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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended Commission file number:
March 31, 2003 333-02302
ALLBRITTON COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1803105
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
808 Seventeenth Street, N.W.
Suite 300
Washington, D.C. 20006-3910
(Address of principal executive offices)
Registrant's telephone number, including area code: 202-789-2130
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X (1)
-------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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Number of shares of Common Stock outstanding as of May 14, 2003: 20,000
shares.
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(1) The Company became subject to such filing requirements effective February
13, 2003.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING ITEM 2 "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THAT ARE NOT HISTORICAL FACTS AND INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF FACTORS THAT COULD
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, OUR
OUTSTANDING INDEBTEDNESS AND OUR HIGH DEGREE OF LEVERAGE; THE RESTRICTIONS
IMPOSED ON US BY THE TERMS OF OUR INDEBTEDNESS; THE HIGH DEGREE OF COMPETITION
FROM BOTH OVER-THE-AIR BROADCAST STATIONS AND PROGRAMMING ALTERNATIVES SUCH AS
CABLE TELEVISION, WIRELESS CABLE, IN-HOME SATELLITE DISTRIBUTION SERVICE,
PAY-PER-VIEW SERVICES AND HOME VIDEO AND ENTERTAINMENT SERVICES; THE IMPACT OF
NEW TECHNOLOGIES; CHANGES IN FEDERAL COMMUNICATIONS COMMISSION REGULATIONS;
DECREASES IN THE DEMAND FOR ADVERTISING DUE TO WEAKNESS IN THE ECONOMY; THE
VARIABILITY OF OUR QUARTERLY RESULTS AND OUR SEASONALITY; AND OUR ABILITY TO
REALIZE THE EXPECTED OPERATIONAL EFFICIENCIES FROM THE ALLNEWSCO ACQUISITION.
ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY ARE
EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH
REFLECT MANAGEMENT'S VIEW ONLY AS OF THE DATE HEREOF.
ALLBRITTON COMMUNICATIONS COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations and Retained Earnings
for the Three and Six Months Ended March 31, 2002 and 2003.... 1
Consolidated Balance Sheets as of September 30, 2002 and
March 31, 2003................................................ 2
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2002 and 2003................................. 3
Notes to Interim Consolidated Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 19
Item 4. Controls and Procedures....................................... 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
Signatures.............................................................. 21
302 Certifications...................................................... 22
Exhibit Index........................................................... 26
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in thousands)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
2002 2003 2002 2003
---- ---- ---- ----
Operating revenues, net ............................. $ 43,316 $ 44,448 $ 96,252 $ 102,957
--------- --------- --------- ---------
Television operating expenses, excluding
depreciation and amortization .................. 30,921 30,653 63,390 62,781
Depreciation and amortization ....................... 3,398 2,658 6,699 5,247
Corporate expenses .................................. 1,435 1,520 2,818 2,978
--------- --------- --------- ---------
35,754 34,831 72,907 71,006
--------- --------- --------- ---------
Operating income .................................... 7,562 9,617 23,345 31,951
--------- --------- --------- ---------
Nonoperating income (expense)
Interest income
Related party .............................. 47 44 92 88
Other ...................................... 20 205 52 325
Interest expense
Related party .............................. (204) -- (384) --
Other ...................................... (10,497) (11,004) (20,963) (22,102)
Loss on early repayment of debt ................ -- (23,194) -- (23,194)
Other, net ..................................... 444 (209) 69 (553)
--------- --------- --------- ---------
(10,190) (34,158) (21,134) (45,436)
--------- --------- --------- ---------
(Loss) income before income taxes and cumulative
effect of change in accounting principle ....... (2,628) (24,541) 2,211 (13,485)
(Benefit from) provision for income taxes ........... (972) (8,843) 1,168 (5,010)
--------- --------- --------- ---------
(Loss) income before cumulative effect
of change in accounting principle .............. (1,656) (15,698) 1,043 (8,475)
Cumulative effect of change in accounting
principle, net of income tax benefit
of $2,027 (Note 4) ............................. -- -- -- 2,973
--------- --------- --------- ---------
Net (loss) income ................................... (1,656) (15,698) 1,043 (11,448)
Retained earnings, beginning of period .............. 6,673 9,167 3,974 4,917
--------- --------- --------- ---------
Retained earnings (deficit), end of period .......... $ 5,017 $ (6,531) $ 5,017 $ (6,531)
========= ========= ========= =========
See accompanying notes to interim consolidated financial statements.
1
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31,
September 30, 2003
2002 (unaudited)
Assets ------------- -----------
Current assets
Cash and cash equivalents ............................. $ 6,299 $ 6,037
Accounts receivable, net .............................. 37,167 34,865
Program rights ........................................ 19,272 9,213
Deferred income taxes ................................. 807 807
Other ................................................. 2,140 3,059
--------- ---------
Total current assets ............................. 65,685 53,981
Property, plant and equipment, net .......................... 56,573 54,827
Intangible assets, net ...................................... 128,150 123,066
Deferred financing costs and other .......................... 7,177 10,699
Cash surrender value of life insurance ...................... 10,362 10,897
Program rights .............................................. 1,047 574
--------- ---------
$ 268,994 $ 254,044
========= =========
Liabilities and Stockholder's Investment
Current liabilities
Current portion of long-term debt ..................... $ 574 $ 533
Accounts payable ...................................... 3,003 2,523
Accrued interest payable .............................. 11,313 8,262
Program rights payable ................................ 22,993 10,281
Accrued employee benefit expenses ..................... 4,906 4,671
Other accrued expenses ................................ 10,370 7,014
--------- ---------
Total current liabilities ........................ 53,159 33,284
Long-term debt .............................................. 439,869 481,124
Program rights payable ...................................... 1,886 1,102
Deferred rent and other ..................................... 3,089 4,517
Accrued employee benefit expenses ........................... 1,879 1,895
Deferred income taxes ....................................... 16,185 15,603
--------- ---------
Total liabilities ................................ 516,067 537,525
--------- ---------
Stockholder's investment
Preferred stock, $1 par value, 1,000 shares authorized,
none issued ........................................ -- --
Common stock, $.05 par value, 20,000 shares authorized,
issued and outstanding ............................. 1 1
Capital in excess of par value ........................ 49,631 49,631
Retained earnings (deficit) ........................... 4,917 (6,531)
Distributions to owners, net .......................... (301,622) (326,582)
--------- ---------
Total stockholder's investment ..................... (247,073) (283,481)
--------- ---------
$ 268,994 $ 254,044
========= =========
See accompanying notes to interim consolidated financial statements.
2
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Six Months Ended
March 31,
-----------------
2002 2003
---- ----
Cash flows from operating activities:
Net income (loss) ................................................ $ 1,043 $ (11,448)
--------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ................................. 6,699 5,247
Cumulative effect of change in accounting principle ........... -- 2,973
Other noncash charges ......................................... 683 718
Noncash tax benefits .......................................... (904) --
Loss on early repayment of debt ............................... -- 23,194
Provision for doubtful accounts ............................... 279 262
Loss (gain) on disposal of assets ............................. 2 (9)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ..................................... 949 2,040
Program rights .......................................... 10,851 10,532
Other current assets .................................... (1,381) (919)
Other noncurrent assets ................................. (640) (537)
Increase (decrease) in liabilities:
Accounts payable ........................................ 148 (480)
Accrued interest payable ................................ (8) (3,051)
Accrued interest payable - related party ................ 374 --
Program rights payable .................................. (10,637) (13,496)
Accrued employee benefit expenses ....................... (196) (219)
Other accrued expenses .................................. (77) (3,356)
Deferred rent and other liabilities ..................... 1,287 1,428
Deferred income taxes ................................... 1,503 1,445
--------- ---------
8,932 25,772
--------- ---------
Net cash provided by operating activities ............... 9,975 14,324
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................. (5,047) (3,440)
Proceeds from disposal of assets ................................. 37 32
--------- ---------
Net cash used in investing activities ................... (5,010) (3,408)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt ................................... -- 451,949
Principal payments on long-term debt and capital lease obligations (969) (425,302)
Draws under line of credit, net .................................. -- 13,936
Redemption premiums and related costs of early repayment of debt . -- (17,409)
Deferred financing costs ......................................... (63) (9,392)
Notes issued from Allnewsco to Perpetual ......................... 1,764 --
Distributions to owners, net of certain charges .................. (228,023) (28,169)
Repayments of distributions to owners ............................ 222,065 3,209
--------- ---------
Net cash used in financing activities ................... (5,226) (11,178)
--------- ---------
Net decrease in cash and cash equivalents .............................. (261) (262)
Cash and cash equivalents, beginning of period ......................... 7,829 6,299
--------- ---------
Cash and cash equivalents, end of period ............................... $ 7,568 $ 6,037
========= =========
Non-cash investing and financing activities:
Equipment acquired under capital leases........................... $ 24 $ --
========= =========
See accompanying notes to interim consolidated financial statements.
3
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
NOTE 1 - The accompanying unaudited interim consolidated financial statements of
Allbritton Communications Company (an indirectly wholly-owned subsidiary of
Perpetual Corporation) and its subsidiaries (collectively, the "Company") have
been prepared pursuant to instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted or condensed where permitted by
regulation. In management's opinion, the accompanying financial statements
reflect all adjustments, which were of a normal recurring nature, and
disclosures necessary for a fair presentation of the consolidated financial
statements for the interim periods presented. The results of operations for the
three and six months ended March 31, 2003 are not necessarily indicative of the
results that can be expected for the entire fiscal year ending September 30,
2003. The interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended September 30, 2002 which are contained in the Company's Form
10-K.
NOTE 2 - On September 16, 2002, the Company acquired certain of the assets of
ALLNEWSCO, Inc. ("Allnewsco") in exchange for $20,000 in cash and the
cancellation of a $20,000 note receivable from Allnewsco. Allnewsco has been
controlled since its inception by Perpetual which also controls the Company.
Because both the Company and Allnewsco are controlled by Perpetual, the Company
was required to account for the acquisition as a transfer of assets within a
group under common control. Under this accounting, the Company and Allnewsco are
treated as if they have always been combined for accounting and financial
reporting purposes. As a result, the Company's consolidated financial statements
have been restated for all periods prior to the asset acquisition to reflect the
combined results of the Company and Allnewsco as of the beginning of the
earliest period presented. In addition to combining the separate historical
results of the Company and Allnewsco, the consolidated financial statements
include all adjustments necessary to conform accounting methods and
presentation, to the extent they were different, and to eliminate significant
intercompany transactions.
4
Selected combining financial data for the three and six months ended March 31,
2002 is as follows:
The Company Allnewsco Adjustment Combined
----------- --------- ---------- --------
Three Months Ended March 31, 2002
- ---------------------------------
Net operating revenues ..... $ 40,841 $ 2,475 $ 43,316
Net (loss) income .......... (823) (1,344) $ 511 (1,656)
Six Months Ended March 31, 2002
- -------------------------------
Net operating revenues ..... $ 90,994 $ 5,258 $ 96,252
Net income (loss) .......... 2,518 (2,379) $ 904 1,043
The adjustment to net income represents the income tax benefit associated with
combining the Company and Allnewsco.
As the Company did not acquire all of the assets or assume all of the
liabilities of Allnewsco, certain expenses reported in the consolidated
financial statements will not be incurred subsequent to the asset acquisition.
Specifically, the Company did not acquire or assume amounts due from Allnewsco
to Perpetual. The accompanying consolidated financial statements include $204
and $384 of related party interest expense relating to amounts due from
Allnewsco to Perpetual during the three and six months ended March 31, 2002,
respectively, that will not recur subsequent to the acquisition. Accordingly, no
such related party interest expense was incurred during the three or six months
ended March 31, 2003.
NOTE 3 - On December 20, 2002, the Company issued $275,000 principal amount of
7 3/4% Senior Subordinated Notes due 2012 (the "7 3/4% Notes") at par. The net
proceeds, together with borrowings under the Company's senior credit facility,
were used to purchase and redeem the Company's $275,000 9 3/4% Senior
Subordinated Debentures due 2007 (the "9 3/4% Debentures") as well as to pay the
fees and expenses associated with the offering of the 7 3/4% Notes. As of
January 21, 2003, all of the 9 3/4% Debentures had been purchased or redeemed.
On February 6, 2003, the Company issued an additional $180,000 principal amount
of its 7 3/4% Notes at a price of 98.305%. The net proceeds were used to redeem
the Company's $150,000 8 7/8% Senior Subordinated Notes due 2008 (the "8 7/8%
Notes"), fund the redemption premium for the 8 7/8% Notes, pay the fees and
expenses associated with the offering of the additional 7 3/4% Notes and repay
borrowings outstanding under the Company's senior credit facility. On March 10,
2003, all of the 8 7/8% Notes were redeemed.
As a result of the purchase and redemption of its 9 3/4% Debentures as well as
the redemption of its 8 7/8% Notes, the Company recorded a pre-tax charge of
$23,194 during the quarter ended March 31, 2003 (see Note 6).
5
NOTE 4 - Effective October 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to periodic impairment tests. The Company's indefinite lived
intangible assets consist of broadcast licenses. Other intangible assets will
continue to be amortized over their useful lives of 11 to 25 years.
Upon adoption, the Company performed the first of the required impairment tests
on its indefinite lived intangible assets. The fair value of the Company's
broadcast licenses was determined by applying an estimated market multiple to
the broadcast cash flow generated by the respective market. Market multiples
were determined based on recent transactions within the industry, information
available regarding publicly traded peer companies and the respective station's
competitive position within its market. Appropriate allocation was made to each
of the station's tangible and intangible assets in determining the fair value of
the station's broadcast licenses. As a result of these tests, it was determined
that one of the Company's broadcast licenses was impaired. Accordingly, the
Company recorded a non-cash, after-tax impairment charge of $2,973 related to
the carrying value of its indefinite lived intangible assets. This charge was
recorded as a cumulative effect of a change in accounting principle during the
three months ended December 31, 2002. The carrying value of the Company's
broadcast licenses at September 30, 2002 and March 31, 2003 was $127,290 and
$122,290, respectively, with the decrease representing the $5,000 pre-tax
impairment charge discussed above.
Other intangible assets at September 30, 2002 and March 31, 2003 consisted of
the following:
September 30, March 31,
2002 2003
------------- ---------
Gross carrying amount................. $ 6,174 $ 6,174
Accumulated amortization.............. 5,314 5,398
------- -------
Net carrying amount................... $ 860 $ 776
======= =======
6
The following table adjusts reported income before cumulative effect of change
in accounting principle and reported net income for the three and six months
ended March 31, 2002 (prior to the adoption date of SFAS No. 142) to exclude
amortization of indefinite lived intangible assets:
(Loss) Income Before
Cumulative Effect
Of Change in Net (Loss)
Accounting Principle Income
-------------------- ----------
Three Months Ended March 31, 2002
- ---------------------------------
As reported ..................................... $(1,656) $(1,656)
Amortization of broadcast licenses, net of tax... 686 686
------- -------
Adjusted ........................................ $ (970) $ (970)
======= =======
Six Months Ended March 31, 2002
- -------------------------------
As reported ..................................... $ 1,043 $ 1,043
Amortization of broadcast licenses, net of tax... 1,372 1,372
------- -------
Adjusted ........................................ $ 2,415 $ 2,415
======= =======
NOTE 5 - For the six months ended March 31, 2002 and 2003, distributions to
owners and related activity consisted of the following:
Federal and
Allnewsco Virginia state Net
Distributions Notes Payable Income Tax Distributions
to Owners to Perpetual Receivable to Owners
--------- ------------ ---------- ---------
Balance as of September 30, 2001 ............ $ 301,670 $ (9,508) $ 17,586 $ 309,748
Cash advances to Perpetual .................. 225,940 225,940
Repayment of cash advances to Perpetual ..... (222,065) (222,065)
Issuance of notes payable to Perpetual ...... (1,764) (1,764)
Charge for federal and state income taxes ... (450) (450)
Payment of income taxes ..................... 2,533 2,533
Tax benefit associated with combining
ACC and Allnewsco ...................... 904 904
--------- --------- --------- ---------
Balance as of March 31, 2002 ................ $ 305,545 $ (11,272) $ 20,573 $ 314,846
========= ========= ========= =========
Balance as of September 30, 2002 ............ $ 301,622 $ -- $ -- $ 301,622
Cash advances to Perpetual .................. 19,730 19,730
Repayment of cash advances to Perpetual ..... (3,209) (3,209)
Benefit from federal and state income taxes.. 6,017 6,017
Payment of income taxes ..................... 2,422 2,422
--------- --------- --------- ---------
Balance as of March 31, 2003 ................ $ 318,143 $ -- $ 8,439 $ 326,582
========= ========= ========= =========
7
The operations of the Company are included in a consolidated federal income tax
return and a combined Virginia state income tax return filed by Perpetual in
accordance with the terms of a tax sharing agreement between the Company and
Perpetual. For the six months ended March 31, 2003, the Company recorded a
benefit for federal and Virginia state income taxes. To the extent that a
benefit for federal or Virginia state income taxes exists for the year ending
September 30, 2003, any such benefit will be effectively distributed to
Perpetual as such benefit will not be recognized in future years pursuant to the
tax sharing agreement between the Company and Perpetual.
The weighted average amount of non-interest bearing advances outstanding was
$329,729 and $309,662 during the six months ended March 31, 2002 and 2003,
respectively.
NOTE 6 - SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," was issued in
April 2002 and primarily eliminates the requirement that gains or losses
associated with early debt extinguishments be accounted for as extraordinary
items. SFAS No. 145 will likely require any future gains or losses associated
with early extinguishments of debt to be recorded as a component of income from
continuing operations rather than as an extraordinary item. This standard is
effective for the Company's fiscal year ending September 30, 2003. As a result
of the purchase and redemption of its 9 3/4% Debentures in January 2003 and the
redemption of its 8 7/8% Notes in March 2003, the Company has recorded a pre-tax
charge of $23,194 during the quarter ended March 31, 2003. This loss has been
reflected as a component of income from continuing operations rather than net of
tax as an extraordinary item. The other provisions of SFAS No. 145 are not
expected to have a material effect on the Company's financial position or
results of operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June
2001 to address diversity in practice for recognizing obligations associated
with the retirement of tangible long-lived assets. SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," was issued in August 2001 to
establish a single accounting model for long-lived assets to be disposed of by
sale and to address issues surrounding the impairment of long-lived assets. SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was
issued in June 2002 to address financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." These standards are effective for
the Company's fiscal year ending September 30, 2003 and their adoption will not
have a material impact on the Company's financial position or results of
operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(dollars in thousands)
Overview
As used herein, the terms the "Company," "our," "us," or "we" refer to
Allbritton Communications Company and its subsidiaries and "ACC" refers solely
to Allbritton Communications Company.
We own ABC network-affiliated television stations serving seven geographic
markets: WJLA-TV in Washington, D.C.; WCFT-TV in Tuscaloosa, Alabama, WJSU-TV in
Anniston, Alabama and WBMA-LP, a low power television station licensed to
Birmingham, Alabama (we operate WCFT-TV and WJSU-TV in tandem with WBMA-LP
serving the viewers of the Birmingham, Tuscaloosa and Anniston market as a
single programming source); WHTM-TV in Harrisburg, Pennsylvania; KATV in Little
Rock, Arkansas; KTUL in Tulsa, Oklahoma; WSET-TV in Lynchburg, Virginia; and
WCIV in Charleston, South Carolina. We also provide 24-hour per day basic cable
television programming to the Washington, D.C. market, through NewsChannel 8,
primarily focused on regional and local news for the Washington, D.C.
metropolitan area. The operations of NewsChannel 8 have been integrated with
WJLA.
Our advertising revenues are generally highest in the first and third quarters
of each fiscal year, due in part to increases in retail advertising in the
period leading up to and including the holiday season and active advertising in
the spring. The fluctuation in our operating results is generally related to
fluctuations in the revenue cycle. In addition, advertising revenues are
generally higher during election years due to spending by political candidates,
which is typically heaviest during our first and fourth fiscal quarters.
Acquisitions and Basis of Financial Presentation
On September 16, 2002, we acquired certain of the assets of ALLNEWSCO, Inc.
("Allnewsco") in exchange for $20,000 in cash and the cancellation of a $20,000
note receivable from Allnewsco. Allnewsco has been controlled since its
inception by Perpetual which also controls ACC. Because both ACC and Allnewsco
are controlled by Perpetual, we were required to account for the acquisition as
a transfer of assets within a group under common control. Under this accounting,
the Company and Allnewsco are treated as if they have always been combined for
accounting and financial reporting purposes. As a result, our consolidated
financial statements have been restated for all periods prior to the asset
acquisition to reflect the combined results of the Company and Allnewsco as of
the beginning of the earliest period presented. In addition to combining the
separate historical results of the Company and Allnewsco, the consolidated
financial statements include all adjustments necessary to conform accounting
methods and presentation, to the extent they were different, and to eliminate
significant intercompany transactions.
As we did not acquire all of the assets or assume all of the liabilities of
Allnewsco, certain expenses reported in our consolidated financial statements
will not be incurred subsequent to the asset acquisition. Specifically, we did
not acquire or assume amounts due from Allnewsco to Perpetual. Our consolidated
financial statements include $204 and $384 of related party interest expense
relating to amounts due from Allnewsco to Perpetual during the three and six
months
9
ended March 31, 2002, respectively, that will not recur subsequent to the
acquisition. Accordingly, no such related party interest expense was incurred
during the three or six months ended March 31, 2003.
Financing Transactions
On December 20, 2002, we issued $275,000 principal amount of 7 3/4% senior
subordinated notes at par. As of January 21, 2003, we had used the net proceeds
from the offering, together with approximately $15,500 of borrowings under our
senior credit facility, to purchase and redeem all of our outstanding 9 3/4%
senior subordinated debentures as well as to pay the fees and expenses
associated with the offering of the 7 3/4% notes.
On February 6, 2003, we issued an additional $180,000 principal amount of our
7 3/4% notes at a price of 98.305%. We used the proceeds to redeem our existing
8 7/8% senior subordinated notes, fund the redemption premium for the 8 7/8%
notes, pay the fees and expenses associated with the offering of the additional
7 3/4% notes and repay borrowings outstanding under our senior credit facility.
On March 10, 2003, all of the 8 7/8% notes were redeemed.
The issuance of the 7 3/4% notes and the related purchase and redemption of the
9 3/4% debentures and the redemption of the 8 7/8% notes will reduce our annual
payments of interest on our debt by approximately $5,000. As a result of the
purchase and redemption of our 9 3/4% debentures and the redemption of our
8 7/8% notes, we recorded a pre-tax charge of $23,194 during the quarter ended
March 31, 2003. Such charge has been reflected as a nonoperating expense.
Results of Operations
Set forth below are selected consolidated financial data for the three and six
months ended March 31, 2002 and 2003 and the percentage change between the
periods:
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
Percent Percent
2002 2003 Change 2002 2003 Change
---- ---- ------ ---- ---- ------
Operating revenues, net ............ $ 43,316 $ 44,448 2.6% $ 96,252 $ 102,957 7.0%
Total operating expenses............ 35,754 34,831 -2.6% 72,907 71,006 -2.6%
-------- -------- -------- ---------
Operating income.................... 7,562 9,617 27.2% 23,345 31,951 36.9%
Nonoperating expenses, net.......... 10,190 34,158 235.2% 21,134 45,436 115.0%
Income tax (benefit) provision...... (972) (8,843) 809.8% 1,168 (5,010) -528.9%
-------- -------- -------- ---------
(Loss) income before cumulative
effect of change in accounting
principle........................... (1,656) (15,698) 847.9% 1,043 (8,475) -912.6%
Cumulative effect of change in
accounting principle, net of
income tax benefit.................. -- -- -- -- 2,973 --
-------- -------- -------- ---------
Net (loss) income................... $ (1,656) $(15,698) 847.9% $ 1,043 $ (11,448) -1,197.6%
======== ======== ======== =========
Operating cash flow............ $ 10,960 $ 12,275 12.0% $ 30,044 $ 37,198 23.8%
======== ======== ======== =========
- -------
Operating cash flow is not a measure of performance calculated in
accordance with GAAP. For a definition of operating cash flow and a
reconciliation of operating cash flow to operating income, please refer to
"Operating Cash Flow".
10
Net Operating Revenues
The following table depicts the principal types of operating revenues, net of
agency commissions, earned by us for each of the three and six months ended
March 31, 2002 and 2003, and the percentage contribution of each to our total
broadcast revenues, before fees:
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2002 2003 2002 2003
---- ---- ---- ----
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- -------
Local and national....... $38,929 87.3 $40,018 87.8 $85,973 86.5 $ 85,456 81.0
Political................ 511 1.1 20 0.1 2,262 2.3 7,928 7.5
Network compensation..... 1,001 2.2 1,474 3.2 1,680 1.7 2,870 2.7
Trade and barter......... 1,718 3.9 1,678 3.7 3,659 3.7 3,483 3.3
Other revenue............ 2,428 5.5 2,367 5.2 5,742 5.8 5,836 5.5
------- ----- ------- ----- ------- ----- -------- -----
Broadcast revenues............ 44,587 100.0 45,557 100.0 99,316 100.0 105,573 100.0
===== ===== ===== =====
Fees..................... (1,271) (1,109) (3,064) (2,616)
------- ------- ------- --------
Operating revenues, net ...... $43,316 $44,448 $96,252 $102,957
======= ======= ======= ========
- ----------
Represents sale of advertising time to local and national advertisers,
either directly or through agencies representing such advertisers, net of
agency commission.
Represents sale of advertising time to political advertisers.
Represents payment by networks for broadcasting or promoting network
programming.
Represents value of commercial time exchanged for goods and services
(trade) or syndicated programs (barter).
Represents other revenue, principally from cable and direct broadcast
satellite subscriber fees, the sales of University of Arkansas sports
programming to advertisers and radio stations as well as receipts from
tower rental and production of commercials.
Represents fees paid to national sales representatives and fees paid for
music licenses.
Net operating revenues for the three months ended March 31, 2003 totaled
$44,448, an increase of $1,132, or 2.6%, when compared to net operating revenues
of $43,316 for the three months ended March 31, 2002. Net operating revenues
increased $6,705, or 7.0%, to $102,957 for the six months ended March 31, 2003
as compared to $96,252 for the same period in the prior year.
Local and national advertising revenues increased $1,089, or 2.8%, and decreased
$517, or 0.6%, during the three and six months ended March 31, 2003,
respectively, versus the comparable periods in Fiscal 2002. Local and national
advertising revenue increased in a majority of our markets during the three
months ended March 31, 2003 due to increased revenue related to the broadcast of
the Super Bowl by the ABC network in January 2003 (broadcast by the Fox network
in 2002) as well as limited improvement in the television advertising climate as
compared to the same period in the prior year. This increase was partially
offset by preemptions of regular programming and cancellations related to the
war in Iraq in the second half of March 2003 as well as a slight reduction in
the level of prime-time inventory available for sale throughout the quarter as
discussed below related to network compensation. The decrease for the six months
ended March 31, 2003 was largely due to the displacement of local and national
advertisers during the peak political advertising month of October 2002 and the
factors discussed above related to the second fiscal quarter.
11
Political advertising revenues decreased by $491 to $20 for the three months
ended March 31, 2003 as compared to the three months ended March 31, 2002. This
decrease was principally due to advertising related to primaries for
high-profile local political elections in the Harrisburg and Tulsa markets
during the three months ended March 31, 2002 with no comparable advertising in
the second quarter of Fiscal 2003. Political advertising revenues increased
$5,666, or 250.5%, during the six months ended March 31, 2003 as compared to the
same period in Fiscal 2002. Political advertising revenue increased in all but
one of our markets due to several high-profile local political races affecting
our markets for the November 2002 elections, partially offset by advertising
leading up to the November 2001 local political election affecting our
Washington, D.C. and Lynchburg markets.
Network compensation revenue increased $473 and $1,190, or 47.3% and 70.8%,
during the three and six months ended March 31, 2003 as compared to the same
periods in the prior year. The increases were principally due to the July 31,
2002 expiration of certain amendments to our network affiliation agreements.
Under these amendments, ABC, for a three-year period, provided our stations with
additional prime-time inventory, limited participation rights in a new cable
television "soap" channel, and enhanced program exclusivity and commercial
inventory guarantees in exchange for reduced annual network compensation, the
return of certain Saturday morning inventory from the stations, and more
flexibility in repurposing of ABC programming. Upon the expiration of these
amendments, compensation rates and inventory allocations reverted to their
pre-modification levels. We routinely consult with the network in relation to
the levels of program clearances, preemptions, compensation and inventory
availabilities.
No individual advertiser accounted for more than 5% of our broadcast revenues
during the three or six months ended March 31, 2002 or 2003.
Total Operating Expenses
Total operating expenses for the three months ended March 31, 2003 totaled
$34,831, a decrease of $923, or 2.6%, compared to total operating expenses of
$35,754 for the three-month period ended March 31, 2002. This net decrease
consisted of a decrease in television operating expenses, excluding depreciation
and amortization, of $268, a decrease in depreciation and amortization of $740
and an increase in corporate expenses of $85.
Total operating expenses for the six months ended March 31, 2003 totaled
$71,006, a decrease of $1,901, or 2.6%, compared to total operating expenses of
$72,907 for the six-month period ended March 31, 2002. This net decrease
consisted of a decrease in television operating expenses, excluding depreciation
and amortization, of $609, a decrease in depreciation and amortization of $1,452
and an increase in corporate expenses of $160.
Television operating expenses, excluding depreciation and amortization,
decreased $268 and $609, or 0.9% and 1.0%, for the three and six months ended
March 31, 2003, respectively, as compared to the comparable periods in Fiscal
2002. These decreases reflect our continuing focus on controlling programming
and operating costs as well as expense savings related to the integration of the
operations of WJLA and NewsChannel 8.
12
Depreciation and amortization expense decreased $740 and $1,452, or 21.8% and
21.7%, respectively, for the three and six months ended March 31, 2003 versus
the comparable periods in Fiscal 2002. These decreases were principally the
result of our adoption of SFAS No. 142 effective October 1, 2002. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to periodic impairment tests. Other
intangible assets will continue to be amortized over their useful lives. The
non-amortization provisions of SFAS No. 142 resulted in a $1,022 and $2,044
decrease in amortization expense during the three and six months ended March 31,
2003, respectively, as compared to the same periods in the prior fiscal year.
Assuming we had adopted SFAS No. 142 at the beginning of Fiscal 2002,
depreciation and amortization expense for the three and six months ended March
31, 2002 would have been $2,376 and $4,655, respectively. This would have
resulted in increases in depreciation and amortization expense during the three
and six months ended March 31, 2003 of $282 and $592, or 11.9% and 12.7%,
respectively, due primarily to increased depreciation expense associated with
the buildout of studio and office space and acquisition of technical equipment
for the new WJLA/NewsChannel 8 facility.
Operating Income
For the three months ended March 31, 2003, operating income of $9,617 increased
$2,055, or 27.2%, when compared to operating income of $7,562 for the three
months ended March 31, 2002. For the three months ended March 31, 2003, the
operating margin increased to 21.6% from 17.5% for the comparable period in
Fiscal 2002. Operating income of $31,951 for the six months ended March 31, 2003
increased $8,606, or 36.9%, when compared to operating income of $23,345 for the
same period in the prior fiscal year. For the six months ended March 31, 2003,
the operating margin increased to 31.0% from 24.3% for the comparable period in
the prior fiscal year.
Assuming we had adopted SFAS No. 142 at the beginning of Fiscal 2002, operating
income would have been $8,584 and $25,389 for the three and six months ended
March 31, 2002, respectively. Operating margin would have been 19.8% and 26.4%
for the three and six months ended March 31, 2002, respectively. This would have
resulted in an increase in operating income of $1,033 and $6,562, or 12.0% or
25.8%, for the three and six months ended March 31, 2003, respectively. These
increases in operating income and margin were primarily the result of increased
net operating revenues as discussed above.
Operating Cash Flow
Operating cash flow of $12,275 for the three months ended March 31, 2003
increased $1,315, or 12.0%, as compared to $10,960 for the three-month period
ended March 31, 2002. Operating cash flow of $37,198 for the six months ended
March 31, 2003 increased $7,154, or 23.8%, as compared to $30,044 for the same
period in the prior fiscal year. These increases were primarily the result of
increased net operating revenues as discussed above.
We define operating cash flow as operating income plus depreciation and
amortization. Although operating cash flow is not a measure of performance
calculated in accordance with generally accepted accounting principles ("GAAP"),
we believe it is useful for investors in our debt securities and users of our
financial statements in understanding our results of operations. Management
believes that operating cash flow is useful because it is widely used in the
broadcasting industry as a measure of operating performance and is used by
investors and by
13
analysts who report on the performance of broadcast companies. Operating cash
flow also is generally recognized as a tool in applying valuation methodologies
for companies in the media industry. In addition, management closely monitors
operating cash flow in determining our ability to maintain compliance with
certain financial covenants of our indebtedness. Nevertheless, you should not
consider operating cash flow in isolation from or as a substitute for operating
income, net income, cash flow from operating activities and other operations or
cash flow statement data prepared in accordance with GAAP, or as a measure of
performance or liquidity prepared in accordance with GAAP. Moreover, because
operating cash flow is not a measure calculated in accordance with GAAP, this
performance measure is not necessarily comparable to similarly titled measures
employed by other companies.
The following table provides a reconciliation of operating cash flow (a non-GAAP
financial measure) to operating income (as presented in our statements of
operations):
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2002 2003 2002 2003
---- ---- ---- ----
Operating income.................. $ 7,562 $ 9,617 $23,345 $31,951
Add:
Depreciation and amortization..... 3,398 2,658 6,699 5,247
------- ------- ------- -------
Operating cash flow............... $10,960 $12,275 $30,044 $37,198
======= ======= ======= =======
Nonoperating Expenses, Net
Interest Expense. Non-related party interest expense of $11,004 for the three
months ended March 31, 2003 increased $507, or 4.8%, as compared to $10,497 for
the three-month period ended March 31, 2002. Non-related party interest expense
of $22,102 for the six months ended March 31, 2003 increased $1,139, or 5.4%, as
compared to $20,963 comparable period of Fiscal 2002. This increase was the
result of the incremental interest expense associated with carrying both the
newly issued 7 3/4% notes and the 9 3/4% debentures from December 20, 2002
through January 21, 2003 during the redemption notice period. Additionally,
incremental interest expense was incurred related to carrying both the newly
issued 7 3/4% notes and the 8 7/8% notes from February 6, 2003 through March 10,
2003 during the redemption notice period.
Had we purchased or redeemed the 9 3/4% debentures on December 20, 2002 and the
8 7/8% notes on February 6, 2003, interest expense for the three and six months
ended March 31, 2003 would have been $9,189 and $19,542, respectively, resulting
in a decrease of $1,308 and $1,421, or 12.5% and 6.8%, as compared to the three
and six months ended March 31, 2002, respectively. These decreases are the
result of a lower weighted average interest rate on debt, partially offset by
higher average balances of debt outstanding. The average balance of debt
outstanding, including capital lease obligations, for the three and six months
ended March 31, 2003 would have been $476,554 and $459,942, respectively, and
the weighted average interest rate on debt during the three and six months ended
March 31, 2003 would have been 7.7% and 8.4%, respectively. This compares to an
average balance of debt outstanding, including capital lease obligations, for
the three and six months ended March 31, 2002 of $459,183 and $455,457,
respectively, and a weighted average interest rate on debt for each of the three
and six-month periods ended March 31, 2002 of 9.1%.
14
Loss on Early Repayment of Debt. As a result of the purchase and redemption of
our 9 3/4% debentures and the redemption of our 8 7/8% notes during the quarter
ended March 31, 2003, we recorded a pre-tax charge of $23,194. Such charge has
been reflected as a nonoperating expense rather than as an extraordinary item in
accordance with our adoption of SFAS No. 145 during Fiscal 2003. See "New
Accounting Standards."
Income Taxes
The benefit from income taxes for the three months ended March 31, 2003 totaled
$8,843 as compared to the benefit from income taxes of $972 for the three months
ended March 31, 2002. The benefit from income taxes for the six months ended
March 31, 2003 totaled $5,010, a decrease of $6,178 when compared to the
provision for income taxes of $1,168 for the six months ended March 31, 2002.
The increase in income tax benefit during the three and six months ended March
31, 2003 was primarily due to the $23,194 loss on early repayment of debt during
the quarter ended March 31, 2003.
Cumulative Effect of Change in Accounting Principle
Effective October 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses the financial accounting and
reporting for acquired goodwill and other intangible assets. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to periodic impairment tests. Our
indefinite lived intangible assets consist of broadcast licenses. Other
intangible assets will continue to be amortized over their useful lives of 11 to
25 years.
Upon adoption, we performed the first of the required impairment tests on our
indefinite lived intangible assets. The fair value of our broadcast licenses was
determined by applying an estimated market multiple to the broadcast cash flow
generated by the respective market. Market multiples were determined based on
recent transactions within the industry, information available regarding
publicly traded peer companies and the respective station's competitive position
within its market. Appropriate allocation was made to each of the station's
tangible and intangible assets in determining the fair value of the station's
broadcast licenses. As a result of these tests, we determined that one of our
broadcast licenses was impaired. Accordingly, we recorded a non-cash, after-tax
impairment charge of $2,973 related to the carrying value of our indefinite
lived intangible assets. This charge was recorded as a cumulative effect of a
change in accounting principle during the three months ended December 31, 2002.
Net Income
For the three and six months ended March 31, 2003, the Company recorded a net
loss of $15,698 and $11,448, respectively, as compared to a net loss of $1,656
for the three months ended March 31, 2002 and net income of $1,043 for the six
months ended March 31, 2002. The decreases of $14,042 and $12,491 during the
three and six months ended March 31, 2003 were due to the factors discussed
above.
15
Balance Sheet
Significant balance sheet fluctuations from September 30, 2002 to March 31, 2003
consisted of decreases in program rights and program rights payable which
reflect the annual cycle of the underlying program contracts which generally
begins in September of each year. Additionally, long-term debt increased due to
the costs associated with the issuance of our 7 3/4% notes and the related
purchase and redemption of our 9 3/4% debentures and our 8 7/8% notes during
Fiscal 2003.
Liquidity and Capital Resources
As of March 31, 2003, our cash and cash equivalents aggregated $6,037, and we
had an excess of current assets over current liabilities of $20,697.
Cash Provided by Operations. Our principal source of working capital is cash
flow from operations and borrowings under our senior credit facility. As
discussed above, our operating results are cyclical in nature primarily as a
result of seasonal fluctuations in advertising revenues, which are generally
highest in the first and third quarters of each fiscal year. Our cash flow from
operations is also impacted on a quarterly basis by the timing of cash
collections and interest payments on debt. Cash receipts are usually much
greater during the second and fourth fiscal quarters as the collection of
advertising revenue typically lags the period in which such revenue is recorded.
Scheduled semi-annual interest payments on our long-term debt have been higher
during the first and third fiscal quarters, and as a result of the redemption of
our 8 7/8% notes, will in the future occur only in such quarters. As a result,
our cash flows from operating activities as reflected in our consolidated
financial statements are generally significantly higher during our second and
fourth fiscal quarters, and such quarters comprise a substantial majority of our
cash flows from operating activities for the full fiscal year.
As reported in the consolidated statements of cash flows, our net cash provided
by operating activities was $9,975 and $14,324 for the six months ended March
31, 2002 and 2003, respectively. The $4,349 increase in cash flows from
operating activities was primarily due to increased operating income of $8,606.
Transactions with Owners. We have periodically made advances in the form of
distributions to Perpetual Corporation ("Perpetual"). During the six months
ended March 31, 2002 and 2003, we made cash advances, net of repayments, to
Perpetual of $3,875 and $16,521, respectively. The advances to Perpetual are
non-interest bearing and, as such, do not reflect market rates of
interest-bearing loans to unaffiliated third parties.
At present, the primary source of repayment of the net advances is through our
ability to pay dividends or make other distributions, and there is no immediate
intent for the amounts to be repaid. Accordingly, these advances have been
treated as a reduction of stockholder's investment and are described as
"distributions" in our consolidated financial statements.
Under the terms of the agreements relating to our indebtedness, future advances,
distributions and dividends to related parties are subject to certain
restrictions. We anticipate that, subject to such restrictions, applicable law
and payment obligations with respect to our indebtedness, we will make advances,
distributions or dividends to related parties in the future.
16
During the six months ended March 31, 2002 and 2003, we made interest-bearing
advances of tax payments to Perpetual in accordance with the terms of the tax
sharing agreement between us and Perpetual of $2,533 and $2,422, respectively.
We were charged by Perpetual for federal and state income taxes totaling $450
during the six months ended March 31, 2002. During the six months ended March
31, 2003, we were not charged for federal and state income taxes, but rather, we
recorded a benefit for federal and Virginia state taxes of $6,017. Such benefit
has been reflected as receivable from Perpetual at March 31, 2003; however, any
such benefit remaining at the end of the year ending September 30, 2003 will be
effectively distributed to Perpetual as we will receive no future benefit for
federal or Virginia state taxes in accordance with the terms of our tax sharing
agreement. Additionally, because Perpetual has historically filed consolidated
federal and Virginia state income tax returns including the operating results of
both the Company and Allnewsco, certain tax benefits were realized by Perpetual
associated with Allnewsco's net operating losses in the consolidated tax
returns. In accordance with SFAS No. 109, the combined results of the Company
and Allnewsco for the six months ended March 31, 2002 have been adjusted to
reflect the historical tax benefit of $904 which would have been recorded for
financial reporting purposes by the combined entity.
Perpetual historically advanced cash to Allnewsco in the form of unsecured
demand notes bearing interest at a rate of 7.5%. Notes issued during the six
months ended March 31, 2002 amounted to $1,764, with no cash repayments during
this period. The notes payable from Allnewsco to Perpetual are included in
distributions to owners in our consolidated financial statements, conforming the
presentation of cash transactions between ACC, Allnewsco and Perpetual. As we
did not acquire or assume amounts due from Allnewsco to Perpetual, no amount was
outstanding from us under such notes at March 31, 2003.
Stockholder's deficit amounted to $283,481 at March 31, 2003, an increase of
$36,408, or 14.7%, from the September 30, 2002 deficit of $247,073. The increase
was due to the net loss for the period of $11,448, cash advances, net of
repayments, to Perpetual of $16,521, tax payments to Perpetual of $2,422 and the
federal and state income tax benefit at March 31, 2003 of $6,017.
Indebtedness. Our total debt, including the current portion of long-term debt,
increased from $440,443 at September 30, 2002 to $481,657 at March 31, 2003.
This debt, net of applicable discounts, consisted of $451,980 of 7 3/4% senior
subordinated notes due December 15, 2012, $28,800 of draws under our senior
credit facility and $877 of capital lease obligations at March 31, 2003. The
increase of $41,214 in total debt from September 30, 2002 to March 31, 2003 was
primarily due to an additional $30,000 in senior subordinated notes. This
increased indebtedness approximated the amount of redemption premiums, fees and
expenses associated with the issuance of the new 7 3/4% notes, the purchase and
redemption of the 9 3/4% debentures and the redemption of the 8 7/8% notes.
Our $70,000 senior credit facility is secured by the pledge of stock of ACC and
its subsidiaries and matures March 27, 2006. Interest is payable quarterly at
various rates from prime plus 0.25% or LIBOR plus 1.50% depending on certain
financial operating tests.
Under the existing borrowing agreements, we are subject to restrictive covenants
that place limitations upon payments of cash dividends, issuance of capital
stock, investment transactions, incurrence of additional obligations and
transactions with affiliates. In addition, under the senior
17
credit facility, we must maintain compliance with certain financial covenants.
Compliance with the financial covenants is measured at the end of each quarter,
and as of March 31, 2003, we were in compliance with those financial covenants.
The senior credit facility was amended as of December 6, 2002 to adjust certain
of the financial covenants for the remaining term of the facility. We believe
that the amendment allows us sufficient operational flexibility to remain in
compliance with the financial covenants. We are also required to pay a
commitment fee ranging from 0.5% to 0.75% per annum based on the amount of any
unused portion of the senior credit facility.
Other Uses of Cash. We anticipate that capital expenditures for Fiscal 2003 will
approximate $10,000 and will be primarily for the implementation of DTV service
in our remaining markets and the acquisition of technical equipment and vehicles
to support ongoing operations across our stations. We expect that the source of
funds for these anticipated capital expenditures will be cash provided by
operations and borrowings under the senior credit facility. Capital expenditures
during the six months ended March 31, 2003 totaled $3,440.
Based upon our current level of operations, we believe that available cash,
together with cash flows generated by operating activities and amounts available
under the senior credit facility, will be adequate to meet our anticipated
future requirements for working capital, capital expenditures and scheduled
payments of interest on our debt.
New Accounting Standards
SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections," was issued in April 2002 and
primarily eliminates the requirement that gains or losses associated with early
debt extinguishments be accounted for as extraordinary items. SFAS No. 145 will
likely require any future gains or losses associated with early extinguishments
of debt to be recorded as a component of income from continuing operations
rather than as an extraordinary item. This standard is effective for our fiscal
year ending September 30, 2003. As a result of the purchase and redemption of
our 9 3/4% debentures in January 2003 and the redemption of our 8 7/8% notes in
March 2003, we recorded a pre-tax charge of $23,194 during the quarter ended
March 31, 2003. This charge has been reflected as a component of income from
continuing operations rather than net of tax as an extraordinary item. The other
provisions of SFAS No. 145 are not expected to have a material effect on our
financial position or results of operations.
18
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June
2001 to address diversity in practice for recognizing obligations associated
with the retirement of tangible long-lived assets. SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," was issued in August 2001 to
establish a single accounting model for long-lived assets to be disposed of by
sale and to address issues surrounding the impairment of long-lived assets. SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was
issued in June 2002 to address financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." These standards are effective for
our fiscal year ending September 30, 2003 and their adoption will not have a
material impact on our financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2003, we had other financial instruments consisting primarily of
long-term fixed interest rate debt. Such debt, with future principal payments of
$455,000, matures December 15, 2012. At March 31, 2003, the carrying value of
such debt was $451,980, the fair value was $464,100 and the interest rate was
7 3/4%. The fair market value of long-term fixed interest rate debt is subject
to interest rate risk. Generally, the fair market value of fixed interest rate
debt will increase as interest rates fall and decrease as interest rates rise.
We estimate the fair value of our long-term debt using either quoted market
prices or by discounting the required future cash flows under our debt using
borrowing rates currently available to us, as applicable. We actively monitor
the capital markets in analyzing our capital raising decisions.
Item 4. Controls and Procedures
We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify our financial reports and to other
members of senior management.
Based on their evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the principal executive officer and principal
financial officer of the Company have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) are effective to ensure that the information required to
be disclosed by us in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms.
There were no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of their
most recent evaluation.
19
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We currently and from time to time are involved in litigation incidental to the
conduct of our business, including suits based on defamation and employment
activity. We are not currently a party to any lawsuit or proceeding which, in
our opinion, if decided adverse to us, would be likely to have a material
adverse effect on our consolidated financial condition, results of operations or
cash flows.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index on pages 26-29.
b. Reports on Form 8-K
(1) A Report on Form 8-K was filed on January 8, 2003 announcing that
we had accepted for payment an aggregate of $255,576 principal
amount of our 9 3/4% Senior Subordinated Debentures due 2007 that
had been tendered pursuant to our previously announced tender offer
and consent solicitation.
(2) A Report on Form 8-K was filed on February 6, 2003 announcing that
we had completed our private placement of $180,000 aggregate
principal amount of 7 3/4% Senior Subordinated Notes due December
15, 2012.
20
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.
ALLBRITTON COMMUNICATIONS COMPANY
(Registrant)
May 14, 2003 /s/ Robert L. Allbritton
- -------------------------- ----------------------------------
Date Name: Robert L. Allbritton
Title: Chairman and Chief
Executive Officer
May 14, 2003 /s/ Stephen P. Gibson
- -------------------------- ----------------------------------
Date Name: Stephen P. Gibson
Title: Senior Vice President
and Chief Financial Officer
21
Certification
(Pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, as amended)
I, Robert L. Allbritton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allbritton
Communications Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
22
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Robert L. Allbritton
-------------------------------------------------
Robert L. Allbritton
Chairman and Chief Executive Officer
23
Certification
(Pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, as amended)
I, Stephen P. Gibson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allbritton
Communications Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
24
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Stephen P. Gibson
-------------------------------------------------
Stephen P. Gibson
Senior Vice President and Chief Financial Officer
25
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
1.1 Purchase Agreement dated December 6, 2002 by and among ACC, *
Deutsche Bank Securities Inc. and Fleet Securities, Inc.
(Incorporated by reference to Exhibit 1 of the Company's
Form 10-K, No. 333-02302, dated December 17, 2002)
1.2 Purchase Agreement dated January 28, 2003 by and among ACC, *
Deutsche Bank Securities Inc. and Fleet Securities, Inc.
(Incorporated by reference to Exhibit 1.2 of the Company's
Quarterly Report on Form 10-Q, No. 333-02302, dated February
3, 2003)
2.1 Asset Purchase Agreement between ALLNEWSCO, Inc. and *
Allbritton Communications Company, dated as of March 5,
2002. (Incorporated by reference to Exhibit 2.1 of the
Company's Report on Form 8-K, No. 333-02302, dated March 5,
2002)
3.1 Certificate of Incorporation of ACC. (Incorporated by *
reference to Exhibit 3.1 of Company's Registration Statement
on Form S-4, No. 333-02302, dated March 12, 1996)
3.2 Bylaws of ACC. (Incorporated by reference to Exhibit 3.2 of *
Registrant's Registration Statement on Form S-4, No.
333-02302, dated March 12, 1996)
4.1 Indenture dated as of December 20, 2002 between ACC and *
State Street Bank and Trust Company, as Trustee, relating to
the 7 3/4% Senior Subordinated Notes due 2012. (Incorporated
by reference to Exhibit 4.1 of the Company's Report on Form
8-K, No. 333-02302, dated December 23, 2002)
4.2 Supplemental Indenture dated as of February 6, 2003 between *
ACC and U.S. Bank National Association
(successor-in-interest to State Street Bank and Trust
Company), as Trustee, to the Indenture dated as of December
20, 2002 between ACC and State Street Bank and Trust
Company, as Trustee, relating to the 7 3/4% Senior
Subordinated Notes due 2012. (Incorporated by reference to
Exhibit 4.1 of the Company's Report on Form 8-K, No.
333-02302, dated February 6, 2003)
4.3 Form of 7 3/4% Series B Senior Subordinated Notes due 2012. *
(Incorporated by reference to Exhibit 4.7 of the Company's
Quarterly Report on Form 10-Q, No. 333-02302, dated February
3, 2003)
26
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
4.4 Amended and Restated Revolving Credit Agreement dated as of *
March 27, 2001 by and among Allbritton Communications
Company, certain financial institutions, and Fleet National
Bank, as Agent, and Deutsche Banc Alex. Brown Inc., as
Documentation Agent. (Incorporated by reference to Exhibit
4.4 of the Company's Quarterly Report on Form 10-Q, No.
333-02302, dated May 10, 2001)
4.5 First Amendment dated as of December 19, 2001 to the Amended *
and Restated Revolving Credit Agreement. (Incorporated by
reference to Exhibit 4.5 of the Company's Form 10-K, No.
333-02302, dated December 27, 2001)
4.6 Second Amendment dated as of May 15, 2002 to the Amended and *
Restated Revolving Credit Agreement. (Incorporated by
reference to Exhibit 4.6 of the Company's Quarterly Report
on Form 10-Q, No. 333-02302, dated August 14, 2002)
4.7 Third Amendment dated as of December 6, 2002 to the Amended *
and Restated Revolving Credit Agreement. (Incorporated by
reference to Exhibit 4.6 of the Company's Form 10-K, No.
333-02302, dated December 17, 2002)
10.1 Registration Rights Agreement by and among ACC, Deutsche *
Bank Securities Inc. and Fleet Securities Inc. dated
December 20, 2002. (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q, No.
333-02302, dated February 3, 2003)
10.2 Registration Rights Agreement by and among ACC, Deutsche *
Bank Securities Inc. and Fleet Securities Inc. dated
February 6, 2003. (Incorporated by reference to Exhibit 10.2
of the Company's Registration Statement on Form S-4, No.
333-02302, dated April 11, 2003)
10.3 Network Affiliation Agreement (Harrisburg Television, Inc.). *
(Incorporated by reference to Exhibit 10.3 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.4 Network Affiliation Agreement (First Charleston Corp.). *
(Incorporated by reference to Exhibit 10.4 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
27
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
10.5 Network Affiliation Agreement (WSET, Incorporated). *
(Incorporated by reference to Exhibit 10.5 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.6 Network Affiliation Agreement (WJLA-TV). (Incorporated by *
reference to Exhibit 10.6 of Company's Pre-effective
Amendment No. 1 to Registration Statement on Form S-4, dated
April 22, 1996)
10.7 Network Affiliation Agreement (KATV Television, Inc.). *
(Incorporated by reference to Exhibit 10.7 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.8 Network Affiliation Agreement (KTUL Television, Inc.). *
(Incorporated by reference to Exhibit 10.8 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.9 Network Affiliation Agreement (TV Alabama, Inc.). *
(Incorporated by reference to Exhibit 10.9 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.10 Amendment to Network Affiliation Agreement (TV Alabama, *
Inc.) dated January 23, 1997. (Incorporated by reference to
Exhibit 10.15 of the Company's Quarterly Report on Form
10-Q, No. 333-02302, dated February 14, 1997)
10.11 Tax Sharing Agreement effective as of September 30, 1991 by *
and among Perpetual Corporation, ACC and ALLNEWSCO, Inc.,
amended as of October 29, 1993. (Incorporated by reference
to Exhibit 10.11 of Company's Registration Statement on Form
S-4, No. 333-02302, dated March 12, 1996)
10.12 Second Amendment to Tax Sharing Agreement effective as of *
October 1, 1995 by and among Perpetual Corporation, ACC and
ALLNEWSCO, Inc. (Incorporated by reference to Exhibit 10.9
of the Company's Form 10-K, No. 333-02302, dated December
22, 1998)
10.13 Master Lease Finance Agreement dated as of August 10, 1994 *
between BancBoston Leasing, Inc. and ACC, as amended.
(Incorporated by reference to Exhibit 10.16 of Company's
Registration Statement on Form S-4, No. 333-02302, dated
March 12, 1996)
28
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
10.14 Master Equipment Lease Agreement dated as of November 22, *
2000 between Fleet Capital Corporation and ACC.
(Incorporated by reference to Exhibit 10.19 of the Company's
Form 10-K, No. 333-02302, dated December 28, 2000)
10.15 Amended and Restated Pledge Agreement dated as of March 27, *
2001 by and among ACC, Allbritton Group, Inc., Allfinco,
Inc., and Fleet National Bank, as Agent. (Incorporated by
reference to Exhibit 10.20 of the Company's Quarterly Report
on Form 10-Q, No. 333-02302, dated May 10, 2001)
10.16 Supplement No. 1 dated as of December 13, 2002 to the *
Amended and Restated Pledge Agreement dated as of March 27,
2001 by and among ACC, Allbritton Group, Inc., Allfinco,
Inc. and Fleet National Bank, as Agent. (Incorporated by
reference to Exhibit 10.15 of the Company's Quarterly Report
on Form 10-Q, No. 333-02302, dated February 3, 2003)
10.17 Joinder Agreement dated as of December 13, 2002 by ACC *
Licensee, Inc. to the Amended and Restated Pledge Agreement
dated as of March 27, 2001 by and among ACC, Allbritton
Group, Inc., Allfinco, Inc. and Fleet National Bank, as
Agent. (Incorporated by reference to Exhibit 10.16 of the
Company's Quarterly Report on Form 10-Q, No. 333-02302,
dated February 3, 2003)
99.1 Certification of Chairman and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Senior Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------------
* Previously filed
29