<PAGE>
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 March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 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.
Title of Class Outstanding at April 30, 1999
- ------------------------------- --------------------------------------
Common Stock, $.01 par value 20,577,268 shares
Class B Common Stock, $.01 par value 11,051,230 shares
===============================================================================
<PAGE>
TABLE OF CONTENTS
Page
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998......................... 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998............ 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998............ 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 15
SIGNATURES................................................... 15
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE ACKERLEY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
_______________
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
March 31, December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
(In thousands)
Current assets:
Cash and cash equivalents $ 2,547 $ 4,630
Accounts receivable, net of allowance 46,832 44,680
Current portion of broadcast rights 6,719 7,339
Prepaid expenses 12,954 10,212
Deferred tax asset 4,497 4,497
Other current assets 3,564 3,883
-------- --------
Total current assets 77,113 75,241
Property and equipment, net 120,551 113,108
Goodwill, net 107,028 70,034
Other intangibles, net 7,534 7,780
Other assets 54,572 49,963
-------- --------
Total assets $366,798 $316,126
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 4,703 $ 8,004
Accrued interest 6,320 694
Other accrued liabilities 17,105 11,861
Deferred revenue 12,046 27,736
Current portion of broadcasting obligations 7,063 8,139
Current portion of long-term debt 4,973 3,101
-------- --------
Total current liabilities 52,210 59,535
Long-term debt, less current portion 329,709 266,999
Litigation accrual 7,999 8,016
Other long-term liabilities 7,029 7,417
-------- --------
Total liabilities 396,947 341,967
Stockholders' deficiency:
Common stock, par value $.01 per share--authorized 50,000,000 shares;
issued 21,952,214 shares at March 31, 1999 and 21,951,380 shares at
December 31, 1998; and outstanding 20,577,268 shares at March 31, 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 March 31, 1999
and December 31, 1998 111 111
Capital in excess of par value 10,584 10,339
Deficit (30,974) (26,421)
Less common stock in treasury, at cost (10,089) (10,089)
-------- --------
Total stockholders' deficiency (30,149) (25,841)
-------- --------
Total liabilities and stockholders' deficiency $366,798 $316,126
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
1
<PAGE>
THE ACKERLEY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
_______________
<TABLE>
<CAPTION>
For the Three Month
Periods Ended March 31,
1999 1998
-------------- ---------------
<S> <C> <C> <C>
(In thousands, except
per share amounts)
Revenue $75,117 $89,629
Less agency commissions and discounts (7,421) (8,583)
------- -------
Net revenue 67,696 81,046
Expenses (other income):
Operating expenses 60,164 69,388
Depreciation and amortization expense 4,723 3,843
Interest expense 7,311 6,510
Stock compensation expense 244 ---
Gain on disposition of assets (1,626) ---
------- -------
Total expenses and other income 70,816 79,741
------- -------
Income (loss) before income taxes (3,120) 1,305
Income tax benefit (expense) 572 (496)
------- -------
Income (loss) before extraordinary item (2,548) 809
Extraordinary item: loss on debt (1,373) ---
extinguishment ------- -------
Net income (loss) $(3,921) $ 809
======= =======
Income (loss) per common share, before
extraordinary item $ (0.08) $ 0.03
Extraordinary item: loss on debt (0.04) ---
extinguishment ------- -------
Net income (loss) per common share $ (0.12) $ 0.03
======= =======
Income (loss) per common share, assuming
dilution, before extraordinary item $ (0.08) $ 0.03
Extraordinary item: loss on debt (0.04) ---
extinguishment ------- -------
Net income (loss) per common share,
assuming dilution $ (0.12) $ 0.03
======= =======
Dividends per common share $ 0.02 $ 0.02
======= =======
Dividends per common share, assuming
dilution $ 0.02 $ 0.02
======= =======
Weighted average number of common shares 31,627 31,458
Weighted average number of common shares,
assuming dilution 31,882 31,692
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
THE ACKERLEY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
_______________
<TABLE>
<CAPTION>
For the Three Month
Periods Ended March 31,
1999 1998
------------------- --------------------
<S> <C> <C>
(In thousands)
Cash flows from operating activities:
Reconciliation of net income (loss) to net cash used in operating
activities:
Net income (loss) $ (3,921) $ 809
Adjustment to reconcile net income (loss) to net cash used in operating
activities:
Stock compensation expense 244 ---
Deferred tax expense (benefit) (1,092) 290
Debt extinguishment, net of taxes 1,373
Depreciation and amortization 4,723 3,843
Amortization of deferred financing costs 429 130
Gain on disposition of assets (1,626) ---
Gain on sale of property and equipment --- (25)
Amortization of broadcast rights 2,727 2,781
Income from barter transactions (576) (545)
Change in assets and liabilities:
Accounts receivable (2,152) 4,262
Prepaid expenses (2,742) 102
Other current assets and other assets 1,211 (4,051)
Accounts payable and accrued interest 2,325 4,972
Other accrued liabilities and other long-term liabilities 4,926 1,631
Deferred revenues (15,690) (12,168)
Current portion of broadcast obligations (3,289) (2,782)
--------- ---------
Net cash used in operating activities (13,130) (751)
Cash flows from investing activities
Proceeds from disposition of assets 1,626 ---
Proceeds from sale of property and equipment 175 76
Capital expenditures (5,919) (11,976)
Payments for acquisitions (42,564) (10,756)
Other, net --- (513)
--------- ---------
Net cash used in investing activities (46,682) (23,169)
Cash flows from financing activities:
Borrowings under credit agreements 169,063 171,750
Payments under credit agreements (104,274) (145,924)
Payments under capital lease obligations (220) (210)
Note redemption prepayment fees (1,208) ---
Payments of deferred financing costs (5,632) (1,345)
Proceeds from stock issuance --- 72
--------- ---------
Net cash provided by financing activities 57,729 24,343
Net increase (decrease) in cash and cash equivalents (2,083) 423
Cash and cash equivalents at beginning of period 4,630 3,656
--------- ---------
Cash and cash equivalents at end of period $ 2,547 $ 4,079
========= =========
Supplemental disclosure of noncash transactions:
Broadcast rights acquired and broadcast obligations assumed $ 1,567 $ 29
Property and equipment acquired through barter 606 602
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
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. 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"). The Revolver
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.
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.
4
<PAGE>
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 3. ACQUISITIONS
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.
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.
On March 16, 1999, the Company purchased substantially all of the assets of
KMTR(TV), the NBC affiliate licensed to Eugene, Oregon, together with two
satellite stations licensed to Roseburg and Coos Bay, Oregon, and a low power
station licensed to Eugene. The purchase price was approximately $26.0 million.
From December 1, 1998 until closing of the transaction, the Company operated the
stations pursuant to a time brokerage agreement with the former owner. The
Company recorded net assets with estimated fair values aggregating $3.0 million
and goodwill of $23.0 million.
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.
The following table summarizes, on an unaudited pro forma basis, the
consolidated results of operations of the Company for the three month periods
ended March 31, 1999 and 1998, giving pro forma effect to the acquisition of
WOKR(TV) as if the acquisition had been made at the beginning of the periods
presented. These pro forma consolidated statements do not necessarily reflect
the results of operations which would have occurred had such an acquisition
taken place on the date indicated.
<TABLE>
<CAPTION>
For the Three Month
Periods Ended March 31,
1999 1998
----------------------- -----------------------
<S> <C> <C>
(In thousands, except per share amounts)
Net revenue $ 71,606 $ 84,741
Operating expenses (62,728) (71,737)
Income (loss) before extraordinary item (2,337) 781
Net income (loss) (3,710) 781
Net income (loss) per common share (0.12) 0.02
Net income (loss) per common share, assuming dilution (0.12) 0.02
</TABLE>
On May 1, 1999, the Company exchanged substantially all of the assets plus
certain liabilities of KKTV(TV), a CBS affiliate licensed to Colorado Springs,
Colorado, for substantially all of the assets plus certain liabilities of
KCOY(TV), a 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
5
<PAGE>
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 and goodwill of $16.8 million.
NOTE 4. TELEVISION BROADCASTING SEGMENT 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, traffic, programming, and
accounting for several television stations at one location. To implement this
strategy, the Company has organized the television stations it owns and operates
into the following three regional station groups: New York (WIXT, WIVT, WUTR,
and WOKR), Central Coast (KGET, KCBA, KION, and KCOY), and North Coast (KFTY,
KVIQ, and KMTR). Using Digital CentralCasting, one station will perform the
back-office functions for all of the stations in a regional station group.
The Company expects to implement Digital CentralCasting in the New York
station group by July 1, 1999, the Central Coast station group in the fourth
quarter of 1999, and the North Coast station group in the first quarter of 2000.
The Company will accrue the costs related to the implementation when the amount
of these costs becomes reasonably determinable.
NOTE 5. 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. A
decision from the hearing has not yet been rendered.
NOTE 6. 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 expenses before depreciation,
amortization, interest, disposition of assets, and stock compensation expenses.
Segment Operating Cash Flow is defined as Operating Cash Flow before corporate
overhead.
Selected financial information for these segments for the three month
periods ended March 31, 1999 and 1998 is presented as follows:
6
<PAGE>
<TABLE>
<CAPTION>
Three Month Period Ended Outdoor Television Radio Sports &
March 31, 1999: Media Broadcasting Broadcasting Entertainment Consolidated
--------- ------------- ------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net revenue $ 19,990 $ 16,251 $ 5,221 $ 26,234 $ 67,696
Segment operating expenses (12,957) (16,291) (3,452) (23,652) (56,352)
-------- -------- ------- -------- --------
Segment Operating Cash Flow $ 7,033 $ (40) $ 1,769 $ 2,582 11,344
======== ======== ======= ========
Corporate overhead (3,812)
--------
Operating Cash Flow 7,532
Other (expenses) income:
Depreciation and amortization (4,723)
Interest expense (7,311)
Stock compensation expense (244)
Gain on disposition of assets 1,626
--------
Income before income taxes and
extraordinary item $ (3,120)
========
Segment assets $ 88,114 $115,644 $57,964 $ 39,343 $301,065
======== ======== ======= ========
Corporate assets 65,733
--------
Total assets $366,798
========
Three Month Period Ended
March 31, 1998:
Net revenue $ 26,467 $ 14,536 $ 4,956 $ 35,087 $ 81,046
Segment operating expenses (18,962) (13,651) (3,502) (30,216) (66,331)
-------- -------- ------- -------- --------
Segment Operating Cash Flow $ 7,505 $ 885 $ 1,454 $ 4,871 $ 14,715
======== ======== ======= ========
Corporate Overhead (3,057)
--------
Operating Cash Flow 11,658
Other (expenses) income:
Depreciation and amortization (3,843)
Interest expense (6,510)
--------
Income before income taxes and $ 1,305
extraordinary item ========
</TABLE>
The increase in assets from the outdoor media and television broadcasting
segments as of March 31, 1999 compared to December 31, 1998 is primarily due to
the acquisitions of an outdoor advertising company for $11.0 million and
television stations KMTR for $26.0 million and KVIQ for $5.5 million, as
discussed in Note 3.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We reported a net loss of $3.9 million for the first three months of 1999,
compared to net income of $0.8 million for the first three months of 1998. Net
revenues for the first three months of 1999 decreased over the same period last
year by $13.3 million, or 16%, while our Operating Cash Flow (as defined below)
decreased by $4.2 million, or 36%.
On April 15, 1999, we paid a $.02 per share dividend.
Refinancing. On January 22, 1999, we replaced our existing credit
agreement with the new $325.0 million 1999 Credit Agreement. On February 24,
1999, we issued additional 9% Senior Subordinated Notes 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 with borrowings under the
Revolver.
Acquisitions. We acquired four television stations and an outdoor
advertising company. These transactions are more fully described in Note 3 to
the Condensed Consolidated Financial Statements.
As with many media companies that have grown through acquisitions, our
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, our management believes that Operating Cash Flow
(defined as net revenue less operating expenses before depreciation,
amortization, interest, disposition of assets, and stock compensation expenses)
is an appropriate measure of the Company's financial performance. Similarly,
our management believes that Segment Operating Cash Flow (defined as Operating
Cash Flow before corporate overhead) is an appropriate measure of the financial
performance of our segments. These measures exclude certain expenses that
management does not consider to be costs of ongoing operations. We use
Operating Cash Flow to pay interest and principal on our 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 our operating performance or to cash flows as a measure of our
liquidity.
Results of Operations
The following tables set forth certain historical financial and operating
data for the three month periods ended March 31, 1999 and 1998, including net
revenue, operating expenses, and Operating Cash Flow information by segment:
<TABLE>
<CAPTION>
Three Month Periods Ended March 31,
-----------------------------------------------------------
1999 1998
---------------------------- -----------------------------
(Dollars in thousands)
As % of As % of
Amount Net Revenue Amount Net Revenue
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue....................... $67,696 100.0% $81,046 100.0%
Segment operating expenses........ 56,352 83.2 66,331 81.8
Corporate overhead................ 3,812 5.6 3,057 3.8
------- -------
Total operating expenses..... 60,164 88.9 69,388 85.6
------- -------
Operating Cash Flow............... 7,532 11.1 11,658 14.4
Other expenses (income):
Depreciation and amortization... 4,723 7.0 3,843 4.7
Interest expense................ 7,311 10.8 6,510 8.0
Stock compensation expense...... 244 0.4 --- ---
</TABLE>
8
<PAGE>
<TABLE>
Three Month Periods Ended March 31,
-----------------------------------------------------------
1999 1998
---------------------------- -----------------------------
(Dollars in thousands)
As % of As % of
Amount Net Revenue Amount Net Revenue
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Gain on disposition of assets.. (1,626) (2.4) --- ---
------ ------
Total other expenses and
income...................... 10,652 15.7 10,353 12.8
------ ------
Income (loss) before income taxes. (3,120) (4.6) 1,305 1.6
Income tax benefit (expense)...... 572 0.8 (496) (0.6)
------ ------
Income (loss) before
extraordinary item............... (2,548) (3.8) 809 1.0
Extraordinary item................ (1,373) (2.0) --- ---
------ ------
Net income (loss)................. $(3,921) (5.8) $809 1.0
======= ======
</TABLE>
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31,
------------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
(Dollars in thousands)
Net revenue:
Outdoor media................................................ $19,990 $26,467
Television broadcasting...................................... 16,251 14,536
Radio broadcasting........................................... 5,221 4,956
Sports & entertainment....................................... 26,234 35,087
------- -------
Total net revenue...................................... $67,696 $81,046
======= =======
Segment operating expenses:
Outdoor media................................................ $12,957 $18,962
Television broadcasting...................................... 16,291 13,651
Radio broadcasting........................................... 3,452 3,502
Sports & entertainment....................................... 23,652 30,216
------- -------
Total segment operating expenses....................... $56,352 $66,331
======= =======
Operating Cash Flow:
Outdoor media................................................ $ 7,033 $ 7,505
Television broadcasting...................................... (40) 885
Radio broadcasting........................................... 1,769 1,454
Sports & entertainment....................................... 2,582 4,871
------- -------
Total segment Operating Cash Flow...................... 11,344 14,715
Corporate overhead........................................... (3,812) (3,057)
------- -------
Total Operating Cash Flow.............................. $ 7,532 $11,658
======= =======
Change in net revenue from prior periods:
Outdoor media................................................ (24.5)% 6.3%
Television broadcasting...................................... 11.8% 7.5%
Radio broadcasting........................................... 5.3% 20.1%
Sports & entertainment....................................... (25.2)% 21.4%
Change in total net revenue............................ (16.5)% 13.4%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31,
------------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
(Dollars in thousands)
Segment operating expenses as a % of segment net revenue:
Outdoor media................................................ 64.8% 71.6%
Television broadcasting...................................... 100.2% 93.9%
Radio broadcasting........................................... 66.1% 70.7%
Sports & entertainment....................................... 90.2% 86.1%
Total segment operating expenses as a % of total net
revenue............................................... 83.2% 81.8%
Operating Cash Flow as a % of segment net revenue:
Outdoor media................................................ 35.2% 28.4%
Television broadcasting...................................... (0.2)% 6.1%
Radio broadcasting........................................... 33.9% 29.3%
Sports & entertainment....................................... 9.8% 13.9%
Total Operating Cash Flow as a % of total net 11.1% 14.4%
revenue...
</TABLE>
Three Month Period Ended March 31, 1999 Compared With Three Month Period Ended
March 31, 1998
Net Revenue. Our net revenue for the first quarter of 1999 was $67.7
million. This represented a decrease of $13.3 million, or 16%, compared to
$81.0 million for the first quarter of 1998. Changes in net revenue were as
follows:
. Outdoor Media. Our net revenue for the first quarter of 1999 from our
outdoor media segment decreased by $6.5 million, or 25%, compared to the
first quarter of 1998. This decrease was primarily due to the absence of
our airport advertising operations, which we sold in June 1998,
partially offset by increased national sales. Excluding our airport
advertising operations, our net revenue for the first quarter of 1999
from our outdoor media segment increased by $1.0 million, or 5%,
compared to the first quarter of 1998.
. Television Broadcasting. Our net revenue for the first quarter of 1999
from our television broadcasting segment increased by $1.8 million, or
12%, compared to the first quarter of 1998. This increase was mainly due
to the addition of stations KVIQ in July 1998, KMTR in December 1998,
and KCOY in January 1999. Excluding the addition of these stations, our
net revenue for the first quarter of 1999 from our television
broadcasting segment remained constant compared to the first quarter of
1998.
. Radio Broadcasting. Our net revenue for the first quarter of 1999 from
our radio broadcasting segment increased by $0.2 million, or 5%,
compared to the first quarter of 1998. This increase was mainly due to
higher national and local sales.
. Sports & Entertainment. Our net revenue for the first quarter of 1999
from our sports & entertainment segment decreased by $8.9 million, or
25%, compared to the first quarter of 1998. This decrease primarily
represented decreased ticket and sponsorship sales for the first quarter
of 1999 as a result of the NBA lockout.
Segment Operating Expenses (Excluding Corporate Overhead). Our operating
expenses (excluding corporate overhead) for the first quarter of 1999 were $56.4
million. This represented
10
<PAGE>
a decrease of $9.9 million, or 15%, compared to $66.3 million for the first
quarter of 1998. Changes in operating expenses (excluding corporate overhead)
were as follows:
. Outdoor Media. Our operating expenses for the first quarter of 1999 from
our outdoor media segment decreased by $6.0 million, or 32%, compared to
the first quarter of 1998. This decrease was primarily due to the
absence of our airport advertising operations which we sold in June
1998, partially offset by higher employment-related expenses. Excluding
our airport advertising operations, our operating expenses for the first
quarter of 1999 from our outdoor media segment increased by $0.9 million
or 7%, compared to the first quarter of 1998.
. Television Broadcasting. Our operating expenses for the first quarter of
1999 from our television broadcasting segment increased by $2.6 million,
or 19%, compared to the first quarter of 1998. This increase was
primarily due to the addition of stations KVIQ in July 1998, KMTR in
December 1998, and KCOY in January 1999, and higher program, promotion,
and production expenses relating to the expansion of local news.
Excluding the addition of these stations, our operating expenses for the
first quarter of 1999 from our television broadcasting segment increased
by $0.4 million, or 3%, compared to the first quarter of 1998.
. Radio Broadcasting. Our operating expenses for the first quarter of 1999
from our radio broadcasting segment remained constant at $3.5 million
compared to the first quarter of 1998.
. Sports & Entertainment. Our operating expenses for the first quarter of
1999 from our sports & entertainment segment decreased by $6.5 million,
or 22%, compared to the first quarter of 1998. This decrease was mainly
attributable to decreased expenses in the first quarter of 1999 due to
the NBA lockout.
Corporate Overhead. Our corporate overhead expenses were $3.8 million for
the first quarter of 1999. This represented an increase of $0.7 million, or
23%, compared to the first quarter of 1998. This increase was primarily due to
higher utilization of outside services and increased marketing costs.
Operating Cash Flow. Our Operating Cash Flow decreased by $4.2 million to
$7.5 million for the first quarter of 1999 compared to $11.7 million for the
first quarter of 1998. The decrease in Operating Cash Flow from our outdoor
media, television broadcasting, and sports & entertainment segments and the
increase in our corporate overhead expenses were partially offset by the
increase in Operating Cash Flow from our radio broadcasting segment. Operating
Cash Flow as a percentage of total net revenue decreased to 11% for the first
quarter of 1999 compared to 14% from the first quarter of 1998.
Depreciation and Amortization Expense. Our depreciation and amortization
expense was $4.7 million for the first quarter of 1999. This represented an
increase of $0.9 million, or 24%, compared to the first quarter of 1998. This
increase mainly resulted from amortization expense relating to our business
acquisitions during 1998 and depreciation expense on our new Seattle SuperSonics
aircraft, which was completed in December 1998.
Interest Expense. Our interest expense was $7.3 million for the first
quarter of 1999. This represented an increase of $0.8 million, or 12%, compared
to the first quarter of 1998. This increase was primarily due to higher average
debt balances during the first quarter of 1999.
11
<PAGE>
Stock Compensation Expense. For the first quarter of 1999, we recognized
stock compensation expense of $0.2 million, primarily relating to the amendment
of a stock option agreement. There was no stock compensation expense in the
first quarter of 1998.
Gain on Disposition of Assets. For the first quarter of 1999, we
recognized a gain on disposition of assets of $1.6 million, which represented
the final cash payment received on the sale of our airport advertising
operations in June 1998.
Income Tax Benefit (Expense). We recorded an income tax benefit of $0.6
million for the first quarter of 1999, primarily as a result of our loss before
income taxes of $3.1 million. For the first quarter of 1998, our income tax
expense was $0.5 million.
Extraordinary Item. For the first quarter 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 (Loss). Our net loss was $3.9 million for the first quarter
of 1999. This represented a $4.7 million decrease from our net income of $0.8
million for the first quarter of 1998. This decrease primarily resulted from
the decrease in Operating Cash Flow and the recognition of the extraordinary
loss related to debt extinguishment, partially offset by the gain on disposition
of assets in the first quarter of 1999. Net loss as a percentage of net revenue
was 6% for the first quarter of 1999, which represents a decrease from net
income as a percentage of net revenue of 1% for the first quarter of 1998.
Liquidity and Capital Resources
On January 22, 1999, we replaced our existing $300.0 million credit
agreement with the new $325.0 million 1999 Credit Agreement, consisting of the
$150.0 million Term Loan and the $175.0 million Revolver. The Revolver includes
up to $10.0 million in standby letters of credit.
On February 24, 1999, we issued additional 9% Senior Subordinated Notes 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. 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, we redeemed the $20.0 million outstanding principal of
the 10.48% Senior Subordinated Notes with borrowings under the Revolver.
As of March 31, 1999, we had borrowed $65.0 million of the Term Loan and
$46.0 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 through December 31, 2005.
Under the 1999 Credit Agreement, we can choose to have interest calculated
at rates based on either a base rate or LIBOR plus defined margins which vary
based on our total leverage ratio. As of March 31, 1999, the annual interest
rate of borrowings under the 1999 Credit Agreement was approximately 7.74%.
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 some or substantially all of our subsidiaries or their assets.
12
<PAGE>
We have also provided guarantees by most of our subsidiaries as further
security for our payment of obligations under the 1999 Credit Agreement and the
Indenture for the 9% Senior Subordinated Notes.
In addition, the 1999 Credit Agreement and the Indenture for 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. As of March 31, 1999, we were in compliance with all
such ratios and covenants.
Our working capital increased to $24.9 million at March 31, 1999 from
$15.7 million at December 31, 1998 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 $5.9 million for capital expenditures in the first quarter of
1999, compared to $12.0 million in the corresponding quarter in 1998. Capital
expenditures in the first quarter of 1999 were primarily for broadcasting
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
that period, long-term liquidity needs, including financing for acquisitions,
have been met primarily through additions to long-term debt, principally through
bank borrowings and the issuance of subordinated debt securities. Capital
expenditures for new property and equipment have been financed with long-term
debt. Cash used in operating activities for the first quarter of 1999 was $13.1
million, an increase from cash used in operating activities of $0.8 million for
the first quarter of 1998.
On April 15, 1999, we paid our shareholders a cash dividend of $.02 per
share.
Subsequent Events
On April 6, 1999, we announced the launch of Digital CentralCasting, a
digital broadcasting system which will allow us to consolidate back-office
functions such as operations, traffic, programming, and accounting for several
television stations at one location. To implement this strategy, we have
organized the television stations we own and operate into the following three
regional station groups: New York (WIXT, WIVT, WUTR, and WOKR), Central Coast
(KGET, KCBA, KION, and KCOY), and North Coast (KFTY, KVIQ, and KMTR). Using
Digital CentralCasting, one station will perform the back-office functions for
all of the stations in a regional station group. We believe this strategy will
enhance our operational efficiency through economies of scale and the sharing of
resources and information among our stations. In addition, we will enhance the
quality of the picture that is seen by our viewers by taking advantage of
digital technology. We plan to invest a portion of the anticipated cost savings
in our stations' local news programming to increase its quality and quantity,
and to increase our stations' presence in their communities.
We expect to implement Digital CentralCasting in the New York station
group by July 1, 1999, the Central Coast station group in the fourth quarter of
1999, and the North Coast station group in the first quarter of 2000. We
believe this strategy will result in improved margins in our television
broadcasting segment within approximately two years of implementation. However,
we cannot guarantee that the implementation of Digital CentralCasting will be
achieved in a timely or effective manner, and, accordingly, we can give no
assurance as to the timing or extent of the anticipated benefits.
13
<PAGE>
The Seattle SuperSonics will not participate in the 1999 NBA playoffs, in
contrast to last season, when they participated in the first two rounds of the
1998 NBA playoffs. Despite the lack of participation in the playoffs, we
estimate an increase in the sports & entertainment segment's Operating Cash Flow
in the second quarter of 1999 from 1998 due to the extension of the NBA regular
season into the second quarter of 1999 resulting from the NBA lockout.
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 fields 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 second 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 completed by June 30, 1999.
Upon completion, we will 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 our
operations 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.
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 significant potential
risks.
14
<PAGE>
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 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 it does now. However, we believe
these functions can be performed manually or by other alternative means, as
necessary, for an indefinite period of time. In fact, we have had to perform
these functions using alternative means in the past due to natural disasters,
such as a tornadoes and hurricanes. In these instances, we were able to recover
such that there were no material adverse effects on our operations.
Our operations, like those of many other organizations, can be adversely
affected by Year 2000 triggered failures of other companies upon whom we depend
for the functioning of our mission-critical automated systems. As described
above, we have identified our mission-critical vendors and are monitoring their
Year 2000 compliance programs.
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 will 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.
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 Fourth Amended and Restated Employees Stock Option Plan (As of May
11, 1999).
27 Financial Data Schedule for the three month period ended March 31,
1999.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K, filed March 2, 1999, relating to the
announcement by the Company of its sale of $25.0 million aggregate
principal amount of Senior Subordinated Notes due 2009 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: May 14, 1999 By: /s/ Denis M. Curley
----------------------------
Denis M. Curley
Co-President and Chief Financial
Officer, Secretary, and Treasurer
15
<PAGE>
EXHIBIT 10
THE ACKERLEY GROUP, INC.
FOURTH AMENDED AND RESTATED
EMPLOYEES STOCK OPTION PLAN
(As of May 11, 1999)
1. Purpose. This Plan (the "Plan") is intended as an incentive for, and to
encourage stock ownership by, key employees of The Ackerley Group, Inc. or its
subsidiaries (the "Company") in order to provide such employees with a
proprietary interest or to increase their proprietary interest in the Company's
success.
The word "Company" when used in the Plan with reference to employment shall
include subsidiaries of the Company. The word "subsidiary" when used herein
shall mean any corporation, 50% or more of the voting stock of which is owned or
controlled, directly or indirectly, by the Company. The term "incentive stock
option" shall mean an option described in Section 422(b) of the Internal Revenue
Code of 1986, as amended. Both incentive and non-incentive stock options may be
granted under this Plan, and the relevant stock option agreement will specify
the type of option granted.
2. Administration. The Company's Board of Directors (the "Board") shall
administer the Plan and perform such other functions as may be reasonable or
necessary under the Plan. The Board is authorized, subject to the provisions of
the Plan, from time to time to establish such rules and regulations as it may
deem appropriate for the proper administration of the Plan, and to make such
determinations under, and such interpretations of, and to take such steps in
connection with, the Plan or the options granted thereunder as it may deem
necessary or advisable.
3. Stock. The stock to be optioned under the Plan shall be shares of the
Company's common stock, $0.01 par value per share ("Stock"), and may be either
authorized and unissued or held in the treasury of the Company. The total amount
of Stock on which options may be granted under the Plan shall not exceed
1,500,000 shares. Such number of shares is subject to adjustment in accordance
with the provisions of Article 10 hereof. The shares involved in the unexercised
portion of any terminated or expired options under the Plan may again be
subjected to options under the Plan.
4. Award of Options.
a. Option Award. The Board, at any time and from time to time prior to
May 1, 2003, may authorize the granting of options to such employees of the
Company as it may select and for such numbers of shares as it shall designate
subject to the provisions of Article 4(b) hereof and Article 3 hereof; and
subject to adjustment in accordance with the provisions of Article 10 hereof.
The date on which an option shall be granted shall be the date of the Board's
authorization of such grant.
<PAGE>
b. Stock Option Agreement. Each option shall be evidenced by a stock option
agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Board from time to time shall approve. Among the
provisions which the Board may, at its option, include in the terms of a stock
option agreement is a provision affecting incentive stock options granted prior
to January 1, 1987 that prohibits the exercise of any such option while there is
outstanding any incentive stock option granted before the granting of the new
incentive stock option to the employee. Each stock option agreement shall state
whether the option is an incentive stock option or a nonincentive stock option
and the number of shares subject to option. Any number of options may be granted
to a single eligible employee at any time and from time to time, except that, in
the case of incentive stock options, the aggregate fair market value (determined
as of the time each option is granted) of all shares of stock with respect to
which incentive stock options become exercisable for the first time by such
employee in any one calendar year (under all incentive stock option plans of the
Company, and all of its affiliated companies taken together) shall not exceed
$100,000.
5. Option Price.
a. Incentive Stock Options. The purchase price of shares subject to
options qualifying as incentive stock options awarded to qualified Company
employees shall not be less than 100% of the fair market value of such shares at
the time of grant of the options; provided, however, that such price shall not
be less than 110% of the fair market value of the shares subject to the options
for any incentive stock options granted to any individual who, at the time such
an option is granted, owns shares possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company.
b. Nonincentive Stock Options. The purchase price of shares subject to
options not qualifying as incentive stock options shall be determined by the
Board in its sole discretion.
c. In General. The Board shall determine the fair market value of
shares on the date of grant of any option, and, subject to the restrictions
contained in this Article 5, the Board shall determine the purchase price of the
shares covered by each option. The purchase price specified in each option will
remain constant during the term of such option, subject to adjustment pursuant
to Article 10.
6. Term of Options. Each option granted under the Plan shall be exercisable
on such date or dates and during such periods and for such numbers of shares as
shall be determined pursuant to the provisions of the stock option agreement
with respect to such option; provided, however, that no option granted under the
Plan shall be exercised beyond 10 years from the date of grant of the option;
provided, further, that no option qualifying as an incentive stock option shall
be exercised beyond five years from the date of grant if the optionee at the
time the option is granted owns shares possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company.
7. Nontransferability of Option Rights. No option shall be transferable by
an optionee otherwise than by will or the laws of descent and distribution.
During the lifetime of an optionee the option shall be exercisable only by the
optionee.
<PAGE>
8. Effect of Termination of Employment.
a. Employment Termination. Except as provided in subsections b., c. or
d. of this Section of the Plan, if, prior to the date that any option shall be
exercised, the optionee shall cease for any reason to be an employee of the
Company, the optionee's right to exercise such option shall terminate and all
rights thereunder shall cease upon the effectiveness of the termination, unless
otherwise provided by the Board. Any stock option agreement may provide that any
funds placed in escrow by an optionee towards payment of the option price shall
be returned to the optionee in the event the optionee ceases to be an employee
of the Company.
b. Retirement of Employee. If an optionee's status as an employee is
terminated at any time during the option period by reason of retirement of such
employee at age 57 years or older, and if said optionee had been an employee at
all times between the date of grant of the option and the termination of his or
her status as an employee, the employee's option shall terminate on the earlier
of (i) one year after the date of termination or such other period from the date
of termination as established by the Board of Directors, or (ii) the expiration
date otherwise provided in the employee's stock option agreement.
c. Disability of Employee. If an optionee's status as an employee is
terminated at any time during the option period by reason of a disability
(within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended) and if said optionee had been an employee at all times between the date
of grant of the option and the termination of his or her status as an employee,
the employee's option shall terminate on the earlier of (i) one year after the
date of termination or such other period from the date of termination as
established by the Board of Directors, or (ii) the expiration date otherwise
provided in the employee's stock option agreement.
d. Death of Employee. If an optionee shall die while an employee of the
Company, the executor or administrator of the estate of the deceased optionee or
the person or persons to whom an option shall have validly transferred by the
executor or the administrator pursuant to will or the laws of descent and
distribution, shall have the right, within one year from the date of the
optionee's death, to exercise the option to the extent that it is then
exercisable, but not exercised, at the date of death, subject to the other
limitation on the exercise of the option in effect at the date of exercise. Such
one-year period shall not extend the time during which the option can be
exercised.
9. Payment for Shares. In the discretion of the Board of Directors, the
stock option agreement with respect to any option granted under the Plan may
require that the option price be paid in cash or check, or may give the optionee
the choice of paying in cash, check, in Stock of the Company, or a combination
thereof. The option price must be paid to the Company in full on or before the
exercise of any option under this Plan. Shares of Stock of an option shall be
valued at the mean of the highest and lowest quoted selling price for the Stock
on the date of exercise, or, if such price is unavailable, the mean of the bid
and asked prices for the Stock on the date of exercise, or, if such price is
also unavailable, the fair value of the Stock as determined by the Board of
Directors, including, without limitation, as determined by a formula provided in
the relevant stock option agreement.
<PAGE>
10. Stock Dividend, Reclassification, Merger, Consolidation, Etc. The total
amount of Stock on which options may be granted under the plan, and option
rights (both as to the number of shares of Stock and the option price) shall be
appropriately adjusted for any increase or decrease in the number of outstanding
shares of Stock resulting from a subdivision or combination of shares of Stock,
or a reclassification of Stock.
In the event of a merger or consolidation involving the Company, or an
acquisition of the Company, the Board of Directors of the Company in its sole
discretion, and upon reasonable notice to the optionee, shall be entitled: (a)
(i) to permit any optionee, even as to any option not then exercisable by its
terms, to exercise such option and (ii) notwithstanding the terms of the
relevant stock option agreement, to require such optionee to complete the
exercise of any option by the effective date of such merger, consolidation or
acquisition, on which date all rights of the optionee as 'to any unexercised
portion of any option shall cease; (b) to provide for the assumption by the
surviving or acquiring entity of any or all of the outstanding options of the
Company upon such terms as the Board of Directors of the Company shall decide;
or (c) to take such other action as the Board may decide.
The foregoing adjustments or other actions and the manner of application of
the foregoing provisions shall be determined by the Board in its sole
discretion. Any such adjustment or other actions may provide for the
elimination of any fractional share which might otherwise become subject to an
option.
11. Rights as a Stockholder. An optionee or a transferee of an option shall
have no rights as a stockholder with respect to any share covered by option
until the optionee shall have become the holder of record of such share, and no
adjustments shall be made for dividends (ordinary or extraordinary, whether in
cash, securities, or other property) or distributions or other rights in respect
of such share for which the record date is prior to the date on which the
optionee shall have become the holder of record thereof; except that the holders
of options as of June 24, 1987 became entitled to participate with shareholders
of record in the Class B Common Stock dividend as declared and paid and further,
that the holders of such options have been and shall be entitled to receive such
Class B Common Stock dividend upon the exercise of such options and becoming
shareholders of record with respect to the option shares.
12. Amendment, Modification, and Termination of the Plan. The Board may at
any time terminate, and at any time and from time to time, and in any respect,
may amend or modify the Plan or options issued thereunder; provided, however,
that no such action of the Board without approval of the stockholders may (a)
increase the total amount of Stock on which options may be granted under the
Plan, except as contemplated in Article 10, or (b) change the criteria for
determining the option price; and provided, further, that no amendment,
modification or termination of the Plan shall in any manner affect any option
theretofore granted under the Plan without the consent of the optionee or the
transferee of the option. The Board may amend or modify options issued under the
Plan provided that no incentive stock option shall be adjusted by the Board
pursuant to this Section 12 in a manner which causes the option to fail to
continue to qualify as an incentive stock option within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended; and provided, further,
that no amendment or modification of an option shall grant the optionee
additional benefits under the option such that the optionee will be
<PAGE>
deemed to have received a grant of a new option, without the consent of the
optionee or the transferee of the option.
13. Conditions to Exercise of Options. The Board may, in its discretion,
provide that: (a) options hereunder shall not be exercisable unless their
exercise and the issuance and delivery of shares thereunder shall, in the
opinion of counsel for the Company, comply with all relevant provisions of law,
including, without limitation, any applicable state or federal securities laws
and regulations; and (b) in the event that the Company is unable without
unreasonable expense to obtain the necessary authority form all regulatory
bodies having jurisdiction, the Company shall not have any liability to any
optionee for the failure to issue shares.
The Board may, in its discretion, require as a condition to the exercise of
options and the issuance of shares thereunder that the optionee (i) shall have
represented, warranted and agreed in form and substance satisfactory to the
Company, at the time of exercising the option that the optionee is acquiring the
shares for the optionee's own account, for investment and not with a view to or
in connection with any distribution thereof, (ii) shall have agreed to
restrictions on transfer in form and substance satisfactory to the Company, and
(iii) shall have agreed to an endorsement which makes appropriate reference to
such representations, warranties, agreements and restrictions on the
certificates representing the shares.
14. Finality of Determinations. Each determination, interpretation or other
action made or taken pursuant to the provisions of the Plan by the Board shall
be final and shall be binding and conclusive for all purposes and upon all
persons, including but without limitation thereto the Company, the stockholders
and the directors, officers and employees of the Company and its subsidiaries,
the optionees and their respective successors in interest.
15. Law Governing. This Plan shall be governed by and construed in
accordance with the laws of the State of Washington.
(Approved by the Board of Directors on February 24, 1999, and approved by the
Company's shareholders at the 1999 Annual Meeting of Shareholders on May 11,
1999.)
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<EPS-DILUTED> (0.12)
</TABLE>
