<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT
UNDER
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13D OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 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 1-10321
THE ACKERLEY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1043807
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1301 FIFTH AVENUE
SUITE 4000
SEATTLE, WASHINGTON 98101
(206) 624-2888
(Address, including zip code, and telephone number,
including area code, of Registrant's 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 (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Title of Class Outstanding at August 6, 1999
-------------- -----------------------------
<S> <C>
Common Stock, $.01 par value 23,578,141 shares
Class B Common Stock, $.01 par value 11,051,230 shares value
</TABLE>
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998............................ 1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998....... 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998................. 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 23
SIGNATURES..................................................... 23
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE ACKERLEY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
---------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
----------- ------------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,637 $ 4,630
Accounts receivable, net of allowance 54,613 44,680
Current portion of broadcast rights 6,117 7,339
Prepaid expenses 9,383 10,212
Deferred tax assets 4,746 4,497
Other current assets 3,701 3,883
--------- ---------
Total current assets 82,197 75,241
Property and equipment, net 134,050 113,108
Goodwill, net 221,664 70,034
Other Intangibles, net 24,377 7,780
Other assets 40,524 49,963
--------- ---------
Total assets $ 502,812 $ 316,126
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 7,858 $ 8,004
Accrued interest 12,453 694
Other accrued liabilities 14,826 11,861
Deferred revenue 5,939 27,736
Current portion of broadcasting obligations 6,741 8,139
Current portion of long-term debt 6,910 3,101
--------- ---------
Total current liabilities 54,727 59,535
Long-term debt, less current portion 439,125 266,999
Litigation accrual 7,979 8,016
Other long-term liabilities 15,285 7,417
--------- ---------
Total liabilities 577,116 341,967
Stockholders' deficiency:
Common stock, par value $.01 per share--
authorized 50,000,000 shares; issued
21,953,087 shares at June 30, 1999 and
21,951,380 shares at December 31, 1998; and
outstanding 20,578,141 shares at June 30, 1999 and
20,576,434 shares at December 31, 1998 219 219
Class B common stock, par value $.01 per
share--authorized 11,406,510
shares; and issued and outstanding 11,051,230
shares at June 30, 1999 and December 31, 1998 111 111
Capital in excess of par value 10,858 10,339
Deficit (15,403) (26,421)
Less common stock in treasury, at cost (10,089) (10,089)
--------- ---------
Total stockholders' deficiency (14,304) (25,841)
--------- ---------
Total liabilities and stockholders' deficiency $ 502,812 $ 316,126
========= =========
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
1
<PAGE> 4
THE ACKERLEY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
---------------
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Periods Ended June 30, Periods Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue $ 81,264 $ 85,798 $ 156,381 $ 175,427
Less agency commissions and discounts (9,864) (9,961) (17,285) (18,544)
--------- --------- --------- ---------
Net revenue 71,400 75,837 139,096 156,883
Expenses (other income):
Operating expenses 56,734 61,897 116,898 131,285
Restructuring expenses 1,126 -- 1,126 --
Depreciation and amortization expense 6,860 3,223 11,583 7,066
Interest expense 9,407 7,129 16,718 13,639
Stock compensation expense 274 422 519 422
Gain on disposition of assets (27,307) (32,980) (28,933) (32,980)
--------- --------- --------- ---------
Total expenses and other income 47,094 39,691 117,911 119,432
--------- --------- --------- ---------
Income before income taxes and extraordinary item 24,306 36,146 21,185 37,451
Income tax expense (8,734) (13,748) (8,162) (14,244)
--------- --------- --------- ---------
Income before extraordinary item 15,572 22,398 13,023 23,307
Extraordinary item: loss on debt extinguishment -- -- (1,373) --
--------- --------- --------- ---------
Net income $ 15,572 $ 22,398 $ 11,650 $ 23,207
========= ========= ========= =========
Income per common share, before extraordinary item $ 0.49 $ 0.71 $ 0.41 $ 0.74
Extraordinary item: loss on debt extinguishment -- -- (0.04) --
--------- --------- --------- ---------
Net income per common share $ 0.49 $ 0.71 $ 0.37 $ 0.74
========= ========= ========= =========
Income per common share, before extraordinary
item, assuming dilution $ 0.49 $ 0.70 $ 0.41 $ 0.73
Extraordinary item: loss on debt extinguishment -- -- (0.04) --
--------- --------- --------- ---------
Net income per common share, assuming dilution $ 0.49 $ 0.70 $ 0.37 $ 0.73
========= ========= ========= =========
Dividends per common share $ -- $ -- $ 0.02 $ 0.02
========= ========= ========= =========
Dividends per common share, assuming dilution $ -- $ -- $ 0.02 $ 0.02
========= ========= ========= =========
Weighted average number of common shares 31,628 31,572 31,628 31,572
Weighted average number of common
shares, assuming dilution 32,039 31,820 32,039 31,820
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 5
THE ACKERLEY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
---------------
<TABLE>
<CAPTION>
For the Six Month
Periods Ended June 30,
---------------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,650 $ 23,207
Adjustments to reconcile net income to net cash used in
operating activities:
Stock compensation expense 519 422
Deferred tax expense 7,239 12,135
Debt extinguishment, net of taxes 1,373 --
Depreciation and amortization expense 11,583 7,066
Amortization of deferred financing costs 871 416
Gain on disposition of assets (28,933) (32,980)
Amortization of broadcast rights 5,824 5,553
Income from barter transactions (1,077) (1,007)
Change in assets and liabilities:
Accounts receivable (6,642) 3,105
Prepaid expenses 1,024 955
Other current assets and other assets 1,735 (372)
Accounts payable and accrued interest 11,579 (3,094)
Other accrued liabilities and other long-term 2,867 (803)
liabilities
Deferred revenues (21,797) (9,894)
Current portion of broadcast obligations (5,969) (5,640)
--------- ---------
Net cash used in operating activities (8,154) (931)
Cash flows from investing activities:
Proceeds from disposition of assets 10,626 763
Proceeds from sale of property and equipment 175 --
Capital expenditures (11,926) (19,268)
Payments for acquisitions (159,553) (30,459)
Other, net -- (513)
--------- ---------
Net cash used in investing activities (160,678) (49,477)
Cash flows from financing activities:
Borrowings under credit agreements 287,063 201,592
Payments under credit agreements (110,743) (147,181)
Payments under capital lease obligations (444) (424)
Note redemption prepayment fees (1,208) --
Dividends paid (632) (633)
Payments of deferred financing costs (6,197) (1,345)
Proceeds from stock issuance -- 72
--------- ---------
Net cash provided by financing activities 167,839 52,081
Net increase (decrease) in cash and cash equivalents (993) 1,673
Cash and cash equivalents at beginning of period 4,630 3,656
--------- ---------
Cash and cash equivalents at end of period $ 3,637 $ 5,329
========= =========
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
For the Six Month
Periods Ended June 30,
---------------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Supplemental disclosure of noncash transactions:
Broadcast rights acquired and broadcast obligations assumed $ 2,027 $ 864
Property and equipment acquired through barter 817 922
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 7
THE ACKERLEY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The balance sheet at December 31, 1998 has been
derived from the audited consolidated financial statements at that date. The
accompanying condensed consolidated financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
normal and recurring adjustments necessary for a fair presentation of the
financial position and the results of operations for such periods have been
included. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
The results of operations for any interim period are not necessarily
indicative of anticipated results for the full year. The Company's results of
operations may vary from quarter to quarter due in part to the timing of
acquisitions and to seasonal variations in the operations of the television
broadcasting, radio broadcasting, and sports & entertainment segments. In
particular, the Company's net revenue and net income historically have been
affected positively during the NBA basketball season (the first, second, and
fourth quarters) and by increased advertising activity in the second and fourth
quarters.
Certain prior year's amounts have been reclassified to conform to the
1999 presentation.
NOTE 2. NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board issued Statement
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133. The Statement defers for one
year the effective date of Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Statement No. 133 will now apply to all
fiscal quarters of all fiscal years beginning after June 15, 2000. Because of
our minimal use of derivatives, management does not anticipate that the adoption
of Statement No. 133 will have a significant effect on our earnings or financial
position.
NOTE 3. ACQUISITIONS AND DISPOSITIONS
On January 5, 1999, the Company purchased substantially all of the
assets of KVIQ(TV), the CBS affiliate licensed to Eureka, California, for
approximately $5.5 million, pursuant to an agreement dated July 15, 1998.
Pending closing of the transaction, the Company operated the station pursuant to
a time brokerage agreement with the former owner. The Company recorded net
assets with estimated fair values aggregating $0.5 million and goodwill of $5.0
million in connection with the transaction.
On February 19, 1999, the Company purchased substantially all of the
assets of an outdoor advertising company in the Boston/Worcester, Massachusetts
market for approximately $11.0 million. The Company recorded net assets with
estimated fair values aggregating $0.6 million and goodwill of $10.4 million in
connection with the transaction.
On March 16, 1999, the Company purchased substantially all of the assets
of KMTR(TV), the NBC affiliate licensed to Eugene, Oregon, together with two
satellite stations licensed to Roseburg and Coos Bay, Oregon, and a low power
station licensed to Eugene. The purchase price was approximately
5
<PAGE> 8
$26.0 million. Pending closing of the transaction, the Company operated the
stations pursuant to a time brokerage agreement with the former owner since
December 1, 1998. The Company recorded net assets with estimated fair values
aggregating $3.0 million and goodwill of $23.0 million in connection with the
transaction.
On April 12, 1999, the Company purchased substantially all of the assets
of WOKR(TV), the ABC affiliate licensed to Rochester, New York, for
approximately $128.2 million. In September 1998, the Company paid $12.5 million
of the purchase price into an escrow account, with the balance paid at closing.
The Company recorded net assets with estimated fair values aggregating $9.8
million and goodwill of $118.4 million in connection with the transaction.
The following table summarizes, on an unaudited pro forma basis, the
consolidated results of operations of the Company for the six month periods
ended June 30, 1999 and 1998, giving pro forma effect to the acquisition of
WOKR(TV) as if the acquisition had been made at the beginning of the periods
presented. These pro forma consolidated statements do not necessarily reflect
the results of operations which would have occurred had such an acquisition
taken place on the date indicated.
<TABLE>
<CAPTION>
For the Six Month
Periods Ended June 30,
------------------------------------------
1999 1998
--------- ---------
(In thousands, except per share amounts)
<S> <C> <C>
Net revenue $ 142,994 $ 165,638
Operating expenses (120,576) (136,250)
Income before extraordinary item 19,784 23,802
Net income 18,411 23,802
Net income per common share .58 .75
Net income per common share, assuming dilution .57 .75
</TABLE>
On May 1, 1999, the Company exchanged substantially all of the assets
plus certain liabilities of KKTV(TV), the CBS affiliate licensed to Colorado
Springs, Colorado, for substantially all of the assets plus certain liabilities
of KCOY(TV), the CBS affiliate licensed to Santa Maria, California. In
conjunction with the transaction, the Company received a cash payment of
approximately $9.0 million (subject to certain adjustments). Pending closing of
the transaction, the Company operated KCOY(TV) and the former owner of KCOY(TV)
operated KKTV(TV) pursuant to time brokerage agreements. The Company recorded
net assets with estimated fair values aggregating $7.2 million, intangible
assets of $16.8 million, and a gain of $28.5 million in connection with this
transaction.
On July 6, 1999, the Company sold a radio broadcasting tower for $2.8
million. In connection with the transaction, the Company recorded a loss from
disposition of assets of $1.2 million in the second quarter of 1999.
On August 2, 1999, the Company purchased substantially all of the assets
of KTVF(TV), the NBC affiliate licensed to Fairbanks, Alaska, for $7.2 million.
The Company recorded net assets with estimated fair values aggregating $1.8
million and goodwill of $5.4 million in connection with the transaction.
NOTE 4. DEBT
On January 22, 1999, the Company replaced its $300.0 million credit
agreement with a new $325.0 million credit agreement (the "1999 Credit
Agreement"), consisting of a $150.0 million term loan facility (the "Term Loan")
and a $175.0 million revolving credit facility (the "Revolver"), which includes
up to $10.0 million in standby letters of credit. The transaction resulted in a
charge of approximately $0.6 million, net of applicable taxes, consisting of the
write-off of deferred financing costs.
6
<PAGE> 9
Principal repayments under the Term Loan are due quarterly from March
31, 2000 through December 31, 2005. The Revolver requires scheduled annual
commitment reductions, with required principal repayments of outstanding amounts
in excess of the commitment levels, quarterly beginning March 31, 2001 through
December 31, 2005.
The Company can choose to have interest calculated at rates based on
either a base rate or LIBOR plus defined margins which vary based on the
Company's total leverage ratio. The commitment fees under the Revolver are
payable quarterly at a rate based on the Company's total leverage ratio.
On February 24, 1999, the Company issued additional 9% Senior
Subordinated Notes due 2009 (the "9% Senior Subordinated Notes") in the
aggregate amount of $25.0 million. The total aggregate amount of 9% Senior
Subordinated Notes issued and outstanding is $200.0 million. These notes bear
interest at 9% which is payable semi-annually in January and July. Principal is
payable in full in January 2009.
On March 15, 1999, the Company redeemed its $20.0 million outstanding
principal of the 10.48% Senior Subordinated Notes due 2000 (the "10.48% Senior
Subordinated Notes") with borrowings under the Revolver. This transaction
resulted in a charge of approximately $0.8 million, net of applicable taxes,
consisting of prepayment fees and the write-off of deferred financing costs.
NOTE 5. INCOME TAXES
For the six months ended June 30, 1999, the Company recorded income tax
expense of $8.2 million based on its pretax income.
NOTE 6. STOCK OPTION PLAN
On May 11, 1999, the Company amended its Employee Stock Option Plan (the
"Plan") to increase the amount of common stock reserved for issuance under the
Plan from 1,000,000 shares to 1,500,000 shares. On June 14, 1999, the Company
granted 210,000 options to certain employees. The exercise price of these
options represented the market price of the Company's stock on the date of
grant.
NOTE 7. LITIGATION ACCRUAL
The Company and two of its executive officers were defendants in a
wrongful termination suit brought by former employees. On February 29, 1996, a
jury issued a verdict awarding the plaintiffs compensatory and punitive damages
of approximately $13.0 million. At December 31, 1995, the Company initially
recorded an accrual of $14.2 million, including estimated additional legal
costs, related to the verdict. Following post-trial motions, the punitive
damages award was reduced, and in 1997, the Company reduced the accrual related
to this litigation by $5.0 million, leaving a total accrual of approximately
$8.0 million.
On October 1, 1998, the U.S. Court of Appeals for the Ninth Circuit
ruled in the Company's favor, holding that the plaintiffs did not have a valid
claim under the Federal Fair Labor Standards Act and striking the award of
damages, including all punitive damages. The Court of Appeals remanded the case
for further consideration of whether the plaintiffs have a valid claim under the
Washington State Fair Labor Standards Act.
On March 9, 1999, the Court of Appeals issued an order referring the
case to an 11-judge panel for a new hearing, which was held on April 23, 1999.
On June 10, 1999, the Court of Appeals reinstated the District Court verdict in
favor of the plaintiffs. The Company intends to petition for review of this
decision by the U.S. Supreme Court and anticipates that the U.S. Supreme Court
would decide whether or not to grant the petition for review before the end of
1999. If the Court does not grant the petition for review, the Company will be
required to pay the awarded damages, accrued interest thereon, and
7
<PAGE> 10
plaintiff's attorney's fees (which, at June 1, 1999, totaled approximately $7.2
million, including estimated attorney's fees). If the Court grants the petition
for review, the Company anticipates that a final decision in this case will be
rendered during 2000.
NOTE 8. TELEVISION BROADCASTING GROUP RESTRUCTURING
On April 6, 1999, the Company announced the launch of Digital
CentralCasting, a digital broadcasting system which allows the Company to
consolidate back-office functions such as operations, programming, advertising
scheduling, and accounting for all of the television stations within a regional
group at one station. To implement this strategy, the Company has organized ten
of the television stations it owns and operates into the following three
regional station groups: New York (WIXT, WIVT, WUTR, and WOKR), Central
California (KGET, KCBA, KION, and KCOY), and North Coast (KFTY, KVIQ, and KMTR).
The Company expects to implement Digital CentralCasting for all of its
television station groups over the next twelve months. The Company recorded a
$1.1 million restructuring charge in the second quarter of 1999 relating to the
ongoing implementation of Digital CentralCasting. This restructuring charge
consisted primarily of costs associated with employee staff reductions.
NOTE 9. INDUSTRY SEGMENT INFORMATION
The Company organizes its segments based on the products and services
from which revenues are generated. The Company evaluates segment performance and
allocates resources based on Segment Operating Cash Flow. The Company defines
Operating Cash Flow as net revenue less operating and restructuring expenses
before depreciation, amortization, interest, and stock compensation expenses and
gain on disposition of assets. Segment Operating Cash Flow is defined as
Operating Cash Flow before corporate overhead.
Selected financial information for these segments for the three and six
month periods ended June 30, 1999 and 1998 is presented as follows (in
thousands):
<TABLE>
<CAPTION>
OUTDOOR TELEVISION RADIO SPORTS &
MEDIA BROADCASTING BROADCASTING ENTERTAINMENT CONSOLIDATED
-------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
THREE MONTH PERIOD ENDED JUNE 30, 1999:
Net revenue $ 25,743 $ 21,430 $ 6,935 $ 17,292 $ 71,400
Segment operating expenses (14,050) (18,625) (3,901) (17,453) (54,029)
-------- ------------- ------------- ------------ ------------
Segment Operating Cash Flow $ 11,693 $ 2,805 $ 3,034 $ (161) $ 17,371
======== ============= ============= ============
Corporate overhead (3,831)
------------
Operating Cash Flow 13,540
Other (expenses) income:
Depreciation and amortization expense (6,860)
Interest expense (9,407)
Stock compensation expense (274)
Gain on disposition of assets 27,307
------------
Income before income taxes and extraordinary item $ 24,306
============
Segment assets $ 92,553 $ 265,859 $ 58,330 $ 34,858 $ 451,600
======== ============= ============= ============
Corporate assets 51,212
------------
Total assets $ 502,812
============
THREE MONTH PERIOD ENDED JUNE 30, 1998:
Net revenue $ 33,358 $ 17,030 $ 6,438 $ 19,011 $ 75,837
Segment operating expenses (20,486) (13,999) (3,569) (19,218) (57,272)
-------- ------------- ------------- ------------ ------------
Segment Operating Cash Flow $ 12,872 $ 3,031 $ 2,869 $ (207) $ 18,565
======== ============= ============= ============
Corporate overhead (4,625)
------------
Operating Cash Flow 13,940
Other (expenses) income:
Depreciation and amortization expense (3,223)
Interest expense (7,129)
Stock compensation expense (422)
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
OUTDOOR TELEVISION RADIO SPORTS &
MEDIA BROADCASTING BROADCASTING ENTERTAINMENT CONSOLIDATED
-------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Gain on disposition of assets 32,980
------------
Income before income taxes and extraordinary item $ 36,146
============
SIX MONTH PERIOD ENDED JUNE 30, 1999:
Net revenue $ 45,733 $ 37,681 $ 12,156 $ 43,526 $ 139,096
Segment operating expenses (27,006) (34,917) (7,353) (41,105) (110,381)
-------- ------------- ------------- ------------ ------------
Segment Operating Cash Flow $ 18,727 $ 2,764 $ 4,803 $ 2,421 $ 28,715
======== ============= ============= ============
Corporate overhead (7,643)
------------
Operating Cash Flow 21,072
Other (expenses) income:
Depreciation and amortization expense (11,583)
Interest expense (16,718)
Stock compensation expense (519)
Gain on disposition of assets 28,933
------------
Income before income taxes and extraordinary item $ 21,185
============
SIX MONTH PERIOD ENDED JUNE 30, 1998:
Net revenue $ 59,824 $ 31,567 $ 11,394 $ 54,098 $ 156,883
Segment operating expenses (39,448) (27,651) (7,071) (49,434) (123,604)
-------- ------------- ------------- ------------ ------------
Segment Operating Cash Flow $ 20,376 $ 3,916 $ 4,323 $ 4,664 $ 33,279
======== ============= ============= ============
Corporate overhead (7,681)
------------
Operating Cash Flow 25,598
Other (expenses) income:
Depreciation and amortization (7,066)
Interest expense (13,639)
Stock compensation expense (422)
Gain on disposition of assets 32,980
------------
Income before income taxes and extraordinary item $ 37,451
============
</TABLE>
The increase in assets from the outdoor media and television
broadcasting segments as of June 30, 1999 compared to December 31, 1998 is
primarily due to the acquisition of an outdoor advertising company and
television stations KVIQ, KMTR, WOKR, and KCOY, as discussed in Note 2.
NOTE 10. SUBSEQUENT EVENT - STOCK OFFERING
On August 6, 1999, the Company issued 3,000,000 shares of common stock
at $15.25 per share pursuant to a firmly underwritten public offering. In
conjunction with the transaction, the Company received net proceeds of
approximately $43.5 million.
9
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We reported net income of $11.7 million for the first six months of
1999, compared to net income of $23.2 million for the first six months of 1998.
Net revenue for the first six months of 1999 decreased over the same period last
year by $17.8 million, or 11%, while our Operating Cash Flow (as defined below)
decreased $4.5 million, or 18%. On April 15, 1999, we paid an annual cash
dividend of $.02 per share.
Refinancing. On January 22, 1999, we replaced our existing $300.0
million credit agreement with a new $325.0 million credit agreement. On February
24, 1999, we issued additional 9% Senior Subordinated Notes due 2009 in the
aggregate amount of $25.0 million. On March 15, 1999, we redeemed the $20.0
million outstanding principal of the 10.48% Senior Subordinated Notes due 2000
with borrowings under the revolving credit facility of the new credit agreement.
Acquisitions and Dispositions. During the first six months of 1999, we
acquired four television stations and an outdoor advertising company, and sold
one television station and a radio broadcasting tower. On August 2, 1999, we
acquired an additional television station.
Stock Offering. On August 6, 1999, we received approximately $43.5
million in net proceeds from the issuance of 3,000,000 shares of common stock
pursuant to a firmly underwritten public offering.
As with many media companies that have grown through acquisitions, the
Company's acquisitions and dispositions of television and radio stations have
resulted in significant non-cash and non-recurring charges to income. For this
reason, in addition to net income, management believes that Operating Cash Flow
(defined as net revenue less operating and restructuring expenses before
depreciation, amortization, interest, and stock compensation expenses and gain
on disposition of assets) is an appropriate measure of the Company's financial
performance. Similarly, management believes that Segment Operating Cash Flow
(defined as Operating Cash Flow before corporate overhead) is an appropriate
measure of the financial performance of the Company's segments. These measures
exclude certain expenses that management does not consider to be costs of
ongoing operations. The Company uses Operating Cash Flow to pay interest and
principal on its long-term debt as well as to finance capital expenditures.
Operating Cash Flow and Segment Operating Cash Flow, however, are not to be
considered alternatives to net income as an indicator of the Company's operating
performance or to cash flows as a measure of the Company's liquidity.
10
<PAGE> 13
RESULTS OF OPERATIONS
The following tables set forth certain historical financial and
operating data for the three and six month periods ended June 30, 1999 and 1998,
including net revenue, operating expenses, and Operating Cash Flow information
by segment:
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED JUNE 30,
------------------------------------------------------
1999 1998
------------------------- -------------------------
AS % OF AS % OF
AMOUNT NET REVENUE AMOUNT NET REVENUE
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue ......................................... $ 71,400 100.0% $ 75,837 100.0%
Segment operating expenses .......................... 54,029 75.7 57,272 75.5
Corporate overhead .................................. 3,831 5.4 4,625 6.1
--------- ---------
Total operating expenses .................. 57,860 81.0 61,897 81.6
--------- ---------
Operating Cash Flow ................................. 13,540 19.0 13,940 18.4
Other expenses (income):
Depreciation and amortization expense ........... 6,860 9.6 3,223 4.2
Interest expense ................................ 9,407 13.2 7,129 9.4
Stock compensation expense ...................... 274 0.4 422 0.6
Gain on disposition of assets . ................. (27,307) (38.2) (32,980) (43.5)
--------- ---------
Total other expenses (income) ............. (10,766) (15.1) (22,206) (29.3)
Income before income taxes and extraordinary item ... 24,306 34.0 36,146 47.7
Income tax expense .................................. (8,734) (12.2) (13,748) (18.1)
--------- ---------
Income before extraordinary item .................... 15,572 21.8 22,398 29.5
Extraordinary item .................................. -- -- -- --
--------- ---------
Net income .......................................... $ 15,572 21.8 $ 22,398 29.5
========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED JUNE 30,
------------------------------------------------------
1999 1998
------------------------- -------------------------
AS % OF AS % OF
AMOUNT NET REVENUE AMOUNT NET REVENUE
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue ......................................... $ 139,096 100.0% $ 156,883 100.0%
Segment operating expenses .......................... 110,381 79.4 123,604 78.8
Corporate overhead .................................. 7,643 5.5 7,681 4.9
--------- ---------
Total operating expenses .................. 118,024 84.9 131,285 83.7
Operating Cash Flow ................................. 21,072 15.1 25,598 16.3
Other expenses (income):
Depreciation and amortization expense ........... 11,583 8.3 7,066 4.5
Interest expense ................................ 16,718 12.0 13,639 8.7
Stock compensation expense ...................... 519 0.4 422 0.3
Gain on disposition of assets ................... (28,933) (20.8) (32,980) (21.0)
--------- ---------
Total other expenses (income) ............. (113) (0.1) (11,853) (7.6)
Income before income taxes and extraordinary item ... 21,185 15.2 37,451 23.9
Income tax expense .................................. (8,162) (5.9) (14,244) (9.1)
--------- ---------
Income before extraordinary item .................... 13,023 9.4 23,207 14.8
Extraordinary item .................................. (1,373) (1.0) -- --
--------- ---------
Net income .......................................... $ 11,650 8.4 $ 23,207 14.8
========= =========
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue:
Outdoor media $ 25,743 $ 33,358 $ 45,733 $ 59,824
Television broadcasting 21,430 17,030 37,681 31,567
Radio broadcasting 6,935 6,438 12,156 11,394
Sports & entertainment 17,292 19,011 43,526 54,098
-------- -------- --------- ---------
Total net revenue $ 71,400 $ 75,837 $ 139,096 $ 156,883
======== ======== ========= =========
Segment operating expenses:
Outdoor media $ 14,050 $ 20,486 $ 27,006 $ 39,448
Television broadcasting 18,625 13,999 34,917 27,651
Radio broadcasting 3,901 3,569 7,353 7,071
Sports & entertainment 17,453 19,218 41,105 49,434
-------- -------- --------- ---------
Total segment operating expenses $ 54,029 $ 57,272 $ 110,381 $ 123,604
======== ======== ========= =========
Operating Cash Flow:
Outdoor media $ 11,693 $ 12,872 $ 18,727 $ 20,376
Television broadcasting 2,805 3,031 2,764 3,916
Radio broadcasting 3,034 2,869 4,803 4,323
Sports & entertainment (161) (207) 2,421 4,664
-------- -------- --------- ---------
Total Segment Operating Cash Flow 17,371 18,565 28,715 33,279
Corporate overhead (3,831) (4,625) (7,643) (7,681)
-------- -------- --------- ---------
Total Operating Cash Flow $ 13,540 $ 13,940 $ 21,072 $ 25,598
======== ======== ========= =========
Change in net revenue from prior period:
Outdoor media (22.8)% 14.9% (23.6)% 10.9%
Television broadcasting 25.8 7.3 19.4 7.4
Radio broadcasting 7.7 20.6 6.7 20.4
Sports & entertainment (9.0) 5.8 (19.5) 15.4
Change in total net revenue (5.9)% 11.2% (11.3)% 12.3%
Segment operating expenses as a
% of segment net revenue:
Outdoor media 54.6% 61.4% 59.1% 65.9%
Television broadcasting 86.9 82.2 92.7 87.6
Radio broadcasting 56.3 55.4 60.5 62.1
Sports & entertainment 100.9 101.1 94.4 91.4
Total segment operating expenses as a
% of total net revenue 75.7% 75.5% 79.4% 78.8%
Segment Operating Cash Flow as a
% of net revenue by segment:
Outdoor media 45.4% 38.6% 40.9% 34.1%
Television broadcasting 13.1 17.8 7.3 12.4
Radio broadcasting 43.7 44.6 39.5 37.9
Sports & entertainment (0.9) (1.1) 5.6 8.6
Operating Cash Flow as a
% of total net revenue 19.0% 18.4% 15.1% 16.3%
</TABLE>
12
<PAGE> 15
THREE MONTH PERIOD ENDED JUNE 30, 1999 COMPARED WITH THREE MONTH PERIOD ENDED
JUNE 30, 1998
Net Revenue. Our net revenue for the second quarter of 1999 was $71.4
million. This represented a decrease of $4.4 million, or 6%, compared to $75.8
million for the second quarter of 1998. Changes in net revenue were as follows:
o Outdoor Media. Our net revenue for the second quarter of 1999
from our outdoor media segment decreased by $7.7 million, or
23%, compared to the second quarter of 1998. This decrease was
primarily due to the absence of our airport advertising
operations, which we sold in June 1998. Excluding our airport
advertising operations, our net revenue for the second quarter
of 1999 from our outdoor media segment increased by $1.0
million, or 4%, compared to the second quarter of 1998. This
increase mainly resulted from increased local and national sales
and revenue from our large format printing operations, which
began in the third quarter of 1998.
o Television Broadcasting. Our net revenue for the second quarter
of 1999 from our television broadcasting segment increased by
$4.4 million, or 26%, compared to the second quarter of 1998.
This increase was mainly due to the addition of stations KVIQ in
July 1998, KMTR in December 1998, and WOKR in April 1999, and
the exchange of station KKTV for station KCOY in January 1999.
Excluding these transactions, our net revenue for the second
quarter of 1999 from our television broadcasting segment
decreased by $0.5 million, or 3%, compared to the second quarter
of 1998. This decrease was primarily due to the lack of
political advertising in 1999.
o Radio Broadcasting. Our net revenue for the second quarter of
1999 from our radio broadcasting segment increased by $0.5
million, or 8%, compared to the second quarter of 1998. This
increase was primarily due to higher local sales.
o Sports & Entertainment. Our net revenue for the second quarter
of 1999 from our sports & entertainment segment decreased by
$1.7 million, or 9%, compared to the second quarter of 1998.
This decrease was primarily due to the failure of the Seattle
SuperSonics to participate in the NBA playoffs (in contrast to
the prior season, when they participated in the first two rounds
of the 1998 NBA playoffs) and decreased revenue from NBA-related
activities mostly due to the NBA lockout. The decreased revenue
from NBA-related activities was partially offset by additional
revenue (after expenses) generated by the extension of the NBA's
1998-99 regular season into the second quarter of 1999 to make
up for some of the games cancelled as a result of the lockout.
Segment Operating Expenses. Our segment operating expenses (which
exclude corporate overhead) for the second quarter of 1999 were $54.0 million.
This represented a decrease of $3.3 million, or 6%, compared to $57.3 million
for the second quarter of 1998. Changes in segment operating expenses were as
follows:
o Outdoor Media. Our operating expenses for the second quarter of
1999 from our outdoor media segment decreased by $6.4 million,
or 31%, compared to the second quarter of 1998. This decrease
was primarily due to the absence of our airport advertising
operations, which we sold in June 1998. Excluding our airport
advertising operations, our operating expenses for the second
quarter of 1999 from our outdoor media segment increased by $1.3
million, or 10%, compared to the second quarter of 1998. This
increase primarily represented expenses relating to our large
format printing operations, which began in the third quarter of
1998, and higher expenses resulting from the expansion of our
national sales force.
13
<PAGE> 16
o Television Broadcasting. Our operating expenses for the second
quarter of 1999 from our television broadcasting segment
increased by $4.6 million, or 33%, compared to the second
quarter of 1998. This increase was mainly due to the addition of
stations KVIQ in July 1998, KMTR in December 1998, and WOKR in
April 1999, and the exchange of station KKTV for station KCOY in
January 1999. Excluding these transactions, our operating
expenses for the second quarter of 1999 from our television
broadcasting segment increased by $0.6 million, or 5%, compared
to the second quarter of 1998. This increase was primarily due
to a restructuring charge of $1.1 million in connection with our
ongoing implementation of Digital CentralCasting. This
restructuring charge consisted primarily of costs associated
with employee staff reductions.
o Radio Broadcasting. Our operating expenses for the second
quarter of 1999 from our radio broadcasting segment increased by
$0.3 million, or 8%, compared to the second quarter of 1998.
This increase was primarily due to higher expenses relating to
increased sales activity.
o Sports & Entertainment. Our operating expenses for the second
quarter of 1999 from our sports & entertainment segment
decreased by $1.7 million, or 9%, compared to the second quarter
of 1998. This decrease was primarily due to the failure of the
Seattle SuperSonics to participate in the NBA playoffs (in
contrast to the prior season, when they participated in the
first two rounds of the 1998 NBA playoffs). This decrease was
partially offset by additional expenses generated by the
extension of the NBA's 1998-99 regular season into the second
quarter of 1999 to make up for some of the games cancelled as a
result of the lockout.
Corporate Overhead. Our corporate overhead expenses were $3.8 million
for the second quarter of 1999. This represented a decrease of $0.8 million, or
17%, compared to the second quarter of 1998. This decrease was primarily a
result of a one-time severance charge recognized in the second quarter of 1998.
Operating Cash Flow. Our Operating Cash Flow for the second quarter of
1999 was $13.5 million. This represented a decrease of $0.4 million, or 3%,
compared to $13.9 million for the second quarter of 1998. The decrease in
Operating Cash Flow from our outdoor media and television broadcasting segments
was partially offset by the increase in the Operating Cash Flow from our radio
broadcasting segment and the decrease in corporate overhead expenses. Operating
Cash Flow as a percentage of total net revenue increased to 19% for the second
quarter of 1999 compared to 18% for the second quarter of 1998.
Depreciation and Amortization Expense. Our depreciation and amortization
expense was $6.9 million for the second quarter of 1999. This represented an
increase of $3.7 million, compared to $3.2 million for the second quarter of
1998. This increase primarily resulted from depreciation and amortization
expense relating to our business acquisitions during the first six months of
1999 and depreciation expense on our new Seattle Supersonics aircraft, which was
placed in service in December 1998.
Interest Expense. Our interest expense was $9.4 million for the second
quarter of 1999. This represented an increase of $2.3 million, or 32%, compared
to the second quarter of 1998. This increase was primarily due to higher average
debt balances during the second quarter of 1999 used to fund our various
acquisitions.
Stock Compensation Expense. For the second quarter of 1999, we
recognized stock compensation expense of $0.3 million compared to $0.4 million
in the second quarter of 1998. These amounts primarily related to the amendments
of certain stock option agreements.
Gain on Disposition of Assets. For the second quarter of 1999, we
recognized a net gain on disposition of assets of $27.3 million, which consisted
of a $28.5 million gain from the exchange of
14
<PAGE> 17
television station KKTV for television station KCOY in May 1999 and a $1.2
million loss on the write-down of a radio broadcasting tower in June 1999, which
was then sold in July 1999. For the second quarter of 1998, we recognized a
$33.0 gain on disposition of assets relating to the sale of our airport
advertising operations in June 1998.
Income Tax Expense. For the second quarter of 1999, we recognized income
tax expense of $8.7 million based on our pretax income compared to $13.7 million
for the second quarter of 1998.
Net Income. Our net income for the second quarter of 1999 was $15.6
million. This represented a decrease of $6.8 million, or 30%, from $22.4 million
for the second quarter of 1998. This includes pre-tax gains on dispositions of
assets of $27.3 million in the second quarter of 1999, resulting primarily from
the exchange of television station KKTV for television station KCOY, and $33.0
million in the second quarter of 1998 for the sale of our airport advertising
operations. Net income as a percentage of net revenue decreased to 22% for the
second quarter of 1999 from 30% for the second quarter of 1998.
SIX MONTH PERIOD ENDED JUNE 30, 1999 COMPARED WITH SIX MONTH PERIOD ENDED JUNE
30, 1998
Net Revenue. Our net revenue for the six months ended June 30, 1999 was
$139.1 million. This represented a decrease of $17.8 million, or 11%, compared
to $156.9 million for the six months ended June 30, 1998. Changes in net revenue
were as follows:
o Outdoor Media. Our net revenue for the first six months of 1999
from our outdoor media segment decreased by $14.1 million, or
24%, compared to the first six months of 1999. This decrease was
primarily due to the absence of our airport advertising
operations, which we sold in June 1998. Excluding our airport
advertising operations, our net revenue for the first six months
of 1999 from our outdoor media segment increased by $2.1
million, or 5%, compared to the first six months of 1998. This
increase mainly resulted from increased local and national sales
and revenue from our large format printing operations, which
began in the third quarter of 1998.
o Television Broadcasting. Our net revenue for the first six
months of 1999 from our television broadcasting segment
increased by $6.1 million, or 19%, compared to the first six
months of 1998. This increase was mainly due to the addition of
stations KVIQ in July 1998, KMTR in December 1998, and WOKR in
April 1999, and the exchange of station KKTV for station KCOY in
January 1999. Excluding these transactions, our net revenue for
the first six months of 1999 from our television broadcasting
segment decreased by $0.6 million, or 2%, compared to the first
six months of 1998. This decrease was primarily due to the lack
of political advertising during 1999.
o Radio Broadcasting. Our net revenue for the first six months of
1999 from our radio broadcasting segment increased by $0.8
million, or 7%, compared to the first six months of 1998. This
increase was primarily due to higher local sales.
o Sports & Entertainment. Our net revenue for the first six months
of 1999 from our sports & entertainment segment decreased by
$10.6 million, or 20%, compared to the first six months of 1998.
This decrease was primarily due to the failure of the Seattle
SuperSonics to participate in the NBA playoffs (in contrast to
the prior season, when they participated in the first two rounds
of the 1998 NBA playoffs) and decreased revenue from NBA-related
activities mostly due to the NBA lockout.
Segment Operating Expenses. Our segment operating expenses (which
exclude corporate overhead) for the six months ended June 30, 1999 were $110.4
million. This represented a decrease of $13.2 million, or 11%, compared to
$123.6 million for six months ended June 30,1998. Changes in segment operating
expenses were as follows:
15
<PAGE> 18
o Outdoor Media. Our operating expenses for the first six months
of 1999 from our outdoor media segment decreased by $12.4
million, or 31%, compared to the second quarter of 1998. This
decrease was primarily due to the absence of our airport
advertising operations, which we sold in June 1998. Excluding
our airport advertising operations, our operating expenses for
the first six months of 1999 from our outdoor media segment
increased by $2.2 million, or 9%, compared to the first six
months of 1998. This increase primarily represented expenses
relating to our large format printing operations, which began in
the third quarter of 1998, and higher expenses resulting from
the expansion of our national sales force.
o Television Broadcasting. Our operating expenses for the first
six months of 1999 from our television broadcasting segment
increased by $7.2 million, or 26%, compared to the first six
months of 1998. This increase was mainly due to the addition of
stations KVIQ in July 1998, KMTR in December 1998, and WOKR in
April 1999, and the exchange of station KKTV for station KCOY in
January 1999. Excluding these transactions, our operating
expenses for the first six months of 1999 from our television
broadcasting segment increased by $0.9 million, or 4%, compared
to the first six months of 1998. This increase was primarily due
to a restructuring charge of $1.1 million in connection with our
ongoing implementation of Digital CentralCasting. This
restructuring charge consisted primarily of costs associated
with employee staff reductions.
o Radio Broadcasting. Our operating expenses for the first six
months of 1999 from our radio broadcasting segment increased by
$0.3 million, or 4%, compared to the first six months of 1998.
This increase was primarily due to higher expenses relating to
increased sales activity.
o Sports & Entertainment. Our operating expenses for the first six
months of 1999 from our sports & entertainment segment decreased
by $8.3 million, or 17%, compared to the first six months of
1998. This decrease was primarily due to the failure of the
Seattle SuperSonics to participate in the NBA playoffs (in
contrast to the prior season, when they participated in the
first two rounds of the 1998 NBA playoffs).
Corporate Overhead Expenses. Our corporate overhead expenses were $7.6
million for the first six months of 1999. This represented a decrease of $0.1
million, or 1%, compared to the first six months of 1998. This decrease was
primarily a result of a one-time severance charge recognized in 1998, partially
offset by higher utilization of outside services and increased marketing costs
during 1999.
Operating Cash Flow. Our Operating Cash Flow for the six months ended
June 30, 1999 was $21.1 million. This represented a decrease of $4.5 million, or
18%, compared to $25.6 million for the six months ended June 30, 1998. The
decrease in Operating Cash Flow from our outdoor media and television
broadcasting segments was partially offset by the increase in the Operating Cash
Flow from our radio broadcasting segment and the decrease in corporate overhead
expenses. Operating Cash Flow as a percentage of total net revenue decreased to
15% for the first six months of 1999 compared to 16% from first six months of
1998.
Depreciation and Amortization Expense. Our depreciation and amortization
expense was $11.6 million for the first six months of 1999. This represented an
increase of $4.5 million, compared to $7.1 million for the first six months of
1998. This increase primarily resulted from depreciation and amortization
expense relating to our business acquisitions during 1999 and depreciation
expense on our new Seattle Supersonics aircraft, which was placed in service in
December 1998.
Interest Expense. Our interest expense was $16.7 million for the first
six months of 1999. This represented an increase of $3.1 million, or 23%,
compared to the first six months of 1998. This increase was primarily due to
higher average debt balances during 1999 used to fund our various acquisitions.
16
<PAGE> 19
Stock Compensation Expense. For the first six months of 1999, we
recognized stock compensation expense of $0.5 million compared to $0.4 million
for the first six months of 1998. These amounts primarily related to the
amendments of certain stock option agreements.
Gain on Disposition of Assets. For first six months of 1999, we
recognized a net gain on disposition of assets of $28.9 million. This gain
consisted primarily of a $28.5 million gain from the exchange of the assets of
television station KKTV for the assets of television station KCOY, a $1.6
million gain relating to the sale of our airport advertising operations, and a
$1.2 million loss on the write-down of a radio broadcasting tower, which was
then sold in July 1999. For the first six months of 1998, we recognized a $33.0
gain on disposition of assets relating to the sale of our airport advertising
operations in June 1998.
Income Tax Expense. For the first six months of 1999, we recognized
income tax expense of $1.5 million based on our pretax income compared to $14.2
million for the first six months of 1998.
Extraordinary Item. In the first six months of 1999, we replaced our
existing credit agreement with a new $325.0 million credit agreement and
redeemed our $20.0 million 10.48% Senior Subordinated Notes. These transactions
resulted in an aggregate charge of $1.4 million, net of taxes, primarily
consisting of the write-off of deferred financing costs and prepayment fees.
Net Income. Our net income for the six months ended June 30, 1999 was
$11.7 million. This represented a decrease of $11.5 million, or 50%, from $23.2
million for the six months ended June 30, 1998. This includes pre-tax gains on
dispositions of assets of $28.9 million during 1999, resulting primarily from
the exchange of television station KKTV for television station KCOY, and $33.0
million during 1998 for the sale of our airport advertising operations. Net
income as a percentage of net revenue decreased to 8% for the first six months
of 1999 from 15% for the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
On January 22, 1999, we replaced a $300.0 million credit agreement (the
"1998 Credit Agreement") with a new $325.0 million credit agreement (the "1999
Credit Agreement"), consisting of a $150.0 million term loan facility (the "Term
Loan") and a $175.0 million revolving credit facility (the "Revolver"), which
includes up to $10.0 million in standby letters of credit.
On February 24, 1999, we issued additional 9% Senior Subordinated Notes
due 2009 in the aggregate principal amount of $25.0 million. The total aggregate
amount of 9% Senior Subordinated Notes issued and outstanding is $200.0 million.
The 9% Senior Subordinated Notes bear interest at 9%, which is payable
semi-annually in January and July. Principal is payable in full in January 2009.
On March 15, 1999, we redeemed the $20.0 million outstanding principal
of our 10.48% Senior Subordinated Notes due 2000 with borrowings under the
Revolver.
On August 6, 1999, we issued 3,000,000 shares of common stock at a price
of $15.25 per share pursuant to a firmly underwritten public offering. Our net
proceeds were approximately $43.5 million, which were used to repay borrowings
outstanding under the Revolver. The Revolver credit has historically been used
for general corporate purposes, including acquisitions and capital expenditures.
Subject to the terms of the 1999 Credit Agreement, we are entitled to make
further borrowings under the Revolver.
As of August 6, 1999, we had borrowed $150.0 million of the Term Loan
and $39.0 million of the Revolver. Principal repayments under the Term Loan are
due quarterly from March 31, 2000 through December 31, 2005. The Revolver
requires scheduled annual commitment reductions, with required principal
repayments of outstanding amounts in excess of the commitment levels, quarterly
beginning March 31, 2001.
17
<PAGE> 20
In connection with our time brokerage agreements with the owners of
television stations WUTR and KION, we have guaranteed certain bank loans of the
station owners. The aggregate principal balance outstanding on such obligations
was $10.2 million at June 30, 1999.
Under the 1999 Credit Agreement, we can choose to have interest
calculated at rates based on either a base rate of LIBOR plus defined margins
which vary based on our total leverage ratio. As of June 30, 1999, the annual
weighted average interest rate of borrowings under the 1999 Credit Agreement was
approximately 7.77%.
We have pledged substantially all of our subsidiaries' outstanding stock
and assets as collateral for amounts due under the 1999 Credit Agreement. Thus,
if we default under the 1999 Credit Agreement, the lenders may take possession
of and sell substantially all of our subsidiaries and their assets.
In addition, the 1999 Credit Agreement and the 9% Senior Subordinated
Notes restrict, among other things, our ability to borrow, pay dividends,
repurchase outstanding shares of our stock, and sell or transfer our assets.
They also contain restrictive covenants requiring us to maintain certain
financial ratios.
In 1999, we have purchased the assets of an outdoor advertising company
in the Boston-Worcester, Massachusetts market and television stations KVIQ,
KMTR, WOKR, KCOY, and KTVF. These acquisitions were financed with borrowings
under our 1998 and 1999 Credit Agreements. These transactions are more fully
described in Note 3 to Condensed Consolidated Financial Statements.
Our working capital increased to $27.5 million at June 30, 1999 from
$15.7 million at December 31, 1998. This increase was primarily due to a
reduction of deferred revenue resulting from the NBA lockout, partially offset
by an increase in accrued interest resulting from the refinancing activity in
the fourth quarter of 1998 and first quarter of 1999.
We expended $11.9 million for capital expenditures in the first six
months of 1999, compared to $19.3 million in the corresponding period in 1998.
Capital expenditures in the first six months of 1999 were primarily for
broadcasting equipment, computer equipment, and advertising signs.
For the periods presented, we financed our working capital needs
primarily from cash provided by operating activities and bank borrowings. Over
those periods, our long-term liquidity needs, including for acquisitions and to
refinance our indebtedness, have been financed through additions to our
long-term debt, principally through bank borrowings and the sale of senior and
subordinated debt securities. Capital expenditures for new property and
equipment have been financed with both cash provided by operating activities and
long-term debt. Cash used in operating activities was $8.2 million for the first
six months of 1999, an increase from cash used in operating activities of $0.9
million for the first six months of 1998.
On April 15, 1999, we paid our shareholders an annual cash dividend of
$.02 per share.
TELEVISION BROADCASTING GROUP RESTRUCTURING
On April 6, 1999, we announced the launch of Digital CentralCasting, a
digital broadcasting system which allows us to consolidate back-office functions
such as operations, programming, advertising scheduling, and accounting for all
of our television stations within a regional group at one station. To implement
this strategy, we have organized ten of the television stations we own and
operate into the following three regional station groups: New York (WIXT, WIVT,
WUTR, and WOKR), Central California (KGET, KCBA, KION, and KCOY), and North
Coast (KFTY, KVIQ, and KMTR). In addition, we recorded a $1.1 million
restructuring charge in the second quarter of 1999 relating to the
18
<PAGE> 21
ongoing implementation of Digital CentralCasting. This restructuring charge
consisted primarily of costs associated with employee staff reductions.
We expect to implement Digital CentralCasting for all of our television
station groups over the next twelve months, and believe we are among the first
companies to introduce this technology in our industry. We anticipate that
Digital CentralCasting will enhance our operational efficiency through economies
of scale and the sharing of resources and programming among our stations.
However, we cannot guarantee that the implementation of Digital CentralCasting
will be achieved in a timely or effective manner and can give no assurance as to
the timing or extent of the anticipated benefits.
YEAR 2000
Many computer systems were originally designed to recognize calendar
years by the last two digits in the date code field. Beginning in the year 2000,
these date code field will need to accept four-digit entries to distinguish
twenty-first century dates from twentieth century dates. The issue is not
limited to computer systems. Year 2000 issues may affect any system or equipment
that has an embedded microchip that processes date sensitive information.
State of Readiness
We are committed to addressing the Year 2000 issue in a prompt and
responsible manner, and have dedicated the resources to do so. Our management
has completed an assessment of its automated systems and has implemented a
program to complete all steps necessary to resolve identified issues. Our
compliance program has several phases, including (1) project management; (2)
assessment; (3) testing; and (4) remediation and implementation.
Project Management: We formed a Year 2000 compliance team in December
1997. The team meets generally on a semi-monthly basis to discuss project
status, assign tasks, determine priorities, and monitor progress. The team also
reports to senior management on a regular basis.
Assessment: All of our mission-critical software programs have been
identified. This phase is essentially complete. Our primary software vendors and
business partners were also assessed during this phase, and vendors/business
partners who provide mission-critical software have been contacted. In most
cases, the vendors/business partners that are not already compliant have planned
new Year 2000 compliant releases to be available by the third quarter of 1999.
We will continue to monitor and work with vendors and business partners to
ensure that appropriate upgrades and/or testing is completed.
Testing: Updating and testing of our automated systems is currently
underway and we anticipate that testing will be substantially complete by August
31, 1999. Upon completion, we expect to be able to identify any in-house
developed computer systems that remain non-compliant.
Remediation and Implementation: This phase involves obtaining and
implementing renovated Year 2000 compliant software applications provided by our
vendors and performing the necessary programming to render in-house developed
systems Year 2000 compliant. This process also involves replacing non-compliant
hardware. The remediation and implementation process will continue through 1999.
Costs
The total financial impact that Year 2000 issues will have on us cannot
be predicted with certainty at this time. In fact, in spite of all efforts being
made to rectify these issues, the success of our efforts will not be known for
sure until the year 2000 actually arrives. However, based on our assessment to
date, we do not believe that expenses related to meeting Year 2000 challenges
will exceed $750,000,
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of which approximately $360,000 had been expended as of June 30, 1999, although
there can be no assurance in this regard.
Risks Related to Year 2000 Issues
The year 2000 poses certain risks to our company and our operations.
Some of these risks are present because we purchase technology and information
systems applications from other parties who face Year 2000 challenges. Other
risks are present simply because we transact business with organizations who
also face Year 2000 challenges. Although it is impossible to identify all
possible risks that we may face moving into the next millennium, our management
has identified the following potential risks.
The functions performed by our mission-critical software that are
primarily at risk from Year 2000 challenges generally involve the scheduling of
advertising and programming in our television broadcasting, radio broadcasting,
and sports & entertainment segments, the scheduling of advertising in our
outdoor media segment, and the scheduling of events in our sports &
entertainment segment. In all of these cases, Year 2000 challenges could impact
our ability to deliver our product with the same efficiency as we do now.
Our operations, like those of many other organizations, can be adversely
affected by Year 2000 triggered failures of other companies upon whom we depend.
As described above, we have identified our mission-critical vendors and are
monitoring their Year 2000 compliance programs. We have not determined the state
of compliance of certain third-party suppliers of services such as phone
companies, long distance carriers, financial institutions, and electric
companies, the failure of any one of which could severely disrupt our ability to
carry on our business.
Contingency Plans
We have developed contingency plans related to Year 2000 issues covering
approximately 80% of our systems. As we continue the testing phase, and based on
future ongoing assessment of the readiness of vendors and service providers, we
intend to develop appropriate contingency plans for our remaining systems. It is
possible that certain circumstances may occur for which there are no completely
satisfactory contingency plans.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We become involved, from time to time, in various claims and lawsuits
incidental to the ordinary course of our operations, including such matters as
contract and lease disputes and complaints alleging employment discrimination.
In addition, we participate in various governmental and administrative
proceedings relating to, among other things, condemnation of outdoor advertising
structures without payment of just compensation and matters affecting the
operation of broadcasting facilities. Management believes that the outcome of
any such pending claims or proceedings, individually or in the aggregate, will
not have a material adverse effect on the Company's business or financial
condition, except for the matters disclosed below.
Lambert v. Ackerley. In December 1994, six former employees of one of
our subsidiaries filed a complaint in King County (Washington) Superior Court
against two of our wholly-owned subsidiaries at the time, Seattle SuperSonics,
Inc. and Full House Sports & Entertainment, Inc., and two of our officers, Barry
A. Ackerley, Chairman and Chief Executive Officer, and William N. Ackerley,
former Co-President and Chief Operating Officer. The complaint alleged various
violations of applicable wage and hour laws and breaches of employment
contracts. The plaintiffs sought unspecified damages and injunctive relief.
On or about January 10, 1995, those claims were removed on motion by the
defendants to the U.S. District Court for the Western District of Washington in
Seattle. On September 5, 1995, the plaintiffs amended the claims (1) to specify
violations of Washington and U.S. federal labor laws and (2) to seek additional
relief, including liquidated and punitive damages under the U.S. Fair Labor
Standards Act and double damages under Washington law for willful refusal to pay
overtime and minimum wages.
On February 29, 1996, the jury rendered a verdict finding that the
defendants had wrongfully terminated the plaintiffs' employment under Washington
law and U.S. federal laws, and awarded compensatory damages of approximately
$1.0 million for the plaintiffs and punitive damages against the defendants of
$12.0 million. Following post-trial motions, the court reduced the punitive
damages award to $4.2 million, comprised of $1.4 million against each of Barry
A. Ackerley and William N. Ackerley, and $1.4 million against the corporate
defendants collectively.
On November 22, 1996, the defendants filed their Notice of Appeal from
the U.S. District Court to the Ninth Circuit Court of Appeals in San Francisco.
On October 1, 1998, the U.S. Court of Appeals for the Ninth Circuit
issued an opinion ruling in our favor, holding that the plaintiffs did not have
a valid claim under the U.S. Fair Labor Standards Act and striking the award of
damages, including all punitive damages that had been entered by the District
Court. The Court of Appeals further reversed the lower court's award of $75,000
in emotional distress damages. Finally, the Court of Appeals remanded the cases
for further consideration of whether or not the plaintiffs had a valid claim
under the Washington State Fair Labor Standards Act and whether, if such were
the case, the corporate officers named in the suit could have individual
liability separate from the Company under State law. Subsequently, the
plaintiffs filed a Motion for Rehearing or Reconsideration en banc.
On March 9, 1999, the Court of Appeals issued an order referring the
case to an 11-judge panel for a new hearing, which was held on April 23, 1999.
On June 10, 1999, the Court of Appeals reinstated the District Court verdict in
favor of the plaintiffs. We intend to petition for review of this decision by
the U.S. Supreme Court and we anticipate that the U.S. Supreme Court would
decide whether or not to grant our petition for review before the end of 1999.
If the Court does not grant our petition for review, we will be required to pay
the awarded damages, accrued interest thereon, and plaintiff's attorney's fees
(which, at June 1, 1999, totaled approximately $7.2 million, including estimated
attorney's fees). The
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<PAGE> 24
foregoing amount includes damages payable by Barry A. Ackerley and William N.
Ackerley, which we will pay on their behalf unless our Board of Directors
determines that Barry A. Ackerley and William N. Ackerley are not covered by the
indemnification provisions of our Certificate of Incorporation or otherwise
entitled to be indemnified by us with respect to this matter. If the Court
grants our petition for review, we anticipate that a final decision in this case
would be rendered during 2000.
Van Alstyne v. The Ackerley Group, Inc. On June 7, 1996, a former sales
manager for television station WIXT, Syracuse, New York filed a complaint in the
U.S. District Court for the Northern District of New York against The Ackerley
Group, Inc., WIXT and the current and former general managers of WIXT. The
complaint seeks unspecified damages and injunctive relief for discrimination on
the basis of gender and disability, as well as unlawful retaliation, under both
state and federal law. We have filed a motion for summary judgment which has not
yet been decided. In the event that this motion is not successful, a trial date
will be set. We believe that a trial is not likely to take place prior to
September 1999.
RSA Media Inc. v. AK Media Group, Inc. On June 4, 1997, RSA Media Inc.,
a supplier of outdoor advertising in Massachusetts, filed a complaint in the
U.S. District Court for the District of Massachusetts (the "Court") alleging
that we have unlawfully monopolized the Boston-area billboard market in
violation of the Sherman Antitrust Act, engaged in unlawful restraint of trade
in violation of the Sherman Antitrust Act, and committed unfair trade practices
in violation of Massachusetts state law. The plaintiff is seeking in excess of
$20.0 million in damages. On May 22, 1998, the Court, in a ruling from the
bench, dismissed the count of plaintiff's complaint that alleged that the
existence of leases between us and landowners restricted the landowners' ability
to lease that same space to the plaintiff in violation of the Sherman Antitrust
Act. We have filed a motion for summary judgment with respect to the remaining
counts which is currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on May 5,
1997.
(b) The following directors were elected at the above meeting: Barry A.
Ackerley, Gail A. Ackerley, Deborah L. Bevier, M. Ian G. Gilchrist, and
Michel C. Thielen.
(c) The result of the vote for the directors was as follows:
<TABLE>
<CAPTION>
DIRECTOR FOR AGAINST ABSTAINED NOT VOTED
- -------- ----------- ------- --------- ------------
<S> <C> <C> <C> <C>
Barry A. Ackerley 128,646,459 -0- 76,700 131,089,568
Gail A. Ackerley 128,646,459 -0- 76,700 131,089,568
Deborah L. Bevier 128,646,669 -0- 76,490 131,089,568
M. Ian G. Gilchrist 128,646,669 -0- 76,490 131,089,568
Michel C. Thielen 128,646,669 -0- 76,490 131,089,568
</TABLE>
(d) The shareholders approved an amendment to the Company's Third Amended
and Restated Stock Option Plan to increase the number of shares reserved
for issuance under the Plan from 1,000,000 shares to 1,500,000 shares.
The result of the vote for the amendment was as follows: 128,483,123
for; 233,234 against; 6,802 abstained; and 131,089,568 shares not voted.
22
<PAGE> 25
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Exhibit
27 Financial Data Schedule for the six-month period ending
June 30, 1999.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K, filed April 22, 1999, relating to
the announcement by the Company that it had extended the
expiration date of its offer to exchange up to $200,000,000 of
its 9% Series B Senior Subordinated Notes due 2009 for its
outstanding 9% Series A Senior Subordinated Notes due 2009, as
described under Item 5.
(2) Current Report on Form 8-K, filed April 27, 1999, relating to
the announcement by the Company that it had acquired
substantially all of the assets of WOKR(TV), as described under
Item 2.
(3) Current Report on Form 8-K, filed June 10, 1999, relating to the
announcement by the Company that it expected its results of
operations for the second quarter of 1999 will be adversely
affected by a charge related to its implementation of Digital
CentralCasting(TM) and lower than previously anticipated revenue
from NBA-related activities due in large part to the effect of
the NBA lock-out, as described under Item 5.
(4) Current Report on Form 8-K/A, filed June 25, 1999, incorporating
by reference financial statements and pro forma financial
information in connection with the acquisition of substantially
all of the assets of WOKR(TV), as described under Item 2.
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.
THE ACKERLEY GROUP, INC.
DATED: August 13, 1999 By:/s/ Keith W. Ritzmann
------------------------------------
Keith W. Ritzmann
Senior Vice President and
Chief Information Officer,
Assistant Secretary, and Controller
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,637
<SECURITIES> 0
<RECEIVABLES> 54,613
<ALLOWANCES> 1,710
<INVENTORY> 0
<CURRENT-ASSETS> 82,197
<PP&E> 134,050
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<CURRENT-LIABILITIES> 54,727
<BONDS> 0
0
0
<COMMON> 330
<OTHER-SE> (14,634)
<TOTAL-LIABILITY-AND-EQUITY> 502,812
<SALES> 0
<TOTAL-REVENUES> 139,096
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<TOTAL-COSTS> 118,024
<OTHER-EXPENSES> (113)
<LOSS-PROVISION> 582
<INTEREST-EXPENSE> 16,716
<INCOME-PRETAX> 21,185
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