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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 333-84191
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ACME COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrants as specified in its charter)
DELAWARE 33-0866283
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2101 E. FOURTH STREET, SUITE 202 A
SANTA ANA, CALIFORNIA, 92705
(714) 245-9499
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(Address and Telephone number of Principal Executive Offices)
----------------
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
As of November 15, 1999, ACME Communications, Inc. had 16,750,000 shares of
common stock outstanding.
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ACME COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
- ------ ----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACME Communications, Inc. and Subsidiaries
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998................... 3
Consolidated Statements of Operations for the Three Months Ended September 30, 1999
and September 30, 1998 and for the Nine Months Ended September 30, 1999 and
September 30, 1998......................................................................... 4
Consolidated Statements of Stockholders' Equity as of September 30, 1999..................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and September 30, 1998.................................................. 6
Notes to Consolidated Financial Statements................................................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 14
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS............................................................................ 14
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................... 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................. 16
</TABLE>
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ACME COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,001 $ 806
Accounts receivable, net 10,842 12,921
Current portion of programming rights 6,357 10,745
Prepaid expenses and other current assets 414 2,154
--------- ---------
Total current assets 18,614 26,626
Property and equipment, net 16,441 24,792
Programming rights, net of current portion 8,046 16,277
Deposits 37 1,843
Deferred income taxes 3,811 3,688
Intangible assets, net 222,987 257,537
Other assets 18,146 12,866
--------- ---------
Total assets $ 288,082 $ 343,629
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,425 $ 5,555
Accrued liabilities 4,210 13,008
Bridge loan -- 15,000
Current portion of programming rights payable 7,649 10,135
Current portion of obligations under lease 1,273 1,426
--------- ---------
Total current liabilities 17,557 45,124
Programming rights payable, net of current portion 6,512 15,299
Obligations under lease, net of current portion 4,199 4,646
Other liabilities 4,671 268
Deferred income taxes 31,241 29,666
Revolving credit facility 8,000 40,000
Convertible debt 24,756 --
10 7/8% Senior discount notes 145,448 157,415
12% Senior secured notes 42,052 46,392
--------- ---------
Total liabilities 284,436 338,810
--------- ---------
Minority interest 2,233 148
Stockholders' equity:
Preferred stock, $.01 par value: 10,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.01 par value; 50,000,000 authorized, 10,826,062
shares issued and outstanding at September 30, 1999 and 52 108
5,180,051 issued and outstanding at December 31, 1998
Additional paid-in capital 30,780 101,149
Accumulated deficit (29,419) (96,586)
--------- ---------
Total stockholders' equity 1,413 4,671
--------- ---------
Total liabilities and stockholders' equity $ 288,082 $ 343,629
========= =========
</TABLE>
See the notes to the consolidated financial statements
3
<PAGE> 4
ACME COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues $ 11,805 $ 15,803 $ 31,132 $ 42,438
----------- ----------- ----------- -----------
Operating expenses:
Station operating expenses 9,177 12,829 24,342 32,819
Depreciation and amortization 3,534 4,847 7,715 13,006
Corporate 667 3,897 1,861 5,380
Equity-based compensation -- 28,856 -- 39,556
----------- ----------- ----------- -----------
Operating loss (1,573) (34,626) (2,786) (48,323)
Other income (expense):
Interest income 35 49 223 76
Interest expense (6,055) (8,294) (17,527) (22,362)
Gain on sale of asset 1,112 -- 1,112 --
Other (10) -- -- --
----------- ----------- ----------- -----------
Loss before income taxes and
minority interest (6,491) (42,871) (18,978) (70,609)
Income tax benefit 402 3,421 767 1,357
Loss before minority interest (6,089) (39,450) (18,211) (69,252)
Minority interest 435 682 1,303 2,085
----------- ----------- ----------- -----------
Net loss $ (5,654) $ (38,768) $ (16,908) $ (67,167)
=========== =========== =========== ===========
Pro forma net loss per share:
Loss before income taxes and
minority interest, as reported $ (6,491) $ (42,871) $ (18,978) $ (70,609)
Pro forma tax benefit 1,974 4,842 6,698 10,333
----------- ----------- ----------- -----------
Loss before minority interest (4,517) (38,029) (12,280) (60,276)
Pro forma minority interest allocation 355 721 966 1,629
----------- ----------- ----------- -----------
Pro forma net loss $ (4,162) $ (37,308) $ (11,314) $ (58,647)
=========== =========== =========== ===========
Pro forma net loss per share, basic
and diluted $ (0.80) $ (7.20) $ (2.26) $ (11.32)
=========== =========== =========== ===========
Basic and diluted weighted average
common shares outstanding 5,180,051 5,180,051 4,999,830 5,180,051
=========== =========== =========== ===========
</TABLE>
See the notes to the consolidated financial statements
4
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ACME COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 5,200 $ 52 $ 30,780 $(29,419) $ 1,413
Equity-based compensation 1,700 17 39,539 -- 39,556
Stock-option compensation -- -- 738 -- 738
Conversion of convertible debt 3,900 39 30,092 -- 30,131
Net loss -- -- -- (67,167) (67,167)
------ ---- -------- -------- --------
Balance at September 30, 1999 (unaudited) 10,800 $108 $101,149 $(96,586) $ 4,671
====== ==== ======== ======== ========
</TABLE>
See the notes to the consolidated financial statements
5
<PAGE> 6
ACME COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,908) $(67,167)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,715 13,004
Amortization of program rights 3,792 5,560
Amortization of debt issuance costs 289 492
Amortization of discount on 10 7/8% senior discount notes 12,692 11,967
Amortization of discount on 12% senior secured notes 3,805 4,340
Minority interest allocation 1,303 2,085
Equity-based compensation -- 39,556
Deferred taxes -- 123
Gain on sale of assets (1,112) --
Changes in assets and liabilities:
Increase in accounts receivables, net (4,020) (2,079)
Increase in prepaid expenses (876) (1,740)
Decrease in due from affiliates 15 --
Increase in other assets (936) (814)
Increase (decrease) in accounts payable (1,697) 1,130
Decrease in deferred tax liability (560) (1,575)
Increase in accrued liabilities 1,327 10,741
Payments on programming rights payable (4,570) (6,906)
Decrease in other liabilities (710) (4,895)
-------- --------
Net cash provided by (used in) operating activities (451) 3,822
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,213) (4,333)
Purchase of and deposits for station interests (16,675) (43,071)
Cash acquired in acquisition -- St. Louis 779 --
Proceeds from sale of station interest 3,337 --
Purchase of Sylvan Tower interest -- (2,583)
-------- --------
Net cash used in investing activities (14,772) (49,987)
-------- --------
Cash flows from financing activities:
Increase in revolving credit facility, net 8,000 32,000
Increase in bridge loan -- 15,000
Payments of capital lease obligations (312) (1,030)
-------- --------
Net cash provided by financing activities 7,688 45,970
-------- --------
Net decrease in cash (7,535) (195)
Cash at beginning of period 8,824 1,001
-------- --------
Cash at end of period $ 1,289 $ 806
======== ========
Cash payments for:
Interest $ 422 $ 2,069
Taxes $ -- $ 102
======== ========
Non-cash transactions:
Purchases of property and equipment in exchange for
capital lease obligations $ 2,746 $ 1,591
Issuance of equity in connection with station acquisitions 7,047 --
Use of deposit as consideration for purchase transaction 143,000 --
Exchange of note receivable and option deposit as; purchase
consideration for station interest -- 7,000
Conversion of convertible debt into stockholders' equity -- 30,131
Issuance of equity in exchange for management carry units $ -- $ 39,556
======== ========
</TABLE>
See the notes to the consolidated financial statements.
6
<PAGE> 7
ACME COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) FORMATION AND DESCRIPTION OF THE BUSINESS
FORMATION
ACME Communications, Inc. was formed on July 23, 1999, in conjunction with a
proposed initial public offering of its stock.
On September 27, 1999, the Board of Advisors of ACME Television Holdings, LLC
and its members approved a merger and reorganization (the "Reorganization"),
whereby ACME Communications became the direct parent of ACME Television
Holdings. As a result of the Reorganization, ACME Communications is the ultimate
parent of ACME Intermediate Holdings, LLC, and its wholly-owned subsidiary ACME
Television, LLC. All transactions contemplated as part of The Reorganization
closed on October 5, 1999.
Among the significant transactions of the Reorganization were the exchange of
shares of the Company's common stock for members' units, management carry units
and convertible debt of ACME Television Holdings. The common stock exchanged for
members' units in ACME Television Holdings was recorded at historical cost. The
management carry units were treated as a variable compensation plan. As the
number of shares of common stock issued to the holders of the management carry
units were fixed and fully vested, compensation expense was recorded for the
difference between the fair value of the shares issued and the MCU expense
previously recorded. The convertible debt was converted pursuant to its original
conversion terms, and accordingly, no gain or loss was recognized.
The financial statements for the current period and prior period give effect to
the exchange of common stock for members' units for all periods presented. The
Company has also reflected the conversion of the convertible debt and the MCUs
as of September 30, 1999. No interest accreted or accrued on the convertible
debt subsequent to September 30, 1999.
On September 29, 1999, the ACME Communications also entered into an underwriting
agreement to issue 5,000,000 shares of common stock at $23 per share, before
underwriters' discounts and other issuance costs. This transaction closed on
October 5, 1999. ACME Communications received net proceeds of approximately $107
million and concurrently repaid the balance due, including interest, on its
revolving credit facility (approximately $40 million) and a bridge loan and its
related interest (approximately $16.3 million).
Finally, on September 29, 1999, the ACME Communications entered into an
agreement with holders of the minority interest in ACME Intermediate Holdings to
acquire such minority interest in exchange for 923,938 shares of common stock.
The shares were issued and the transaction will be recorded on October 5, 1999.
The acquisition of the minority interest will be accounted for at fair market
value.
DESCRIPTION OF THE BUSINESS
ACME Communications is a holding company with no assets or independent
operations other than its indirect wholly-owned subsidiary, ACME Television.
ACME Television, through its wholly-owned subsidiaries, owns and operates the
following nine commercially licensed broadcast television stations located
throughout the United States:
<TABLE>
<CAPTION>
NETWORK
STATION MARKET AFFILIATION
------- ------ -----------
<S> <C> <C>
KPLR - 11 St. Louis WB
KWBP - 32 Portland, OR WB
KUWB - 30 Salt Lake City WB
KWBQ - 19 Albuquerque WB
WBXX - 20 Knoxville WB
WTVK - 46 Ft. Myers/Naples WB
WBDT - 26 Dayton WB
WIWB - 14 Green Bay WB
WBUI - 23 Champaign-Springfield-Decatur WB
</TABLE>
7
<PAGE> 8
(2) PRESENTATION OF INTERIM FINANCIAL STATEMENTS
Unless the context requires otherwise, references to the Company refer to ACME
Communications, Inc and its wholly-owned subsidiaries. Segment information is
not presented because all of the Company's revenues are attributed to a single
reportable segment - television broadcasting. Certain amounts previously
reported for 1998 have been reclassified to conform to the 1999 financial
statement presentation.
The accompanying consolidated financial statements for the nine months ended
September 30, 1999 and 1998 are unaudited and have been prepared in accordance
with generally accepted accounting principles, the instructions to this Form
10-Q and Article 10 of Regulation S-X. In the opinion of management, such
financial statements include all adjustments (consisting of normal recurring
accruals) considered necessary for the fair presentation of the financial
position and the results of operations, and cash flows for these periods. As
permitted under the applicable rules and regulations of the Securities and
Exchange Commission, these financials statements do not include all disclosures
and footnotes normally included with annual consolidated financial statements,
and accordingly, should be read in conjunction with the consolidated financial
statements, and the notes thereto, included in the Company's Prospectus filed
with the SEC on September 30, 1999. The results of operations presented in the
accompanying financial statements are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
(3) LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No.
128,"Earnings per Share" and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 (SAB 98). SFAS No. 128 requires companies with complex capital
structures to present basic and diluted EPS. Basic EPS is measured as the income
or loss available to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to basic EPS
but presents the dilutive effect on a per share basis of potential common shares
(e.g. convertible securities, options, etc.) as if they had been converted at
the beginning of the periods presented. Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from diluted EPS. Prior to the Reorganization the
Company's predecessor was organized as a limited liability company and had not
issued common stock. Accordingly, no historical loss per share information is
included in the financial statements.
(4) PRO FORMA NET LOSS PER SHARE (UNAUDITED)
The pro forma net loss per share (unaudited) for the three and nine month
periods ended September 30, 1998 and 1999 were computed using the weighted
average number of common shares outstanding giving pro forma effect to the
issuance of common stock by the Company in exchange for members units as if such
issuances occurred on January 1, 1998, or at the original issuance date, if
later. In addition, the pro forma net loss includes an adjustment for the change
in tax status due to the Reorganization and an adjustment to the loss allocated
to minority interests. Although the Company, in its third quarter 1999 earnings
release, preliminarily treated the 1,719,820 shares issued in exchange for
management carry units as outstanding as of July 1, 1999, the net loss per
share is calculated in this report as if the shares were issued on September
30, 1999 because they are anti-dilutive. The pro forma diluted loss per share
data also excludes 3,926,191 shares issued in exchange for convertible debt
and 2,834,091 shares issuable upon the exercise of options since their impact
would be anti-dilutive as well.
8
<PAGE> 9
(5) ACQUISITIONS
On February 16, 1999, The Company acquired the remaining 51% interest in Station
KUPX in exchange for the payment of $8.0 million consisting of (i) $3.0 million
paid in December 1997 for an option to acquire the remaining 51% of Station
KUPX; (ii) $4.0 million in repayment of a loan from the Company to the sellers
of this station and (iii) approximately $1.0 million in cash. In March 1999, the
FCC approved the swap of station KUPX for station KUWB. The Company has been
operating KUWB under a local marketing agreement ("LMA") since April 1998, and
station KUPX has been operated by the seller of Station KUWB since May 1998,
under a reciprocal LMA agreement. The station swap closed on September 14, 1999,
and the LMAs terminated. The Company accounted for the swap as a business
combination using fair market value. There was no material difference between
the fair value of KUWB and our book carrying value of KUPX.
On February 19, 1999, the Company entered into an agreement in principle with
Ramar Communications ("Ramar") to acquire Ramar's KASY TV-50, serving the
Albuquerque market for approximately $27 million. This transaction has been
approved by the FCC and is expected to close in the fourth quarter of 1999.
On April 23, 1999, the Company acquired all of the property and equipment of
three wholly-owned subsidiaries of Paxson Communications Corporation ("Paxson"):
Paxson Communications of Dayton-26, Inc. (Station WBDT, Channel 26, which is
licensed to broadcast in the Dayton, Ohio market), Paxson Communications of
Green Bay-14, Inc. (Station WIWB, Channel 14, which is licensed to broadcast in
the Green Bay, Wisconsin market) and Paxson Communications of Decatur-23, Inc.
(Station WBUI, Channel 23, which is licensed to broadcast in the
Champaign-Decatur, Illinois market) (collectively, the "Acquired Stations") for
an aggregate purchase price of $32 million. Following FCC approval of the
transfer of the broadcast licenses and pursuant to the same Asset Purchase
Agreement, the Company acquired the licenses of the Acquired Stations (the
"Licenses Acquisition") for an additional aggregate consideration of $8 million
on June 23, 1999. The Company operated the three stations under an interim LMA
agreement beginning June 2, 1999 and ending at the close of the Licenses
Acquisition on June 23, 1999. The operating results of the three stations
(excluding depreciation and amortization expense) for the LMA period are
included in the Company's results of operations.
(6) BRIDGE LOAN
In connection with the Company's financing of its acquisition of WBDT, WIWB and
WBUI, affiliates of certain of our stockholders loaned the Company $7.0 million
in April 1999 and another $8.0 million in June 1999. Interest on the loan
accrues at an initial rate of 22.5% per year and escalates quarterly after six
months and is due on the earlier of April 2002 or consummation by the Company of
any debt or equity financings generating net proceeds greater than the
outstanding loan balance. The Company repaid the $15 million balance, along with
accrued interest, on October 5, 1999 with the proceeds from the Company's
initial public stock offering.
(7) RELATED PARTY TRANSACTIONS
In February 1999, the Company exercised its option to purchase the property
where KWBP's corporate and studio facilities are located for $1.5 million from
an affiliate of a stockholder of the Company. Before this purchase, the facility
was leased from this same party.
(8) CERTAIN COMPENSATION ARRANGEMENTS
In June 1997 ACME Television Holdings issued Management Carry Units ("MCUs") to
certain founding members of management. These units entitle the holders to
certain distribution or exchange rights from the Company upon achievement of
certain returns by non-management investors. In connection with the
Reorganization, these MCUs were exchanged for shares in the Company and the fair
value of those shares based on the initial offering price, less amounts provided
for in prior periods, have been treated as an equity-based compensation charge.
For the nine months ended September 30, 1999 the Company has recorded
compensation expense and a corresponding capital contribution of $39.6 million
related to the MCUs. For the nine months ended September 30, 1998, no expense or
related capital contribution was recorded. No further compensation charge
related to these MCUs will be recorded by the Company.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
report on Form 10-Q.
OVERVIEW
We derive our revenues primarily from the sale of advertising time to local,
regional and national advertisers. Our revenues depend on our ability to provide
popular programming that attracts audiences in the demographic groups targeted
by advertisers, thereby allowing us to sell advertising time at satisfactory
rates. Our revenues also depend significantly on factors such as the national
and local economy and the level of local competition.
Our revenues are generally highest during the fourth quarter of each year,
primarily due to increased expenditures by advertisers in anticipation of
holiday season consumer spending and an increase in viewership during this
period. We generally pay commissions to advertising agencies on local, regional
and national advertising and to national sales representatives on national
advertising. Our revenues reflect deductions from gross revenues for commissions
payable to advertising agencies and national sales representatives.
Our primary operating expenses are programming costs, employee compensation,
advertising and promotion expenditures and depreciation and amortization.
Programming expense consists primarily of amortization of broadcast rights
relating to syndicated programs as well as news production and sports rights
fees. Changes in employee compensation expense result primarily from increases
in total staffing levels, from adjustments to fixed salaries based on individual
performance and inflation and from changes in sales commissions paid to our
sales staff based on levels of advertising revenues. Advertising and promotion
expenses consist primarily of media and related production costs resulting from
the promotion of our stations and programs. This amount is net of any
reimbursement received or due to us for such advertisement and promotion from
The WB Network or from other program suppliers.
The carrying value of long-lived assets, consisting of tangible, identifiable
intangible, and goodwill, is reviewed if the facts and circumstances suggest
that they might be impaired. For purposes of this review, assets are grouped at
the operating company level, which is the lowest level for which there are
identifiable cash flows. If this review indicates that an asset's carrying value
will not be recoverable, as determined based on future expected, undiscounted
cash flows, the carrying value is reduced to fair market value. There are
neither facts nor circumstances that would lead management to believe that any
of our long-lived assets are impaired.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth our calculation of broadcast cash flow and
adjusts EBITDA along with a recap of our statement of cash flow data for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1999 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Broadcast cash flow and adjusted EBITDA(1):
Operating loss $ (1,573) $(34,626) $ (2,786) $(48,323)
Add back:
Equity based compensation -- 28,856 -- 39,556
Depreciation and amortization 3,534 4,847 7,715 13,006
Time brokerage fees -- -- 228 --
Amortization of program rights 1,597 2,310 3,792 5,560
Corporate expenses 667 3,897 1,861 5,380
Adjusted program payments(1) (1,447) (2,410) (3,599) (5,789)
-------- -------- -------- --------
Broadcast cash flow 2,778 2,874 7,211 9,390
Less:
Corporate expenses 667 3,897 1,861 5,380
-------- -------- -------- --------
Adjusted EBITDA $ 2,111 $ (1,023) $ 5,350 $ 4,010
Broadcast cash flow margin(1) 23.5% 18.2% 23.2% 22.1%
Adjusted EBITDA margin(1) 17.9% (6.5)% 17.2% 9.4%
Cash flows provided by (used in):
Operating activities $ (451) $ 3,822
Investing activities $(14,772) $(49,987)
Financing activities $ 7,688 $ 45,970
</TABLE>
- ---------------
(1) We define:
- broadcast cash flow as operating income, plus equity-based
compensation, depreciation and amortization, time brokerage fees,
amortization of program rights, and corporate expenses, less program
payments -- the latter as adjusted to reflect reductions for
liabilities relating to expired rights or rights which have been
written-off in connection with acquisitions;
- adjusted EBITDA as broadcast cash flow less corporate expenses;
- broadcast cash flow margin as broadcast cash flow as a percentage of
net revenues; and
- adjusted EBITDA margin as adjusted EBITDA as a percentage of net
revenues.
We have included broadcast cash flow, broadcast cash flow margin, adjusted
EBITDA and adjusted EBITDA margin data because management believes that
these measures are useful to an investor to evaluate our ability to service
debt and to assess the earning ability of our stations' operations.
However, you should not consider these items in isolation or as substitutes
for net income, cash flows from operating activities and other statement of
operations or cash flows data prepared in accordance with generally
accepted accounting principles. These measures are not necessarily
comparable to similarly titled measures employed by other companies.
11
<PAGE> 12
Net revenues increased 34% to $15.8 million for the third quarter and increased
36% to $42.4 million for the first nine months of 1999 compared to the same
periods a year ago. These gains reflect significant growth at our developmental
stations, above-market growth at our flagship station KPLR and revenue from the
three stations serving the Dayton, Green Bay and Champaign-Decatur-Springfield
markets that the Company began operating in June 1999. The revenue gains in
these markets have been driven by improved audience ratings and in-market
audience shares at these stations.
Station operating expenses increased 40% to $12.8 million for the third quarter
and increased 35% to $32.8 million for the first nine months of 1999 compared to
the same periods a year ago. These increases are primarily relate to increased
programming and staffing related costs at our developing stations in Portland,
Oregon, Salt Lake City, Albuquerque, Knoxville and Ft. Myers and to the station
expenses at the newly acquired Paxson stations.
Depreciation and amortization increased 37% to $4.8 million in the third quarter
and increased 69% to $13.0 million during the first nine months of 1999 compared
to the corresponding periods a year ago. The third quarter increase relates
primarily to the increased depreciation of property, plant and equipment
additions since September 1998 and to the amortization of intangibles related to
the acquired Paxson stations. The significant increase for the first nine months
primarily relates to the March 1998 acquisition of KPLR - St. Louis and the
resulting amortization of intangibles for that station along with the
amortization of intangibles relating to the acquired Paxson stations.
Corporate expenses for the quarter included a $3.0 million charge related to
bonuses awarded to certain executives and founders in connection with our
initial public offering. Excluding this charge, corporate expenses increased 2%.
On a nine-month basis, corporate expenses, excluding the $3.0 million charge,
increased 15%. These increases in corporate overhead relate primarily to
increased staffing to support the growing operations of our station group and
the increase in the number of stations being managed.
Equity-based compensation expense during the quarter was $28.9 million and for
the first nine months of 1999 totaled $39.6 million. The third quarter expense
reflects the value of ACME Communications shares, based on the initial offering
price, exchanged by the Company's founding executives for Management Carry Units
issued to them in June 1997, less the amounts provided for during the first six
months of 1999. There was no corresponding expense in 1998.
Interest expense for the third quarter was $8.3 million, an increase of 37% over
the prior year third quarter. The first nine months interest expense was $22.4
million, an increase of 28% over the prior year. These increases in interest
expense relate primarily to the continued amortization of the discount on ACME
Television's 10 7/8% senior discount notes and ACME Intermediate's 12%
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senior secured notes along with interest on the April and June 1999 borrowings
on the Company's revolving credit facility and interest on the bridge loan, both
made in connection with the acquisition of the Paxson Stations.
The Company recorded a net income tax benefit of $3.4 million during the third
quarter compared to a benefit of $402,000 in the corresponding quarter of 1998.
This increase in tax benefit relates to the reversal of a $3.0 million provision
booked in the first quarter of 1999 in connection with an inadvertent merger of
a C corporation subsidiary into it's LLC parent. During September 1999, the
Company obtained court rescissions of the transaction and reversed the
provision.
The Company's net loss for the third quarter was $38.8 million compared to a net
loss for the third quarter of 1998 of $5.7 million. This $33.1 million increase
in the Company's net loss is primarily attributable to the non-recurring
equity-based compensation charge of $28.9 million, the $3.0 million IPO related
bonus charge, $2.2 million in increased interest expense and $1.3 million in
increased amortization, net of improved station operating results (exclusive of
amortization and depreciation). For the first nine months, the Company's net
loss was $67.2 million compared to a $16.9 million net loss in the prior year
period. This increased loss was primarily attributable to the $39.6 million
equity-based compensation charge for the first nine months of 1999, the IPO
bonuses of $3.0 million, increased amortization relating to the March 1998
acquisition of KPLR and the June 1999 acquisitions of the Paxson stations and
increased interest expense, net of improved station operating results (exclusive
of depreciation and amortization).
Broadcast cash flow for the third quarter increased 3% to $2.9 million and for
the first nine months increased 30% to $9.4 million. The increases during the
third quarter was adversely affected by losses from the three stations acquired
from Paxson and from start-up losses at the Company's Albuquerque WB Network
affiliate - KWBQ which was launched in March 1999. For the five stations that
the Company operated in both the third quarter of 1999 and 1998 (i.e. St. Louis,
Portland, Salt Lade City, Knoxville and Ft. Myers/Naples) broadcast cash flow
increased 39%. The nine month increase was also adversely affected, although
less so, by the start-up losses at the three former Paxson stations and KWBQ.
Adjusted EBITDA was ($1.0) million during the third quarter; a $3.1 million
decrease from the $2.1 million adjusted EBITDA for the third quarter of 1998.
This decrease relates to the $3.0 million IPO bonuses and start-up losses at the
Paxson stations and at KWBQ. Adjusted EBITDA for the nine months decreased 25%,
but when calculated excluding the $3.0 million IPO related charge, increased
31%, despite the adverse impact of the start-up losses at the Paxson stations
and KWBQ.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities was $3.8 million for the nine months
ended September 30, 1999 compared to cash flow used by operating activities of
$451,000 for the first nine months of 1998. This increase is related primarily
to the Company's improved broadcast cash flow.
Cash flow used in investing activities during the first nine months of 1999 was
$50.0 million compared to $14.8 million used for investing activities during the
first nine months of 1998. This increase relates primarily to the acquisition of
the Paxson Stations as described in note 5.
Cash flow provided by financing activities of $46.0 million for the first nine
months of 1999 related primarily to increased borrowings in connection with the
second quarter 1999 acquisition of the Paxson Stations.
At September 30, 1999, ACME Television's existing credit agreement allows for
revolving credit borrowings of up to a maximum of $40 million, dependent upon
its meeting certain financial ratio tests as set forth in the credit agreement.
The revolving credit facility can be used to fund future acquisitions of
broadcast stations and for general corporate purposes. At September 30, 1999,
the entire $40 million was outstanding under the facility. The effective average
annual interest rate on this outstanding principal amount was 8.46% at September
30, 1999. On October 5, 1999, the entire revolving credit facility balance was
repaid from the proceeds of the Company's initial public stock offering.
ACME Intermediate's 12% senior secured discount notes were issued in September
1997 and mature in September 2005. Cash interest begins accruing on October 1,
2002, with the first semi-annual payment of interest due on March 31, 2003. ACME
Television's 10-7/8% senior discount notes were issued in September 1997 and
mature in September 2004. Cash interest begins accruing on October 1, 2000, with
the first semi-annual payment of interest due on March 31, 2001.
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The Company believes that internally generated funds from operations and
borrowings under its credit agreement, if necessary, will be sufficient to
satisfy the Company's cash requirements for its existing operations for at least
the next twelve months. The Company expects that any future acquisitions of
television stations would be financed through funds generated from operations,
through borrowings under the existing credit agreement and through additional
debt and equity financings. However there is no guarantee that such additional
debt and/or equity financing will be available or available at rates acceptable
to the Company.
YEAR 2000
Year 2000 issues are a result of computer software applications using a
two-digit format, as opposed to a four-digit format, to indicate the year. Some
computer software applications might be unable to distinguish dates beyond the
year 1999, which could cause system failures, or miscalculations at our
broadcast and corporate locations that could cause disruption of operations,
including a temporary inability to produce broadcast signals or engage in normal
business activities.
The Company is in the process of evaluating potential year 2000 issues for both
its information technology and non-information technology systems such as
telephone systems, fax machines, editing equipment, cameras, microphones, etc.
All of our internal software and hardware is purchased, leased or licensed from
third party vendors. Most of our station facilities are new or have been
recently upgraded and we have polled all of our significant software vendors and
have been advised by them that their software is year 2000 compliant.
We have completed the assessment, planning and testing phases, and have
commenced the final phase of our year 2000 project. During this phase, the
Company will fix, retest and implement critical applications that were
discovered to be year 2000 deficient during the preceding phases.
The Company is not aware of any additional significant upgrades or changes that
will need to be made to its internal software and hardware to become year 2000
ready, nor is it aware of any material supplier with year 2000 readiness
problem. We expect to implement the systems and programming changes necessary to
address year 2000 information technology and non-information technology
readiness issues and, based on preliminary estimates, we do not believe that the
costs of doing so will have a material effect on our results of operations or
financial condition. As we obtain the results of compliance testing, there might
be a delay in, or increased costs associated with the implementation of such
changes. As of September 30, 1999, we have spent less than $100,000 on year 2000
activities and our budgeted expenditures for the remainder of 1999 are less than
$75,000.
ADOPTION OF ACCOUNTING STANDARD
The FASB (Financial Accounting Standards Board) has issued FASB statement No.
133 "Accounting for Derivative Instruments and Hedging Activities" which we will
be required to adopt for our year ending December 31, 2000. This pronouncement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This pronouncement is not expected to impact the Company's financial
statements since the Company currently has no derivative instruments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's revolving credit facility has a variable interest rate.
Accordingly, the Company's interest expense can be materially affected by future
fluctuations in the applicable interest rate. Based on our September 30, 1999
loan balance under the facility, a 100 basis point increase in the underlying
rates would result in additional interest expense of $400,000 on an annualized
basis.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business. The Company maintains comprehensive general
liability and other insurance, which it believes to be adequate for the purpose.
The Company is not currently a party to any lawsuit or proceeding that
management believes would have a material adverse affect on its financial
condition or results of operations.
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ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM REGISTERED SECURITIES
In the Company's initial public offering, the Company sold 5,000,000 shares of
the Company's common stock on October 5, 1999. Upon the exercise of the
underwriters' over-allotment option, the selling stockholders sold 750,000
shares of common stock. The effective date of the registration statement on Form
S-1 for the 5,750,000 shares of common stock registered by the registration
statement was September 29, 1999 and the file number is 333-84191. The managing
underwriters of the offering are Deutsche Banc Securities Inc., Merrill Lynch,
Pierce Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and CIBC
World Markets Corp.
The price to the public of the 5,750,000 shares of common stock sold was $23.00
per share and the gross proceeds were $132.25 million. The total underwriting
discounts and commissions were $9.26 million. The net proceeds before expenses
to the Company and the selling stockholders were $106.95 million and $16.04
million, respectively. The total costs and expenses incurred in the offering,
exclusive of the underwriting discount, are estimated at $1.35 million and are
payable by the Company. The net proceeds to the Company after deducting costs
and expenses was approximately $106.50 million.
The net proceeds were used to: (a) repay all outstanding indebtedness under our
revolving credit agreement ($40.0 million, plus accrued interest), (b) fund the
escrow account in connection with the Company's acquisition of station KASY
(approximately $25.6 million), and (c) repay the bridge loan debt ($15.0 million
plus accrued interest) incurred in connection with the acquisition of the Paxson
Stations. The remainder of the funds have been retained for general corporate
purposes, including working capital requirements and future acquisitions.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Before the consummation of the initial public offering the sole stockholder of
the Company acted by written consent and approved the following actions on the
following dates during the third quarter of 1999. On September 3, 1999, the
stockholder approved the Company's 1999 Stock Incentive Plan. On September 21,
1999, the stockholder approved an amendment of the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock of the
Company to 50,000,000, par value $.01 per share. On September 27, the
stockholder approved (a) the adoption of the Company's restated certificate of
incorporation, (b) the agreement and plan of reorganization, and (c) the merger
agreement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.1 Employment Agreement, as amended, by and between ACME
Communications, Inc. and Thomas Allen.
27.0 Financial Data Schedule for ACME Communications, Inc.,
available in electronic format as filed by the Registrant.
(b) REPORTS ON FORM 8-K
The Company has not filed a Current Report on Form 8-K within the
three-month period ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACME Communications, Inc.
Date: November 15, 1999 By: /s/ Doug Gealy
-----------------------------
Doug Gealy, President
Date: November 15, 1999 By: /s/ Thomas D. Allen
-----------------------------
Thomas D. Allen
Executive Vice President/CFO
(Principal financial officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.1 Employment Agreement, as amended, by and between ACME
Communications, Inc. and Thomas Allen.
27.0 Financial Data Schedule for ACME Communications, Inc.,
available in electronic format as filed by the Registrant.
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Agreement is entered as of September 29, 1999, by and between ACME
Communications, Inc., a Delaware corporation (the "Company") as employer and
Thomas D. Allen ("Executive"). This Agreement will be effective on the date on
which the Company has closed its initial public offering of shares of its common
stock.
1. EMPLOYMENT.
1.1 TITLE; DUTIES. The Company hereby employs Executive as Executive Vice
President and Chief Financial Officer to perform such management and
executive duties on behalf of the Company as the Chief Executive Officer
or Board of Directors of the Company may from time to time determine.
Executive will have such duties and responsibilities as are generally
consistent with such position in a public company of comparable present
and projected size. Executive will also serve without additional
compensation in an executive capacity for one of more direct or indirect
subsidiaries of the Company if the Board from time to time requests.
Executive will also, subject to Executive's election as such, serve as a
member of the Board, as well as a member of any committee of the Board
to which Executive may be elected or appointed.
1.2 TERM. Executive will be employed until June 16, 2002, unless Executive's
employment is terminated before that date pursuant to the provisions
hereof or extended in accordance with the next sentence. The Company
will have the option to extend the term of Executive's employment until
September 29, 2003. The Company must give Executive notice of its
exercise of its extension option by March 16, 2002. If the extension
option is exercised, Executive's then current Base Salary would be
increased by 10% for the period of the extension. If the extension
option is not exercised, vesting of all of Executive's options granted
as of the date this Agreement becomes effective will accelerate and
become immediately exercisable on June 16, 2002.
2. COMPENSATION
2.1 COMPENSATION. As compensation for his services hereunder, the Company
will pay Executive the following:
2.1.1 BASE SALARY. A base salary ("Base Salary") of $300,000 per annum
payable in monthly installments in accordance with the Company's normal
payroll practices. On January 1, 2000, the Base Salary will increase to
$375,000 per annum. Starting January 1, 2001, (a) the Base Salary will
increase annually as of January 1 by the amount of the increase in the
Consumer Price Index (All Urban Consumers) during the previous year, and
(b) will be reviewed annually by the Company's Compensation Committee to
determine whether an additional increase is appropriate.
2.1.2 PERFORMANCE BONUS. The Company's Compensation Committee will
recommend to the Company's Board of Directors for the Board's adoption
no later than November 30, 1999 a cash incentive plan under which
Executive will be eligible to
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receive awards. No later than January 1, 2000, Executive will be awarded
cash incentives under such plan if Executive meets performance targets
during fiscal 2000.
2.1.3 BONUSES.
(a) On January 1, 2000, Executive will receive a $802,500 special,
one-time bonus.
(b) Executive will be eligible to receive additional annual bonuses
to the extent, if any, awarded by the Company's Compensation
Committee.
2.1.4 ADDITIONAL BENEFITS.
(a) During the term of this Agreement, Executive will be entitled to
participate, to the extent he is eligible under the terms and
conditions thereof, in any pension, profit sharing, retirement,
hospitalization, insurance, medical service or other employee
benefit plan generally available to the executives of the
Company which may be in effect from time to time during the
period of his employment hereunder, it being understood that the
Company will pay the entire costs of any health insurance or
disability insurance maintained by the Company for Executive in
accordance with Company's policies generally in effect.
(b) Executive will be provided a leased vehicle to be acquired in a
"trade deal" (i.e. non-cash); provided, however, that the
Compensation Committee will have the discretion to determine the
value of such trade deal.
2.1.5 VACATIONS. Executive shall be entitled to four (4) weeks of paid
vacation (in addition to Company-wide holiday periods) annually, two
weeks of which may be carried forward to the following year.
2.2 REIMBURSEMENT. The Company will reimburse Executive for all expenses
reasonably incurred by him in connection with the performance of his
duties hereunder or in the business of the Company.
3. NON-COMPETITION AND BUSINESS OPPORTUNITIES.
3.1 COMPETITIVE ENTERPRISES. While employed by the Company, and for a period
of twelve (12) months after termination of employee status for any
reason, Executive must not, without the express written consent of the
Board, directly or indirectly, engage in any activity that is, or
participate or invest in or assist (whether as owner, part-owner,
stockholder, partner, director, officer, trustee, employee, agent,
independent contractor or consultant, or in any other capacity) a
Competitive Enterprise. "Competitive Enterprise" means any entity that
operates television stations, cable distribution systems or other video
broadcast or distribution enterprises exclusively in a designated market
area ("DMA") where the Company or any affiliate (as defined in the
Securities Exchange Act of 1934) of the Company owns and/or operates
stations.
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3.1.1 EXCEPTIONS. Notwithstanding the foregoing, nothing in this
Section 3 will prohibit Executive, after termination of Executive's
employee status, from engaging in any activity on behalf of, or being
employed in any capacity by, a group television station operator so long
as no more than 5% of such operator's revenues result from a Competitive
Enterprise. Executive must not, until July 1, 2000, own any equity
interests in any privately-held television enterprise or more than 5% of
the equity interests in any publicly-held television enterprise if, in
either case, such enterprise is engaged in a Competitive Enterprise.
3.1.2 CORPORATE OPPORTUNITY. Executive agrees, while serving as an
officer or employee of the Company, to offer or otherwise make known or
available to the Company without compensation or consideration, any
business prospects, contracts or other business opportunities that
Executive may discover, find, develop or otherwise have available to
acquire, own or manage any television stations, cable distribution
systems or other video broadcast or distribution enterprises that could
deliver WB Network programming for DMAs 20 to 100, excluding any Web
Network opportunities controlled by The WB Network and/or Time Warner
(such prospects, contracts or opportunities are referred to as
"Television Station Opportunities"), and further agrees that any such
Television Station Opportunities will be the property of the Company.
3.1.3 NON-SOLICITATION. Executive must not, until the second
anniversary his employee status is terminated, whether on behalf of a
Competitive Enterprise or otherwise, hire or attempt to hire any officer
or other senior employee of the Company or any affiliate of the Company
or encourage any officer or other senior employee of the Company or any
affiliate of the Company to terminate his or her relationship with the
Company or any affiliate of the Company.
4. TERMINATION.
4.1 DEATH; DISABILITY. If Executive's employment is terminated by reason of
Executive's death or disability, Executive or his estate will be
entitled to one year's Base Salary in effect at the time of his
termination as severance pay, payable in monthly installments in
advance.
4.2 WITHOUT CAUSE. If Executive's employment is terminated by the Company,
without Cause, as defined in clause 4.6 below, he will be entitled to
receive severance pay for a period of eighteen months based upon his
Base Salary in effect at the time of his termination, payable in monthly
installments in advance.
4.3 RESIGNATION; FOR CAUSE. If the Executive's employment is terminated as a
result of his resignation or termination for Cause, he will not be
entitled to any severance payments.
4.4 NO MITIGATION. The Executive has no duty to mitigate any amounts of
severance payable hereunder.
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<PAGE> 4
4.5 DISABILITY DEFINED. "Disability" means that Executive has been
substantially unable, by reason of injury, illness or similar cause
(physical or mental), to have performed his duties and responsibilities
for a period of one hundred and eighty (180) consecutive days or shorter
periods aggregating 180 days in any consecutive twelve (12) month
period, and such person is not anticipated to recover the ability to
perform such duties and responsibilities with the foreseeable future.
4.6 CAUSE DEFINED. "Cause" will be determined by the Company's Board of
Directors and will mean: (A) the conviction of Executive of, or a plea
of guilty or nolo contendere entered by or on behalf of Executive with
respect to, a felony or crime, where such felony or crime involves moral
turpitude or where such conviction or plea is likely to have a material
adverse effect on the Company or upon Executive's ability to perform his
duties as an Executive of the Company; (B) fraud, embezzlement or other
act of dishonesty by Executive with respect to the Company; (C) the
continued willful refusal or neglect of Executive to perform or
discharge any substantial portion of his duties and responsibilities for
a period in excess of thirty (30) days, which willful refusal or neglect
continues for an additional thirty (30) day after written notice to
Executive from the Company with regard thereto; (D) intentional and
willful violation by Executive of any rule, regulation or policy of the
Federal Communications Commission ("FCC") that would reasonably be
expected to (i) result in a material loss to the Company, (ii) result in
the termination, cancellation or suspension of any of the Company's
material FCC licenses or permits, or (iii) otherwise have a material
adverse effect on the Company's business or financial condition; or (iv)
the material breach (after expiration of any notice and cure period) of
this Agreement.
4.7 LIMITATION ON SEVERANCE PAYMENTS. If the vesting of any options or
other awards granted to Executive under any incentive plan upon a change
in control event (as defined under the Company's 1999 Stock Incentive
Plan) together with all other payments and the value of any benefit
received or to be received by Executive would result in all or a portion
of such payments to be subject to excise tax under Section 4999 of the
Internal Revenue Code (the "Code"), then Executive's payments will be
either (a) the full payments or (b) such lesser amount that would result
in no portion of the payments being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into
account the applicable Federal, state, and local employment taxes,
income taxes, and the excise tax imposed by Section 4999 of the Code,
results in the receipt by Executive, on an after-tax basis, of the
greatest amount of the payments notwithstanding that all or some portion
of the payments may be taxable under Section 4999 of the Code. Executive
will be entitled to receive the foregoing full payments, however, only
if the excess of (c) the "parachute payments" as defined in Section
280G(b)(2) of the Code, over (d) 2.99 times Executive's "base amount" as
defined in Section 280G(b)(3) of the Code exceeds the sum of (x) the
greater of (i) $100,000 or (ii) ten (10) percent of the payments under
this Agreement plus (y) the excise tax imposed under Section 4999 of the
Code, plus (z) the applicable federal, state, and local employment taxes
and income taxes imposed on the excess of (i) the "parachute payments"
as defined in Section 280G(b)(2) of the Code, over (ii) 2.99 times
Executive's
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<PAGE> 5
"base amount" as defined in Section 280G(b)(3) of the Code. All
determinations required to be made under this Section will be made by
any nationally recognized accounting firm that is the Company's outside
auditor at the time of such determination (the "ACCOUNTING FIRM"). The
Company will cause the Accounting Firm to provide detailed supporting
calculations of its determinations to the Company and Executive. Notice
must be given to the Accounting Firm within fifteen (15) business days
after an event entitling Executive to a payment under this Agreement.
All fees and expenses of the Accounting Firm will be borne solely by the
Company. The Accounting Firm's determinations must be made with
substantial authority (within the meaning of Section 6662 of the Code).
5. MISCELLANEOUS
5.1 EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. Executive represents and
warrants to the Company that: (A) the Executive has the unfettered right
to enter into this Agreement on the terms and subject to the conditions
hereof and (B) neither the execution and delivery of this Agreement nor
the performance by Executive of any of Executive's obligations hereunder
constitute or will constitute a violation or breach of or a default
under any agreement, arrangement or understanding or any other
restriction of any kind to which Executive is a party or by which
Executive is bound.
5.2 INSURANCE. The Company will have the right to take out life, health,
accident, "Key-man" or other insurance covering Executive in the name of
the Company and at the Company's expense in any amount deemed
appropriate by the Company. Executive will assist the Company in
obtaining such insurance, including, but not limited to, submitting to
any reasonably required medical examination.
5.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes
all prior agreements and understandings among the parties or any of
them. There are no representations, warranties, agreements or
understandings other than those expressly contained herein. No
termination, alteration, modification, variation or waiver of this
Agreement or any of the provisions hereof shall be effective unless in
writing and signed by the party against whom enforcement thereof is
sought.
5.4 NOTICE. Any notice required, permitted or desired to be given pursuant
to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if sent by certified or
registered mail, return receipt and postage prepaid, hand delivered,
overnight delivery service or sent by telephone facsimile as follows:
If to the Company, to it at:
ACME Communications, Inc.
10829 Olive Blvd., Suite 202
St. Louis, MO 63141
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Attention: Doug Gealy
Facsimile No.: (314) 989-0616
If to Executive, to him at:
2450 Kiser
Tustin, CA 92782
Facsimile No.: (714) 832-4307
Either of the parties may at any time and from time to time change the address
to which notice will be sent hereunder by notice to the other party given under
this Section. The date of the giving of any notice sent by mail will be the date
of the posting of the mail; by any other means of delivery it will be the date
of receipt.
5.5 ASSIGNMENT. Neither this Agreement nor the right to receive any payments
hereunder may be assigned by Executive nor Company.
5.6 WAIVER. No course of dealing nor any delay on the part of the Company in
exercising any rights hereunder will operate as a waiver of any such
rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
5.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to
agreements executed and to be performed entirely therein.
5.8 SEVERABILITY. Should any clause, paragraph or part of this Agreement be
held or declared to be void or illegal for any reason, all other
clauses, paragraphs or parts of this Agreement which can be effected
without such illegal clause, paragraph or part shall nevertheless remain
in full force and effect. If, in the opinion of any court, any clause,
paragraph or part of this Agreement is unreasonable or unenforceable,
such court shall have the right, power and authority to excise or modify
such provisions, or portions thereof, of this Agreement as the court
shall find not be reasonable or enforceable and to enforce the remainder
of such clause, paragraph or part as so excised or modified.
5.9 BINDING EFFECT. This Agreement will be binding upon and inure to the
benefit of the Company, Executive and Executive's heirs and personal
representatives.
5.10 HEADINGS. The headings of the paragraphs of this Agreement are inserted
for convenience only and do not constitute a part hereof or affect in
any way the meaning or interpretation of this Agreement.
5.11 CONFIDENTIALITY. Executive will hold all Confidential Information in a
fiduciary capacity for the benefit of the Company. After termination of
Executive's employment, Executive will not, without the prior written
consent of the Company or as may otherwise be required by law or legal
process, communicate or divulge any such Confidential
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Information to anyone other than the Company and those designated by it.
"CONFIDENTIAL INFORMATION" means information not known by the trade
generally or not reasonably available to a knowledgeable person in the
trade, even though such information may have been disclosed to one or
more third parties pursuant to consulting agreements, joint research
agreements, or other agreements entered into by the Company.
Confidential Information does not include information that is required
to be disclosed by law, statute, regulation or legal or administrative
process
5.12 OWNERSHIP OF WORK PRODUCT. If Executive conceives of, discovers, invents
or creates inventions, improvements, new contributions, literary
property, material, ideas and discoveries, whether patentable or
copyrightable or not (all of the foregoing being collectively referred
to herein as "WORK PRODUCT"), or receives information about business
opportunities for the Company, unless Company otherwise agrees in
writing, all of the foregoing will be owned by and belong exclusively to
Company and that Executive will have no personal interest therein, if
they are either related in any manner to the business (commercial or
experimental) of Company, or are, in the case of Work Product, conceived
or made on Company's time or with the use of Company's facilities or
materials, or, in the case of business opportunities, are presented to
Executive for the possible interest or participation of Company.
Executive will further, unless Company otherwise agrees in writing, (a)
promptly disclose any such Work Product and business opportunities to
Company; (b) assign to Company, upon request and without additional
compensation, the entire rights to such Work Product and business
opportunities; (c) sign all papers necessary to carry out the foregoing;
and (d) give testimony in support of Executive's inventorship or
creation in any appropriate case. Executive will not to assert any
rights to any Work Product or business opportunity as having been made
or acquired by executive before the date of this Agreement except for
Work Product or business opportunities, if any, disclosed to and
acknowledged by Company in writing before the date of this Agreement.
5.13 REASONABLE REIMBURSEMENT. The Company will reimburse Executive for
reasonable attorney fees in connection with the negotiation of this
Agreement upon its receipt of invoices and such other supporting
documentation reasonably necessary to substantiate the nature and
payment of such expenses.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the day and year first above written.
ACME Communications, Inc.
By: /s/ Douglas E. Gealy
-------------------------------
Douglas E. Gealy
President
/s/ Thomas D. Allen
- -----------------------------------
Thomas D. Allen
-8-
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