW SOURCES OF REVENUES. We believe that the
investment we have made in our cable systems has enabled us to
generate additional revenue by providing expanded tiers of
basic programming, premium services, and additional
pay-per-view services. In addition, we are expanding new
services, such as Internet access, high speed data,
video-on-demand and other interactive services.
THE CABLE TELEVISION INDUSTRY
A cable customer generally pays an initial installation charge and
fixed monthly fees for cable television services and for other services (such as
the rental of converters and remote control devices). Such monthly service fees
constitute the primary source of revenue for cable television operators. In
addition to these services, cable television operators generate revenue from
additional fees paid by customers for pay-per-view programming of movies and
special events and from the sale of available advertising spots on
advertiser-supported programming. Cable television operators frequently also
offer to their customers home shopping services, which pay the systems a share
of revenue from sales of products in the systems' service areas. Cable
television operators are also generating increasing revenues from the sale of
enhanced data services. Cable television revenues tend to be stable, growing
over the last 15 years at an 11.0% compound annual rate, compared to a gross
domestic product growth rate of 6.2%. Cable television did not experience a
single down year in revenue during this period of time. Cable television systems
offer customers various levels (or "tiers") of cable television services
consisting of:
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o a limited basic service comprised of off-air broadcast
television signals, local origination programming produced by
the cable system and/or public access groups, and a limited
number of satellite services such as home shopping channels
and C-Span; and
o an expanded basic service comprised of satellite delivered,
non-broadcast channels such as: Cable News Network (CNN),
Entertainment and Sports Programming Network (ESPN) and Turner
Network Television (TNT).
For an extra monthly charge, cable television systems also offer
premium television services to their customers. These services (such as Home Box
Office and Showtime) are satellite delivered channels offering feature films,
live sporting events, concerts and other special entertainment features
presented without commercial interruption.
A cable television system receives television, radio and data signals
that are transmitted to the system's signal receiving and transmitting facility
by means of off-air antennae, microwave relay systems and satellite earth
stations. These signals are then modulated, amplified and distributed, primarily
through coaxial and in some instances fiber optic cable, to customers who pay a
fee for this service. Cable television systems may also originate their own
television programming and other information services for distribution through
the system. Cable television systems generally are constructed and operated
pursuant to non-exclusive franchises or similar licenses granted by local
governmental authorities for a specified term of years, generally for extended
periods of up to 15 years.
CABLE PROPERTIES
The following table sets forth certain information regarding our cable
systems as of December 31, 1999. Homes passed represents the maximum number of
homes that could become subscribers in the particular cable system. Basic
penetration represents basic subscribers as a percentage of homes passed.
Premium penetration represents premium units as a percentage of basic
subscribers. Premium units represents the aggregate number of individual premium
services (e.g., HBO, Cinemax, Showtime) for which customers have subscribed.
Average monthly revenue per basic subscriber represents revenues divided by 12
divided by the weighted average number of subscribers for the year.
<TABLE>
<CAPTION>
Average Monthly
Revenue
Basic Basic Premium Per Basic
Cable Systems Homes Passed Subscribers Penetration Penetration Subscriber
------------ ------------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Pennsylvania
York(1).......... 114,359 89,233 78.0% 43.4% $38.29
Williamsport..... 44,688 35,192 78.8 33.3 36.73
Mississippi
Rankin........... 31,171 22,659 72.7 46.6 38.08
Maine
Casco........... 26,691 19,723 73.9 33.2 34.11
Illinois/Indiana
SBC.............. 26,544 20,599 77.6 40.1 33.30
Totals 243,453 187,406 77.0% 40.5% $37.33
</TABLE>
- --------------------
(1) Information includes Hanover Cable TV, which was acquired in January 1999.
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CABLE SYSTEMS
The following table sets forth selected technical, operating and
financial data for each of our cable systems as of and for the year ended
December 31, 1999. York information includes Hanover Cable TV, which was
acquired in January 1999. Density represents homes passed divided by miles of
plant. Plant Bandwidth represents percentage of basic subscribers within a
system served by the indicated plant bandwidth. Basic penetration represents
basic subscribers as a percentage of homes passed. Premium units represents the
aggregate number of individual premium services (e.g., HBO, Cinemax, Showtime)
for which customers have subscribed. Premium penetration represents premium
units as a percentage of basic subscribers. Average monthly revenue per basic
subscriber represents revenues divided by 12 divided by the weighted average
number of subscribers for the year.
<TABLE>
<CAPTION>
SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA BY CABLE SYSTEM
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
YORK WILLIAMSPORT RANKIN CASCO SBC TOTAL
---- ------------ ------ ----- --- -----
<S> <C> <C> <C> <C> <C> <C>
TECHNICAL DATA:
Miles of Plant .......... 1,583 725 600 741 524 4,173
Density................. 72 62 52 36 51 58
Headends................. 1 1 2 4 6 15
Planned 2000 Headend 0 0 2 2 5
eliminations.............
Plant Bandwidth..........
330 MHz or less.... 0.0% 22.0% 5.0% 0.0% 21.0% 7.0%
400-450MHz.......... 31.0% 0.0% 78.0% 30.0% 29.0% 32.0%
550 MHz............. 0.0% 0.0% 11.0% 33.0% 50.0% 14.0%
750 MHz............. 69.0% 78.0% 6.0% 37.0% 0.0% 41.0%
OPERATING DATA:
Homes passed............. 114,359 44,688 31,171 26,691 26,544 243,453
Basic subscribers........ 89,233 35,192 22,659 19,723 20,599 187,406
Basic penetration....... 78.0% 78.8% 72.7% 73.9% 77.6% 77.0%
Premium units 38,754 11,704 10,549 6,540 8,266 75,813
Premium penetration...... 43.4% 33.3% 46.6% 33.2% 40.1% 40.5%
FINANCIAL DATA:
Revenue (in thousands)... $39,922 $15,419 $10,297 $ 8,849 $ 8,233 $82,720
Average monthly revenue per
basic subscriber......... $38.29 $36.73 $38.08 $ 34.11 $ 33.30 $37.33
</TABLE>
YORK. The York, Pennsylvania cable system is our largest, serving
subscribers in 34 municipalities and accounting for 47% of our total
subscribers. On January 29, 1999, we acquired neighboring Hanover Cable TV,
which serves 17,000 customers in 17 municipalities. A hybrid fiber/coaxial
rebuild of the York system began in 1995, and approximately 69% of the system
(including Hanover) has cable plant with bandwidth capacity of 750 MHz. The
rebuild is expected to be completed by the end of 2001. We have constructed a
fiber optic link from York to Hanover, which enables us to serve York and
Hanover from one signal receiving and transmitting facility. The York system is
two-way capable. Cable modem service has been provided to customers since 1997.
Digital services were launched in October 1999.
WILLIAMSPORT. The Williamsport, Pennsylvania cable system was acquired
in a swap with Cox Communications, Inc. for our East Providence, Rhode Island
system in April 1996. We also acquired two adjacent systems in December 1996.
The Williamsport system accounts for 19% of our total subscribers. Approximately
78% of the system has been rebuilt to 750 MHz, and the rebuild is expected to be
completed by the second quarter of 2000. The system is two-way capable. Cable
modem services are
10
<PAGE>
presently offered to consumers and commercial customers. Digital services are
expected to be launched in 2000.
RANKIN. The Rankin County, Mississippi cable system encompasses three
small towns, many upscale suburban developments and the southeastern shore of an
attractive reservoir recreation area just east of the state capitol of Jackson.
The area continues to experience explosive housing growth. Over the past five
years, the average annual compound internal growth rate of new subscribers to
the Rankin system has been 7.1%, and the system accounts for 12% of our total
subscribers. Approximately 95% of the Rankin system currently has a bandwidth of
450 MHz or greater. The system launched digital technology in February 2000,
enabling it to add new programming services without having to rebuild the
system.
CASCO. The Casco cable system serves the communities of Brunswick,
Freeport, Bath, Harpswell and Woolwich, Maine and accounts for 11% of our total
subscribers. Approximately 70% of the Casco system has been rebuilt to a minimum
of 550 MHz. The primary signal receiving and transmitting facility in Brunswick
serves approximately 79% of the subscribers. Three smaller signal receiving and
transmitting facilities, which were acquired in December 1998, will be
eliminated over the next 18 months and linked to the Brunswick signal receiving
and transmitting facility. The Casco system is two-way capable. The system has
been providing cable modem service since 1996 to commercial customers and since
1998 to residential customers. Digital services are planned to be launched in
2000.
SBC. The SBC cable system serves Shelbyville, Indiana and Olney and
DuQuoin, Illinois. Shelbyville offers attractive demographics and growth
opportunities as a result of its proximity to the growing Indianapolis market.
The SBC system accounts for 11% of our total subscribers. The system currently
has bandwidth ranging from 330 MHz to 550 MHz. Digital services are planned to
be launched in 2000 in both Indiana and Illinois.
PROGRAMMING
We have various contracts to obtain basic, satellite and premium
programming for our cable systems from program suppliers, including, in limited
circumstances, some broadcast stations, with compensation generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures and
some offer marketing support. We acquire a portion of our programming through an
affiliation agreement with a subsidiary of AT&T. Rates for programming obtained
through AT&T are generally lower than rates that we would be charged as a stand
alone multiple system operator. We receive favorable rates on AT&T programming
because Lenfest Communications, Inc., which currently is 50% owned by AT&T, has
minority ownership interests in Susquehanna Cable and its principal operating
subsidiaries. In December 1999, calculated on a cost basis, we acquired 67% of
our programming through AT&T, 32% through individual contracts and 1% through
Lenfest.
In January 2000, Comcast Corporation acquired Lenfest Communications,
Inc. and consequently, Lenfest's interest in Susquehanna Cable and certain of
its subsidiaries. In the opinion of management, programming costs for 2000 may
be approximately $1.7 million higher than expected due to the loss of AT&T's
programming discounts. We anticipate that the cost of cable programming will
increase in the future as cable programming rates increase and additional
sources of cable programming become available.
Programming costs are expected to increase in the ordinary course of
our business as a result of increases in the number of basic subscribers,
increased costs to purchase cable programming, expansion of the number of
channels provided to customers and contractual rate increases from programming
11
<PAGE>
suppliers. In the event that we acquire Lenfest's ownership interests in
Susquehanna Cable, our programming costs will increase faster than they would
otherwise. See Part III, Item 13 of this annual report.
MARKETING, CUSTOMER SERVICE AND COMMUNITY RELATIONS
Our cable marketing strategy is designed to increase total revenues and
revenues per subscriber by:
o aggressively promoting and marketing our current services;
o expanding our product offerings; and
o providing superior customer service.
We believe that this strategy will enable us to acquire new customers
and maintain a positive relationship with existing customers to retain their
business and sell them additional products. Implementation strategies include:
o targeted marketing campaigns using door-to-door sales, direct mail and
telemarketing;
o price promotions, such as installation specials, to attract new
subscribers and discounts for premium packages for multi-pay customers;
o introduction of multiplexed premium channels to improve their price/
value perception; and
o advertisement and sponsorship of community-based events to enhance our
local presence.
We believe that providing superior customer service is a key element of
our long-term success because the quality of customer service affects our
ability to retain customers. We believe that it also contributes to subscriber
growth and positions us to sell additional products and services. To enhance
customer service, we have initiated programs to improve the skills of our
employees. In 1997, we introduced the Opportunities to Excel Program, which
gives technical personnel the opportunity to improve their earnings by
successfully completing courses that enhance their on-the-job skills. In 1998,
we introduced a parallel initiative for customer service employees entitled
Sales Training for Excellence in Leadership, Learning and Retention, which
includes extensive training, performance follow-up and standardized skills for
all customer service representatives.
Recognizing that positive franchise and public relations are crucial to
our overall success, we emphasize maintaining good working relationships with
municipal officials in our franchise areas and with the communities that we
serve. Our local management meets regularly with municipal officials to keep
them informed of both our activities and trends in the industry. As a result of
these working relationships, we receive valuable feedback on our standing with
the municipalities and the satisfaction of our customers. Local management is
also responsible for maintaining a high level of visibility for us, which is
accomplished through active involvement in various community and nonprofit
organizations.
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<PAGE>
TECHNOLOGY
As part of our commitment to customer service, we seek to provide
reliable, high-quality cable television service. As such, our primary objective
with respect to Susquehanna Cable's capital expenditures is to maintain, expand
and upgrade its cable plant to improve and expand its cable television services.
Through a capital investment program, we are expanding channel capacity,
enhancing signal quality, improving technical reliability and providing a
platform to deliver high-speed data services, including Internet access. We
believe that such technical improvements and upgrades create additional revenue
opportunities, enhance operating efficiencies, improve franchising relations and
increase customer satisfaction.
The following table summarizes, as of December 31, 1999, our existing
bandwidth profile and our bandwidth profile upon completion of work-in-progress
projects (which are generally expected to be completed by the end of 2001).
<TABLE>
<CAPTION>
330 MHZ Or Less 400 TO 450 MHZ 550 MHZ 750 MHZ
(Approximately 40 (Approximately 60 (Approximately 82 (Approximately 82
Analog Channels) Analog Channels) Analog Channels) Analog Channels) (1)
<S> <C> <C> <C> <C>
EXISTING BANDWIDTH PROFILE
Miles of plant............... 303 1,327 570 1,973
% miles of plant............. 7% 32% 14% 47%
BANDWIDTH PROFILE UPON
COMPLETION OF WORK IN PROGRESS
Miles of plant............... 29 470 839 3,053
% miles of plant............. 1% 11% 19% 69%
</TABLE>
- --------------------
(1) Plus 200 MHz of additional bandwidth for digital programming and other
enhanced services.
Our use of fiber optic technology as an enhancement to coaxial is
enabling us to consolidate signal receiving and transmitting facilities and
reduce amplifier cascades, thereby improving picture quality and system
reliability and reducing signal receiving and transmitting facility and
maintenance expenditures. Fiber optic strands are capable of carrying hundreds
of video, data and voice channels over extended distances without the extensive
signal amplification typically required for coaxial cable. We anticipate that
the installation of fiber optic cable will allow us to consolidate from 15
signal receiving and transmitting facilities as of December 31, 1999 to
approximately 10 signal receiving and transmitting facilities by the end of
2000. In our larger systems, fiber optic technology is deployed in a "ring"
design providing a redundant path for video and data signals being delivered to
large subscriber groups. This approach provides an extra degree of reliability
in the event that fiber optic cable is damaged on the primary path.
We have been closely monitoring developments in the area of digital
compression, a technology that enables cable operators to increase the channel
capacity of cable television systems by permitting a significantly increased
number of digitized video signals to fit in a cable television system's existing
bandwidth. We believe that the utilization of digital compression technology in
the future could enable us to increase channel capacity in certain systems in a
cost efficient manner. Such utilization of digital compression would generally
be implemented as part of system upgrades, where some portion of the additional
analog channels would be allocated to additional tiers of cable services. The
use of digital
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<PAGE>
compression will expand the number and types of services offered and enhance the
development of current and future revenue sources.
The provision of high-speed cable modems to residential and business
customers has recently become a source of additional revenue to the cable
industry. Cable modems provide Internet access at higher speeds and lower costs
than the technologies offered by other communication providers. For example, a
10 megabit cable modem provides Internet access at download speeds 350 times
faster than typical 28.8 kilobit dial-up telephone modem connections. Through
BlazeNet, we are developing high speed data revenues from both commercial and
consumer accounts. Cable modem service is now available in York and
Williamsport, Pennsylvania and Brunswick, Maine and on a more limited basis in
Rankin County, Mississippi and Shelbyville, Indiana.
OTHER SERVICES
SUSQUEHANNA DATA SERVICES. Susquehanna Data Services, Inc., a
wholly-owned subsidiary of Susquehanna Media, was formed in 1996 to provide
Internet and data networking services to residential and business customers.
Marketing its products and services under the tradename "BlazeNet," Susquehanna
Data offers Internet access over both telephone and cable modems, website
creation, hosting and maintenance, local and wide area network design,
construction and operation, and telecommunications products from Susquehanna
Adelphia Telecommunications and other local telephone companies. As a website
host, we provide a central computer that is connected to the Internet 24 hours a
day. We store all of our customers' website files on our computer so that each
website and all of its content are available to users worldwide at all times.
Our local and wide area network services enable us to provide network services
in both a limited area, such as a building or campus, or a larger area extending
beyond a single building or campus. As of December 31, 1999, BlazeNet provided
access service to approximately 8,900 business and consumer accounts.
Approximately 11% of these accounts access the Internet using cable modems. The
access business continues to grow rapidly, with an increase in accounts of over
76% in 1999.
In addition to benefits created with Susquehanna Cable, BlazeNet is
actively working with both Susquehanna Radio and The Pfaltzgraff Co. to host
their websites. BlazeNet has also made progress developing an electronic
commerce product. Offering consulting, design, development, implementation and
hosting services for companies wanting to sell products on the Internet,
BlazeNet utilizes its programming and design staff to implement custom solutions
using custom-developed programs.
ADELPHIA PARTNERSHIP. In 1997, Susquehanna Media, through its
wholly-owned subsidiary Susquehanna Fiber Systems, Inc., entered into a 50/50
partnership with Hyperion Telecommunications of Pennsylvania, Inc., now Adelphia
Business Solutions, Inc., a subsidiary of Adelphia Communications Corp., to
enter the competitive local exchange carrier business in the York, Pennsylvania
market. The partnership provides long distance access circuits to businesses
bypassing the local telephone company, point-to-point data circuits and switched
business access services. Susquehanna Cable has constructed and maintains a 180
mile fiber optic SONET ring network that is leased to the partnership under a
long-term contract. As of December 31, 1999, the partnership provided service to
72 buildings in the York area and had over 4,700 access lines installed.
FRANCHISES
Cable television systems are constructed and operated under fixed-term
non-exclusive franchises or other types of operating permits that are granted by
local governmental authorities. These franchises contain many conditions, such
as:
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<PAGE>
o time limitations on commencement and completion of construction;
o conditions of service, including mix of programming required to meet
the needs and interests of the community;
o the provision of free service to schools and certain other public
institutions;
o the maintenance of insurance and indemnity bonds; and
o the payment of fees to communities.
Certain of these franchises may require the imposition of penalties if
the franchise agreements are violated. Certain provisions of these local
franchises are subject to limits imposed by federal law.
As of December 31, 1999, we held a total of 126 franchises. Many of
these franchises require the payment of fees to the issuing authorities ranging
from 1% to 5% of gross revenues (as defined by each franchise agreement) from
the related cable system. The Cable Communications Policy Act of 1984 (1984
Cable Act) prohibits franchising authorities from imposing annual franchise fees
in excess of 5% of gross annual revenues and permits the cable television system
operator to seek renegotiation and modification of franchise requirements if
warranted by changed circumstances that render performance commercially
impracticable.
Our cable franchises expire at various times through 2013. The
following table sets forth certain information relating to our franchises
(including Hanover Cable TV):
<TABLE>
<CAPTION>
Number of Percentage of Total Percentage of Total
Year of Franchise Expiration Franchises Franchises Basic Subscribers
- ---------------------------- ---------- ------------------- ------------------
<S> <C> <C> <C>
2000-2002...................... 27 21% 32%
2003 and after................. 99 79% 68%
--- --- ----
Total 126 100% 100%
=== === ====
</TABLE>
The 1984 Cable Act and the Cable Television Consumer Protection and
Competition Act of 1992 (1992 Cable Act) provide, among other things, for an
orderly franchise renewal process, which limits a franchising authority's
ability to deny a franchise renewal if the incumbent operator follows prescribed
renewal procedures. In addition, the 1984 and 1992 Cable Acts establish
comprehensive renewal procedures, which require, when properly elected by an
operator, that an incumbent franchisee's renewal application be assessed on its
own merits and not as part of a comparative process with competing applications.
Upon a franchise renewal request, however, a franchise authority may seek to add
new and more onerous requirements upon the cable operator, such as significant
upgrades in facilities and services or increased franchise fees, as a condition
or renewal. We believe that our relationship with local franchise authorities is
good.
COMPETITION
Cable television systems face competition from alternative methods of
distributing video programming and from other sources of news, information and
entertainment. These sources include off-
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<PAGE>
air television broadcast programming, newspapers, movie theaters, live sporting
events, interactive online computer services and home video products, including
videotape cassette recorders. The extent to which a cable television system
is competitive depends, in part, upon that system's ability to provide, at a
reasonable price to customers, a greater variety of programming and other
communications services than those available off-air or through alternative
delivery sources and upon superior technical performance and customer service.
COMPETING FRANCHISES. Cable television systems generally operate
pursuant to franchises granted on a non-exclusive basis. Franchising authorities
may not unreasonably deny requests for additional franchises and may operate
cable television systems themselves. Well-financed businesses from outside the
cable television industry (such as the public utilities that own the poles to
which cable is attached) may become competitors for franchises or providers of
competing services. We are aware of direct competition from other franchised
cable television operators (called "overbuilding") in systems that service less
than 1% of its total basic subscribers. Additional cable television systems may
be constructed in our other franchise areas.
DIGITAL BROADCAST SATELLITES. The fastest growing method of satellite
distribution is by high-powered direct broadcast satellites utilizing video
compression technology, which provides more than 100 channels of programming
over a single high-powered digital broadcast satellite. Digital broadcast
satellite service can be received virtually anywhere in the United States
through small rooftop or side-mounted antennae and is not subject to certain
local restrictions on the location and use of digital broadcast satellite and
other satellite receiver dishes. Digital broadcast satellite service is
presently being heavily marketed on a nationwide basis by three service
providers. Digital broadcast satellite systems offer more programming and with
digital quality, but have high upfront costs and a lack of local programming,
service and equipment distribution. One digital broadcast satellite provider has
announced plans to offer some local signals in a limited number of markets.
SATELLITE MASTER ANTENNA TELEVISION SYSTEMS. Cable television operators
also face competition from private satellite master antenna television systems
that serve condominiums, apartment and office complexes and private residential
developments. Like cable television systems, satellite master antenna television
systems offer both improved reception of local television stations and many of
the same satellite-delivered program services. Satellite master antenna
television operators often enter into exclusive agreements with building owners
or homeowners associations, although some states have enacted laws that
authorize franchised cable television operators access to such private
complexes. Packages of data and video services are also being offered to private
residential and commercial developments. As long as they do not use public
rights-of-way, satellite master antenna television systems can interconnect
non-commonly owned buildings without having to comply with many of the local,
state and federal regulations that are imposed on cable television systems. Our
ability to compete for customers in residential and commercial developments
served by satellite master antenna television operators is uncertain.
LOCAL MULTIPOINT DISTRIBUTION SERVICE. Local multipoint distribution
service, a new wireless service, can deliver over 100 channels of programming
directly to consumers' homes. A large amount of this spectrum was auctioned in
March 1998, and cable television operators and local telephone companies were
restricted in their participation in this auction. It is uncertain whether this
spectrum will be used to deliver multichannel video programming and other
services to subscribers and thereby compete with franchised cable television
systems.
MULTICHANNEL MULTIPOINT DISTRIBUTION SYSTEMS. Multichannel multipoint
distribution systems use low power microwave frequencies to transmit video
programming over the air to customers. Wireless
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<PAGE>
distribution services provide many of the same programming services as cable
television systems, and digital compression technology is likely to increase
significantly the channel capacity of their systems. Multichannel multipoint
distribution systems service requires unobstructed "line of sight" transmission
paths. In the majority of our franchise service areas, prohibitive topography
and "line of sight" access have limited, and are likely to continue to limit,
competition from multichannel multipoint distribution systems. Moreover, in
the majority of our franchise areas, multichannel multipoint distribution
systems operators face significant barriers to growth because lower population
densities make these areas less attractive. We are not aware of any significant
multichannel multipoint distribution systems operation currently within our
cable television franchise service areas, other than Wireless One, Inc., which
competes with us in Rankin County, Mississippi.
LOCAL EXCHANGE CARRIERS. The Telecommunications Act of 1996 (1996
Telecom Act) allows local exchange carriers and others to compete with cable
television systems and other video services in their telephone service
territory, subject to certain regulatory requirements. Local exchange carriers
use a variety of distribution methods, including both broadband wire facilities
and wireless transmission facilities within and outside of their telephone
service areas. Local exchange carriers and other telephone companies have an
existing relationship with the households in their service areas, have
substantial financial resources, and may have an existing infrastructure capable
of delivering cable television service. Unlike cable television systems, local
exchange carriers are not required, under certain circumstances, to obtain local
franchises to deliver video services and are not subject to certain obligations
imposed under such franchises. We believe that our rural markets are unlikely to
support competition in the provision of video and telecommunications broadband
services given the lower population densities and higher capital costs per
household of installing plant.
PUBLIC UTILITIES. Registered utility holding companies and their
subsidiaries may provide telecommunications services (including cable
television). Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems. Electric utilities also
have the potential to become significant competitors in the video marketplace,
as many of them already possess fiber optic transmission lines in certain of the
areas they serve. In the last year, several utilities have announced, commenced,
or moved forward with ventures involving multichannel video programming
distribution.
OTHER NEW TECHNOLOGIES. Other new technologies, including
Internet-based services, may compete with cable television systems. Incumbent
television broadcast licensees may obtain licenses for digital television, which
can deliver high definition television pictures, multiple digital-quality
program streams, as well as CD-quality audio programming and advanced digital
services, such as data transfer or subscription video. Television broadcast
stations are authorized to transmit textual and graphic information. Commercial
and noncommercial FM stations may use their subcarrier frequencies to provide
nonbroadcast services, including data transmissions. In addition, over-the-air
interactive video and data service permits two-way interaction with commercial
and educational programming, along with informational and data services. Local
exchange carriers and other common carriers provide facilities for the
transmission and distribution of video services, including interactive
computer-based services like the Internet, data and other nonvideo services.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environments, are constantly
occurring. We are not, therefore, able to predict the effect that current or
future developments might have on the cable industry or on our operations.
17
<PAGE>
EMPLOYEES
We have approximately 1,326 employees as of December 31, 1999. No
employees are covered by collective bargaining agreements, and we consider
relations with our employees to be good.
FEDERAL REGULATION OF RADIO BROADCASTING
INTRODUCTION
The ownership, operation and sale of broadcast stations, including
those licensed to us, are subject to the jurisdiction of the FCC, which acts
under authority derived from the Communications Act of 1934 (the Communications
Act). The Communications Act was amended in 1996 by the 1996 Telecom Act to make
changes in several broadcast laws. Among other things, the FCC grants permits
and licenses to construct and operate radio stations; assigns frequency bands
for broadcasting; determines whether to approve changes in ownership or control
of station licenses; regulates equipment used by stations and the operating
power and other technical parameters of stations; adopts and implements
regulations and policies that directly or indirectly affect the ownership,
operation and employment practices of stations; regulates some forms of radio
broadcasting programming; and has the power to impose penalties for violations
of its rules under the Communications Act.
LICENSE GRANT AND RENEWAL
Radio broadcast licenses are granted and renewed for maximum terms of
eight years. Licenses may be renewed through an application to the FCC. The
Communications Act requires that the FCC grant the renewal of a station's
license if the FCC finds that, during the preceding term of the license, the
station has served the public interest, convenience and necessity, that there
have been no serious violations by the licensee of the Communications Act or the
rules and regulations of the FCC, and that there have been no other violations
by the licensee of the Communications Act or the rules and regulations of the
FCC that, when taken together, would constitute a pattern of abuse.
Petitions to deny license renewal applications can be filed by
interested parties, including members of the public. Such petitions may raise
various issues before the FCC. The FCC is required to hold hearings on renewal
applications if it is unable to determine that renewal of a license would serve
the public interest, convenience and necessity, or if a petition to deny raises
a "substantial and material question of fact" as to whether the grant of the
renewal application would be prima facie inconsistent with the public interest,
convenience and necessity. Also, during certain periods when a renewal
application is pending, the transferability of the applicant's license may be
restricted. Historically, we have not experienced any material problems renewing
our licenses to operate our radio stations and are not currently aware of any
facts that would prevent the timely renewal of our licenses. There can be no
assurance, however, that our licenses will be renewed.
The following table sets forth certain regulatory information regarding
each of the stations owned by us. "HAAT," which applies to FM stations only,
represents height above average terrain. Height above average terrain means the
actual height of the station's transmitting antenna above the ground level of
the surrounding terrain and is used to measure the coverage of a FM station. The
FCC class determines the maximum power and maximum height above average terrain
for the particular station.
18
<PAGE>
<TABLE>
<CAPTION>
Frequency
City of (FM-MHZ) FCC HAAT Power in Expiration Date of
Market and Stations Licensure (AM-KHZ) Class (Meters) Kilowatts (Day) License
--------------------- ---------- ---------- ----- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
San Francisco, CA
KNBR-AM......... San Francisco 680 KHz A -- 50 KW December 1, 2005
KFOG-FM......... San Francisco 104.5 MHz B 459 7.1 KW December 1, 2005
KFFG-FM......... Los Altos 97.7 MHz A 137 1.6 KW December 1, 2005
KSAN-FM......... San Mateo 107.7 MHz B 354 8.9 KW December 1, 2005
KTCT-AM......... San Mateo 1050 KHz B -- 50 KW December 1, 2005
Dallas/Ft. Worth, TX
KLIF-AM......... Dallas 570 KHz B -- 5 KW August 1, 2005
KKLF-AM......... Dennison/Sherman 950 KHz B -- .5 KW August 1, 2005
KTCK-AM......... Dallas 1310 KHz B -- 5 KW August 1, 2005
KPLX-FM......... Ft. Worth 99.5 MHz C 511 100 KW August 1, 2005
KKMR-FM......... Haltom City 93.3 MHz C2 133 50 KW August 1, 2005
KMRR-FM......... Sanger 104.1 MHz C3 150 11 KW August 1, 2005
KTBK-AM......... Sherman 1700 KHz B -- 10 KW Pending
KGVL-AM (1)..... Greenville 1400 KHz C 1 KW August 1, 2005
KIKT-FM (1)..... Greenville 935 MHz C3 100 91.1 KW August 1, 2005
Houston, TX
KRBE-FM......... Houston 104.1 MHz C 585 100 KW August 1, 2005
Atlanta, GA
WNNX-FM......... Atlanta 99.7 MHz C 315 100 KW April 1, 2004
WHMA-FM......... Anniston, AL 100.5 MHz C 348 100 KW April 1, 2004
WHMA-AM......... Anniston, AL 1390 KHz B -- 5 KW April 1, 2004
Cincinnati, OH
WRRM-FM......... Cincinnati 98.5 MHz B 246 17.5 KW October 1, 2004
WMOJ-FM......... Fairfield 94.9 MHz B 322 10.5 KW October 1, 2004
Indianapolis, IN
WFMS-FM......... Indianapolis 95.5 MHz B 302 13 KW August 1, 2004
WGRL-FM......... Noblesville 93.9 MHz A 150 2.75 KW August 1, 2004
WGLD-FM......... Indianapolis 104.5 MHz B 150 50 KW August 1, 2004
York/Lancaster, PA
WSBA-AM......... York 910 KHz B -- 5 KW August 1, 2006
WARM-FM......... York 103.3 MHz B 398 6.4 KW August 1, 2006
Albemarle, NC
WABZ-FM(1)...... Albemarle 100.9 MHz A 61 3 KW December 1, 2003
</TABLE>
- --------------------
(1) Operated by a third party under a time brokerage agreement.
REGULATORY APPROVALS
Broadcast licenses may not be assigned nor may the control of broadcast
licenses be transferred without the prior approval of the FCC. In determining
whether to assign, transfer, grant or renew a broadcast license, the FCC
considers a number of factors pertaining to the proposed licensee, including
limits on common ownership of media properties, financial qualifications of the
proposed licensee, the "character" of the proposed licensee (including that no
party to the application (i.e. officer, director, or 10% or greater owner) is
subject to the denial of federal benefits that include FCC benefits pursuant to
Section 5301 of the Anti-Drug Abuse Act of 1988, 21 U.S.C. sec.862), limitations
on alien ownership, and compliance with programming, public file and
anti-discrimination requirements.
Assigning a license or transferring control requires the filing of an
application with the FCC. The FCC staff reviews the application and determines
whether to grant the application. This process generally takes about four
months. During the application process, interested parties and the public may
file petitions, during specific periods of time, to deny or raise objections to
the application. A full FCC review of staff action can be requested, and final
FCC approval or disapproval is subject to judicial review.
Absent a timely request for reconsideration, administrative review or
judicial review, the FCC staff's grant of an application becomes final by
operation of law and generally is no longer subject to administrative or
judicial review.
The pendency of a license renewal application may alter the
aforementioned timetables, because the FCC might not issue an unconditional
assignment grant if the station's license renewal is pending.
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<PAGE>
OWNERSHIP MATTERS
The 1996 Telecom Act and the FCC's broadcast multiple ownership rules
do not restrict the number of radio stations one person or entity may own
(including having an attributable interest in), operate or control on a national
level, but do impose restrictions on a local level.
These restrictions are:
(i) in a market with 45 or more commercial radio signals, an entity may own
up to eight commercial radio stations, not more than five of which are
in the same service (FM or AM);
(ii) in a market with between 30 and 44 (inclusive) commercial radio
signals, an entity may own up to seven commercial radio stations, not
more than four of which are in the same service;
(iii) in a market with between 15 and 29 (inclusive) commercial radio
signals, an entity may own up to six commercial radio stations, not
more than four of which are in the same service; and
(iv) in a market with 14 or fewer commercial radio signals, an entity may
own up to five commercial radio stations, not more than three of which
are in the same service, except that an entity may not own more than
50% of the stations in such market.
The foregoing summarizes the material radio broadcast industry
regulations with which we must comply. However, it does not purport to describe
all present and proposed regulations and legislation relating to the radio
broadcasting industry, some of which may be subject to judicial and legislative
review and change, and their impact on the radio broadcasting industry or us
cannot be predicted at this time.
REGULATION OF CABLE TELEVISION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future, materially affect us and the cable television industry. The following is
a summary of federal laws and regulations materially affecting the growth and
operation of the cable television industry and a description of certain state
and local laws. We believe that the regulation of the cable television industry
remains a matter of interest to Congress, the FCC and other regulatory
authorities. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on us.
FEDERAL LEGISLATION
The principal federal statute governing the cable television industry
is the Communications Act of 1934, as amended. As it affects the cable
television industry, the Communications Act has been significantly amended on
three occasions, by the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom
Act. The 1996 Telecom Act altered the regulatory structure governing the
nation's telecommunications providers. It removed barriers to competition in
both the cable television market and the local telephone market. Among other
things, it also reduced the scope of cable rate regulation. In
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<PAGE>
addition, the 1996 Telecom Act required the FCC to undertake a host of
rulemakings to implement the 1996 Telecom Act, the final outcome of which cannot
yet be determined.
FEDERAL REGULATION
The FCC is the principal federal regulatory agency with jurisdiction
over cable television. It has adopted regulations covering such areas as
cross-ownership between cable television systems and other communications
businesses, carriage of television broadcast programming, cable rates, consumer
protection and customer service, leased access, indecent programming, programmer
access to cable television systems, programming agreements, technical standards,
consumer electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, political
programming and advertising, advertising during children's programming, signal
leakage and frequency use, maintenance of various records, and antenna structure
notification, marking and lighting. The FCC has the authority to enforce these
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. A brief summary of
certain of these federal regulations as adopted to date follows.
RATE REGULATION
Substantial federal legislation and regulations have governed cable
television rates since 1984. Pursuant to the 1984 and 1992 Cable Acts, rates for
the basic service tier, the lowest level of cable programming service which must
include local broadcast channels and public access channels, were deregulated
for cable television systems that the FCC has determined to be subject to
effective competition. The 1996 Telecom Act expanded the definition of effective
competition to cover situations where a local telephone company or its
affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except direct broadcast
satellites. Satisfaction of this test exempts a cable operator from rate
regulation with respect to the basic service tier.
We are currently being regulated for basic service, installation and
equipment rates in five of our franchise areas, three in Maine and two in
Mississippi. Where there is no effective competition, franchise authorities may
regulate the monthly rates we charge to subscribers for the basic service tier
and for the installation, sale and lease of equipment used by subscribers to
receive basic service. In addition, pursuant to the 1996 Telecom Act, the FCC's
jurisdiction to regulate the rates of the cable service programming tier, which
generally includes programming other than that carried onthe basic service tier
or offered on a per-program or per-channel basis expired in 1999. Per-channel
and pay-per-view programming has always been exempt from rate regulation. New
product tiers also can be created free of rate regulation so long as certain
conditions are met such as moving services from existing tiers to the new tiers.
Local franchising authorities have authority to order reductions and,
in certain circumstances, refunds of existing rates for the basic service tier
and associated equipment. In carrying out their rate regulatory authority,
however, local officials are subject to certain FCC standards. As an alternative
to the FCC's benchmark price cap system for measuring the reasonableness of
existing rates, cable operators may make cost-of-service showings which may
justify rates above the applicable benchmarks. Future rate increases may not
exceed an inflation-indexed amount, plus increases in certain costs beyond the
cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates also can be made
in the event a cable television operator adds or
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deletes channels. There is also a streamlined cost-of-service methodology
available to justify a rate increase for "significant" system rebuilds or
upgrades.
Existing regulations require cable television systems to permit
customers to purchase video programming on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic service tier, unless the cable television system is technically incapable
of doing so. Generally, this exemption from compliance with the statute for
cable television systems that do not have such technical capability is available
until a cable television system obtains the capability, but not later than
December 2002.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system (i.e., the system is located in the station's designated market area ) to
elect every three years whether to require the cable television system to carry
the station, subject to certain exceptions, or whether the cable television
system will have to negotiate for "retransmission consent" to carry the station.
The next election between must-carry and retransmission consent will be October
1, 2002. A cable television system is generally required to devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations whether pursuant to the mandatory carriage requirements or
retransmission consent requirements of the 1992 Cable Act. Local non-commercial
television stations are also given mandatory carriage rights, subject to certain
exceptions, on cable systems with the principal headend located within the
larger of: (i) a 50-mile radius from the station's city of license; or (ii) the
station's Grade B contour (a measure of signal strength). Unlike commercial
stations, noncommercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. In addition, cable
television systems have to obtain retransmission consent for the carriage of all
"distant" commercial broadcast stations, except for certain "superstations"
(i.e., commercial satellite-delivered independent stations such as WGN). To
date, compliance with the "retransmission consent" and "must carry" provisions
of the 1992 Cable Act has not had a material effect on us, although this result
may change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
has initiated a rulemaking proceeding on the carriage of television signals in
high definition and digital formats. The outcome of this proceeding could have a
material effect on the number of services that a cable operator will be required
to carry.
RENEWAL OF FRANCHISES AND FRANCHISE FEES
The 1984 Cable Act established renewal procedures and criteria designed
to protect incumbent franchisees against arbitrary denials of renewal. While
these formal procedures are not mandatory unless timely invoked by either the
cable television operator or the franchising authority, they can provide
substantial protection to incumbent franchisees. Even after the formal renewal
procedures are invoked, franchising authorities and cable television operators
remain free to negotiate a renewal outside the formal process. Nevertheless,
renewal is by no means assured, as the franchisee must meet certain statutory
standards. Even if a franchise is renewed, a franchising authority may impose
new and more onerous requirements such as upgrading cable-related facilities and
equipment and complying with voluntary commitments, although the municipality
must take into account the cost of meeting such requirements. In the case of
franchises in effect prior to the effective date of the 1984 Cable Act,
franchising authorities may enforce requirements contained in the franchise
relating to facilities, equipment and services, whether or not cable-related.
The 1984 Cable Act, under certain limited circumstances, permits a cable
operator to obtain modifications of franchise obligations. Franchises have
generally been renewed for cable television operators that have provided
satisfactory services and have
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complied with the terms of their franchises. Historically, we have not
experienced any material problems renewing our franchises for our cable
television systems. We are not aware of any current or past material failure on
our part to comply with our franchise agreements. We believe that we have
generally complied with the terms of our franchises and have provided quality
levels of service.
The 1992 Cable Act makes several changes to the process under which a
cable television operator seeks to enforce his renewal rights which could make
it easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities have the
right to deny renewal because of an operators failure to substantially comply
with the material terms of the franchise even if the franchising authority has
"effectively acquiesced" to such past violations. The franchising authority is,
however, precluded from denying renewal if, after giving the cable television
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable television operator of its failure or inability to cure. Courts
may not reverse a denial of renewal based on procedural violations found to be
"harmless error."
Franchising authorities may generally impose franchise fees of up to 5%
of a cable television system's annual gross revenues, excluding revenues derived
from telecommunications services. However, they may be able to exact some
compensation for the use of public rights-of-way.
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require
cable television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
COPYRIGHT MATTERS
Cable systems must obtain copyright licenses for programming and
television signals they carry. Copyright authority for programming on
non-broadcast networks typically is obtained from the networks in question, and
copyright authority for programming originated locally by the cable system must
be obtained directly from copyright holders. The Copyright Act provides a
blanket license for copyrighted material on television stations whose signals a
cable system retransmits. Cable operators can obtain this license by filing
semi-annual reports and paying a percentage of their revenues as a royalty fee
to the U.S. Copyright Office, which then distributes the royalty pool to
copyright holders. For larger cable systems, these payments vary with the
numbers and type of distant television stations the system carries. From time to
time, Congress considers proposals to alter the blanket copyright license, some
of which could make the license more costly.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. Franchises generally contain
provisions governing fees to be paid to the franchising authority, length of the
franchise term, renewal, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use
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<PAGE>
and occupancy of public streets and number and types of cable television
services provided. The 1992 Cable Act prohibits exclusive franchises, and allows
franchising authorities to regulate customer service and rates. Franchising
authorities may operate their own multichannel video distribution system without
a franchise. States and local franchising authorities may adopt certain
restrictions on cable television systems ownership.
The foregoing summarizes the material cable television industry
regulations with which we must comply. However, it does not purport to describe
all present and proposed federal, state and local regulations and legislation
relating to the cable television industry, some of which are subject to judicial
and legislative review and change, and their impact on the cable television
industry or us cannot be predicted at this time.
ITEM 2. PROPERTIES
The headquarters of our cable television operations are located in
York, Pennsylvania in office space leased from a related party. We do not have a
separate headquarters for our radio broadcast operations.
We lease nine studio facilities for our radio operations. We own
broadcast towers for 11 of our radio stations and lease 13 other broadcast
towers. We own the real property under nine of our broadcast towers and lease
the land under our other 15 towers. We own three, and lease seven, office and
signal receiving and transmitting facilities for our cable television
operations. In connection with our cable operations, we own eight tower
locations and lease eight others.
Our principal physical assets with respect to our cable operations
consist of cable television operating plant and equipment, including signal
receiving, encoding and decoding devices, headends and distribution systems and
customer house drop equipment for each of our cable television systems. The
signal receiving apparatus typically includes a tower, antenna, ancillary
electronic equipment and earth stations for reception of satellite signals.
Headends, consisting of associated electronic equipment necessary for the
reception, amplification and modulation of signals, are located near the
receiving devices. Our distribution system consists primarily of coaxial and
fiber optic cables and related electronic equipment.
We believe that our properties are suitable for our operations and are
in good condition.
ITEM 3. LEGAL PROCEEDINGS
We currently and from time to time are involved in litigation incidental
to the conduct of our business, but we are not currently a party to any lawsuit
or proceeding which, in our opinion, is likely to have a material adverse effect
on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the
fourth quarter of 1999.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no market for our common stock. All of the outstanding common
stock of Susquehanna Media is owned by our parent, Susquehanna Pfaltzgraff Co.
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ITEM 6. SELECTED FINANCIAL DATA
The below selected financial data as of and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 is derived from our audited
consolidated financial statements. Our audited consolidated financial statements
and related notes for the years ended December 31, 1999, 1998 and 1997 are
included elsewhere in this annual report. You should read this information and
the accompanying notes in conjunction with the consolidated financial statements
and related notes and the other financial information included elsewhere in this
annual report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Radio $185,193 $151,170 $131,438 $116,300 $100,556
Cable 82,720 70,641 65,122 55,791 48,544
Other 3,353 1,616 539 85 --
-------- -------- ------- ------- -------
Total revenues 271,266 223,427 197,099 172,176 149,100
Total operating expenses 203,218 172,224 154,389 135,385 118,914
-------- -------- ------- ------- -------
Operating income 68,048 51,203 42,710 36,791 30,186
Interest expense, net 28,573 20,506 18,890 13,797 12,111
Gain (loss) on sale of assets (1,499) 1,748 9,451 21,768 (20)
Interest income from loan to parent 4,476 -- -- -- --
company
Pension curtailment gain 2,299 -- -- -- --
Other income 379 334 426 1,177 1,329
-------- -------- ------- ------- -------
Income before income taxes 45,130 32,779 33,697 45,939 19,384
Provision for income taxes 18,044 14,523 14,033 20,305 8,913
-------- -------- ------- ------- -------
Income before extraordinary loss 27,086 18,256 19,664 25,634 10,471
Loss related to early retirement of
debt (3,316) -- -- -- --
-------- -------- ------- ------- -------
Income before minority interests 23,770 18,256 19,664 25,634 10,471
Minority interests (4,140) (4,304) (3,070) (4,111) (1,258)
-------- -------- ------- ------- -------
Net income $ 19,630 $ 13,952 $ 16,594 $ 21,523 $9,213
======== ======== ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $526,142 $355,141 $333,476 $238,628 $141,902
Total debt 405,621 272,776 265,500 200,350 137,450
Stockholders' equity (deficit) 31,281 9,201 (2,295) (18,191) (40,814)
RATIO OF EARNINGS TO FIXED CHARGES (2) 2.4x 2.3x 2.7x 4.1x 2.3x
SUPPLEMENTARY FINANCIAL DATA:
Adjusted EBITDA: (1)
Radio $ 64,744 $ 42,553 $ 34,062 $ 29,761 $ 22,997
Cable 35,458 31,699 29,511 23,975 20,818
Other 2,167 (386) (692) (1,236) (898)
-------- -------- ------- ------- -------
Total adjusted EBITDA $102,369 $73,866 $62,881 $52,500 $42,917
======== ======== ======= ======= =======
Cash flows related to:
Operating activities $60,211 $36,843 $36,347 $21,711 $27,828
Investing activities (182,944) (38,842) (70,399) (81,588) (2,469)
Financing activities 121,430 3,941 33,334 60,595 (25,359)
Capital expenditures $33,066 $29,592 $22,610 $12,073 $12,899
</TABLE>
- --------------------
(1) We define adjusted EBITDA as net income before income taxes,
extraordinary items, interest expense, interest income, depreciation
and amortization, employee stock ownership plan
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expense, pension curtailment gain, minority interest, and any gain or
loss on the disposition of assets. Employee stock ownership plan
expense for the year ended December 31, 1999 was $6.4 million.
Although adjusted EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles, we believe
that adjusted EBITDA is a meaningful measure of performance because it
is commonly used in the radio and cable television industries to
analyze and compare radio and cable television companies on the basis
of operating performance, leverage and liquidity. In addition, our new
senior credit facility and the indenture that governs our 8.5% senior
subordinated notes contain certain covenants in which compliance is
measured by computations substantially similar to those used in
determining adjusted EBITDA. There are no legal restrictions on the use
of adjusted EBITDA, other than those contained in our new senior credit
facility and indenture. Management expects that adjusted EBITDA will be
used to satisfy working capital, debt service and capital expenditure
requirements and other commitments and contingencies. Adjusted EBITDA
should not be considered in isolation or as a substitute for or an
alternative to net income, cash flow from operating activities or other
income or cash flow data prepared in accordance with GAAP. Adjusted
EBITDA should not be considered as a measure of a company's operating
performance or liquidity. Adjusted EBITDA as presented may not be
comparable to other similarly titled measures used by other companies.
(2) The ratio of earnings to fixed charges is expressed as the ratio of
income before income taxes and extraordinary items plus fixed charges
(excluding capitalized interest) to fixed charges. Fixed charges
consist of interest expense, capitalized interest and one-third of
rental expense (the portion deemed representative of the interest
factor).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and our financial statements and the notes
thereto included elsewhere in this annual report. Much of the discussion in this
section involves forward-looking statements. Our actual results may differ
significantly from the results suggested by these forward-looking statements.
OVERVIEW
We are a diversified communications company with operations in radio
broadcasting and cable television. We are the largest privately owned radio
broadcaster and the 10th largest radio broadcaster overall in the United States
based on revenues. We own and operate 15 FM and 8 AM stations that serve four of
the nation's ten largest radio markets (San Francisco, Dallas, Houston and
Atlanta), as well as three other significant markets (Cincinnati, Indianapolis
and York, Pennsylvania). We are also the 23rd largest cable multiple system
operator in the United States with seven cable systems serving approximately
187,000 subscribers as of December 31, 1999.
For the year ended December 31, 1999, we had revenues and adjusted
EBITDA of $271.3 million and $102.4 million, respectively, with approximately
63% of adjusted EBITDA generated by our radio broadcast operations and 35% by
our cable television operations. For the year ended December 31, 1999, our net
income was $19.6 million, our cash flows from (used in) operating, investing and
financing
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activities were $60.2 million, ($182.9) million and $121.4 million,
respectively, and our ratio of earnings to fixed charges was 2.4x.
We also provide Internet access and enhanced services to residential
and business customers under the tradename "BlazeNet." The services include:
o Internet access via telephone dial-up service or cable modem;
o website creation, hosting and maintenance; and
o local and wide area network design, construction and operation.
REVENUES. Our principal source of radio broadcasting revenue is the
sale of broadcasting time on our stations for advertising. Radio revenue is
reported net of agency commissions. Sales of advertising are affected by changes
in demand for advertising time by national and local advertisers and by
advertising rates charged by the stations. Radio station advertising rates are
based on a station's ability to attract audiences that match the demographic
groups that advertisers want to reach, the number of stations competing in a
marketplace and economic conditions. Radio stations attempt to maximize revenue
by adjusting advertising rates based upon local market conditions, by
controlling inventory, by creating demand and by increasing audience ratings.
Radio stations sometimes use barter or trade agreements to exchange merchandise
or services for advertising time with advertisers, in lieu of cash. It is our
policy not to pre-empt advertising paid in cash with advertising paid in trade.
For the years ended December 31, 1999, 1998 and 1997, cash advertising revenue
was 99%, 98% and 98% of broadcasting revenue, respectively. Seasonal revenue
fluctuations are common in the radio broadcasting industry, due primarily to
fluctuations in expenditure levels by local and national advertisers. Our radio
revenues are lowest in the first quarter and are relatively level in the other
quarters.
Most of our cable revenues are derived from monthly subscriber fees for
cable television programming services and from fees incident to the provision of
such services, such as installation fees and fees for converter rentals and
rentals of remote control devices. Some revenues are derived from advertising.
Since cable is subject to regulation at the federal, state and local levels,
increases in rates charged for regulated services may be governed by the 1992
Cable Act and the 1996 Telecom Act. Cable revenues are affected by the timing of
subscriber rate increases.
OPERATING EXPENSES. Radio operating expenses are comprised of employee
salaries and commissions, depreciation and amortization, programming expenses,
advertising expenses, promotion expenses and selling, general and administrative
expenses. General and administrative expenses include office administration and
other support functions that are handled on a centralized basis.
Cable operating expenses include programming expenses, employee
salaries and benefits, electricity, depreciation, amortization and selling,
general and administrative expenses for accounting and billing services,
franchise fees, office administration expenses and corporate charges.
Depreciation and amortization expense relates to the depreciation of
tangible assets used in the business and the amortization of franchise costs.
ADJUSTED EBITDA. Adjusted EBITDA is net income before income taxes,
extraordinary items, interest expense, interest income, depreciation and
amortization, employee stock ownership plan expense, pension curtailment gain,
minority interest and any gain or loss on the disposition of assets.
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RESULTS OF OPERATIONS
The following table summarizes our consolidated historical results of
operations and consolidated historical results of operations as a percentage of
revenues for the years ended December 31, 1999, 1998 and 1997 (in millions of
dollars):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Radio $ 185.2 68.3% $ 151.2 67.7% $ 131.4 66.7%
Cable 82.7 30.5% 70.6 31.6% 65.1 33.0%
Other 3.4 1.2% 1.6 0.7% 0.6 0.3%
--------- ---------- --------- --------- --------- ----------
Total revenues 271.3 100.0% 223.4 100.0% 197.1 100.0%
--------- ---------- --------- --------- --------- ----------
Operating expenses:
Operating, programming,
selling, general and
administrative 175.7 64.7% 149.9 67.1% 134.7 68.3%
Depreciation and amortization 27.6 10.2% 22.3 10.0% 19.7 10.0%
--------- ---------- --------- --------- --------- ----------
Total operating expenses 203.3 74.9% 172.2 77.1% 154.4 78.3%
--------- ---------- --------- --------- --------- ----------
Operating income $ 68.0 25.1% $ 51.2 22.9% $ 42.7 21.7%
========= ========== ========= ========= ========= ==========
Net income $ 19.6 7.2% $ 14.0 6.3% $ 16.6 8.4%
========= ========== ========= ========= ========= ==========
Adjusted EBITDA $ 102.4 37.7% $ 73.9 33.1% $ 62.9 31.9%
========= ========== ========= ========= ========= ==========
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased $47.9 million, or 21%, from 1998 to 1999.
Radio revenues increased $34.0 million, or 23%, from 1998 to 1999. The number of
stations was comparable for 1998 and 1999. Radio's revenue growth was due to
higher advertising rates. Cable revenues increased $12.1 million, or 17%, from
1998 to 1999. Revenues from subscribers of Hanover Cable TV, which was acquired
on January 29, 1999, contributed $5.2 million or 43% of the increased cable
revenues. Rate increases on basic and expanded basic services were responsible
for the remaining growth in cable revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$5.2 million, or 23%, from 1998 to 1999. Cable depreciation and amortization
expenses comprised $4.4 million of the increase, with the acquisition of Hanover
Cable TV being responsible for $2.4 million, or 46% of the change. Completed
phases of cable system rebuilds also contributed to 1999's increased expense.
Radio depreciation and amortization decreased $0.2 million, or 3%, from 1998 to
1999.
OPERATING INCOME. Operating income increased $16.8 million or 33% from
1998 to 1999. While depreciation and amortization increased faster than revenues
due to the Hanover Cable TV acquisition and cable plant rebuilds, other expenses
increased approximately 17% as compared to the 21% increase in revenues. The
largest single item contributing to the increase in operating expenses was ESOP
benefit cost of $6.4 million, or 21% of the increase, was a new cost for 1999.
Cable service programming costs, radio promotion and advertising and sales
commissions grew commensurately with revenues.
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NET INCOME. Net income increased $5.6 million or 40% from 1998 to 1999,
largely due to increased operating income. The 1999 extraordinary loss related
to early retirement of debt decreased net income by $3.3 million. Income before
the extraordinary loss was $8.8 million, or 48% higher than 1998. Although gain
(loss) on sale of assets, pension curtailment gain and other income for 1999 was
$0.9 million less than the gain on sale of assets and other income in 1998, the
significant increase in operating income and, to a lesser extent, the 10%
decrease in the effective tax rate contributed to higher 1999 net income.
ADJUSTED EBITDA. Adjusted EBITDA increased $28.5 million, or 39%, from
1998 to 1999. Adjusted EBITDA as a percentage of revenues increased from 33% in
1998 to 38% in 1999. Adjusted Radio EBITDA increased $22.1 million, or 52%, from
1998 to 1999. Adjusted Cable EBITDA increased $3.8 million, or 12%, between 1998
and 1999. The improvement in adjusted EBITDA is due to the majority of the
Company's revenue increase being derived from Radio advertising rate increases
and revenue from the acquisition of Hanover Cable TV. The Hanover cable system
has been physically merged into the existing York operation, thus avoiding added
fixed costs. The most significant cost increases experienced in 1999, new ESOP
benefit costs and depreciation and amortization expenses from the Hanover Cable
TV acquisition and cable plant rebuilds, did not impact adjusted EBITDA.
INTEREST EXPENSE. Interest expense increased $8.1 million, or 39%,
between 1998 and 1999. The increase was due to additional debt incurred during
1999, which was used to loan $116.9 million to our parent to fund its ESOP, to
acquire the assets of Hanover Cable TV and to finance a portion of our cable
rebuild projects. Interest income of $4.5 million was recognized arising from
the loan to our parent. The net increase in interest was $3.6 million, or 18%
from 1998 to 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased $26.3 million, or 13%, from 1997 to 1998.
Radio revenues increased $19.7 million, or 15%, from 1997 to 1998. For stations
operated for a full year in both 1997 and 1998, revenues increased $11.9
million, or 10%, for the year. The balance of the growth was attributable to a
full year of operation for six radio stations acquired in 1997 in San Francisco,
Indianapolis, Cincinnati and Anniston, Alabama. Increased radio revenues were
due to higher advertising rates. Cable revenues increased $5.5 million, or 9%,
from 1997 to 1998. Subscriber rate increases were primarily responsible for
cable revenue growth.
OPERATING AND PROGRAMMING EXPENSES. Operating and programming expenses
increased $7.2 million or 11% between 1998 and 1999. Increased radio programming
expenditures of $1.7 million and special event spending of $1.0 million in 1998
contributed to the increase. Cable programming supplier costs increased $1.5
million during 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 increased $8.1 million or 12% over 1997. Radio
selling, general and administrative expenses increased $5.8 million in 1998.
Approximately $3.7 million of the increase was due to increased sales
commissions and salaries. Occupancy costs of our radio operations increased $0.8
million in 1998 while those of our cable operations, as a percentage of
revenues, were unchanged from 1997 to 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.6 million or 13% from 1997 to 1998. Radio depreciation and amortization
expenses increased $1.7 million, primarily due to a full year's operation of
stations added in 1997. Cable depreciation and amortization expenses increased
$0.6 million due to system rebuilds.
30
<PAGE>
OPERATING INCOME. Operating income increased $8.5 million, or 20%, from
1997 to 1998. As a percentage of revenues, operating income increased from 22%
in 1997 to 23% in 1998. Radio operating income grew $6.4 million, or 23%, from
1997 to 1998. This increase was due to internal revenue growth from existing
stations and revenue from newer stations growing more rapidly than related
operating expenses. Cable operating income increased $1.8 million, or 12%, from
1997 to 1998. This increase was due to revenue growth generated by rate
increases.
NET INCOME. Net income decreased $2.6 million or 15.7% from 1997 to
1998. Despite an $8.5 million increase in operating income, interest expense
increased $1.6 million and gain on the sale of assets decreased $7.7 million.
Minority interests increased $1.3 million, primarily due to higher radio
earnings.
ADJUSTED EBITDA. Adjusted EBITDA increased $11.0 million, or 18%, from
1997 to 1998. Adjusted EBITDA as a percentage of revenues increased from 32% in
1997 to 33% in 1998. Adjusted Radio EBITDA increased $8.5 million, or 25%, from
1997 to 1998. Adjusted Cable EBITDA increased $2.2 million, or 7%, between 1997
and 1998. Adjusted Radio EBITDA and adjusted Cable EBITDA increased for the same
reasons that operating income increased.
INTEREST EXPENSE. Interest expense increased $1.6 million, or 9%,
between 1997 and 1998. This increase was due to the incurrence of additional
debt to acquire radio stations and fund cable system capital expenditures.
Acquisitions and capital expenditures were funded in part by cash flow from
operations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of liquidity have been cash flow from
operations and borrowings under our senior credit facilities. Our future needs
for liquidity arise primarily from capital expenditures, potential acquisitions
of radio stations and cable systems, potential repurchases of our common stock,
and interest payable on the notes and our new senior credit facility.
Net cash provided by operating activities was $60.2 million, $36.8
million and $36.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Our net cash provided by operating activities was generated
primarily by normal operations.
Net cash used by investing activities was $182.9 million for the year
ended December 31, 1999. The loan to parent was $116.9 million. The parent
repaid $5.5 million of the loan on December 30, 1999. Capital expenditures,
excluding acquisitions, were $66.5 million and $39.7 million for the years ended
December 31, 1999 and 1998, respectively. Capital expenditures over this period
were used primarily to upgrade and maintain its cable systems.
Net cash provided by financing activities was $121.4 million for the
year ended December 31, 1999. Approximately $116.9 million cash was borrowed and
subsequently loaned to the Company's parent. Deferred financing costs related to
new borrowings totaled $8.1 million.
Our acquisitions of radio stations and cable systems and our capital
expenditures have historically been financed with cash flow from operations and
borrowings under our senior credit facility. Capital expenditures, excluding
acquisitions, were $33.1 million, $29.6 million and $22.6 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Capital expenditures over
this period were used primarily to upgrade and maintain our cable systems. We
expect to make capital expenditures of $35.0 million in 2000, primarily to
continue upgrading our current cable systems.
31
<PAGE>
On May 12, 1999, we sold $150 million of 8.5% Senior Subordinated Notes
due 2009 for 99.75% of their face value. Proceeds to us were $145.5 million. As
of December 31, 1999, the fair value of these notes was $144.0 million. Any
change in interest rates will affect the market value of these notes, however
cash outflows for semi-annual interest payments are fixed.
On May 12, 1999, we also entered into a new senior credit facility
arranged by First Union Capital Markets Corp. The new senior credit facility
consists of a $250 million revolver, a $100 million term loan A, and a $100
million term loan B, all collateralized by a pledge of all of our material
assets (excluding real property) and voting common stock. The credit agreement
governing the new senior credit facility requires us to maintain certain
financial leverage and interest coverage ratios. As of December 31, 1999, we had
$194.5 million of borrowing availability under our senior credit facility. The
refinancing of our old senior credit facility and prepayment of senior notes
resulted in the recognition of an extraordinary loss of $3.3 million (net of
income taxes) for the second quarter of 1999.
We believe that funds generated from operations and the borrowing
availability under our new senior credit facility will be sufficient to finance
our current operations, our debt service obligations, including our obligations
under the notes, cash obligations in connection with potential repurchases of
our common stock and planned capital expenditures. From time to time, we
evaluate potential acquisitions of radio stations and cable television systems.
In connection with future acquisition opportunities, we may incur additional
debt or issue additional equity or debt securities depending on market
conditions and other factors. We have no current commitments or agreements with
respect to any material acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement established accounting and reporting standards for derivatives
and hedging activities. Upon the adoption of SFAS No. 133, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In July 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB
Statement No. 133" deferring the effective date for implementation of SFAS No.
133 to fiscal years beginning after June 15, 2000. We are currently evaluating
the impact the adoption of SFAS No. 133 will have on our financial position and
results of operations.
IMPACT OF YEAR 2000 ISSUES
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize the year 2000 as "00." This could cause many computer
applications to fail completely or to create erroneous results unless corrective
measures are taken. We recognized the need to ensure that our operations will
not be adversely impacted by Year 2000 software failures and evaluated and
addressed the impact of Year 2000 issues on our operations. We established a
Year 2000 Task Force to manage an overall Year 2000 assessment, remediation,
testing and contingency planning project. The Year 2000 Task Force developed and
implemented a Year 2000 strategic plan. Our goal was to minimize the potential
effects of the Year 2000 problem on customers and business processes.
Our internal information technology, product delivery and support
systems, as well as our key suppliers, vendors and customers were included in
the scope of the investigation. We use purchased software programs and systems
for a variety of functions including accounts payable and accounts receivable
accounting, inventory control and audio delivery. We received Year 2000
compliance certificates from the vendors of these programs.
Our inventory of mission-critical and non-critical systems found no
issues of significant consequence. As of December 31, 1999, we have completed
the remediation or replacement of material non-compliant system components and
the replacement of all non-compliant computers and other equipment with embedded
date chips or processors that might have had a material impact on operations.
32
<PAGE>
Costs associated with completing our Year 2000 compliance program were
approximately $648,000. As of December 31, 1999, we have completed our Year 2000
remediation and replacement project. As of March 29, 2000, we have experienced
no significant disruption in operations. Contingency plans are in place for
systems critical to our businesses. In most of our operations, business
continuity plans are in place to significantly mitigate future Year 2000 risk.
However, there can be no guarantee that other companies on which we rely are
Year 2000 compliant, or that another company's Year 2000 related problem would
not have an adverse impact on us.
Conclusions related to our Year 2000 compliance program contain
forward-looking statements and are based on management's best judgments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of December 31, 1999, the Company had $255.5 million in variable
rate debt. The fair value of this debt approximates its carrying value. Variable
rate debt matures as follows (in thousands):
2002 $ 8,750 2006 $50,500
2003 17,000 2007 89,875
2004 21,000 2008 47,375
2005 21,000
The Company's interest rate exposure is primarily to changes in LIBOR
rates. At December 31, 1999, the weighted average interest rate for the variable
rate debt was 8.1%. If LIBOR rates increased 1%, and sustained that increased
rate for an entire year, annual interest expense on variable rate debt as of
December 31, 1999 would increase by $2.6 million.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and report of independent
accounts of Susquehanna Media Co. and Subsidiaries are set forth on the pages
listed below:
Page
----
Report of Independent Accountants 35
Financial Statements
Consolidated Balance Sheets 36
Consolidated Statements of Income and Comprehensive Income 37
Consolidated Statements of Cash Flows 38
Consolidated Statements of Stockholders' Equity (Deficit) 39
Notes to Consolidated Financial Statements 40-55
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Susquehanna Media Co. and subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Susquehanna Media Co. and subsidiaries (Company) at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
March 3, 2000
35
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents 639 $ 1,942
Accounts receivable, less allowance for doubtful
accounts of $1,494 in 1999 and $1,259 in 1998 43,017 32,324
Deferred income taxes (Note 4) -- 262
Other current assets 4,400 4,223
--------- ------
Total Current Assets 48,056 38,751
--------- ------
Property, Plant and Equipment, at cost
Land 4,363 3,585
Buildings and improvements 10,556 9,499
Equipment 178,244 151,169
Construction-in-progress 25,656 19,470
--------- ------
218,819 183,723
Accumulated depreciation and amortization 94,731 84,179
--------- ------
Property, plant and equipment, net 124,088 99,544
--------- ------
Intangible Assets, net (Notes 2, 3 and 5) 215,125 201,643
--------- ------
Note Receivable from Parent (Note 9) 111,329 --
--------- ------
Investments and Other Assets (Notes 2, 3, 6 and 9) 27,544 15,203
--------- ------
$ 526,142 $355,141
========= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt (Note 3) $ 59 $ 12,054
Accounts payable 15,350 10,115
Accrued interest 3,108 1,691
Accrued income taxes 227 890
Deferred income taxes (Note 4) 815 --
Accrued ESOP benefit costs (Note 9) 1,370 --
Other accrued expenses 11,919 8,350
--------- ------
Total Current Liabilities 32,848 33,100
--------- ------
Long-term Debt (Note 3) 405,562 260,722
--------- ------
Deferred Compensation Liability (Note 7) 832 776
--------- ------
Deferred Income Taxes (Note 4) 37,166 34,119
--------- ------
Minority Interests (Note 2) 18,453 17,223
--------- ------
Stockholders' Equity (Notes 2, 3, 7 and 14)
Preferred stock - Voting, 7% cumulative with par value of $100, authorized
110,000 shares, 70,499.21 issued and outstanding 7,050 7,050
Common stock - Voting, $1 par value, authorized 1,100,000 shares, 1,100,000
shares issued and outstanding 1,100 1,100
Retained earnings 23,131 1,051
--------- ------
Total Stockholders' Equity 31,281 9,201
--------- ------
$ 526,142 $355,141
========= ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Radio $ 185,193 $ 151,170 131,438
Cable 82,720 70,641 65,122
Blazenet and other 3,353 1,616 539
-------- --------- ---------
Total revenues 271,266 223,427 197,099
-------- --------- ---------
Operating Expenses
Operating and programming 95,145 82,783 65,754
Selling 32,286 26,795 32,139
General and administrative 48,215 40,317 36,752
Depreciation and amortization 27,572 22,329 19,744
-------- --------- ---------
Total operating expenses 203,218 172,224 154,389
-------- --------- ---------
Operating Income 68,048 51,203 42,710
Other Income (Expense)
Interest expense (28,573) (20,506) (18,890)
Interest income from loan to Parent (Note 9) 4,476 -- --
Gain (loss) on sale of assets (Note 2) (1,499) 1,748 9,451
Pension curtailment gain (Note 9) 2,299 -- --
Other 379 334 426
-------- --------- ---------
Income Before Income Taxes, Extraordinary
Loss and Minority Interests 45,130 32,779 33,697
Provision for Income Taxes (Note 4) 18,044 14,523 14,033
-------- --------- ---------
Income Before Extraordinary Loss and
Minority Interests 27,086 18,256 19,664
Extraordinary Loss Related to Early Retirement
of Debt, net of $2,165 tax benefit (Note 3) (3,316) -- --
-------- --------- ---------
Income Before Minority Interests 23,770 18,256 19,664
Minority Interests (4,140) (4,304) (3,070)
-------- --------- ---------
Net Income and Comprehensive Income 19,630 13,952 16,594
Preferred Dividends Declared (493) (635) (682)
-------- --------- ---------
Net Income Available for Common Shares $ 19,137 $ 13,317 15,912
======== ========= =========
Basic Net Income Per Share (Note 8)
Income before extraordinary loss $ 20.41 $ 12.11 $ 14.47
Extraordinary loss (3.01) -- --
-------- --------- ---------
$ 17.40 $ 12.11 $ 14.47
======== ========= =========
Diluted Net Income Per Share (Note 8)
Income before extraordinary loss $ 20.13 $ 11.31 $ 13.50
Extraordinary loss (2.96) -- --
-------- --------- ---------
$ 17.17 $ 11.31 $ 13.50
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 19,630 $ 13,952 $ 16,594
Adjustments to reconcile net income to net cash:
Depreciation and amortization 27,572 22,329 19,744
Deferred income taxes 4,124 2,938 1,300
Minority interest 4,140 4,304 3,070
Equity in (income) losses of investees (652) 534 281
Extraordinary loss 3,316 -- --
Pension curtailment gain (2,299) -- --
Imputed deferred compensation 80 200 318
Deferred financing amortization 885 791 703
Loss (gain) on sale of assets 1,499 (1,748) (9,451)
Changes in assets and liabilities:
Increase in accounts receivable, net (10,694) (2,550) (3,140)
Decrease (increase) in other current assets (484) 209 (637)
Increase (decrease) in accounts payable 5,236 (526) 1,157
Increase (decrease) in accrued interest 1,417 (896) 1,345
Increase (decrease ) in accrued income taxes 1,501 (2,784) 3,362
Increase in accrued ESOP benefit cost 1,370 -- --
Increase in other accrued expenses 3,570 90 1,701
--------- --------- ---------
Net cash provided by operating activities 60,211 36,843 36,347
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to Parent (116,850) -- --
Repayment on loan to Parent 5,521 -- --
Purchase of property, plant and equipment, net (33,066) (29,592) (22,610)
Purchase of cable assets (32,400) (2,161) (1,160)
Purchase of radio assets (1,171) (7,970) (68,649)
Proceeds from sale of radio stations -- -- 26,523
Acquisition of HCI, Inc. -- -- (1,500)
Proceeds related to exchange of cable assets -- 3,203 --
Increase in investments, other assets and intangible assets (4,978) (3,250) (3,000)
Other -- 928 (3)
--------- --------- ---------
Net cash used by investing activities (182,944) (38,842) (70,399)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 350,000 -- 100,000
Repayment of prior debt (272,600) -- --
Increase in revolving credit borrowings 55,500 49,700 (53,600)
Payment of deferred financing costs (8,061) -- (1,088)
Debt prepayment penalties (2,925) -- --
Payments of preferred dividends (493) (635) (682)
Repayments of long-term debt -- (42,600) (11,250)
Repurchase of preferred stock -- (2,690) --
Repurchase of non-voting subsidiary common stock (10) -- (325)
Sale of non-voting subsidiary common stock 19 444 --
Decrease in cash overdrafts -- (278) 279
--------- --------- ---------
Net cash provided by financing activities 121,430 3,941 33,334
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (1,303) 1,942 (718)
CASH AND CASH EQUIVALENTS, January 1, 1,942 -- 718
--------- --------- ---------
CASH AND CASH EQUIVALENTS, December 31, $ 639 $ 1,942 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
38
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED EARNINGS STOCKHOLDERS
SHARES AMOUNTS SHARES AMOUNTS (ACCUMULATED DEFICIT) EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 97 $ 9,740 1,100 $ 1,100 $(29,032) $(18,192)
Net Income 16,594 16,594
Preferred dividends
declared (682) (682)
Repurchase of preferred stock
Adjustment of minority
interest value (15) (15)
-------- -------- -------- -------- -------- --------
Balance, January 1, 1998 97 $ 9,740 1,100 $ 1,100 $(13,135) $ (2,295)
Net Income 13,952 13,952
Preferred dividends
declared (635) (635)
Repurchase of preferred stock (27) (2,690) (2,690)
Adjustment of minority
interest value 869 869
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 70 7,050 1,100 1,100 1,051 9,201
Net Income 19,630 19,630
Preferred dividends
declared (493) (493)
Merger of cable subsidiaries (Note 7) 2,195 2,195
Adjustment of minority
interest value 748 748
-------- -------- -------- -------- -------- --------
Balance, December 31, 1999 70 $ 7,050 1,100 $ 1,100 $ 23,131 $ 31,281
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
39
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Operations - Susquehanna Media Co. (Media) and its
subsidiaries, Susquehanna Radio Corp. (SRC), Susquehanna Cable Co. (SCC),
Susquehanna Data Services, Inc. (BlazeNet), Susquehanna Fiber Systems, Inc.
and Media PCS Ventures, Inc. (collectively, the Company), are primarily in
the businesses of radio broadcasting, cable television services, Internet
services and other communications-related services. Susquehanna Fiber
Systems, Inc. is a 50% general partner in Susquehanna Adelphia Business
Solutions, a competitive access provider.
Through its subsidiaries, the Company operates radio stations in major U.S.
markets and cable television systems in Pennsylvania, Maine, Mississippi,
Illinois, and Indiana. Internet services are provided in Pennsylvania and
Mississippi.
Principles of Consolidation - The consolidated financial statements
include the accounts of Media and its subsidiaries. All significant
intercompany accounts and transactions are eliminated. All Media common
stock is owned by Susquehanna Pfaltzgraff Co. (the Parent).
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Credit Risk - The Company's accounts receivable are largely from
consumers and consumer businesses whose ability to pay is subject to
changes in general economic conditions. Media's revenues were concentrated
in the following media markets:
1999 1998 1997
---- ---- ----
San Francisco 25% 23% 21%
Dallas - Fort Worth 13% 13% 14%
Property, Plant and Equipment - These assets are stated at cost.
Depreciation and amortization are computed on the straight-line method for
financial statement purposes based on the following estimated useful lives:
Buildings and improvements - 10 to 40 years
Equipment - 3 to 20 years
Depreciation expense was approximately $16.5 million, $12.6 million and
$10.8 million for the years ended December 31, 1999, 1998, and 1997
respectively.
Asset additions and major renovations are capitalized and depreciated
over their estimated useful lives. Costs of maintenance, repairs and minor
renovations are charged against income.
40
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gains or losses on dispositions are credited to or charged against
income and the related costs and accumulated depreciation are removed from
the balance sheet.
Impairment of Long-Lived Assets - When events or changes in
circumstances indicate that the carrying value of an asset or group of
assets may be impaired, the estimated future undiscounted pretax cash flows
from the affected asset(s) are compared with carrying value to determine if
an impairment loss must be recorded. No impairment losses were recognized
in 1999, 1998 or 1997.
Disclosures about Fair Value of Financial Instruments - Financial
instruments include cash and cash equivalents, investments and long-term
debt. The fair value of investments and cash and cash equivalents
approximate their carrying values.
Investments and Other Assets - The Company's investments of less than
20% in other entities are reported using the cost method of accounting.
Investments in other entities, which are at least 20% owned, are reported
using the equity method.
Net Income Per Share - Basic net income per share excludes dilution and
is computed by dividing consolidated net income available for common
shareholders by the weighted-average number of common shares outstanding
for the period (1.1 million shares for the years ended December 31, 1999,
1998 and 1997). Diluted net income per share reflects the potential
dilution that could occur if SRC common stock options were exercised;
resulting in the issuance of additional common stock that would then share
in SRC's earnings.
Revenues - Revenues are recognized in the periods that services are
provided. Radio revenues have been reported net of agency commissions.
Agency commissions for the fiscal years ended December 31, 1999, 1998, and
1997 were $25.3 million, $20.2 million and $17.1 million, respectively.
Interest - Interest paid was $27.3 million, $21.8 million, and $16.9
million for the years ended December 31, 1999, 1998, and 1997 respectively.
Interest relating to construction of buildings and equipment is capitalized
as part of the related asset's cost. Capitalized interest was $1 million
for 1999, and $1.2 million for 1998 and $118 thousand for 1997.
Deferred financing costs are included in Investments and Other Assets
and are amortized on a straight-line basis over the repayment period of the
related debt.
Income Taxes - Income taxes are based on the liability method of
accounting. Deferred income taxes reflects the future tax consequences of
temporary differences between the tax bases of assets and liabilities and
their financial reporting balances at each year-end. Changes in enacted tax
rates are reflected in the tax provision as they occur.
Comprehensive Income - Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain
information previously not recognized in the calculation of net income.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivatives and hedging activities. Upon the
adoption of the SFAS No. 133, all derivatives are required to be recognized
in the
41
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statement of financial position as either assets or liabilities and
measured at fair value. In July 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - an amendment of FASB
Statement No. 133" deferring the effective date for implementation of SFAS
No. 133 to fiscal years beginning after June 15, 2000. The Company is
currently evaluating the impact the adoption of SFAS No. 133 will have on
its financial position and results of operations.
2. Acquisitions, Exchanges, Dispositions and Mergers
On October 22, 1999, Susquehanna Radio Corp. purchased the assets of
KIKT-FM and KGVL-AM in Greenville, Texas for $1.2 million. The Company
simultaneously entered into a time brokerage agreement with a third party
permitting them to operate the stations while FCC approval is pending on
facility adjustments that will enhance signal coverage of another
company-owned station, KKMR-FM, Dallas/Fort Worth, Texas. The purchase
price has been included in Investments and Other Assets, since the station
may be ultimately sold or swapped to facilitate a separate strategic
acquisition.
On January 29,1999, a Cable subsidiary purchased assets serving
approximately 17,000 cable subscribers in the Hanover, Pennsylvania area
for $33.4 million cash. Investments and Other Assets at December 31, 1998
included a $1 million escrowed purchase deposit.
On November 30, 1998, a cable subsidiary exchanged assets serving
approximately 6,600 subscribers in Newcastle, Maine, Warren, Maine, and New
London, New Hampshire for assets serving approximately 4,500 subscribers in
Woolwich, Harpswell, and Freeport, Maine plus $3.2 million cash. A gain of
$3 million was recognized on the sale of assets involved in the exchange.
On June 15, 1998, Susquehanna Radio Corp. purchased the assets of
KXIL-FM and KDSX-AM in North Dallas for $3.6 million and $2.6 million
respectively.
On June 2, 1998, Susquehanna Radio Corp. purchased the assets of
WABZ-FM in Albermarle, North Carolina for $1.7 million. The Company has
entered into a time brokerage agreement with a third party permitting them
to operate the station while awaiting FCC approval to relocate the signal
closer to Charlotte, North Carolina market and ultimately sell or swap the
station to facilitate a separate strategic acquisition. The purchase price
has been included in Investments and Other Assets.
On October 8, 1997, Susquehanna Radio Corp. purchased the assets of
radio station KTCT-AM (formerly KOFY-AM) in the San Francisco, California
area for $14.5 million.
On September 30, 1997, a cable subsidiary acquired assets serving
approximately 970 subscribers in Warren, Maine for $1.2 million cash.
Assets serving approximately 1,700 subscribers in New London and Wilmot,
New Hampshire were acquired for $2.2 million as of February 1, 1998.
On July 14, 1997, a radio subsidiary purchased the assets of WGLD-FM in
Indianapolis, Indiana for $4.3 million cash.
On July 7, 1997, Susquehanna Radio Corp. purchased the assets of
KSAN-FM in San Francisco, California for $44.5 million cash.
42
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Susquehanna Radio Corp. purchased the assets of WHMA-AM/FM, licensed to
Anniston, Alabama for $15.3 million on May 22, 1997. If the Company is
permitted to relocate the FM transmitting facilities within the next six
years, the WHMA-AM/FM purchase agreement provides for an additional payment
to the sellers of up to $20 million. It is not possible to determine
whether relocation will be approved or to estimate any additional cost at
this time. Any payment would be added to the cost basis of the station's
Federal Communication Commissions License.
On June 10, 1997, Susquehanna Radio Corp. exchanged its Norfolk,
Virginia radio stations and $5 million cash for WVAE-FM in Cincinnati,
Ohio. This transaction was treated as an exchange, and accordingly, the
cost basis of the assets received were increased by $5 million. The $5
million was allocated to the FCC license. The station's call letters were
changed to WMOJ-FM.
All acquisitions during the years ended December 31, 1999, 1998 and
1997 have been accounted for as purchases. The results of their operations
have been included in the Consolidated Statements of Income since
acquisition. The Company has allocated the costs of purchased assets, at
their fair market values, as follows (in thousands):
1999 1998 1997
---- ---- ----
Radio
Property, plant and equipment $ -- 630 $ 1,648
Investments and other assets 1,171 1,703 --
Intangible assets -- 5,637 98,501
-------- -------- --------
Total $ 1,171 7,970 $100,149
======== ======== ========
Cable
Property, plant and equipment $ 9,566 1,328 $ --
Intangible assets 23,834 834 1,160
-------- -------- --------
Total $ 33,400 2,162 $ 1,160
======== ======== ========
For disclosures related to the Consolidated Statements of Cash Flows,
acquired intangibles and property, plant and equipment of $2.0 million in
1998 were non-cash items.
Susquehanna Cable Co., and its subsidiaries are involved in an
extensive phased rebuilding of its distribution systems. Assets replaced in
the rebuilt phases were retired and related losses of $1.4 million in 1999,
$1.2 million in 1998 and $0.7 million in 1997 were recognized.
On May 22, 1997, a radio subsidiary purchased the assets of KBYA-FM,
licensed to Carson City, Nevada for 15.1 million. On November 26, 1997, the
radio subsidiary sold the assets of KBYA-FM for 15.9 million. A $0.7
million gain, net of selling expenses, was recognized.
On April 18, 1997, Susquehanna Radio Corp. sold the assets of WARM-AM
and WMGS-FM for $10.6 million cash. A gain of $9.8 million was recognized
on the sale.
43
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Long-Term Debt
1999 1998
---- ----
Long-term debt includes (in thousands):
8.5% Senior Subordinated Notes $150,000 $ --
Term Loan "A" 100,000 --
Term Loan "B" 100,000 --
Revolving Credit Commitment 55,500 --
Reducing Revolver Commitment -- 126,100
Term Loan -- 100,000
8.61% Senior Notes, Series A -- 19,500
8.41% Senior Notes, Series B -- 19,500
11.15% Senior Notes, Series C -- 7,500
Other 121 176
-------- --------
405,621 272,776
Less amounts payable within one year 59 12,054
-------- --------
$405,562 $260,722
======== ========
On May 12, 1999, the Company sold $150.0 million of 8.5% Senior
Subordinated Notes due in 2009. Proceeds to the Company totaled $145.0
million. Interest is payable semi-annually. The Notes' fair value at
December 31, 1999 was $144.0 million.
On May 12, 1999, the prior Term Loan and Reducing Revolver Commitment
were replaced by a new $450.0 million Senior Secured Credit Facility with a
group of banks. The new facility's Revolving Credit Commitment allows the
Company to borrow up to $250.0 million. The revolving loans begin reducing
in 2002 and mature in 2007. The Company has utilized two $100.0 million
Term Loan commitments that begin amortizing in 2002 and mature in 2007 and
2008. Both the Revolving Credit Commitment and Term Loans bear interest
priced at the LIBOR rate plus an applicable margin based on certain ratios.
The average interest rate on the Revolving Credit Commitment was 7.63% at
December 31, 1999. The interest rate on Term Loan "A" was 7.47% and the
interest rate on Term Loan "B" was 9.00% at December 31, 1999. Interest is
payable quarterly or on maturity of a LIBOR-based tranche.
The interest rate on the prior Term Loan was 6.98 % at December 31,
1998. The interest rate on the prior Reducing Revolver Commitment was 6.74%
at December 31, 1998.
The 8.61% Series A, 8.41% Series B and 11.15% Series C Senior Notes
with insurance companies were repaid on April 16, 1999 along with a
prepayment premium of $2.9 million.
The banks have collateralized interests in certain FCC licenses and
stock pledges from shareholders of the Company and its subsidiaries. The
banks are further collateralized by a first lien
44
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on all assets (tangible and intangible) of the Company and its subsidiaries
excluding realty and vehicles. The Company has agreed to maintain debt
coverage and financial ratios at prescribed levels. The Company has further
consented to restrict payment of common stock dividends, investment
transactions with affiliates, ownership changes, sale of assets and
issuance of additional debt.
Coincident with the repayment of prior long-term debt, the Company
incurred an extraordinary loss, net of a $2.2 million tax benefit, for
payment of prepayment premiums and the write-off of $2.6 million in
unamortized deferred financing costs.
Derivative financial instruments are used solely to limit interest rate
exposure on certain debt and are not used for trading purposes. The Company
has two interest rate collar agreements expiring in 2001 with an aggregate
notional amount of $50 million. The effect of these agreements limits the
interest rate exposure on the notional amount to between 7.5% and 8%, plus
an applicable margin. No income or loss has been recognized related to
these instruments.
The non-current portion of long-term debt matures in the following years
(in thousands):
2001 $ 62 2006 $ 50,500
2002 8,750 2007 89,875
2003 17,000 2008 47,375
2004 21,000 2009 150,000
2005 21,000
4. Income Taxes
The provision for income taxes is summarized as follows for the years
ended December 31, (in thousands):
1999 1998 1997
------ ------ ------
Current
Federal $11,195 $ 8,637 $ 9,756
State 2,726 2,946 2,977
------ ------ ------
Total current 13,921 11,583 12,733
------ ------ ------
Deferred
Federal 4,393 2,671 1,073
State (270) 269 227
------ ------ ------
Total deferred 4,123 2,940 1,300
------ ------ ------
Provision for Income Taxes $18,044 $14,523 $14,033
====== ====== ======
Cash taxes paid for the years ended December 31, 1999, 1998, and 1997
were approximately $14.1 million, $14.5 million and $10.4 million
respectively.
45
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is included in the consolidated federal income tax return
of its Parent. The Company's tax provision is computed on a separate return
basis. Losses used in the consolidated return may reduce the Company's tax
payments on a pro rata basis.
Significant temporary differences giving rise to the Company's deferred
tax assets and liabilities include depreciation, amortization, and pension
funding.
Reconciliations of the difference between the U.S. statutory income
tax rate and the effective book income tax rate follow:
1999 1998 1997
---- ---- ----
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal income tax benefit 3.5 6.4 6.2
Non-deductible amortization and expenses 1.2 1.5 1.2
Other 0.3 1.4 (0.8)
---- ---- ----
Effective book income tax rate 40.0% 44.3% 41.6%
==== ==== ====
46
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999 and 1998, deferred tax assets and liabilities
resulted from the following temporary differences (in thousands):
1999 1998
-------- --------
Deferred tax assets:
Allowance for bad debts $ 169 $ 85
Investments in partnerships 134 295
Self insurance 122 130
Liabilities not recognized for tax purposes 141 220
Stock option benefits/deferred compensation 488 485
Deferred revenues 420 651
-------- --------
Total deferred tax assets 1,474 1,866
-------- --------
Deferred tax liabilities:
Pension benefits 1,663 656
Book/Tax basis differences -tangible assets
19,445 18,331
Book/Tax basis differences -intangible assets 16,435 15,407
Investments in partnerships 1,711 1,326
Other liabilities 201 3
-------- --------
Total deferred tax liabilities 39,455 35,723
-------- --------
Net deferred tax liabilities $ 37,981 $ 33,857
======== ========
5. Intangible Assets
Intangible assets at cost are comprised of the following (in thousands):
1999 1998
-------- --------
Federal Communications Commission
licenses $157,757 $157,480
Cable franchise values 92,071 68,858
Goodwill 11,468 11,417
Cable subscriber lists 5,154 5,154
Favorable leases 3,497 3,497
Going concern and other values 11,613 10,364
-------- --------
281,560 256,770
Accumulated Amortization 66,435 55,128
-------- --------
$215,125 $201,643
======== ========
47
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cable franchise values and cable subscriber lists are being amortized
through 2014 and 2003, respectively. Favorable leases and covenants
not-to-compete are amortized according to the life of the agreements.
Federal Communications Commission (FCC) licenses, going concern values and
goodwill are amortized over periods of up to 40 years. Most intangible
assets are being amortized using the straight-line method. Amortization for
the years ended December 31, 1999, 1998, and 1997 was approximately $11.0
million $9.7 million and $9.6 million, respectively.
6. Investments and Other Assets
KNBR, Inc., a subsidiary, is a limited partner in San Francisco
Baseball Associates L.P. In July 1998, KNBR, Inc. entered into a rights
agreement that extends radio station KNBR-AM's right to broadcast Giants'
baseball games through the 2004 baseball season. An $800 thousand contract
fee was paid at signing. The agreement requires annual rights payments
ranging from $4.8 million in 1999 to $6 million in 2004. KNBR, Inc.
expensed rights payment of $4.8 million, $4 million and $4.6 million during
the 1999, 1998, and 1997 baseball seasons, respectively.
A subsidiary is a 50% general partner in Susquehanna Adelphia Business
Solutions, a competitive access provider. Capital contributions of $1.3
million, $2.3 million and $3 million were made during the years ended
December 31, 1999, 1998 and 1997, respectively.
Unamortized deferred financing costs were $7.1 million at December 31,
1999 and $2.8 million at December 31, 1998.
7. Stockholders' Equity
Certain minority interests are valued using a contractual formula,
which differs from a pro-rata valuation. Accordingly, the contractual value
is used to determine the liability and any adjustment to the pro-rata
amount is charged or credited to stockholders' equity. Other minority
interest expense recognized in the income statement is also adjusted for
subsidiaries with a stockholders' deficit.
On August 1, 1999, two Cable subsidiaries merged with two other Cable
subsidiaries. These mergers had no impact on the Company's results of
operations. The mergers of a subsidiary with stockholders' deficit into a
subsidiary with stockholders' equity resulted in a $2.2 million decrease in
minority interests and a corresponding increase in consolidated
stockholders' equity.
On October 21, 1998, the Company repurchased and retired $2.7 million
of preferred stock at par.
SRC maintains an Employee Stock Plan to compensate certain key
employees who may purchase SRC Class "B" non-voting common stock at a
formula value based on stockholders' equity and earnings. With each share
purchased, participants receive options to purchase two additional shares
at the same formula value. Options expire ten years and one month after the
grant date. Total shares and options offered may not exceed 400,000 shares.
Options awarded are subject to settlement in cash. Shares are subject to
repurchase by SRC, generally at formula value, which is determined annually
in accordance with the Plan Agreement. The Plan's transaction year is April
1 through March 31. Although SRC may modify, suspend, or terminate the Plan
at any time, previously offered purchase rights or options are not subject
to change.
48
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option activity in the SRC Employee Stock Plan was as follows:
Shares Option Price
------ ------------
Balance as December 31, 1996 142,216 $1.26 - $9.54
Granted 20,688 $14.24
Exercised (68,040) $1.26 - $14.24
-------
Balance at December 31, 1997 94,864 $1.26 - $14.24
Balance as December 31, 1997 94,864 $1.26 - $14.24
Granted 22,440 $18.82
Exercised (44,944) $1.26 - $14.24
-------
Balance at December 31, 1998 72,360 $1.26 - $18.82
-------
Balance as December 31, 1998 72,360 $1.26 - $18.82
Granted 0 --
Exercised (2,328) $1.60 - $18.82
-------
Balance at December 31, 1999 70,032 $1.60 - $18.82
-------
1999 1998 1997 1996
---- ---- ---- ----
Total compensation
expense (in thousands) $ 80 $203 $318 $678
Risk free rate N/A 5.73% 6.88% 6.35%
An expected duration of six years, no expected dividends and no
volatility were used as factors in determining the compensation expense
recognized for options granted and not immediately exercised.
On April 2, 1997, SRC repurchased 29,820 shares of Class "B" non-voting
common stock at the formula share price of $18.82 from its former
president. The approximately $499,000 excess of formula share price over
issue cost was charged to minority interests.
49
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Basic and Diluted Net Income Per Share
The following table provides a reconciliation of the computation from
basic to diluted net income per share (in thousands, except for per share
data):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income before extraordinary loss $ 22,946 $ 13,952 $ 16,594
Extraordinary loss (3,316) -- --
-------- -------- --------
Net income 19,630 13,952 16,594
Preferred dividends declared (493) (635) (682)
-------- -------- --------
Basic net income available for common
shares 19,137 13,317 15,912
Dilutive effect of potential issuance of SRC
common stock (248) (877) (1,062)
-------- -------- --------
Dilutive net income available for common
shares $ 18,889 $ 12,440 $ 14,850
======== ======== ========
Basic and diluted weighted-average shares 1,100 1,100 1,100
======== ======== ========
Basic net income per common share
Income before extraordinary loss $ 20.41 $ 12.11 $ 14.47
Extraordinary loss (3.01) -- --
-------- -------- --------
$ 17.40 $ 12.11 $ 14.47
======== ======== ========
Diluted net income per common share
Income before extraordinary loss $ 20.13 $ 11.31 $ 13.50
Extraordinary loss (2.96) -- --
-------- -------- --------
$ 17.17 $ 11.31 $ 13.50
======== ======== ========
</TABLE>
9. Employee Benefits
Full-time employees of the Company and its subsidiaries are covered by
the Susquehanna Pfaltzgraff Co. Pension Plan (the Plan), a noncontributory
qualified defined benefit pension plan. Benefits under the Plan are based
on employees' years of service and earnings over part or all of their
careers through April 1999. The Company's funding policy is to make
contributions, as required by various regulations, not to exceed the
maximum amounts deductible for federal income tax purposes. Plan assets,
primarily listed bonds and stocks, are held by independent trustees.
50
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The funded status of the Plan at December 31, was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Benefit obligation, beginning of year $ 31,876 $ 26,503
Service cost - 1,838
Interest cost 1,744 1,798
Actuarial (gains) losses (3,150) 2,621
Curtailments (5,890) -
Plan amendments 798 -
Benefits paid (1,026) (884)
------- -----
Benefit obligation, end of year 24,352 31,876
------- ------
Fair value of plan assets, beginning of year 35,730 32,247
Actual return on plan assets 5,329 3,627
Employer contributions - 740
Benefits paid (1,026) (884)
------- -----
Fair value of plan assets, end of year 40,033 35,730
------- ------
Excess of fair value of plan assets over
benefit obligation at end of year 15,681 3,854
Unrecognized net actuarial gain (9,377) (3,386)
Unrecognized prior service costs 754 1,276
Unrecognized transition asset -- 115
-- ---
Prepaid pension cost at December 31, $ 7,058 $ 1,859
====== =====
</TABLE>
The Plan's net pension costs for the years ended December 31, included the
following components (in thousands):
1999 1998 1997
---- ---- ----
Service cost $ 230 $ 1,838 $ 1,538
Interest cost 1,744 1,798 1,599
Expected return on plan assets (2,719) (2,393) (2,038)
Amortization of net asset 4 13 13
Amortization of prior service cost (41) 147 146
---- ---- ---
Net periodic pension cost $ (782) $ 1,403 $ 1,258
===== ===== =====
The weighted average discount rate used in determining the actuarial
present value of projected benefit obligations was 7.25% and 6.5% for 1999
and 1998, respectively. The assumed rate of
51
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
increase in future compensation levels was 5.0% for 1999 and 1998. The
expected long-term rate of return on Plan assets was 9% for both 1999 and
1998.
On March 19,1999, the Parent's Board of Directors approved a cessation
of benefit accruals under the Plan effective April 30, 1999. Based on an
independent actuary's calculations, the Company was allocated a $2.3
million curtailment gain related to the Plan.
Negative pension cost recognized for the year ended December 31, 1999
was $219 thousand. Pension expense allocated to the Company for the year
ended December 31, 1998 was $1 million. Included in the Company's other
assets are prepaid pension costs of $3.1 million and $411 thousand at
December 31, 1999 and 1998.
On March 19, 1999, the Parent's Board of Directors approved creation of
an Employee Stock Ownership Plan (ESOP) for Susquehanna Pfaltzgraff Co.
Full-time employees participate in the ESOP. ESOP expense of $6.4 million
was recorded for the year ended December 31, 1999. On May 12, 1999, the
Company made a $116.9 million twenty-year loan to its Parent at a 6%
interest rate. Loan proceeds were used to fund the Parent's ESOP. Principal
and interest payments are receivable annually in December. On December 30,
1999, the Parent paid the Company $10 million.
The Parent also sponsors a defined contribution (401k) plan, which
covers all full-time employees. The plan matches 75% of the first 2% of
salary contributed by a participant. The Company contributed approximately
$590 thousand and $446 thousand to the plan for the years ended December
31, 1999 and 1998, respectively.
10. Lease Commitments
Rental expense for operating leases was $4.6 million, $4.5 million and
$3.5 million for the years ended December 31, 1999, 1998, and 1997,
respectively.
Annual aggregate minimum rental commitments under non-cancelable
operating leases are as follows (in thousands of dollars):
2000 $3,677 2003 $2,675
2001 3,202 2004 2,724
2002 2,735 2005 and beyond 9,891
52
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Related Parties
The Company purchases management services, office space and
administrative services from related parties, primarily its Parent.
Included in general and administrative expenses for the years ended
December 31, are charges for (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Management fees $ 2,846 $ 2,722 $ 2,566
Accounting, internal audit and tax services 630 589 498
Human resources 1,119 863 824
Treasury 354 270 262
Occupancy, vehicle rentals and
administrative services 857 815 608
---- --- ---
$ 5,806 $ 5,259 $ 4,758
===== ====== ========
</TABLE>
Expenses are allocated based on the Parent's best estimates of
proportional or incremental costs, whichever is deemed more appropriate in
the circumstances. In management's opinion, expenses shown in the
financial statements approximate expenses on a stand-alone basis.
12. Contingencies and Commitments
Susquehanna Radio Corp. purchased the assets of WHMA-AM/FM, licensed to
Anniston, Alabama for $15.3 million on May 22, 1997. If SRC is permitted
to relocate the FM transmitting facilities within six years of
acquisition, the purchase agreement provides for an additional payment to
the seller of up to $20 million. It is not possible to determine whether
relocation will be approved or to estimate any additional cost at this
time.
An unrelated cable television Multiple System Operator (MSO) purchased
a 14.9% interest in Susquehanna Cable Co. and a 17.75% interest in each of
Susquehanna Cable Co.'s cable television operating subsidiaries in 1993.
On January 18, 2000, the MSO was acquired by an unrelated company.
Management believes cable programming formerly acquired through the MSO
will cost approximately $1.7 million more in 2000 than expected due to the
change in ownership.
The MSO may offer to purchase the Company's interest in its cable
television operations. The Company must either accept or reject an offer
within sixty days. If the Company rejects the offer, the MSO may require
the Company to repurchase the MSO's holdings at the offer price plus a fee
equal to 3% of the MSO's $25 million investment, compounded annually from
1993.
If the MSO does not offer to purchase the Company's cable television
operations by May 28, 2000, the Company may elect to pay the MSO a fee
equal to 1-1/2% of the MSO's $25 million investment compounded annually
from 1993 and avoid any further fee obligation. No liability has been
recorded due to the uncertainty of future events.
On April 22, 1999, the MSO was granted a three year "Put Right". After
an eighteen-month holding period (beginning May 12, 1999), the MSO may
require the Company to repurchase its
53
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ownership interest at a price to be determined by independent appraisers.
The "Put Right" may not be exercised if exercise would create default
under certain debt agreements. If the "Put Right" is exercised, the
Company may, at its sole discretion and in lieu of acquiring the MSO's
ownership interests, sell Cable and pay the MSO its pro-rata share of net
proceeds.
The Company is involved in litigation and administrative proceedings
primarily arising in the normal course of its business. In the opinion of
management, the Company's recovery, if any, or the Company's liability, if
any, under any pending litigation or administrative proceeding would not
materially affect its financial condition or operations.
13. Segments
The Company's four business units have separate management teams and
infrastructures that offer different products and services. The business
units have been aggregated into three reportable segments: Radio, Cable,
and Other. Other includes Internet revenues.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on operating income of the respective business units.
Segment information for the years ended December 31, 1999, 1998, and
1997 was as follows (in thousands):
54
<PAGE>
SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RADIO CABLE OTHER CONSOLIDATED
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Operating income $ 51,866 $ 15,225 $ 957 $ 68,048
Interest expense, net 6,310 11,802 10,461 28,573
Depreciation and amortization 7,965 19,048 559 27,572
Income (loss) before income taxes, and
extraordinary loss and minority interests 47,212 2,290 (4,372) 45,130
Provision (benefit) for income taxes 18,531 1,024 (1,511) 18,044
Identifiable assets 222,462 177,797 125,883 526,142
Capital expenditures 3,400 28,375 1,291 33,066
FOR THE YEAR ENDED DECEMBER 31, 1998
Operating income (loss) $ 34,406 16,945 $ (148) $ 51,203
Interest expense, net 8,210 9,390 2,906 20,506
Depreciation and amortization 7,281 14,609 439 22,329
Income (loss) before income taxes
and minority interests 27,062 9,447 (3,730) 32,779
Provision (benefit) for income taxes 11,928 3,907 (1,312) 14,523
Identifiable assets 211,842 135,927 7,372 355,141
Capital expenditures 7,727 20,737 1,128 29,592
FOR THE YEAR ENDED DECEMBER 31, 1997
Operating income (loss) $ 27,991 15,161 $ (442) $ 42,710
Interest expense, net 5,852 10,626 2,412 18,890
Depreciation and amortization 5,542 13,949 253 19,744
Income (loss) before income taxes
minority interests 33,207 3,848 (3,358) 33,697
Provision (benefit) for income taxes 13,385 1,789 (1,141) 14,033
Identifiable assets 201,527 128,433 3,516 333,476
Capital expenditures 6,994 12,667 2,949 22,610
</TABLE>
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
56
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our by-laws provide that the number of directors shall not be less than
three nor more than seven and may be fixed from time to time by resolution of
our board of directors. Our board is currently comprised of six directors. All
members of our board of directors are elected annually by our parent,
Susquehanna Pfaltzgraff.
The following table sets forth certain information with respect to our
directors and executive officers and other key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Louis J. Appell, Jr. 75 Chairman of the Board of Directors,
Peter P. Brubaker 53 Director, Chief Executive Officer and
President
Craig W. Bremer 51 Director, Secretary and General Counsel
William H. Simpson 58 Director
John L. Finlayson 58 Director and Vice President
Alan L. Brayman 48 Treasurer
David E. Kennedy 47 Director and Vice President
James D. Munchel 45 President and Chief Operating Officer of
Susquehanna Cable
</TABLE>
Louis J. Appell, Jr. is the Chairman of the Board of Directors of
Susquehanna Media, a position he has held since 1993. He is also Director,
President and Chief Executive Officer of Susquehanna Pfaltzgraff. He has over
fifty years of experience in the communications industry. Mr. Appell holds a BA
degree from Harvard College.
Peter P. Brubaker is a Director, the Chief Executive Officer and
President of Susquehanna Media. He has been a director and officer of
Susquehanna Media since 1993. Prior to 1995, Mr. Brubaker was Vice
President/Finance of Susquehanna Pfaltzgraff. He joined Susquehanna Pfaltzgraff
in 1977 and assumed responsibility for the cable operations in 1979. He holds a
BA degree from Wesleyan University and an MBA degree from the Harvard Business
School. Mr. Brubaker serves as a director of the National Cable Television
Association.
Craig W. Bremer is a Director and the Secretary and General Counsel of
Susquehanna Media, positions he has held since 1993. He is also the Secretary of
Susquehanna Pfaltzgraff. Mr. Bremer has been employed by Susquehanna Pfaltzgraff
since 1978. Prior to joining Susquehanna Pfaltzgraff, Mr. Bremer was an
associate with the law firm of Beckley & Madden, Harrisburg, Pennsylvania. He
holds a JD degree from Dickinson School of Law and is a member of the
Pennsylvania Bar. He earned a BS degree in History from Washington & Lee
University.
William H. Simpson is a Director of Susquehanna Media and has served as
such since 1993. He has been employed by Susquehanna Pfaltzgraff or an
affiliated corporation since 1971 and was promoted to his current position as
President of The Pfaltzgraff Co. in 1988. He was
57
<PAGE>
formerly Vice President and General Counsel of Susquehanna Pfaltzgraff
from 1971 to 1981. Mr. Simpson is a graduate of the United States Air Force
Academy and Harvard Law School.
John L. Finlayson is a Director and Vice President of Susquehanna Media
and the Chief Financial Officer of Susquehanna Pfaltzgraff, where he has been
employed since 1978. He has been a Vice President of Susquehanna Media since
1993. Prior to 1978, Mr. Finlayson was an audit manager with Arthur Andersen &
Co. He is a CPA and a graduate of Franklin and Marshall College.
Alan L. Brayman is the Treasurer of Susquehanna Media. He is also Vice
President, Treasury Operations, of Susquehanna Pfaltzgraff. Mr. Brayman joined
Susquehanna Media in February 1998. Prior to that, he was a principal of Global
Treasury Solutions from 1996 through January 1998. Mr. Brayman was also
Assistant Treasurer and an officer of VF Corporation, an apparel manufacturer,
from January 1993 to December 1995. Prior to that, Mr. Brayman was employed by
Armstrong World Industries Inc., a diversified manufacturer, from 1973 to 1992,
where he was Assistant Treasurer. Mr. Brayman is a graduate of the University
of Delaware and has an MBA from Shippensburg University.
David E. Kennedy is a Director and a Vice President of Susquehanna
Media. He has also been President of Susquehanna Radio since 1993. Mr. Kennedy
joined the radio group in 1973 as an on-air personality of its former Toledo,
Ohio station. He has held positions in programming, planning and research
during his career. Mr. Kennedy is a graduate of the University of Toledo and
holds masters and doctoral degrees from Bowling Green State University. He
serves as a director of the Radio Advertising Bureau and as a director of the
National Association of Broadcasters.
James D. Munchel is the President and Chief Operating Officer of
Susquehanna Cable. Mr. Munchel oversees the operations of all Susquehanna Cable
systems. He joined a predecessor of Susquehanna Media in 1981 and was promoted
to General Manager of the York cable system in 1986. Mr. Munchel was promoted
to his current position in 1999. He is a graduate of Shippensburg University.
ITEM 11. EXECUTIVE COMPENSATION
Susquehanna Media does not compensate its directors for services provided
in that capacity.
Susquehanna Media has no employees. All of the executive officers of
Susquehanna Media are also executive officers of Susquehanna Pfaltzgraff,(our
parent company). Susquehanna Pfaltzgraff paid all compensation of Susquehanna
Media's executive officers under a management agreement between Susquehanna
Media and Susquehanna Pfaltzgraff. Under that agreement, Susquehanna Media pays
a fee to Susquehanna Pfaltzgraff for executive office space, services of the
legal department and management services, including compensation for the
services rendered to Susquehanna Media by the executive officers of Susquehanna
Pfaltzgraff. Under the agreement, Susquehanna Media paid a management fee in the
amount of $2.8 million in 1999. As executive officers of Susquehanna
Pfaltzgraff, the executive officers of Susquehanna Media will continue to render
services to Susquehanna Pfaltzgraff and its other subsidiaries in addition to
Susquehanna Media.
58
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SUSQUEHANNA MEDIA CO.
We have the authority under our charter to issue 1,100,000 shares of
common stock, par value $1.00 per share, and 110,000 shares of 7% cumulative
preferred voting stock, par value $100.00 per share. We currently have
outstanding 1,100,000 shares of common stock and 70,499.22 shares of preferred
stock. The holders of our preferred stock are entitled to an annual cumulative
preferential dividend of $7.00 per share. After payment of the preferred stock
dividend, holders of our preferred stock do not participate in dividends on our
common stock. In the event of a liquidation of our company, our preferred
stockholders are entitled to a $100.00 liquidation preference and any accrued
and unpaid preferred stock dividends. Thereafter, only common stockholders are
entitled to distributions. Our preferred stock is not convertible into our
common stock. The holders of our preferred stock and common stock vote together
as one class on all matters voted upon by our stockholders. Both classes receive
one vote per share.
All of the outstanding common stock of Susquehanna Media is owned by
our parent, Susquehanna Pfaltzgraff. The following table sets forth certain
information regarding the beneficial ownership of our preferred stock as of
December 31, 1999 by:
o each of our directors and executive officers;
o all of our directors and executive officers as a group; and
o each person (or group of affiliated persons) known by us to
beneficially own more than 5% of our outstanding preferred stock.
Unless otherwise indicated, each person has sole voting and investment
power with respect to the preferred shares shown as beneficially owned by such
person.
<TABLE>
<CAPTION>
Share Benefically Owned
-----------------------
Name Of Beneficial Owner Number Percent
<S> <C> <C> <C> <C> <C> <C>
Directors and Executive Officers
Louis J. Appell, Jr. (1) 5,095.98 7.2%
Peter P. Brubaker 793.77 1.1%
Craig W. Bremer -- --
William H. Simpson -- --
John L. Finlayson -- --
Alan L. Brayman -- --
David E. Kennedy -- --
All directors and executive officers as a
group (7 persons) 5,889.75 8.3%
Other 5% Holders
Louis J. Appell, III (2) 7,513.71 10.7%
Helen F. Appell, II (3) 7,513.71 10.7%
Barbara F. Appell (4) 7,513.71 10.7%
Walter M. Norton (5) 32,085.41 45.5%
</TABLE>
- --------------------
(1) Shares held by Louis J. Appell, Jr. and Josephine S. Appell, as
trustees of the Louis J. Appell, Jr. revocable trust. Address is 140
East Market Street, York, PA 17401.
59
<PAGE>
(2) Address is 1331 Via Colonna Terrace, Davis, CA 95616.
(3) Address is 1700 Powder Mill Road, York, PA 17403.
(4) Address is 306 West Princess Street, York, PA 17404.
(5) Of these shares, (a) 8,324.26 are held jointly with Helen A. Norton;
(b) 5,109.81 are held individually; (c) 277.48 are held by Helen A. and
Walter M. Norton as trustees of the Helen A. Norton revocable trust;
and (d) 18,373.86 are held in trust by Walter M. Norton. Address is 126
Skassen Lane, Harpswell, ME 04079.
SUSQUEHANNA PFALTZGRAFF
Susquehanna Pfaltzgraff Co. (Susquehanna Pfaltzgraff) has the authority
under its charter to issue 40,000,000 shares of common stock, par value $.01 per
share, 50,000,000 shares of ESOP common stock, par value $.01 per share, and
10,000,000 shares of Class A nonvoting common stock, par value $.01 per share.
We currently have outstanding 18,251,601 shares of common stock, 6,702,146
shares of ESOP common stock and 2,301,955 shares of Class A nonvoting common
stock. The holders of the ESOP common stock are entitled to an annual cumulative
preferential dividend of approximately $1.05 per share. After payment of the
ESOP common stock dividend, the ESOP common stock, the common stock and the
Class A nonvoting common stock share equally and ratably on a share for share
basis in dividends. In the event of a liquidation of Susquehanna Pfaltzgraff,
the holders of ESOP common stock are entitled to the payment of all accrued and
unpaid dividends before any distributions to holders of common stock or Class A
common stock. Thereafter, all three classes of stock share in distributions on a
pro rata basis. Except as required by law, the holders of Class A nonvoting
common stock have no voting rights. Each share of common stock and ESOP common
stock is entitled to one vote on all matters submitted to a vote of
stockholders.
The following table sets forth certain information regarding the
beneficial ownership of Susquehanna Pfaltzgraff's common stock, ESOP common
stock and Class A nonvoting common stock as of December 31, 1999 by:
o each of our directors and executive officers;
o all of our directors and executive officers as a group; and
o each person (or group of affiliated persons) known by us to
beneficially own more than 5% of our outstanding common stock.
Unless otherwise indicated, each person has sole voting and investment
power with respect to the shares shown as beneficially owned by such person.
60
<PAGE>
<TABLE>
<CAPTION>
Percentage Number of Percentage Number of
Number of of Esop of Esop Class A Percentage
Common Common Common Common Common of Class A
Shares Shares Shares Shares Shares Common Shares Total
Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially Voting
Name of Beneficial Owner Owned Owned Owned Owned Owned Owned Power
------------------------ ------------ ---------- ---------- ---------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Directors and Executive
Officers
Louis J. Appell, Jr. (1) -- -- -- -- 1,252,900 54.4% --
William H. Simpson (1) -- -- -- -- 426,085 18.5% --
Peter B. Brubaker (1) -- -- -- -- 311,485 13.5% --
John L. Finlayson (1) -- -- -- -- 311,485 13.5% --
Craig W. Bremer (1) -- -- -- --
Alan L. Brayman (1) -- -- -- --
David E. Kennedy (1) -- -- -- --
Officers and directors as a -- -- -- -- 2,301,955 100% --
group (7 persons)
Other 5% Holders
Louis J. Appell Trusts (2) 16,824,300 92.2% -- -- -- -- 67.4%
Susquehanna Pfaltzgraff ESOP (3) -- -- 6,702,146 100.0% -- -- 26.9%
</TABLE>
- --------------------
(1) All addresses are 140 East Market Street, York, PA 17401.
(2) Includes shares held as follows: (a) Louis J. Appell residuary trust
for the benefit of Louis J. Appell, Jr. (5,861,800 shares); (b) Louis
J. Appell residuary trust for the benefit of Helen A. Norton (5,968,900
shares); and (c) Louis J. Appell residuary trust for the benefit of
George N. Appell and his descendants (4,993,600 shares). Addresses for
each trust are 140 East Market Street, York, PA 17401.
(3) Held of record by State Street Bank and Trust Co., as trustee of the
Susquehanna Pfaltzgraff Co. Employee Stock Ownership Plan. Address is
P.O. Box 1521, Boston, MA 02104-9818.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
Susquehanna Pfaltzgraff, our parent company, provides us with
management services, executive office space and services of the legal
department. Under an agreement between Susquehanna Pfaltzgraff and us, we paid a
management fee for such services in 1999 in the amount of $2.8 million.
Susquehanna Pfaltzgraff also provides us, at cost, accounting and tax services,
human resources services, treasury services and administrative services. For
such services in 1999, we paid Susquehanna Pfaltzgraff an aggregate of $2.4
million. Expenses are allocated based on the parent's best estimates of
proportional or incremental cost, whichever is deemed more appropriate in the
circumstances.
Certain direct and indirect subsidiaries of Susquehanna Media lease
three office properties and one broadcast tower under lease agreements with
L.A.B. Realty Company. The aggregate amount paid to LAB under such agreements in
1999 was approximately $353,000. LAB is owned directly and indirectly by Louis
J. Appell, Jr., Chairman of Susquehanna Media,
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<PAGE>
his siblings, certain members of their families and trusts of which such
persons or members of their families are trustees or beneficiaries. Mr. Appell
and John L. Finlayson are officers and directors of both LAB and Susquehanna
Media. Craig W. Bremer is an officer of LAB and an officer and director of
Susquehanna Media.
An indirect subsidiary of Susquehanna Media leases vehicles and
equipment from Queen Street Leasing. Susquehanna Radio leases a studio property
from G-III Partners. We paid Queen Street Leasing and G-III Partners
approximately $57,000 and $178,000, respectively, in 1999 under such leases.
Queen Street Leasing and G-III Partners are limited partnerships owned directly
and indirectly by Mr. Appell, his siblings, certain members of their families
and trusts of which such persons or members of their families are trustees or
beneficiaries.
Susquehanna Media and certain of its subsidiaries have entered into a
Tax Sharing Agreement with Susquehanna Pfaltzgraff, The Pfaltzgraff Co. and
certain subsidiaries of The Pfaltzgraff Co. for the payment of federal income
taxes on a consolidated basis. The Tax Sharing Agreement establishes a method
for the computation, collection and payment of taxes by Susquehanna Pfaltzgraff
and the contribution to such payment by Susquehanna Media and The Pfaltzgraff
Co.
Upon completion of the 1999 offering of senior subordinated notes, we
loaned $116.9 million to Susquehanna Pfaltzgraff, which it then loaned to its
newly formed employee stock ownership plan. The employee stock ownership plan
used the proceeds of the loan to purchase approximately $116.9 million of
Susquehanna Pfaltzgraff Co.'s common stock from trusts for the benefit of Mr.
Appell, his siblings and certain members of their families. Our employees
participate in the employee stock ownership plan. The loan to Susquehanna
Pfaltzgraff Co. matures on December 30, 2018 and bears interest at a per annum
rate of 6.0%. We expect the loan to be repaid in annual installments of
principal and interest. Related interest income was $4.5 million in 1999.
Susquehanna Media has outstanding 70,499.22 shares of voting preferred
stock, $100 par value per share. The holders of the preferred stock are entitled
to a cumulative annual dividend of 7.0%. The total amount of dividends paid on
the preferred stock in 1999 was $493,000. The preferred stock is held by certain
members of Mr. Appell's family, trusts of which such persons are trustees or
beneficiaries and Peter P. Brubaker. The holders of the preferred stock have no
right to require Susquehanna Media to redeem their preferred stock.
Each of these transactions was on terms and conditions no less
favorable to us than we would be able to obtain from unaffiliated third parties.
THE LENFEST AGREEMENT
Pursuant to an agreement among Lenfest Communications, Inc. (Lenfest),
Susquehanna Cable and certain of its subsidiaries (as amended, the "Lenfest
Agreement"), Lenfest holds minority ownership interests equal to 14.9% of
Susquehanna Cable and 17.75% of each of its principal operating subsidiaries. At
December 31, 1999, Lenfest was 50% owned by AT&T and 50% owned by H.F. Lenfest
and members of his family. The ownership interests were acquired by Lenfest in
exchange for capital contributions of $11.0 million in cash in May 1993 and
cable television systems in December 1993 valued at $14.0 million. The cable
systems are located in Red Lion and Mount Wolf, Pennsylvania and are now part of
the York system. Under the Lenfest Agreement, Susquehanna Cable may acquire
cable programming and cable equipment at
62
<PAGE>
AT&T rates. We estimate that the favorable programming rates saved us at least
$2.2 million in 1999. In January 2000, Comcast Corporation acquired Lenfest
Communications, Inc. and consequently, Lenfest's interest in Susquehanna Cable
and certain of its subsidiaries. Comcast has succeeded to Lenfest's rights and
obligations under the Lenfest Agreeement. In the opinion of management,
programming costs for 2000 may be approximately $1.7 million higher than
expected due to the loss of AT&T's programming discounts. We anticipate that the
cost of cable programming will increase in the future as cable programming rates
increase and additional sources of cable programming become available.
The Lenfest Agreement provides for a right of first refusal whereby
neither Lenfest nor Susquehanna Cable may sell its ownership interests without
offering them first to the other party. In addition, Susquehanna Cable may not
sell any cable television systems without offering them first to Lenfest. If
Susquehanna Cable decides to sell the assets of a cable system and Lenfest does
not exercise its right of first refusal, Susquehanna Cable must offer to
repurchase Lenfest's shares in the subsidiary that is selling assets.
The Lenfest Agreement contains a buy-sell provision granting
Susquehanna Media, Susquehanna Cable or Lenfest the right to make an offer to
purchase the other party's ownership interests in Susquehanna Cable and its
subsidiaries. If such an offer is made and rejected, the party to whom the offer
was made is then obligated to purchase the offering party's ownership interests
in Susquehanna Cable and its subsidiaries on the same terms and conditions. If
we purchase Lenfest's interests pursuant to the buy-sell agreement, Lenfest is
entitled to receive a fee equal to 3.0% of Lenfest's original $25.0 million
investment compounded annually. This fee is not payable if Lenfest buys
Susquehanna Cable's interests. If the buy-sell provision has not been triggered
by December 1, 2000, Susquehanna Cable may pay Lenfest a fee equal to 1.5% of
Lenfest's original investment compounded annually and have no further
obligations under the fee arrangement. The buy-sell provision will, however,
remain in place.
The Lenfest Agreement grants Lenfest the right to resell to us (the
"Put Right") all of its ownership interests in Susquehanna Cable and its
subsidiaries for a three-year period beginning 18 months after the closing on
the new senior credit facility. Accordingly, the Put Right will expire on
November 12, 2003. The Put Right may not be exercised during any period when a
default exists under our new senior credit facility or if consummation of the
Put Right would create a default under our new senior credit facility or under
the senior subordinated notes. The value of Lenfest's ownership interests in
Susquehanna Cable and its subsidiaries upon exercise of the Put Right would be
the average of the values determined by two independent appraisers with
expertise in the cable industry. In exchange for its ownership interests upon
exercise of the Put Right, Lenfest would receive cash up to the amount of
borrowing availability under our new senior credit facility and would receive a
note for the balance, so long as the issuance of such note would comply with the
terms of the new senior credit facility and the covenant described above. Upon
Lenfest's exercise of the Put Right, we would have the right, in our sole
discretion and in lieu of acquiring Lenfest's ownership interests, to sell
Susquehanna Cable and its subsidiaries to a third party and Lenfest would
receive a pro rata share of the proceeds of such sale.
63
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) The following documents are filed as part of this report:
1. Consolidated Financial Statements Filed:
Please refer to Item 8 - Consolidated Financial Statement and
Supplementary Data.
2. Consolidated Financial Statement Scheduled Filed:
Please refer to Item 8 - Consolidated Financial Statement and
Supplementary Data.
3. Exhibits Filed:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1 Certificate of Incorporation of Susquehanna Media Co., as amended (incorporated herein by
reference from Exhibit 3.1 to the Company's Registration Statement on Form S-4, filed No.
333-80532)
3.2 By-laws of Susquehanna Media Co. (incorporated herein by reference from Exhibit 3.2 to the
Company's Registration Statement on Form S-4, filed No. 333-80532)
4.1 Indenture for the 8 1/2% Senior Subordinated Notes due 2009, dated as of May 12, 1999, between
Susquehanna Media Co. and Chase Manhattan Trust Company, National Association, as
Trustee (incorporated herein by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-4, filed No. 333-80532)
4.2 Form of Exchange Global Note for 8 1/2% Senior Subordinated Note due 2009 (incorporated herein
by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-4, filed
No. 333-80532)
4.3 Form of Exchange Certificated note for 81/2% Senior Subordinated Note due 2009 (incorporated
herein by reference from Exhibit 4.3 to the Company's Registration Statement on Form S-4, filed
No. 333-80532)
10.1 $450 million syndicated credit facility arranged by First Union Capital Markets Corp.
(incorporated herein by reference from Exhibit 10.1 to the Company's Registration Statement on
Form S-4, filed No. 333-80532)
10.2 Agreement dated November 6, 1992, by and among Lenfest Communications, Inc., Susquehanna Cable
Co. and certain subsidiaries of Susquehanna Cable Co., as amended (incorporated herein by
reference from Exhibit 10.2 to the Company's Registration Statement on Form S-4, filed No.
333-80532)
10.3 Management Agreement dated May 24, 1993 by and between Susquehanna Pfaltzgraff Co. and
Susquehanna Media Co. (incorporated herein by reference from Exhibit 10.3 to the Company's
Registration Statement on Form S-4, filed No. 333-80532)
12 Computation of ratios of earnings to fixed charges
21 Subsidiaries of Susquehanna Media Co. (incorporated herein by reference from Exhibit 21 to the
Company's Registration Statement on Form S-4, filed No. 333-80532)
27 Financial Data Schedule
</TABLE>
64
<PAGE>
SUPPLEMENTARY INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to security holders
during the fiscal year ended December 31, 1999. No annual report or proxy
materials will be sent to security holders subsequent to the filing of this
annual report on Form 10-K.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUSQUEHANNA MEDIA CO.
/s/ Peter P. Brubaker
--------------------------
By: Peter P. Brubaker,
Chief Executive Officer and President
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis J. Appell, Jr. Chairman of the Board of Directors March 30 , 2000
- ---------------------------------------
Louis J. Appell, Jr.
/s/ Peter P. Brubaker Director, Chief Executive Officer March 30, 2000
- --------------------------------------- and President
Peter P. Brubaker
/s/ David E. Kennedy Director, Vice President March 30, 2000
- ---------------------------------------
David E. Kennedy
Director, Secretary and General
- --------------------------------------- Counsel
Craig W. Bremer
/s/ William H. Simpson Director March 30, 2000
- ---------------------------------------
William H. Simpson
/s/ John L. Finlayson Director, Vice President (and March 30, 2000
- --------------------------------------- principal accounting officer)
John L. Finlayson
</TABLE>
66
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
Ratio of Earnings to Fixed Charges
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax income $45,130 $32,779 $33,697 $45,939 $19,384
Interest 28,573 20,506 18,890 13,797 12,111
Interest in Leases 1,548 1,507 1,152 861 1,086
Amortization of Cap Interest 242 190 123 107 63
------- ------- ------- ------- -------
$75,493 $54,982 $53,862 $60,704 $32,644
======= ======= ======= ======= =======
Fixed charges:
Interest $28,573 $20,506 $18,890 $13,797 $12,111
Capitalized interest 1,032 1,215 118 202 690
Interest in leases 1,548 1,507 1,152 861 1,086
Amortization of Cap Interest 242 190 123 107 63
------- ------- ------- ------- -------
$31,395 $23,418 $20,283 $14,967 $13,950
======= ======= ======= ======= =======
Ratio: 2.4x 2.3x 2.7x 4.1x 2.3x
</TABLE>
67
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 639
<SECURITIES> 0
<RECEIVABLES> 44,511
<ALLOWANCES> 1,494
<INVENTORY> 0
<CURRENT-ASSETS> 48,056
<PP&E> 218,819
<DEPRECIATION> 94,731
<TOTAL-ASSETS> 526,142
<CURRENT-LIABILITIES> 32,848
<BONDS> 0
0
7,050
<COMMON> 1,100
<OTHER-SE> 23,131
<TOTAL-LIABILITY-AND-EQUITY> 526,142
<SALES> 270,469
<TOTAL-REVENUES> 271,266
<CGS> 0
<TOTAL-COSTS> 203,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,058
<INTEREST-EXPENSE> 28,573
<INCOME-PRETAX> 45,130
<INCOME-TAX> 18,044
<INCOME-CONTINUING> 27,086
<DISCONTINUED> 0
<EXTRAORDINARY> (3,316)
<CHANGES> 0
<NET-INCOME> 19,630
<EPS-BASIC> 17.40
<EPS-DILUTED> 17.17
</TABLE>
