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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 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. 20006-3903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (202) 789-2130
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark if the disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[X]
Indicate by check mark whether this registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates is zero.
As of December 22, 1998, there were 20,000 shares of Common Stock, par value
$.05 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
As used herein, unless the context otherwise requires, the term "ACC" or the
"Company" refers to Allbritton Communications Company. Depending on the context
in which they are used, the following "call letters" refer either to the
corporate owner of the station indicated or to the station itself: "WJLA" refers
to WJLA-TV, a division of ACC (operator of WJLA-TV, Washington, D.C.); "WHTM"
refers to Harrisburg Television, Inc. (licensee of WHTM-TV, Harrisburg,
Pennsylvania); "KATV" refers to KATV, LLC (licensee of KATV, Little Rock,
Arkansas); "KTUL" refers to KTUL, LLC (licensee of KTUL, Tulsa, Oklahoma);
"WCIV" refers to WCIV, LLC (licensee of WCIV, Charleston, South Carolina);
"WSET" refers to WSET, Incorporated (licensee of WSET-TV, Lynchburg, Virginia);
"WCFT" refers to WCFT-TV, Tuscaloosa, Alabama; "WBMA" refers to WBMA-LP,
Birmingham, Alabama; and "WJSU" refers to WJSU-TV, Anniston, Alabama). The term
"ATP" refers to Allbritton Television Productions, Inc., the term "ANB" refers
to Allbritton News Bureau, Inc. and the term "Perpetual" refers to Perpetual
Corporation, which is controlled by Joe L. Allbritton, Chairman of ACC. "AGI"
refers to Allbritton Group, Inc., which is controlled by Perpetual and is ACC's
parent. "Westfield" refers to Westfield News Advertiser, Inc., an affiliate of
ACC that is wholly-owned by Joe L. Allbritton. "Allfinco" refers to Allfinco,
Inc., a wholly-owned subsidiary of ACC. "Harrisburg Television" refers to
Harrisburg Television, Inc., an 80%-owned subsidiary of Allfinco. "TV Alabama"
refers to TV Alabama, Inc., an 80%-owned subsidiary of Allfinco that programs
WJSU and owns WCFT and WBMA. "Allnewsco" refers to ALLNEWSCO, Inc., an affiliate
of ACC that is an 80%-owned subsidiary of Perpetual. "RLA Trust" refers to the
Robert Lewis Allbritton 1984 Trust for the benefit of Robert L. Allbritton,
President and a Director of ACC, that owns 20% of Allnewsco. "RLA Revocable
Trust" refers to the trust of the same name that owns 20% of each of Harrisburg
Television and TV Alabama.
TABLE OF CONTENTS
PAGE
Part I
Item 1. Business.........................................................1
Item 2. Properties......................................................17
Item 3. Legal Proceedings...............................................19
Item 4. Submission of Matters to a Vote of Security Holders.............19
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters..............................19
Item 6. Selected Consolidated Financial Data............................20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......39
Item 8. Consolidated Financial Statements and Supplementary Data........39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................39
Part III
Item 10. Directors and Executive Officers of the Registrant.............40
Item 11. Executive Compensation.........................................43
Item 12. Security Ownership of Certain Beneficial Owners and
Management...............................................44
Item 13. Certain Relationships and Related Transactions.................45
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................48
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 7 "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 1994, AS AMENDED, THAT ARE NOT HISTORICAL FACTS AND INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF FACTORS THAT COULD
CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN
SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THE
COMPANY'S OUTSTANDING INDEBTEDNESS AND ITS HIGH DEGREE OF LEVERAGE; THE
RESTRICTIONS IMPOSED ON THE COMPANY BY THE TERMS OF THE COMPANY'S 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 AND PAY-PER-VIEW AND HOME VIDEO AND ENTERTAINMENT
SERVICES; THE IMPACT OF NEW TECHNOLOGIES; CHANGES IN FEDERAL COMMUNICATIONS
COMMISSION ("FCC") REGULATIONS; THE VARIABILITY OF THE COMPANY'S QUARTERLY
RESULTS AND THE COMPANY'S SEASONALITY; AND THE UNCERTAINTY ASSOCIATED WITH THE
IMPACT OF YEAR 2000 ISSUES ON THE COMPANY, ITS CUSTOMERS, ITS VENDORS AND OTHERS
WITH WHOM IT DOES BUSINESS.
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. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS
TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
PART I
ITEM 1. BUSINESS
The Company
Allbritton Communications Company ("ACC" or the "Company") itself and through
subsidiaries owns and operates ABC network-affiliated television stations
serving seven diverse geographic markets: WJLA in Washington, D.C.; WCFT in
Tuscaloosa (Birmingham), Alabama; WHTM in Harrisburg, Pennsylvania; KATV in
Little Rock, Arkansas; KTUL in Tulsa, Oklahoma; WSET in Lynchburg, Virginia; and
WCIV in Charleston, South Carolina. The Company's owned and operated stations
broadcast to the 8th, 39th, 46th, 57th, 59th, 68th and 120th largest national
media markets in the United States, respectively, as defined by the A.C. Nielsen
Co. ("Nielsen"). The Company also owns a low power television station (WBMA)
licensed to Birmingham, Alabama and programs a station in Anniston (Birmingham),
Alabama.
WJLA is owned and operated by ACC, while the Company's remaining owned and
operated stations are owned by Harrisburg Television, Inc. (WHTM), KATV, LLC
(KATV), KTUL, LLC (KTUL), WSET, Incorporated (WSET), WCIV, LLC (WCIV) and TV
Alabama, Inc. (WCFT and
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WBMA). Each of these is a wholly-owned subsidiary of ACC, except Harrisburg
Television and TV Alabama, each of which is an indirect 80%-owned subsidiary of
ACC. TV Alabama began programming WJSU, licensed to Anniston (Birmingham),
Alabama, under a ten-year Time Brokerage Agreement (referred to herein as a
Local Marketing Agreement ("LMA")) effective December 29, 1995 (the "Anniston
LMA"). The Company also engages in other activities relating to the production
and distribution of television programming through Allbritton Television
Productions, Inc. ("ATP"), a wholly-owned subsidiary of ACC. ACC was founded in
1974 and is a subsidiary of Allbritton Group, Inc. ("AGI"), which is controlled
by Perpetual Corporation, which in turn is controlled by Joe L. Allbritton,
ACC's Chairman. ACC and its subsidiaries are Delaware corporations or limited
liability companies. ACC's corporate headquarters is located at 808 Seventeenth
Street, N.W., Suite 300, Washington, D.C. 20006-3903, and its telephone number
at that address is (202) 789-2130.
Television Industry Background
Commercial television broadcasting began in the United States on a regular basis
in the 1940s. Currently, there is a limited number of channels available for
broadcasting in any one geographic area, and the license to operate a broadcast
television station is granted by the FCC. Television stations that broadcast
over the VHF band (channels 2-13) of the spectrum generally have some
competitive advantage over television stations that broadcast over the UHF band
(channels 14-69) of the spectrum because VHF channels usually have better signal
coverage and operate at a lower transmission cost. However, the improvement of
UHF transmitters and receivers, the complete elimination from the marketplace of
VHF-only receivers and the expansion of cable television systems have reduced
the competitive advantage of television stations broadcasting over the VHF band.
Television station revenues are primarily derived from local, regional and
national advertising and, to a much lesser extent, from network compensation,
revenues from studio rental and commercial production activities. Advertising
rates are set based upon a variety of factors, including a program's popularity
among viewers whom an advertiser wishes to attract, the number of advertisers
competing for the available time, the size and demographic makeup of the market
served by the station and the availability of alternative advertising media in
the market area. Advertising rates are also determined by a station's overall
ability to attract viewers in its market area, as well as the station's ability
to attract viewers among particular demographic groups that an advertiser may be
targeting. Because broadcast television stations rely on advertising revenues,
they are sensitive to cyclical changes in the economy. The size of advertisers'
budgets, which are affected by broad economic trends, affect both the broadcast
industry in general and the revenues of individual broadcast television
stations.
United States television stations are grouped by Nielsen into 211 generally
recognized television market areas that are ranked in size according to various
formulae based upon actual or potential audience. Each market area is designated
as an exclusive geographic area consisting of all counties in which the
home-market commercial stations receive the greatest percentage of total viewing
hours. The specific geographic markets are called Designated Market Areas or
DMAs.
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Nielsen, which provides audience-measuring services, periodically publishes data
on estimated audiences for television stations in the various DMAs throughout
the country. These estimates are expressed in terms of both the percentage of
the total potential audience in the DMA viewing a station (the station's
"rating") and the percentage of the audience actually watching television (the
station's "share"). Nielsen provides such data on the basis of total television
households and selected demographic groupings in the DMA. Nielsen uses two
methods of determining a station's ratings and share. In larger DMAs, ratings
are determined by a combination of meters connected directly to selected
household television sets and weekly viewer-completed diaries of television
viewing, while in smaller markets ratings are determined by weekly diaries only.
Of the market areas in which the Company conducts business, Washington, D.C. and
Birmingham, Alabama are metered markets while the remaining markets are weekly
diary markets.
Historically, three major broadcast networks--ABC, NBC and CBS--dominated
broadcast television. In recent years, FOX has evolved into the fourth major
network, although the hours of network programming produced by FOX for its
affiliates are fewer than those produced by the other three major networks. In
addition, UPN, WB and recently PAX TV have been launched as new television
networks.
The affiliation by a station with one of the four major networks has a
significant impact on the composition of the station's programming, revenues,
expenses and operations. A typical affiliate station receives approximately 9 to
13 hours of each day's programming from the network. This programming, along
with cash payments ("network compensation"), is provided to the affiliate by the
network in exchange for a substantial majority of the advertising time sold
during the airing of network programs. The network then sells this advertising
time for its own account. The affiliate retains the revenues from time sold
during breaks in and between network programs and during programs produced by
the affiliate or purchased from non-network sources. In acquiring programming to
supplement network programming, network affiliates compete primarily with
affiliates of other networks and independent stations in their market areas.
Cable systems generally do not compete with local stations for programming,
although various national cable networks from time to time have acquired
programs that would have otherwise been offered to local television stations. In
addition, a television station may acquire programming through barter
arrangements. Under barter arrangements, which are becoming increasingly popular
with both network affiliates and independents, a national program distributor
can receive advertising time in exchange for the programming it supplies, with
the station paying no fee or a reduced fee for such programming.
An affiliate of UPN, WB or PAX TV receives a smaller portion of each day's
programming from its network compared to an affiliate of ABC, CBS, NBC or FOX.
As a result, affiliates of UPN, WB or PAX TV must purchase or produce a greater
amount of their programming, resulting in generally higher programming costs.
These stations, however, retain a larger portion of the inventory of advertising
time and the revenues obtained therefrom compared to stations affiliated with
the major networks, which may partially offset their higher programming costs.
In contrast to a network affiliated station, an independent station purchases or
produces all of the programming that it broadcasts, generally resulting in
higher programming costs, although the independent station is, in theory, able
to retain its entire inventory of advertising time and all of the
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revenue obtained from the sale of such time. Barter and cash-plus-barter
arrangements, however, have become increasingly popular among all stations.
Public broadcasting outlets in most communities compete with commercial
broadcasters for viewers but not for advertising dollars.
Broadcast television stations compete for advertising revenues primarily with
other broadcast television stations and, to a lesser extent, with radio
stations, cable system operators and programmers and newspapers serving the same
market. Traditional network programming, and recently FOX programming, generally
achieve higher audience levels than syndicated programs aired by independent
stations. However, as greater amounts of advertising time become available for
sale by independent stations and FOX affiliates in syndicated programs, those
stations typically achieve a share of the television market advertising revenues
greater than their share of the market area's audience.
Through the 1970s, network television broadcasting enjoyed virtual dominance in
viewership and television advertising revenues because network-affiliated
stations only competed with each other in local markets. Beginning in the 1980s,
this level of dominance began to change as the FCC authorized more local
stations and marketplace choices expanded with the growth of independent
stations and cable television services.
Cable television systems were first constructed in significant numbers in the
1970s and were initially used to retransmit broadcast television programming to
paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant competitor
for viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than a
small fraction of any of the major broadcast networks. The advertising share of
cable networks increased during the 1970s and 1980s as a result of the growth in
cable penetration (the percentage of television households that are connected to
a cable system). Notwithstanding such increases in cable viewership and
advertising, over-the-air broadcasting remains the dominant distribution system
for mass market television advertising.
Direct Broadcast Satellite ("DBS") service has recently been introduced as a new
competitive distribution method. Home users purchase or lease satellite dish
receiving equipment and subscribe to a monthly service of programming options.
At present, the nature of DBS service permits primarily national programming
and, except in limited circumstances, does not offer locally originated programs
or advertising.
The Company believes that the market shares of television stations affiliated
with ABC, NBC and CBS declined during the 1980s primarily because of the
emergence of FOX and certain strong independent stations and secondarily because
of increased cable penetration. Independent stations have emerged as viable
competitors for television viewership share, particularly as a result of the
availability of first-run, network-quality programming. In addition, there has
been substantial growth in the number of home satellite dish receivers and video
cassette recorders, which has further expanded the number of programming
alternatives available to household audiences.
-4-
Terrestrially-distributed television broadcast stations use analog transmission
technology. Recent advances in digital transmission technology formats have
enabled some broadcasters to begin migration from analog to digital
broadcasting. Digital technologies provide cleaner video and audio signals as
well as the ability to transmit "high definition television" with theatre screen
aspect ratios, higher resolution video and "noise-free" sound. Digital
transmission also permits dividing the transmission frequency into multiple
discrete channels of standard definition television. The FCC recently authorized
a transition plan to convert existing analog stations to digital by temporarily
authoring a second channel to transmit programming digitally with the return of
the analog channel after the transition period. Of the Company's stations, only
WJLA in Washington, D.C. broadcasts with both an analog and digital signal at
this time.
Station Information
The following table sets forth general information for each of the Company's
owned and/or programmed stations as of November 1998 :
Total
Market Commercial Station Rank
Designated Network Channel Rank or Competitors Audience in Acquisition
Market Area Station Affiliation Frequency DMA in MarketShare Market Date
----------- ------- ----------- --------- ------- ----------------------------------------------
Washington, D.C. WJLA ABC 7/VHF 8 6 22% 3 01/29/76
Birmingham (Anniston and
Tuscaloosa), AL WBMA /WCFT/WJSU ABC - 39 6 24% 3 -
Birmingham WBMA ABC 58/UHF - - - - 08/01/97
Anniston WJSU ABC 40/UHF - - - - -
Tuscaloosa WCFT ABC 33/UHF - - - - 03/15/96
Harrisburg-Lancaster-York-Lebanon,
PA WHTM ABC 27/UHF 46 5 24% 2 03/01/96
Little Rock, AR KATV ABC 7/VHF 57 5 32% 1 04/06/83
Tulsa, OK KTUL ABC 8/VHF 59 5 30% 2 04/06/83
Roanoke-Lynchburg, VA WSET ABC 13/VHF 68 4 24% 2 01/29/76
Charleston, SC WCIV ABC 4/VHF 120 5 17% 3 01/29/76
- ---------
Represents market rank based on the Nielsen Station Index for November 1998.
Represents the total number of commercial broadcast television
stations in the DMA with an audience share of at least 1% in
the 6:00 a.m. to 2:00 a.m., Sunday through Saturday, time period.
Represents the station's share of total viewing of commercial broadcast
television stations in the DMA for the time period of 6:00 a.m. to 2:00
a.m., Sunday through Saturday.
Represents the station's rank in the DMA based on its share of total
viewing of commercial broadcast television stations in the DMA for the
time period of 6:00 a.m. to 2:00 a.m., Sunday through Saturday.
Owned Station.
WSET and WCIV have been indirectly owned and operated by Joe L.
Allbritton since 1976. On March 1, 1996, WSET and WCIV
became wholly-owned subsidiaries of ACC.
TV Alabama serves the Birmingham market by simultaneously broadcasting
identical programming over WBMA, WCFT and WJSU (which TV Alabama
programs pursuant to the Anniston LMA). The stations are listed on a
combined basis by Nielsen as WBMA, the call sign of the low power
television station.
Programmed Station.
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Business and Operating Strategy
The Company's business strategy is to focus on building net operating revenues
and net cash provided by operating activities. The Company intends to pursue
selective acquisition opportunities as they arise. The Company's acquisition
strategy is to target network-affiliated television stations where it believes
it can successfully apply its operating strategy and where such stations can be
acquired on attractive terms. Targets include midsized growth markets with what
the Company believes to be advantageous business climates. Although the Company
continues to review strategic investment and acquisition opportunities, no
agreements or understandings are currently in place regarding any material
investments or acquisitions.
In addition, the Company constantly seeks to enhance net operating revenues at a
marginal incremental cost through its use of existing personnel and programming
capabilities. For example, KATV operates the Arkansas Razorback Sports Network
("ARSN"), which provides University of Arkansas sports programming to a network
of 71 radio stations in six states and pay-per-view cable viewing to selected
Arkansas cable system viewers.
The Company's operating strategy focuses on four key elements:
Local News and Community Leadership. The Company's stations strive to be local
news leaders to exploit the revenue potential associated with local news
leadership. Since the acquisition of each station, the Company has focused on
building that station's local news programming franchise as the foundation for
building significant audience share. In each of its market areas, the Company
develops additional information-oriented programming designed to expand the
stations' hours of commercially valuable local news and other programming with
relatively small incremental increases in operating expenses. Local news
programming is commercially valuable because of its high viewership level, the
attractiveness to advertisers of the demographic characteristics of the typical
news audience (allowing stations to charge higher rates for advertising time)
and the enhanced ratings of other programming in time periods adjacent to the
news. In addition, management believes strong local news product has helped
differentiate local broadcast stations from the increasing number of cable
programming competitors that generally do not provide this material.
High Quality Non-Network Programming. The Company's stations are committed to
attracting viewers through an array of syndicated and locally-produced
programming to fill those periods of the broadcast day not programmed by the
network. This programming is selected by the Company on its ability to attract
audiences highly valued in terms of demographic makeup on a cost-effective basis
and reflects a focused strategy to migrate and hold audiences from program to
program throughout dayparts. Audiences highly valued in terms of demographic
makeup include women aged 18-49 and all adults aged 25-54. These demographic
groups are perceived by advertisers as the groups with the majority of buying
authority and decision-making in product selection.
Local Sales Development Efforts. The Company believes that television stations
with a strong local presence and active community relations can realize
additional revenue from advertisers through the development and promotion of
special programming and marketing events. Each of the
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Company's stations has developed such additional products, including
high quality programming of local interest (such as University of Arkansas
football and basketball games, Washington Redskins pre-season football games and
related shows) and sponsored community events. These sponsored events have
included health fairs, contests, job fairs, parades and athletic events and have
provided advertisers, who are offered participation in such events, an
opportunity to direct a marketing program to targeted audiences. These
additional products have proven successful in attracting incremental advertising
revenues. The stations also seek to maximize their local sales efforts through
the use of extensive research and targeted demographic studies.
Cost Control. Management believes that controlling costs is an essential factor
in achieving and maintaining the profitability of its stations. The Company
believes that by delivering highly targeted audience levels and controlling
programming and operating costs, the Company's stations can achieve increased
levels of revenue and operating cash flow. As the provider of ABC network
programming in each of its market areas, the Company has entered into long-term
affiliation agreements. Further, each station rigorously manages its expenses
through project accounting, a budgetary control process, which includes daypart
revenue analysis, and expense analysis. Moreover, each of the stations closely
monitors its staffing levels.
Owned and/or Programmed Stations
WJLA: Washington, D.C.
Acquired by the Company in 1976, WJLA is an ABC network affiliate pursuant to an
affiliation agreement that expires on October 1, 2005. The Station's FCC license
expires on October 1, 2004. Washington, D.C. is the eighth largest DMA, with
approximately 1,956,000 television households. The Company believes that this
position historically permitted stations in this market to earn higher
advertising rates than its other owned and operated stations because many
national advertising campaigns concentrate their spending in the top ten media
markets and on issue-oriented advertising in Washington, D.C. The Washington
market is served by six commercial television stations.
WBMA/WCFT/WJSU: Birmingham (Anniston and Tuscaloosa), Alabama
The Company acquired WCFT in March 1996 and commenced programming WJSU pursuant
to the Anniston LMA in December 1995. The Anniston LMA expires on December 29,
2005. Both stations are ABC affiliates pursuant to an affiliation agreement that
expires on September 1, 2006. The FCC licenses for both stations expire on April
1, 2005. The Company also owns a low power television station licensed to
Birmingham, Alabama (WBMA). In October 1998, Nielsen collapsed the Tuscaloosa
DMA (187th largest) and the Anniston DMA (201st largest) into the Birmingham DMA
creating the 39th largest DMA with approximately 657,000 television households.
The Birmingham DMA is served by six commercial television stations.
In connection with the Anniston LMA, the Company entered into an option to
purchase the assets of WJSU (the "Anniston Option"). The cost of the Anniston
Option was $15,348,000 and it is exercisable for additional consideration of
$3,337,000. Exercise of the Anniston Option is subject
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to certain conditions, including a change in FCC rules or a waiver permitting
common ownership of WCFT and WJSU (see Legislation and Regulation).
The Company serves the Birmingham market by simultaneously transmitting
identical programming from its studio in Birmingham over WCFT, WJSU and WBMA.
The stations are listed on a combined basis by Nielsen as WBMA. TV Alabama
maintains studio facilities in Birmingham for the operation of the stations. The
Company has retained a news and sales presence in both Tuscaloosa and Anniston,
while at the same time maintaining its primary news and sales presence in
Birmingham.
WHTM: Harrisburg-Lancaster-York-Lebanon, Pennsylvania
Acquired by the Company in 1996, WHTM is an ABC network affiliate pursuant to an
affiliation agreement that expires on January 1, 2005. The Station's FCC license
expires August 1, 1999. The application for renewal of the FCC license will be
submitted by April 1, 1999. Harrisburg, Pennsylvania, which consists of nine
contiguous counties located in central Pennsylvania, is the 46th largest DMA,
reaching approximately 592,000 television households. Harrisburg is the capital
of Pennsylvania, and the government represents the area's largest employer. The
Harrisburg market is served by five commercial television stations, one of which
is a VHF station.
KATV: Little Rock, Arkansas
Acquired by the Company in 1983, KATV is an ABC network affiliate pursuant to an
affiliation agreement that expires on July 31, 2005. The Station's FCC license
expires on June 1, 2005. The Little Rock market is the 57th largest DMA, with
approximately 484,000 television households. The Little Rock market has a
diversified economy, both serving as the seat of state and local government and
housing a significant concentration of businesses in the medical services,
transportation and insurance industries. The Little Rock market is served by
five commercial television stations.
Capitalizing on its exclusive rights to the University of Arkansas basketball
and football schedules through the year 2003, KATV launched ARSN in Fiscal 1994
by entering into programming sublicense agreements with a network of 71 radio
stations in six states. Pay-per-view and home video rights are also controlled
by ARSN.
KTUL: Tulsa, Oklahoma
Acquired by the Company in 1983, KTUL is an ABC network affiliate pursuant to an
affiliation agreement that expires on July 31, 2005. The Station's FCC license
expires on June 1, 2006. Tulsa, Oklahoma is the 59th largest DMA, with
approximately 473,000 television households. Because of the demographic
characteristics of the Tulsa DMA, the Company believes many advertisers consider
it an excellent national test market. Consequently, it believes KTUL derives
incremental advertising revenues from advertisers seeking to test-market new
products. The Tulsa market is served by five commercial television stations.
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WSET: Roanoke-Lynchburg, Virginia
Acquired by the Company in 1996, WSET has been indirectly owned and operated by
Joe L. Allbritton since 1976. The Station is an ABC network affiliate pursuant
to an affiliation agreement that expires on July 31, 2005. WSET's FCC license
expires on October 1, 2004. The hyphenated central Virginia market comprised of
Lynchburg, Roanoke and Danville is the 68th largest DMA, with approximately
402,000 television households. The Lynchburg DMA is served by four commercial
television stations.
WCIV: Charleston, South Carolina
Acquired by the Company in 1996, WCIV has been indirectly owned and operated by
Joe L. Allbritton since 1976. The Station is an ABC affiliate pursuant to an
affiliation agreement that expires on August 20, 2006. WCIV's FCC license
expires on December 1, 2004. Charleston, South Carolina is the 120th largest
DMA, with approximately 216,000 television households. The Charleston DMA is
served by five commercial television stations.
Network Affiliation Agreement and Relationship
WJLA, WBMA/WCFT/WJSU, WHTM, KATV, KTUL, WSET and WCIV are ABC network
affiliates: their current affiliation agreement expires September 1, 2006,
January 1, 2005, October 1, 2005, July 31, 2005, July 31, 2005 and August 20,
2006, respectively. ABC has routinely renewed the affiliation agreements with
these stations; however, there can be no assurance that these affiliation
agreements will be renewed in the future. Continuation of the ABC's affiliation
agreement with WCFT and WJSU is conditional on WJSU's continuing to be
programmed by ACC under the Anniston LMA for the duration of the affiliation
agreement. Changes by Congress or by the FCC in the current regulatory treatment
of LMAs for television stations could have a material adverse effect on the
Anniston LMA which, in turn, could jeopardize the Company's ABC network
affiliation in the Birmingham market. As one of the largest group owners of ABC
network affiliates in the nation, ACC believes it enjoys excellent relations
with the ABC network.
Generally, each affiliation agreement provides the Company's stations with the
right to broadcast programs transmitted by the network that includes designated
advertising time the revenue from which the network retains. For every hour or
fraction thereof that the station elects to broadcast network programming, the
network pays the station compensation, as specified in each affiliation
agreement, or as agreed upon by the network and the stations. Typically, "prime
time" programming generates the highest hourly rates. Under specified
conditions, rates are subject to increase or decrease by the network during the
term of each affiliation agreement, with provisions for advance notice and right
of termination on behalf of the station in the event of a reduction in rates.
Competition
Competition in the television industry, including each of the market areas in
which the Company's stations compete, takes place on several levels: competition
for audience, competition for
-9-
programming (including news) and competition for advertisers. Additional factors
material to a television station's competitive position include signal coverage
and assigned frequency. The television broadcasting industry is continually
faced with technological change and innovation, the possible rise or fall in
popularity of competing entertainment and communications media and actions of
federal regulatory bodies, including the FCC, any of which could possibly have a
material adverse effect on the Company's operations.
Audience: Stations compete for audience on the basis of program popularity,
which has a direct effect on advertising rates. A majority of the Company's
daily programming is supplied by ABC. In those periods, the stations are totally
dependent upon the performance of the ABC network programs in attracting
viewers. Non-network time periods are programmed by the station with a
combination of self-produced news, public affairs and other entertainment
programming, including news and syndicated programs purchased for cash, cash and
barter or barter-only. Independent stations, the number of which has increased
significantly over the past decade, have also emerged as viable competitors for
television viewership share, particularly as the result of the availability of
first-run network-quality programming from FOX.
The development of methods of television transmission other than over-the-air
broadcasting and, in particular, the growth of cable television has
significantly altered competition for audience share in the television industry.
These alternative transmission methods can increase competition for a
broadcasting station both by bringing into its market area distant broadcasting
signals not otherwise available to the station's audience and by serving as a
distribution system for programming originated on the cable system.
Historically, cable operators have not sought to compete with broadcast stations
for a share of the local news audience. To the extent cable operators elect to
do so, increased competition for local news audiences could have an adverse
effect on the Company's advertising revenues.
Other sources of competition include home entertainment systems (including video
cassette recorder and playback systems, videodiscs and television game devices),
multipoint distribution systems, multichannel multipoint distribution systems,
wireless cable, satellite master antenna television systems and some low-power
and in-home satellite services. The Company's television stations also face
competition from high-powered direct broadcast satellite services, such as
DIRECT-TV, which transmit programming directly to homes equipped with special
receiving antennas or to cable television systems for transmission to their
subscribers.
Further advances in technology may increase competition for household audiences
and advertisers. Video compression techniques, now under development for use
with current cable channels, or direct broadcast satellites are expected to
reduce the bandwidth required for television signal transmission. These
compression techniques, as well as other technological developments, are
applicable to all video delivery systems, including over-the-air broadcasting,
and have the potential to provide vastly expanded programming to highly targeted
audiences. Reduction in the cost of creating additional channel capacity could
lower entry barriers for new channels and encourage the development of
increasingly specialized niche programming. This ability to reach very defined
audiences is expected to alter the competitive dynamics for advertising
expenditures. The Company is unable to predict the effect that technological
changes will have on the broadcast television
-10-
industry or the future results of the Company's operations.
Programming: Competition for programming involves negotiating with national
program distributors or syndicators which sell first-run and rerun packages of
programming. The Company's stations compete against in-market broadcast station
competitors for off-network reruns (such as "Home Improvement") and first-run
product (such as "The Oprah Winfrey Show") for exclusive access to those
programs. Cable systems generally do not compete with local stations for
programming, although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local television
stations. Competition for exclusive news stories and features is also endemic to
the television industry.
Advertising: Advertising rates are based upon the size of the market area in
which a station operates, the program's popularity among the viewers an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic makeup of the market area served by the station,
the availability of alternative advertising media in the market area, an
aggressive and knowledgeable sales forces and the development of projects,
features and programs that tie advertiser messages to programming. The Company's
television stations compete for advertising revenues with other television
stations in their respective markets as well as with other advertising media,
such as newspapers, radio, magazines, outdoor advertising, transit advertising,
yellow page directories, direct mail and local cable systems. Competition for
advertising dollars in the broadcasting industry occurs primarily in individual
market areas. Generally, a television broadcasting station in the market does
not compete with stations in other market areas. The Company's television
stations are located in highly competitive market areas.
Legislation and Regulation
The ownership, operation and sale of television stations are subject to the
jurisdiction of the FCC under the Communications Act of 1934 (the
"Communications Act"). Matters subject to FCC oversight include, but are not
limited to, the assignment of frequency bands for broadcast television; the
approval of a television station's frequency, location and operating power; the
issuance, renewal, revocation or modification of a television station's FCC
license; the approval of changes in the ownership or control of a television
station's licensee; the regulation of equipment used by television stations and
the adoption and implementation of regulations and policies concerning the
ownership, operation, programming and employment practices of television
stations. The FCC has the power to impose penalties, including fines or license
revocations, upon a licensee of a television station for violations of the FCC's
rules and regulations.
The following is a brief summary of certain provisions of the Communications Act
and of specific FCC regulations and policies affecting broadcast television.
Reference should be made to the Communications Act, FCC rules and the public
notices and rulings of the FCC for further information concerning the nature and
extent of FCC regulation of broadcast television stations.
License Renewal: Broadcast television licenses are generally granted for maximum
terms of eight years. License terms are subject to renewal upon application to
the FCC, but they may be renewed for a shorter period upon a finding by the FCC
that the "public interest, convenience and necessity"
-11-
would be served thereby. Under the Telecommunications Act of 1996 (the
"Telecommunications Act"), the FCC must grant a renewal application if it finds
that the station has served the public interest, there have been no serious
violations of the Communications Act or FCC rules, and there have been no other
violations of the Communications Act or FCC rules by the licensee that, taken
together, would constitute a pattern of abuse. If the licensee fails to meet
these requirements, the FCC may either deny the license or grant it on terms and
conditions as are appropriate after notice and opportunity for hearing.
In the vast majority of cases, television broadcast licenses are renewed by the
FCC even when petitions to deny or competing applications are filed against
broadcast license renewal applications. However, there can be no assurance that
each of the Company's broadcast licenses will be renewed in the future. All of
the stations' existing licenses were renewed for full terms and are currently in
effect.
Programming and Operation: The Communications Act requires broadcasters to serve
the "public interest." Since the late 1970s, the FCC gradually has relaxed or
eliminated many of the more formalized procedures it had developed to promote
the broadcast of certain types of programming responsive to the needs of a
station's community of license. However, broadcast station licensees must
continue to present programming that is responsive to local community problems,
needs and interests and to maintain certain records demonstrating such
responsiveness. Complaints from viewers concerning a station's programming often
will be considered by the FCC when it evaluates license renewal applications,
although such complaints may be filed at any time and generally may be
considered by the FCC at any time. Stations also must follow various FCC rules
that regulate, among other things, political advertising, sponsorship
identifications, the advertisements of contests and lotteries, obscene and
indecent broadcasts and technical operations, including limits on radio
frequency radiation. The FCC also has adopted rules that place additional
obligations on television station operators for maximum amounts of advertising
and minimum amounts of programming specifically targeted for children, as well
as additional public information and reporting requirements.
Digital Television: The FCC has adopted rules for implementing digital
(including high-definition) television ("DTV") service in the United States.
Implementation of DTV is intended to improve the technical quality of
television. Under certain circumstances, however, conversion to DTV operations
may reduce a station's geographical coverage area. The FCC has allotted a second
broadcast channel to each full-power commercial television station for DTV
operation. Under the proposal, stations will be required to phase-in their DTV
operations on the second channel over a transition period and to surrender their
non-DTV channel later. Implementation of advanced television service may impose
additional costs on television stations providing the new service, due to
increased equipment costs, and may affect the competitive nature of the market
areas in which the Company operates if competing stations adopt and implement
the new technology before the Company's stations. The FCC has adopted standards
for the transmission of advanced television signals. These standards will serve
as the basis for the phased conversion to digital transmission. Of the Company's
stations, only WJLA in Washington, D.C. currently operates a DTV channel in
concert with its analog signal.
-12-
Ownership Matters: The Communications Act contains a number of restrictions on
the ownership and control of broadcast licenses. Together with the FCC's rules,
it places limitations on alien ownership; common ownership of broadcast, cable
and newspaper properties; and ownership by those persons not having the
requisite "character" qualifications and those persons holding "attributable"
interests in the license.
The FCC's television national multiple ownership rules limit the audience reach
of television stations in which any entity may hold an attributable interest to
35 percent of total United States audience reach. The FCC's television multiple
ownership local contour overlap rule, the "Duopoly" rule, generally prohibits
ownership of attributable interests by a single entity in two or more television
stations which serve the same geographic market area. The Telecommunications Act
directs the FCC to reevaluate its local ownership rules to consider potential
modifications permitting ownership of more than one station in a market area.
The FCC has proposed to redefine the market area for purposes of the Duopoly
rule from a station's "Grade B" contour to its DMA so long as there is no "Grade
A" overlap in signals of the two stations. The FCC also seeks comment on whether
ownership of two UHF stations or a UHF/VHF combination should be permissible.
The FCC generally applies its ownership limits to "attributable" interests held
by an individual, corporation, partnership or other association. When applying
its multiple ownership or cross-ownership rules, the FCC generally attributes
the interests of corporate licensees to the holders of corporate interests as
follows: (i) any voting interest amounting to five percent or more of the
outstanding voting power of the corporate broadcast licensee generally will be
attributable; (ii) in general, no minority voting stock interests will be
attributable if there is a single holder of more than fifty percent of the
outstanding voting power of a corporate broadcast licensee and (iii) in general,
certain investment companies, insurance companies and banks holding stock
through their trust departments in trust accounts will be considered to have an
attributable interest only if they hold ten percent or more of the outstanding
voting power of a corporate broadcast licensee. Furthermore, corporate officers
and directors and general partners and uninsulated limited partners of
partnerships are personally attributed with the media interests of the
corporations or partnerships of which they are officers, directors or partners.
In the case of corporations controlling broadcast licenses through one or more
intermediate entities, similar attribution standards generally apply to
stockholders, officers and directors of such corporations.
The FCC is conducting rulemaking proceedings to determine whether it should
relax its rules to facilitate greater minority and female ownership of
broadcasting facilities and whether it should modify its rules by (i)
restricting the availability of the single majority shareholder exemption, (ii)
attributing certain interests such as non-voting stock, debt and holdings in
limited liability companies and (iii) changing the attribution benchmarks. The
Company cannot predict the outcome of these proceedings or how they will affect
the Company's business. In light of the FCC's multiple ownership and
cross-ownership rules, an individual or entity that acquires an attributable
interest in the Company may violate the FCC's rules if that acquirer also has an
attributable interest in other television or radio stations, or in cable
television systems or daily newspapers, depending on the number and location of
those radio or television stations, cable television systems or daily
newspapers. Such an acquirer also may be restricted in the companies in which it
may invest, to the extent that those investments give rise to an attributable
interest. If an individual or entity with an
-13-
attributable interest in the Company violates any of these ownership rules, the
Company may be unable to obtain from the FCC the authorizations needed to
conduct its television station business, may be unable to obtain FCC consents
for certain future acquisitions, may be unable to obtain renewals of its
licenses and may be subject to other material adverse consequences.
Under its "cross-interest policy," the FCC considers certain "meaningful"
relationships among competing media outlets in the same market, even if the
FCC's ownership rules do not specifically prohibit these relationships. Under
this policy, the FCC may consider significant equity interests combined with an
attributable interest in a media outlet in the same market, joint ventures and
common key employees among competitors. The cross-interest policy does not
necessarily prohibit all of these interests but requires that the FCC consider
whether, in a particular market, the "meaningful" relationships among
competitors could have a significant adverse effect upon economic competition or
program diversity. Neither the Company nor, to the best of the Company's
knowledge, any officer, director or shareholder of the Company holds an interest
in another radio or television station, cable television system or daily
newspaper that is inconsistent with the FCC's ownership rules and policies.
Related to the Duopoly rule, the FCC has proposed the adoption of rules that
would modify the current treatment of the control and ownership attribution with
respect to LMAs entered into by television stations. The FCC proposes that time
brokerage of any other television station in the same market for more than
fifteen percent of the brokered station's weekly broadcast hours would result in
counting the brokered station toward the brokering licensee's national and local
multiple ownership limits. The FCC has proposed that LMAs in existence prior to
November 6, 1996 be grandfathered for the length of their terms so as not to
place owners of stations in violation of the rules if such owners also operate
another station pursuant to such LMAs. Although the Company cannot predict the
outcome of this proceeding, if the local multiple ownership rules are not
relaxed as proposed, attribution could preclude television LMAs in any market
where the time broker owns or has an attributable interest in another television
station. Changes by the FCC in its current policy regarding LMAs for television
stations could potentially have a material adverse effect on the Anniston LMA,
which, in turn, could jeopardize the Company's ABC network affiliation in the
Birmingham market.
Additional Competition in the Video Services Industry: The Telecommunications
Act also eliminates the overall ban on telephone companies offering video
services and permits the ownership of cable television companies by telephone
companies in their service areas (or vice versa) in certain circumstances.
Telephone companies providing such video services will be regulated according to
the transmission technology they use. The Telecommunications Act also permits
telephone companies to hold an ownership interest in the programming carried
over such systems. Although the Company cannot predict the effect of the removal
of these barriers to telephone company participation in the video services
industry, it may have the effect of increasing competition in the television
broadcast industry in which the Company operates.
Other Legislation: Finally, Congress and the FCC have under consideration, and
in the future may consider and adopt, (i) other changes to existing laws,
regulations and policies or (ii) new laws, regulations and policies regarding a
wide variety of matters that could affect, directly or indirectly,
-14-
the operation, ownership and profitability of the Company's broadcast stations,
result in the loss or gain of audience share and advertising revenues for the
Company's stations and/or affect the ability of the Company to acquire or
finance additional broadcast stations.
Employees
As of September 30, 1998, the Company employed in full-time positions 806
persons, including 198 at WJLA, 107 at KATV, 113 at KTUL, 104 at WHTM, 115 at
WBMA/WCFT/WJSU, 92 at WSET, 63 at WCIV and 14 in its corporate office. Of the
employees at WJLA, 106 are represented by three unions: the American Federation
of Television and Radio Artists ("AFTRA"), the Directors Guild of America
("DGA") or the National Association of Broadcast Employees and
Technicians/Communications Workers of America ("NABET/CWA"). The AFTRA contract
was renegotiated effective June 1, 1996 through September 30, 1999. The DGA
contract was renegotiated effective July 16, 1996 through January 16, 2000. The
NABET/CWA contract expired June 1, 1995. Members of this union have been working
without a contract since that time. WJLA management is in the process of
negotiating a new contract and anticipates resolving the outstanding issues
without any material adverse impact to the station. No employees of the
Company's other owned and/or programmed stations are represented by unions. The
Company believes its relations with its employees are satisfactory.
Environmental Matters
The Company is subject to changing federal, state and local environmental
standards, including those governing the handling and disposal of solid and
hazardous wastes, discharges to the air and water and the remediation of
contamination associated with releases of hazardous substances.
In particular, the Company is subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act, the Resource
Conservation and Recovery Act and analogous state laws for the investigation and
remediation of environmental contamination at properties owned and/or operated
by it and at off-site locations where it has arranged for the disposal of
hazardous substances. Courts have determined that liability under these laws is,
in most cases, joint and several, meaning that any responsible party could be
held liable for all costs necessary for investigating and remediating a release
or threatened release of hazardous substances.
WCIV is currently involved in remediating contamination associated with releases
of hazardous substances at its transmitter site. In September 1994,
approximately 2,000 gallons of electric generator fuel spilled from an
above-ground tank on the premises of WCIV. With the assistance of environmental
consultants and under supervision of the South Carolina Department of Health and
Environmental Control ("SCDHEC"), WCIV has undertaken remediation of the
contamination by installing wells for recovery of free product and monitoring
wells. Based upon the scope of the remediation required as determined by the
environmental consultants, the Company has estimated that any remaining costs
associated with the monitoring wells and related testing are minimal. However,
there can be no assurance that SCDHEC will not require further remedial
activities.
In October 1994, the Pennsylvania Department of Environmental Resources (the
"Pennsylvania
-15-
Department") notified WHTM that it should remediate soils and groundwater
believed to be adversely affected by contamination associated with an
underground tank. The station's environmental consultant has advised the
Pennsylvania Department that it appears that contamination remaining on WHTM's
property did not emanate from its underground tank, which has been removed, but
is from an offsite source and that there is no threat to human health or the
environment which requires remediation. The matter remains unresolved.
In August 1995, concentrations of certain metals including arsenic, barium,
chromium and lead in the soil of a septic leach field were discovered on the
property of WCFT. The Company has been advised that these concentrations are in
the range of background concentrations for the area. As long as concentrations
are demonstrated to be below background to the satisfaction of the State of
Alabama, response action would not be anticipated.
Although there can be no assurance of the final resolution of these matters, the
Company does not believe that the amount of its liability at these properties
individually, or in the aggregate, will have a material adverse effect on the
Company's consolidated financial condition, results of operations or cash flows.
-16-
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Washington, D.C., occupying
leased office space of approximately 9,300 square feet.
The types of properties required to support each of the stations include
offices, studios, transmitter sites and antenna sites. The stations' studios are
co-located with their office space while transmitter sites and antenna sites are
generally located away from the studios in locations determined to provide
maximum market signal coverage.
KATV's broadcast tower, which met non-governmental wind-loading standards when
built, does not meet the current guidelines for wind-loading on broadcast towers
adopted in 1992. Because standards were modified subsequent to the tower
construction, KATV's tower is "grandfathered" under the prior guidelines.
Engineering studies, however, indicate that the tower may be significantly
overstressed under the revised guidelines, particularly at sustained winds of 70
miles per hour and at risk of failing in such sustained winds. KATV has taken
steps to limit access to the area around the tower and to avoid work on the
tower during windy conditions. KATV is in the final stages of completing
structural modifications to the tower to bring it within current guidelines. The
owner of KETS-TV, which has an antenna on the tower, has received a grant from
the National Telecommunications and Information Administration in the Department
of Commerce for matching funds to help offset the costs of tower modification.
KATV's share of the estimated costs for this work is approximately $300,000. In
the event the tower failed prior to completion of structural modifications, KATV
would seek to continue transmission by direct fiber feeds to cable television
systems and temporary leased space on another neighboring broadcast tower,
although there can be no assurance that such an alternative would be available
at such time.
The following table describes the general characteristics of the Company's
principal real property:
-17-
Approximate Lease Expiration
Facility Market/Use Ownership Size Date
- -------- ---------- --------- ---- ----
WJLA Washington, D.C.
Office/Studio Leased 88,828 sq. ft. 11/31/03
Tower/Transmitter Joint Venture 108,000 sq. ft. N/A
WHTM Harrisburg, PA
Office/Studio Owned 14,000 sq. ft. N/A
Tower/Transmitter Owned 2,801 sq. ft. N/A
Adjacent Land Leased 6,808 sq. ft. 10/31/00
KATV Little Rock, AR
Office/Studio Owned 20,500 sq. ft. N/A
Tower/Transmitter Owned 188 Acres N/A
Annex/Garage Owned 67,400 sq. ft. N/A
KTUL Tulsa, OK
Office/Studio Owned 13,520 sq. ft. N/A
Tower/Transmitter Owned 160 acres N/A
Tower Leased 1 acre 5/30/05
WSET Lynchburg, VA
Office/Studio Owned 15,500 sq. ft. N/A
Tower/Transmitter Owned 2,700 sq. ft. N/A
WCIV Mt. Pleasant, SC
Office/Studio Owned 21,700 sq. ft. N/A
Tower/Transmitter Leased 2,000 sq. ft. 8/31/06
WCFT/WJSU Birmingham, AL
Office/Studio Leased 26,357 sq.ft 9/30/06
Satellite Dish Farm Leased 0.5 acres 9/30/06
Tower/Relay-Pelham Leased .08 acres 10/31/01
Tower/Relay-Red Mtn. Owned .21 acres N/A
Tuscaloosa, AL
Office/Studio Owned 9,475 sq. ft. N/A
Tower-Tuscaloosa Owned 10.5 acres N/A
Tower-AmSouth Leased 134.3 acres 4/30/06
Anniston, AL
Office/Studio Leased 7,273 sq. ft. 6 months notice
Tower-Blue Mtn. Owned 1.7 acres N/A
Gadsden Office Leased 1,000 sq. ft. Monthly
Tower-Bald Rock Leased 1 acre 8/29/16
- ----------
TV Alabama uses the pre-existing facilities of WCFT and WJSU to operate news and sales bureaus in the Tuscaloosa
and Anniston market areas.
Although TV Alabama is currently operating these properties under the Anniston LMA, Flagship is the owner and lessee.
-18-
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business, including suits based on defamation. The Company
is not currently a party to any lawsuit or proceeding which, in the opinion of
management, if decided adverse to the Company, would be likely to have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Not Applicable.
-19-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands)
The selected consolidated financial data below should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Report. The selected consolidated financial data for the
fiscal years ended September 30, 1994, 1995, 1996, 1997 and 1998 are derived
from the Company's audited Consolidated Financial Statements.
Fiscal Year Ended September 30,
------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Statement of Operations Data :
Operating revenues, net $125,830 $138,151 $155,573 $172,828 $182,484
Television operating expenses,
excluding depreciation and
amortization 67,745 75,199 92,320 105,630 106,147
Depreciation and amortization 5,122 4,752 10,257 19,652 18,922
Corporate expenses 4,250 3,753 5,112 4,382 4,568
Operating income 48,713 54,447 47,884 43,164 52,847
Interest expense 22,303 22,708 35,222 42,870 44,340
Interest income 2,292 2,338 3,244 2,433 3,339
Income before extraordinary
items and cumulative
effect of changes in
accounting principles 17,360 19,909 8,293 424 5,746
Extraordinary loss -- -- (7,750) -- (5,155)
Cumulative effect of change in
accounting principle 3,150 -- -- -- --
Net income 20,510 19,909 543 424 591
As of September 30,
-------------------
1994 1995 1996 1997 1998
----- ---- ----- ---- ----
Balance Sheet Data :
Total assets $94,079 $99,605 $281,778 $280,977 $279,521
Total debt 199,473 198,919 402,993 415,722 429,691
Redeemable preferred stock 168 168 -- -- --
Stockholder's investment (136,961) (133,879) (172,392) (185,563) (203,776)
Fiscal Year Ended September 30,
-------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Cash Flow Data :
Cash flow from operating
activities $18,267 $22,145 $28,370 $15,551 $28,022
Cash flow from investing activities (1,420) (2,543) (165,109) (17,363) (8,190)
Cash flow from financing activities (16,905) (18,549) 145,031 (2,875) (13,404)
-20-
Fiscal Year Ended September 30,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Financial Ratios and Other Data :
Operating Cash Flow $53,835 $59,199 $58,141 $62,816 $71,769
Operating Cash Flow Margin 42.8% 42.9% 37.4% 36.3% 39.3%
Capital expenditures 3,264 2,777 20,838 12,140 8,557
The consolidated statement of operations data, balance sheet data, cash
flow data and financial ratios and other data as of and for the year
ended September 30, 1996 include the effects of significant
transactions consummated by the Company during the year that impact the
comparability of Fiscal 1996 data to previous years. Such transactions
include the effects of a $275,000 offering of 9.75% Senior Subordinated
Debentures due 2007, the asset acquisitions of WHTM and WCFT, the
acquisition of the Anniston LMA and Anniston Option, the early
repayment of approximately $74,704 in debt and payment of a prepayment
penalty on such debt of $12,934. These transactions are discussed in
Management's Discussion and Analysis of Financial Condition and Results
of Operations as well as Notes 3 and 6 of Notes to Consolidated
Financial Statements. In addition, the comparability of Fiscal 1997 and
1998 data to Fiscal 1996 data is impacted by the fact that that the
results of operations of WHTM, WCFT and WJSU are included for the full
year in Fiscal 1997 and 1998 as compared to the period from the date of
acquisition and the effective date of the Anniston LMA in Fiscal 1996.
The extraordinary losses during Fiscal 1996 and Fiscal 1998 resulted
from the early repayment of long-term debt (see Note 6 of Notes to
Consolidated Financial Statements).
As required by generally accepted accounting principles, the Company
changed its method of accounting for income taxes during Fiscal 1994.
Total debt is defined as long-term debt (including the current portion
thereof, and net of discount), short-term debt and capital lease
obligations.
In September 1996, the Company purchased for cash the Series A
redeemable preferred stock at its redemption value of $168.
Cash flows from operating, investing and financing activities were
determined in accordance with generally accepted accounting
principles. See Consolidated Financial Statements-Consolidated
Statements of Cash Flows.
"Operating Cash Flow" is defined as operating income plus depreciation
and amortization. Programming expenses are included in television
operating expenses. The Company has included Operating Cash Flow data
because it understands that such data is used by investors to measure a
company's ability to fund its operations and service debt. Operating
Cash Flow does not purport to represent cash flows from operating
activities determined in accordance with generally accepted accounting
principles as reflected in the Consolidated Financial Statements, is
not a measure of financial performance under generally accepted
accounting principles, should not be considered in isolation or as a
substitute for net income or cash flows from operating activities and
may not be comparable to similar measures reported by other companies.
"Operating Cash Flow Margin" is defined as Operating Cash Flow as a
percentage of operating revenues, net.
-21-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
General Factors Affecting the Company's Business
The Company owns and/or programs ABC network-affiliated television stations
serving seven diverse geographic markets: WJLA in Washington, D.C.; WHTM in
Harrisburg, Pennsylvania; KATV in Little Rock, Arkansas; KTUL in Tulsa,
Oklahoma; WSET in Lynchburg, Virginia; WCIV in Charleston, South Carolina; and
WCFT in Tuscaloosa, Alabama (west of Birmingham, Alabama). The Company also
programs the ABC network affiliate WJSU in Anniston, Alabama (east of
Birmingham, Alabama) under the Anniston LMA, and owns a low power television
station licensed to Birmingham, Alabama (WBMA). The Company operates WCFT and
programs WJSU in tandem with WBMA serving the viewers of Birmingham, Tuscaloosa
and Anniston.
The operating revenues of the Company are derived from local and national
advertisers and, to a much lesser extent, from the networks and program
syndicators for the broadcast of programming and from commercial production and
tower rental activities. The primary operating expenses involved in owning and
operating television stations are employee compensation, programming, news
gathering, production, promotion and the solicitation of advertising.
Television stations receive revenues for advertising sold for placement within
and adjoining locally originated programming and adjoining their network
programming. Advertising is sold in time increments and is priced primarily on
the basis of a program's popularity among the specific audience an advertiser
desires to reach, as measured principally by quarterly audience surveys. In
addition, advertising rates are affected by the number of advertisers competing
for the available time, the size and demographic makeup of the market areas
served and the availability of alternative advertising media in the market
areas. Rates are highest during the most desirable viewing hours (generally
during local news programming and prime time), with corresponding reductions
during other hours.
The Company's 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 the Company's 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 the Company's first fiscal
quarter. Years in which Olympic Games are held also cause cyclical fluctuation
in operating results depending on which television network is carrying Olympic
coverage.
The broadcast television industry is cyclical in nature, being affected by
prevailing economic conditions. Because the Company relies on sales of
advertising time for substantially all of its revenues, its operating results
are sensitive to general economic conditions and regional conditions
-22-
in each of the local market areas in which the Company's stations operate. For
Fiscal 1996, 1997 and 1998, WJLA accounted for approximately one-half of the
Company's total revenues. As a result, the Company's results of operations are
highly dependent on WJLA and, in turn, the Washington, D.C. economy and, to a
lesser extent, on each of the other local economies in which the Company's
stations operate. The Company is also dependent on automotive-related
advertising. Approximately 25%, 26% and 25% of the Company's total broadcast
revenues for the years ended September 30, 1996, 1997 and 1998, respectively,
consisted of automotive-related advertising. A significant decrease in such
advertising could materially and adversely affect the Company's operating
results.
Operating Revenues
The following table depicts the principal types of operating revenues, net of
agency commissions, earned by the Company for each of the last three fiscal
years and the percentage contribution of each to the total broadcast revenues of
the Company, before fees.
Fiscal Year Ended September 30,
-------------------------------
1996 1997 1998
---- ---- ----
Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
Local/regional $ 77,248 48.0% $ 85,954 48.1% $ 92,398 49.0%
National 64,277 40.0% 71,324 40.0% 75,530 40.0%
Network compensation 5,443 3.4% 6,223 3.5% 6,237 3.3%
Political 3,160 2.0% 4,273 2.4% 3,291 1.8%
Trade and barter 7,119 4.4% 7,868 4.4% 8,192 4.3%
Other revenues 3,489 2.2% 3,002 1.6% 3,065 1.6%
-------- ------- -------- ------- -------- -------
Broadcast revenues 160,736 100.0% 178,644 100.0% 188,713 100.0%
====== ====== ======
Fees (5,541) (6,068) (6,202)
------- ------ -------
Broadcast revenue,
net of fees 155,195 172,576 182,511
Non-broadcast revenue 378 252 (27)
--------- --------- ----------
Total net operating revenues $155,573 $172,828 $182,484
======= ======= =======
- ----------
Represents sale of advertising time to local and regional advertisers
or agencies representing such advertisers.
Represents sale of advertising time to agencies representing national
advertisers.
Represents payment by networks for broadcasting or promoting network
programming.
Represents sale of advertising time to political advertisers.
Represents value of commercial time exchanged for goods and services
(trade) or syndicated programs (barter).
Represents miscellaneous revenue, principally receipts from tower
rental, production of commercials and revenue from the sales of
University of Arkansas sports programming to advertisers and radio
stations.
Represents fees paid to national sales representatives and fees paid
for music licenses.
Represents revenues from program syndication sales and other
miscellaneous non-broadcast revenues.
-23-
Local/regional and national advertising constitute the Company's largest
categories of operating revenues, collectively representing almost 90% of the
Company's total broadcast revenues in each of the last three fiscal years.
Although the total percentage contribution of local/regional and national
advertising has been relatively constant over such period, the growth rate of
local/regional and national advertising revenues varies annually based upon the
demand and rates for local/regional advertising time versus national advertising
time in each of the Company's markets. Local/regional advertising revenues
increased 14.9%, 11.3% and 7.5% in Fiscal 1996, 1997 and 1998, respectively; and
national advertising revenues increased 7.3%, 11.0% and 5.9% during the same
respective periods. Each other individual category of revenues represented less
than 5.0% of the Company's total revenues for each of the last three fiscal
years.
Results of Operations - Fiscal 1998 Compared to Fiscal 1997
As compared to Fiscal 1997, the Company's results of operations for Fiscal 1998
principally reflect increased demand by advertisers in the Washington, D.C.
market as well as increased audience share and advertising revenues in the
Birmingham market. The comparative results are also impacted by the effect of
the Company's $150,000 offering of its 8.875% Senior Subordinated Notes due 2008
(the "8.875% Notes") completed on January 22, 1998. The cash proceeds of the
offering, net of offering expenses, of approximately $146,000 were used to
redeem the Company's 11.5% Senior Subordinated Debentures due 2004 (the "11.5%
Debentures") on March 3, 1998 with the balance used to repay certain amounts
outstanding under the Company's revolving credit facility. The Company incurred
a loss, net of the related income tax effect, of $5,155 on the early
extinguishment of the 11.5% Debentures resulting primarily from the payment of a
call premium and write-off of remaining deferred financing costs.
Set forth below are selected consolidated financial data for Fiscal 1997 and
1998, respectively, and the percentage change between the years.
Fiscal Year Ended September 30,
-------------------------------
Percentage
1997 1998 Change
---- ---- ------
Operating revenues, net $172,828 $182,484 5.6%
Total operating expenses 129,664 129,637 0.0%
------- -------
Operating income 43,164 52,847 22.4%
Nonoperating expenses, net 41,630 41,514 (0.3)%
Income tax provision 1,110 5,587 403.3%
------- --------
Income before extraordinary loss 424 5,746 1,255.2%
Extraordinary loss, net of income
tax benefit -- (5,155) --
--------- ------
Net income $ 424 $ 591 39.4%
======== ========
Operating cash flow $ 62,816 $ 71,769 14.3%
====== ======
-24-
Net Operating Revenues
Net operating revenues for Fiscal 1998 totaled $182,484, an increase of $9,656,
or 5.6%, as compared to Fiscal 1997. This increase resulted principally from
increased local/regional and national advertising demand in the Company's
Birmingham and Washington, D.C. markets, partially offset by a decline in the
Tulsa market as well as decreased political advertising in the majority of the
Company's markets. The revenue growth in Birmingham was achieved through
increased audience and market share. The expansion in audience and market share
was the result of the Company's development of the Birmingham operation.
Local/regional advertising revenues increased $6,444, or 7.5%, over Fiscal 1997.
The increase was primarily attributable to an improvement in the Washington,
D.C. and Little Rock local/regional advertising markets as well as market share
gains by the Birmingham stations, offset by a weakening in the Harrisburg market
for local/regional advertisers.
National advertising revenues increased $4,206, or 5.9%, in Fiscal 1998 over the
prior fiscal year. The increase was principally attributable to improvements in
the Washington, D.C. and Harrisburg national advertising markets and market
share gains by the Birmingham stations, offset by a weakening in the Tulsa
market for national advertisers.
Political advertising revenues decreased by $982, or 23.0%, in Fiscal 1998 from
Fiscal 1997. This decrease was primarily due to the national presidential
election as well as various high-profile local races in several of the Company's
markets that took place during the first quarter of Fiscal 1997 with no
comparable political elections occurring during the first quarter of Fiscal
1998. The decrease was partially offset by increased political advertising
during the third and fourth quarters of Fiscal 1998 as compared to the last two
quarters of Fiscal 1997.
No individual advertiser accounted for more than 5% of the Company's broadcast
revenues during Fiscal 1998 or 1997.
Total Operating Expenses
Total operating expenses in Fiscal 1998 were $129,637, a decrease of $27
compared to total operating expenses of $129,664 in Fiscal 1997.
Television operating expenses, excluding depreciation and amortization, totaled
$106,147 in Fiscal 1998, an increase of $517, or 0.5%, when compared to
television operating expenses of $105,630 in Fiscal 1997. The increase in such
expenses was reduced by a non-recurring programming expense of approximately
$2,000 related to the Company's early termination of a program contract incurred
during Fiscal 1997. Excluding this charge from Fiscal 1997 television operating
expenses, such expenses increased 2.4% in Fiscal 1998 from Fiscal 1997. This
television operating expense increase was primarily attributable to increased
news expenses across a majority of the Company's stations, partially offset by
an overall reduction in television operating expenses in Birmingham, Little Rock
and Charleston.
-25-
Depreciation and amortization expense of $18,922 in Fiscal 1998 decreased $730,
or 3.7%, from $19,652 in Fiscal 1997. The decrease was primarily attributable to
the reduced level of capital expenditures from Fiscal 1996 to Fiscal 1997 and
Fiscal 1998.
Corporate expenses in Fiscal 1998 increased $186, or 4.2%, from Fiscal 1997. The
increase was due to increases in various expenses, including compensation,
travel and entertainment.
Operating Income
Operating income of $52,847 in Fiscal 1998 increased $9,683, or 22.4%, compared
to operating income of $43,164 in Fiscal 1997. The operating profit margin in
Fiscal 1998 increased to 29.0% from 25.0% for the prior fiscal year.
The increase in operating income and margin was due primarily to operating
revenues increasing at a greater rate than operating expenses as discussed
above. The Company's Fiscal 1997 operating margins were adversely impacted due
to the investment in the start-up operations in Birmingham (e.g., programming
and staffing changes, marketing and promotion activities, and depreciation
arising from capital expenditures for facility construction and equipment
purchases to integrate the operation) during the initial phase of Birmingham's
audience share development as well as the non-recurring program termination
expense.
Operating Cash Flow
Operating cash flow increased to $71,769 in Fiscal 1998 from $62,816 in Fiscal
1997, an increase of $8,953, or 14.3%. This increase was a result of the growth
in net operating revenues together with relatively stable television operating
expenses and corporate expenses as discussed above. The Company believes that
operating cash flow, defined as operating income plus depreciation and
amortization, is important in measuring the Company's financial results and its
ability to pay principal and interest on its debt because of the Company's level
of non-cash expenses attributable to depreciation and amortization of intangible
assets. Operating cash flow does not purport to represent cash flows from
operating activities determined in accordance with generally accepted accounting
principles as reflected in the Company's consolidated financial statements, is
not a measure of financial performance under generally accepted accounting
principles, should not be considered in isolation or as a substitute for net
income or cash flows from operating activities and may not be comparable to
similar measures reported by other companies.
Nonoperating Expenses, Net
Interest expense of $44,340 for Fiscal 1998 increased by $1,470, or 3.4%, from
$42,870 in Fiscal 1997. This increase was principally due to the incremental
interest expense associated with carrying both the newly-issued 8.875% Notes and
the 11.5% Debentures from January 22, 1998 until the redemption of the 11.5%
Debentures on March 3, 1998 after the redemption notice period was completed.
Had the Company redeemed the 11.5% Debentures on January 22, 1998, interest
expense for Fiscal 1998 would have been $42,729, a decrease of $141, or 0.3%, as
compared to
-26-
Fiscal 1997. This decrease was related to a reduced average interest rate on
debt as a result of the Company's refinancing on January 22, 1998, partially
offset by higher average outstanding debt balances during Fiscal 1998.
The average amount of debt outstanding and the weighted average interest rate on
such debt for Fiscal 1998 and 1997 approximated $449,431 and 9.7%, and $413,723
and 10.2%, respectively. The increased weighted average debt balance during
Fiscal 1998 was primarily due to carrying both the newly-issued 8.875% Notes and
the 11.5% Debentures from January 22, 1998 until the redemption of the 11.5%
Debentures on March 3, 1998 after the redemption notice period was completed.
Had the Company redeemed the 11.5% Debentures on January 22, 1998, the weighted
average balance of debt would have been $430,507 for Fiscal 1998.
Interest income of $3,339 in Fiscal 1998 increased $906, or 37.2%, as compared
to interest income of $2,433 in Fiscal 1997. The increase was primarily due to
interest earned from temporarily investing the majority of the proceeds from the
issuance of the 8.875% Notes for the period from January 22, 1998 until March 3,
1998 at which time the Company redeemed the 11.5% Debentures.
Income Taxes
The provision for income taxes in Fiscal 1998 of $5,587 increased by $4,477, or
403.3%, when compared to the provision for income taxes of $1,110 in Fiscal
1997. The increase was directly related to the $9,799, or 638.8%, increase in
income before income taxes and extraordinary loss. This increase was a result of
the increased Operating Income and reduced Nonoperating Expenses as discussed
above.
Income Before Extraordinary Loss
Income before extraordinary loss in Fiscal 1998 increased by $5,322 from $424 in
Fiscal 1997. As discussed previously, the start-up nature of the Birmingham
operation and the non-recurring program expense adversely impacted Fiscal 1997
results.
Net Income
Net income for Fiscal 1998 of $591 increased $167, or 39.4%, when compared to
net income of $424 in Fiscal 1997. The increase in net income was attributable
to the improved operating results for Fiscal 1998 as discussed above,
substantially offset by the $5,155 extraordinary loss on early repayment of debt
resulting primarily from the payment of a call premium and write-off of
remaining deferred financing costs.
Balance Sheet
Significant balance sheet fluctuations from September 30, 1997 to September 30,
1998 consisted of increased cash and cash equivalents and long-term debt. These
increases reflect the Company's refinancing transaction in January 1998. In
addition, distributions to owners increased as a result of net cash advances
made during Fiscal 1998.
-27-
Results of Operations - Fiscal 1997 Compared to Fiscal 1996
Factors Affecting Fiscal 1996
There were significant factors which affected the results of operations for the
year ended September 30, 1996. In March 1996, the Company, through its 80%-owned
subsidiaries, acquired the assets and certain liabilities of WHTM and WCFT for
$115,475 and $20,181, respectively (the "Acquisitions"). The results of
operations of WHTM and WCFT are included for the period subsequent to the
acquisitions. Additionally, in December 1995, the Company, through an 80%-owned
subsidiary, entered into the ten-year Anniston LMA with the owners of WJSU, a
television station operating in Anniston, Alabama. The operating revenues and
expenses of WJSU are therefore included in the Company's consolidated financial
statements since December 1995. References to the "New Stations" in Management's
Discussion and Analysis of Financial Condition and Results of Operations are to
WHTM, WCFT and WJSU as programmed under the Anniston LMA. In addition, WSET and
WCIV became wholly-owned subsidiaries of the Company through a contribution of
capital stock (the "Contribution") from an affiliate wholly-owned by Joe L.
Allbritton.
In February 1996, the Company completed the offering of its $275,000 9.75%
Senior Subordinated Debentures due 2007 (the "9.75% Debentures"). The proceeds
from the offering of the 9.75% Debentures were used to finance the acquisitions
of WHTM and WCFT for $135,656, acquire the Anniston Option for $10,000, repay
approximately $74,704 of debt which was outstanding under senior secured
promissory notes and other credit agreements and pay a related prepayment
penalty of $12,934. The remaining net proceeds were retained by the Company for
the construction of studio and transmission facilities in Birmingham, Alabama
and general corporate purposes.
As compared to Fiscal 1996, the Company's results of operations for Fiscal 1997
principally reflect the effect of the New Stations as their results are included
for the entire year in Fiscal 1997 as compared to the period from the date of
acquisition in Fiscal 1996. Additional significant factors include increased
demand by advertisers in the Washington, D.C. market, offset by continued
spending in Birmingham. As part of the planned development of the Birmingham
operation, the Company has continued to make enhancements in its local news and
has increased its marketing activities to promote WCFT and WJSU as the new ABC
affiliates for the Birmingham market. These activities have resulted in
increased audience share, and management believes that expansion in audience
share will continue resulting in increasingly higher advertising revenues.
-28-
Set forth below are selected consolidated financial data for Fiscal 1996 and
1997, respectively, and the percentage change between the years.
Fiscal Year Ended September 30,
-------------------------------
Percentage
1996 1997 Change
---- ---- ------
Operating revenues, net $155,573 $172,828 11.1%
Total operating expenses 107,689 129,664 20.4%
------- -------
Operating income 47,884 43,164 (9.9)%
Nonoperating expenses, net 33,079 41,630 25.9%
Income tax provision 7,812 1,110 (85.8)%
------- --------
Income before minority interest
and extraordinary loss 6,993 424 (93.9)%
Minority interest in net losses of
consolidated subsidiaries 1,300 -- --
Extraordinary loss, net of income
tax benefit (7,750) -- --
------ --------
Net income $ 543 $ 424 (21.9)%
======== ========
Operating cash flow $ 58,141 $ 62,816 8.0%
====== ======
Net Operating Revenues
Net operating revenues for Fiscal 1997 totaled $172,828, an increase of $17,255,
or 11.1%, as compared to Fiscal 1996. The New Stations accounted for $11,282, or
65.4%, of the increase in net operating revenues. The majority of this
significant contribution by the New Stations was due to the fact that results of
the New Stations were included for the full year in Fiscal 1997 as compared to
the period from the date of acquisition in Fiscal 1996. The balance of the
increase resulted principally from increased local/regional and national
advertising in the Washington, D.C. and Little Rock markets offset by a decline
in the Charleston market.
Local/regional advertising revenues increased $8,706, or 11.3%, over Fiscal
1996. The increase was largely attributable to a $6,127 increase in
local/regional revenues by the New Stations and revenue increases generated by
the Company's stations located in the Washington, D.C. and Little Rock markets,
offset by weakening in the Tulsa and Charleston markets for local/regional
advertisers.
National advertising revenues increased $7,047, or 11.0%, in Fiscal 1997 over
the prior fiscal year. The increase was principally attributable to $4,003
generated by the New Stations and improvements in the Washington, D.C., Little
Rock and Tulsa markets offset by a weakening in the Charleston market for
national advertising.
No individual advertiser accounted for more than 5% of the Company's broadcast
revenues during Fiscal 1997 or 1996.
-29-
Increased network compensation revenue of $780, or 14.3%, over the Fiscal 1996
level was principally attributable to the incremental network compensation of
the New Stations during Fiscal 1997.
Total Operating Expenses
Total operating expenses in Fiscal 1997 were $129,664, an increase of $21,975,
or 20.4%, compared to total operating expenses of $107,689 in Fiscal 1996.
Television operating expenses (before depreciation, amortization and corporate
expenses) totaled $105,630 in Fiscal 1997, an increase of $13,310, or 14.4%,
when compared to television operating expenses of $92,320 in Fiscal 1996.
Television operating expenses of the New Stations accounted for 79.5% of the
increase. The New Stations accounted for a greater proportionate increase in
television operating expenses than in net operating revenues principally due to
the impact of Birmingham as discussed further below. The remaining increase in
television operating expenses is largely attributable to approximately $2,000 of
non-recurring program expense resulting from the Company's early termination of
a program contract. Excluding the New Stations and the non-recurring program
expense, Fiscal 1997 television operating expenses increased approximately $727,
or 0.9%, over the Fiscal 1996 level. This expense increase over the prior year
was concentrated in the news area, which is consistent with the Company's
operating strategy that emphasizes local news leadership in each of its markets.
Depreciation and amortization expense of $19,652 in Fiscal 1997 increased $9,395
from $10,257 in Fiscal 1996. The New Stations accounted for $8,843, or 88.8%, of
the increase. This was due to the increased level of depreciable and intangible
assets which resulted principally from the acquisition of WHTM and WCFT, the
Anniston Option and capital equipment and leasehold improvements associated with
the new studio in Birmingham and transmission facilities in Tuscaloosa and
Anniston.
Corporate expenses in Fiscal 1997 decreased $730 from Fiscal 1996. The decrease
was principally due to a decrease in charitable contributions.
Operating Income
The operating results of the New Stations impacted the Company's consolidated
performance trends for Fiscal 1997 as compared to Fiscal 1996 primarily due to
the fact that they were included for the entire period in Fiscal 1997 as
compared to the period from the date of acquisition in the prior year. In
addition, the operating results of the Birmingham operation had a continuing
impact on the Company's consolidated performance trends in Fiscal 1997 as
compared to Fiscal 1996. The operating margins generated by the Company in the
aggregate were adversely impacted primarily due to the Company's continuing
investment in the start-up operations in Birmingham, (e.g., programming and
staffing changes, marketing and promotional activities) as well as due to the
impact of the intangible amortization expense arising from the Acquisitions and
increased depreciation expense from capital improvements made to the New
Stations.
-30-
Operating income of $43,164 in Fiscal 1997 decreased $4,720, or 9.9%, compared
to operating income of $47,884 in Fiscal 1996. The operating profit margin in
Fiscal 1997 decreased to 25.0% from 30.8% for the comparable period in the prior
year. The decrease in operating profit and margin was due primarily to operating
expenses increasing at a greater rate than operating revenue as discussed above.
Operating Cash Flow
Operating cash flow increased to $62,816 in Fiscal 1997 from $58,141 in Fiscal
1996, an increase of $4,675, or 8.0%. This increase was a result of the growth
in net operating revenues as discussed above together with smaller proportional
television operating expenses and corporate expenses. The Company believes that
operating cash flow, defined as operating income plus depreciation and
amortization, is important in measuring the Company's financial results and its
ability to pay principal and interest on its debt because of the Company's level
of non-cash expenses attributable to depreciation and amortization of intangible
assets. Operating cash flow does not purport to represent cash flows from
operating activities determined in accordance with generally accepted accounting
principles as reflected in the Company's consolidated financial statements, is
not a measure of financial performance under generally accepted accounting
principles, should not be considered in isolation or as a substitute for net
income or cash flows from operating activities and may not be comparable to
similar measures reported by other companies.
Nonoperating Expenses, Net
Interest expense of $42,870 for Fiscal 1997 increased by $7,648, or 21.7%, from
$35,222 in Fiscal 1996. The increase was attributable to increased interest
expense from the issuance of the Company's 9.75% Debentures, together with
higher average working capital debt balances during Fiscal 1997 compared to the
prior year. The average amount of debt outstanding and the weighted average
interest rate on such debt for Fiscal 1997 and 1996 approximated $413,723 and
10.2%, and $324,824 and 10.5%, respectively.
Interest income of $2,433 in Fiscal 1997 decreased $811, or 25.0%, as compared
to interest income of $3,244 in Fiscal 1996. The decrease was primarily due to
interest earned from temporarily investing certain proceeds from the sale of the
9.75% Debentures during Fiscal 1996.
Income Taxes
The provision for income taxes in Fiscal 1997 of $1,110 decreased by $6,702, or
85.8%, when compared to the provision for income taxes of $7,812 in Fiscal 1996.
The decrease is directly related to the $13,271, or 89.6%, decrease in income
before income taxes, minority interest and extraordinary item (as previously
discussed).
Income Before Minority Interest and Extraordinary Loss
Income before minority interest and extraordinary loss in Fiscal 1997 decreased
by $6,569, or
-31-
93.9%, from Fiscal 1996. As discussed previously, the start-up nature of the
Birmingham operation, the increased interest expense and depreciation and
amortization associated with the Acquisitions and the non-recurring program
expense adversely impacted the Fiscal 1997 results.
Net Income
Net income for Fiscal 1997 of $424 decreased $119, or 21.9%, when compared to
net income of $543 in Fiscal 1996. The decrease in net income was attributable
to the factors discussed above. Additionally, net income for Fiscal 1996
reflects the $7,750 extraordinary loss on early repayment of debt.
Balance Sheet
Significant balance sheet fluctuations from September 30, 1996 to September 30,
1997 consisted of increased accounts receivable and long-term debt, offset by
decreases in cash and cash equivalents and accounts payable. In addition,
distributions to owners increased as a result of cash advances made during
Fiscal 1997. The increase in accounts receivable reflects the Company's
continued revenue growth while the offsetting decreases in cash and cash
equivalents and accounts payable were primarily attributable to the timing of
cash payments. The increase in long-term debt was related to additional draws
under its revolving credit facility and new capital leases to fund capital
expenditures, primarily in Birmingham, Alabama and Washington, D.C.
Liquidity and Capital Resources
Cash Provided by Operations
Cash and cash equivalents increased $6,428 from September 30, 1997 to September
30, 1998, principally from net cash provided by operations of $28,022 and a net
increase in debt of $12,978, offset by net capital expenditures of $8,557,
financing costs and a related prepayment penalty of $10,323 and net
distributions to owners of $16,059. Cash provided by operations was primarily a
result of net income of $591 plus deprecation and amortization of $18,992 and
the extraordinary loss on early repayment of debt of $5,155.
Cash and cash equivalents decreased $4,687 from September 30, 1996 to September
30, 1997, principally resulting from net cash provided by operations of $15,551
and a $10,600 increase in borrowings under a revolving line of credit, offset by
net capital expenditures of $12,140, the additional payment under the Anniston
Option of $5,348 and net distributions to owners of $12,904. Cash provided by
operations was primarily a result of net income of $424 plus depreciation and
amortization of $19,652, offset by other changes in assets and liabilities,
primarily an increase in accounts receivable, program rights, deferred income
taxes and accounts payable.
Distributions to Related Parties
The Company periodically makes advances in the form of distributions to
Perpetual. Prior to the
-32-
Contribution, WSET and WCIV made cash advances to Westfield. For Fiscal 1996,
1997 and 1998, the Company made cash advances net of repayments to these related
parties of $39,882, $12,904 and $19,237, respectively. In addition, during
Fiscal 1996 and 1998, the Company was charged for federal income taxes by
Perpetual and Westfield and distributed certain tax benefits to Westfield
totaling $836 and $433, respectively. During Fiscal 1997, the Company generated
a benefit from federal income taxes of $691. This benefit was effectively
distributed to Perpetual as such benefit will not be recognized in future years
pursuant to the terms of the tax sharing agreement between the companies. In
conjunction with the Contribution, WSET and WCIV declared non-cash dividends in
Fiscal 1996 to Westfield totaling $18,371 which represented the cumulative net
advances made to Westfield by WSET and WCIV prior to the Contribution. As a
result, the net change in distributions to related parties during such periods
were $20,675, $12,904 and $18,804, respectively. The advances to these related
parties are non-interest bearing and, as such, do not reflect market rates of
interest-bearing loans to unaffiliated third parties.
At present, the primary sources of repayment of net advances is through the
ability of the Company 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 the Company's Consolidated Financial Statements.
During Fiscal 1991, the Company made a $20,000 11.06% loan to Allnewsco. This
amount has been reflected in the Company's Consolidated Financial Statements on
a consistent basis with other distributions to owners. The loan had stated
repayment terms consisting of annual principal installments approximating $2,220
commencing January 1997 through January 2005 and payments of interest
semi-annually. During Fiscal 1997 and 1998, the Company deferred the first two
annual principal installment payments pending renegotiation of the repayment
terms. Effective July 1, 1998, the note was amended to extend the maturity date
to January 2008 and defer all principal installments until maturity, with the
principal balance also due upon demand. In exchange for the amendment, Allnewsco
paid to the Company the amount of $650. Interest payments on the loan have been
made in accordance with the terms of the note, and the Company expects it will
continue to receive such payments on a current basis. To date, interest payments
from Allnewsco have been funded by advances from Perpetual to Allnewsco. The
Company anticipates that such payments will be funded in a similar manner for
the foreseeable future. However, there can be no assurance that Allnewsco will
have the ability to make such interest payments in the future.
Under the terms of the Company's borrowing agreements, future advances,
distributions and dividends to related parties are subject to certain
restrictions. The Company anticipates that, subject to such restrictions, the
Company will make distributions and loans to related parties in the future.
Indebtedness
The Company's total debt, including the current portion of long-term debt,
increased from $415,722 at September 30, 1997 to $429,691 at September 30, 1998.
This debt, net of applicable discounts, consists of $273,935 of the 9.75%
Debentures, $150,000 of the 8.875% Notes and $5,756 of capital lease
obligations. The increase of $13,969 in total debt from September 30, 1997 to
September 30, 1998 was primarily due to the net increase of $27,000 in principal
of the 8.875% Notes as
-33-
compared to the 11.5% Debentures, offset by a $12,700 decrease in amounts
outstanding under the revolving credit facility. The Company's $40,000 revolving
credit facility is secured by the pledge of the stock of the Company and its
subsidiaries and matures April 16, 2001. As of September 30, 1998, there were no
amounts outstanding under the revolving credit facility.
Under the existing borrowing agreements, the Company agrees to abide by
restrictive covenants that place limitations upon payments of cash dividends,
issuance of capital stock, investment transactions, incurrence of additional
obligations and transactions with Perpetual and other related parties. In
addition, the Company must maintain specified levels of operating cash flow (as
defined in the underlying borrowing agreements) and/or working capital and
comply with other financial covenants. Compliance with the financial covenants
is measured at the end of each quarter, and as of September 30, 1998, the
Company was in compliance with those financial covenants.
Other Uses of Cash
During Fiscal 1996, 1997 and 1998, the Company made $20,838, $12,140 and $8,557,
respectively, of capital expenditures. The decrease in capital expenditures from
Fiscal 1996 to Fiscal 1997 and to Fiscal 1998 was principally attributable to
completion of the facility construction and equipment purchases in Alabama
associated with the consolidation of the operations of WCFT and WJSU and the
purchase of a corporate aircraft in Fiscal 1997. Capital expenditures in the
normal course of business are financed from cash flow from operations or with
capitalized leases and are primarily for the acquisition of technical equipment
and vehicles to support operations. The Company anticipates that capital
expenditures for Fiscal 1999 will approximate $10,000, which includes
approximately $2,000 for completion of the project to enable WJLA to
simultaneously broadcast its programming over its second channel authorized to
transmit a digital television signal. Management expects that the source of
funds for these anticipated capital expenditures will be cash provided by
operations and capitalized leases. The Company has a $10,000 annually renewable
lease credit facility for the purpose of financing capital expenditures under
capitalized leases. The equipment under lease is at interest rates which vary
according to the lessor's cost of funds. This facility expires on March 1, 1999
and is renewable annually on mutually satisfactory terms. The Company currently
intends to renew this facility. At September 30, 1998, $5,756 was outstanding
under this lease credit facility.
The Company regularly enters into program contracts for the right to broadcast
television programs produced by others and program commitments for the right to
broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. During Fiscal 1996, 1997
and 1998, the Company made cash payments of approximately $15,700, $19,500 and
$17,600, respectively, for rights to television programs. The Fiscal 1997 amount
includes the approximate $2,000 non-recurring program expense resulting from the
Company's early termination of a program contract. As of September 30, 1998, the
Company had commitments to acquire further program rights through September 30,
2005 totaling $36,312 and anticipates cash payments for program rights will
approximate $18,000 per year for the foreseeable future. The Company currently
intends to fund these commitments with cash provided by operations.
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Based upon the Company's current level of operations, management believes that
available cash, together with available borrowings under the revolving credit
facility and lease credit facility, will be adequate to meet the Company's
anticipated future requirements for working capital, capital expenditures and
scheduled payments of interest on its debt for the next twelve months.
ACC's cash flow from operations and consequent ability to service its debt is,
in part, dependent upon the earnings of its subsidiaries and the distribution
(through dividends or otherwise) of those earnings to ACC, or upon loans,
advances or other payments of funds by those subsidiaries to ACC. As of
September 30, 1998, 75% of the assets of ACC were held by operating subsidiaries
and for Fiscal 1998, approximately 50% of ACC's net operating revenues were
derived from the operations of ACC's subsidiaries.
Income Taxes
The operations of the Company are included in a consolidated federal income tax
return filed by Perpetual. In accordance with the terms of a tax sharing
agreement between the Company and Perpetual, the Company is required to pay to
Perpetual its federal income tax liability, computed based upon statutory
federal income tax rates applied to the Company's consolidated taxable income.
Taxes payable to Perpetual are not reduced by losses generated in prior years by
the Company. In addition, the amount payable by the Company to Perpetual under
the tax sharing agreement is not reduced if losses of other members of the
Perpetual group are utilized to offset taxable income of the Company for
purposes of the Perpetual consolidated federal income tax return.
The Company files state income tax returns in the District of Columbia,
Virginia, Maryland, Arkansas, Oklahoma and South Carolina. Separate state income
tax returns are filed by the Company's subsidiaries, except for KATV, KTUL, WCIV
and WSET. The operations of KATV, KTUL and WCIV are included in the Company's
state income tax returns due to their status as single-member limited liability
companies. The operations of WSET as well as the Company's Virginia-apportioned
operations are included in a combined state income tax return filed with other
affiliates. The resulting state income tax liability is not reduced if losses of
the affiliates are used to offset the Virginia taxable income of WSET and the
Company for purposes of the combined state income tax return.
The provision for income taxes is determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires that the consolidated amount of current and deferred income tax
expense for a group that files a consolidated income tax return be allocated
among members of the group when those members issue separate financial
statements. Perpetual and, prior to the Contribution, Westfield, allocated a
portion of their respective consolidated current and deferred income tax expense
to the Company as if the Company and its subsidiaries were separate taxpayers.
The Company records deferred tax assets, to the extent it is considered more
likely than not that such assets will be realized in future periods, and
deferred tax liabilities for the tax effects of the differences between the
bases of its assets and liabilities for tax and financial reporting purposes. To
the extent a deferred tax asset would be recorded due to the incurrence of
losses for federal income tax purposes, any such benefit
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recognized is effectively distributed to Perpetual as such benefit will not be
recognized in future years pursuant to the tax sharing agreement.
Inflation
The impact of inflation on the Company's consolidated financial condition and
consolidated results of operations for each of the periods presented was not
material.
Year 2000 Compliance
The Year 2000 issue, common to most companies, results from computer programs,
computer equipment and embedded microprocessors using two digits rather than
four to define the applicable year. Computer applications and equipment that use
date-sensitive software or date-sensitive embedded microprocessors may recognize
a date of "00" as the year 1900 rather than the year 2000. As the Company relies
on various technologies throughout its business operations, the Year 2000 issue
could result in a system failure or miscalculations causing disruption of
operations.
The Company has undertaken various initiatives to ensure that its operational
and financial reporting systems and equipment with embedded technology will
function properly with respect to dates in the Year 2000 and thereafter. The
Company is progressing through a comprehensive plan which includes the following
phases: (i) identification of mission-critical operating systems and
applications; (ii) inventory of all applications and equipment at risk of being
date sensitive to the Year 2000; (iii) assessment and evaluation of Year 2000
issues; (iv) system modification, upgrade or replacement; (v) testing; and (vi)
development of contingency plans in the event that modifications, upgrades and
replacements are not completed timely or do not fully remediate the Year 2000
issues.
To implement the plan, the Company has established Year 2000 teams from each of
its television stations that are responsible for analyzing the Year 2000 impact
on operations and for formulating appropriate strategies to resolve the Year
2000 issues. The Company has generally completed the identification and
inventory phases and is actively managing projects in the assessment and
remediation phases of the Year 2000 plan. The Company's assessment phase of the
plan also includes contacting significant third party vendors and service
providers in an effort to determine the state of their Year 2000 readiness as
all computer software utilized by the Company is purchased or leased from third
party vendors. The Company is undertaking formal communications with its
significant vendors and service providers and is monitoring responses and
implementing additional follow-up measures as necessary.
The Company's plan of remediation includes a combination of installing new
applications and equipment, upgrading existing applications and equipment,
retiring obsolete systems and equipment and confirming significant third party
compliance. A summary of certain of the Company's mission-critical systems
follows:
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The Company receives network and first-run syndicated programming via satellite.
The Company's receipt of that programming is dependent upon the ABC television
network and program syndicators resolving their Year 2000 issues. Based upon
communications from the ABC television network, the Company does not currently
anticipate any disruptions in receiving programming from ABC. The Company is in
the process of making inquiries of program syndicators as to their Year 2000
status. In the event of any programming disruptions, the Company has certain
alternative programming options that it would plan to consider.
The Company uses advertising inventory management software to manage, schedule
and bill advertising at each of the Company's television stations. This software
is licensed from a single vendor that has warranted the system for Year 2000
compliance and advised the Company of the satisfactory completion of a Year 2000
test of the software by other users.
The Company utilizes equipment and software to automate the insertion of
advertising into program breaks. This equipment and software at certain of the
Company's television stations must be upgraded in order to be Year 2000
compliant. The Company expects to complete installation of the upgrades by the
end of the third quarter of Fiscal 1999. Failure of this software or equipment
would not materially disrupt the Company's business operations as this process
can also be performed manually.
The Company uses various broadcast and studio equipment to produce and transmit
its broadcast signals. The Company is currently communicating with third party
vendors and testing the equipment with respect to embedded technology. The
results of the procedures thus far have given the Company no reason to believe
that the equipment will not continue to function after 1999. If such procedures
indicate that any of the equipment will be impacted by the Year 2000 issue,
upgrades or replacements will be necessary.
To date, costs toward achieving Year 2000 compliance, including capital
expenditures, have not been material to the Company's results of operations, its
cash flow or its financial position, and such costs are not expected to be
material in Fiscal 1999 or 2000. Based on the status of the Company's assessment
to date, which is incomplete and ongoing, costs of the Company's Year 2000 plan,
including those incurred to date, are currently expected not to exceed $2,000.
Such costs have been, and are expected to be, principally for capital
expenditures for replacement systems. These systems generally provide enhanced
capabilities and functionality as well as Year 2000 compliance. The costs will
be funded with cash provided by operations. This estimate assumes that third
party vendors have accurately assessed the compliance of their products and that
they will successfully correct issues in non-compliant products. The Company
does not separately track internal costs associated with the Year 2000 issue;
however, such costs are not considered to be significant and principally relate
to payroll costs of existing engineering personnel. The Company believes that
none of its other significant information technology projects has been delayed
as a result of the Year 2000 compliance efforts.
Although the Company has not adopted a formal overall contingency plan as of the
present time, it has assessed, and will continue to assess, alternatives and
other specific contingency plans at the individual project level as highlighted
above.
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The Company may discover additional Year 2000 issues, including that remediation
or contingency plans are not feasible or that the costs of such plans exceed
current expectations. In many cases, the Company is relying on assurances from
third parties that their systems or that new or upgraded systems acquired by the
Company will be Year 2000 compliant. The failure of systems of the Company or
third parties could cause a material disruption in the Company's business
operations. In addition, disruptions in the general economy as a result of the
Year 2000 issue could lead to a reduction of advertising spending which could
adversely affect the Company. The Company will continue to evaluate the nature
of these risks, but at this time management is unable to determine the
probability that any such risk will occur, or if it does occur, what the nature,
length or other effects, if any, it may have on the Company.
The Company will continue to fulfill the elements of its Year 2000 plan in order
to mitigate the impact that any Year 2000 issues may have on the Company. While
there can be no assurance that the Company's systems or equipment or those of
third parties on which the Company relies will be Year 2000 compliant in a
timely manner or that the Company's or third parties' contingency plans will
mitigate the effects of any noncompliance, management believes that it has an
effective program to resolve the Year 2000 issue in a timely manner and that its
Year 2000 issues will be remediated.
The information set forth above is deemed by the Company to constitute "Year
2000 Statements" and to contain "Year 2000 Readiness Disclosure" within the
meaning of the "Year 2000 Information and Readiness Act. "
New Accounting Standards
Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" become effective during the Company's Fiscal
1999, but will have no impact on the Company's consolidated financial
statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
Not Applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
See Index on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Executive officers and directors of ACC are as follows:
Name Age Title
---- --- -----
Joe L. Allbritton 73 Chairman of the Executive Committee and Director
Barbara B. Allbritton 61 Vice President and Director
Lawrence I. Hebert 52 Chairman, Chief Executive Officer and Director
Robert L. Allbritton 29 President and Director
Frederick J. Ryan, Jr. 43 Vice Chairman, Executive Vice President,
Chief Operating Officer and Director
Jerald N. Fritz 47 Vice President, Legal and Strategic Affairs,
General Counsel
Stephen P. Gibson 33 Vice President and Chief Financial Officer
Ray P. Grimes II 49 Vice President, Broadcast Operations, Deputy
Chief Operating Officer
JOE L. ALLBRITTON is the founder of ACC and was Chairman of the Board of
Directors from its inception until 1998. In April 1998, Mr. Allbritton became
Chairman of the Executive Committee of the Board of Directors of ACC. In
addition to his position with ACC, Mr. Allbritton has served as Chairman of the
Board of Riggs National Corporation ("Riggs") (owner of banking operations in
Washington, D.C., Maryland, Virginia, Florida and internationally) from 1981 to
the present; Chairman of the Board of Riggs Bank N.A. ("Riggs Bank") since 1983
and its Chief Executive Officer since 1982; Director of Riggs Bank Europe Ltd.
since 1984 and its Chairman of the Board since 1992; Chairman of the Board and
owner since 1958 of Perpetual (owner of ACC and 80% owner through Allnewsco of
NewsChannel 8, a Virginia-based cable programming service); Chairman of
Allnewsco since its inception in 1990; Chairman of the Board and owner since
1988 of Westfield; Chairman of the Board of Houston Financial Services Ltd.
Since 1977; Chairman of the Board of WSET since 1974; a Manager of KATV, KTUL
and WCIV since 1997; Chairman of the Board of Allfinco, Harrisburg Television
and TV Alabama since 1995; Chairman of the Board of AGI and Allbritton
Jacksonville, Inc. ("AJI") since 1996; and a Trustee and President of The
Allbritton Foundation since 1971. Mr. Allbritton is the husband of Barbara B.
Allbritton and the father of Robert L. Allbritton.
BARBARA B. ALLBRITTON has been a Director of ACC since its inception and one of
its Vice Presidents since 1980. In addition to her position with ACC, Mrs.
Allbritton has been a Director of Riggs since 1991; a Director and Vice
President of WSET since 1976; a Vice President and Director of Perpetual since
1978; a Director of Houston Financial Services since 1977; a Director of
Allnewsco since 1990; a Trustee and Vice President of The Allbritton Foundation
since 1971; a Director of Allfinco, Harrisburg Television and TV Alabama since
1995; a Manager of KATV, KTUL and WCIV since 1997; and a Director of AGI and AJI
since 1996. Mrs. Allbritton is the wife of Joe L. Allbritton and the mother of
Robert L. Allbritton.
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LAWRENCE I. HEBERT has been Chairman of the Board and Chief Executive Officer of
ACC since April 1998 and a Director of ACC since 1981. He also serves as a
member of the Executive Committee of the Board of Directors of ACC. He served as
Vice Chairman of the Board of ACC from 1983 to 1998, and was its President from
1984 to 1998. He has been a Director of Perpetual since 1980 and its President
since 1981; President of Westfield since 1988; President and a Director of
Westfield News Publishing, Inc. since 1991; a Director of WSET since 1982; a
Manager of KATV, KTUL and WCIV since 1997; Vice Chairman of the Board of Houston
Financial Services since 1977; a Director of Allnewsco since 1989; President and
a Director of ATP since 1989; a Vice President and a Director of Allfinco since
1995; and a Director of Harrisburg Television and TV Alabama since 1995. He has
been President and a Director of AGI and a Director of AJI since 1996. In
addition, Mr. Hebert was Vice Chairman of the Board of Riggs from 1988 to 1993,
and has been a Director of Riggs since 1988; a Director of Riggs Bank Europe
Ltd. since 1987; a Director of Riggs Bank from 1981 to 1988; a Director of
Allied Capital II Corporation (venture capital fund) since 1989; and a Trustee
of The Allbritton Foundation since 1997.
ROBERT L. ALLBRITTON has been President of ACC since April 1998 and a Director
of ACC since 1993. He also serves as a member of the Executive Committee of the
Board of Directors of ACC. He served as Executive Vice President and Chief
Operating Officer of ACC from 1994 to 1998. He has been a Director of Allnewsco
since 1992; a Director of Riggs Bank from 1994 to 1997 and Riggs Bank Europe
Ltd. since 1994; a Director of Riggs since 1994; and a Trustee and Vice
President of The Allbritton Foundation since 1992. He has been a Director of
Perpetual since 1993; President and Director of Allfinco and Harrisburg
Television since 1995; Vice President and a Director of TV Alabama since 1995;
Vice President and a Director of AGI since 1996; Vice President and a Director
of AJI since 1996 and President of KTUL since 1997. He has been a Manager of
KATV, KTUL and WCIV since 1997. He is the son of Joe L. and Barbara B.
Allbritton.
FREDERICK J. RYAN, JR. has been Executive Vice President and Chief Operating
Officer of ACC since April 1998 and a Director and Vice Chairman of ACC since
1995. He served as Senior Vice President of ACC from 1995 to 1998. He is also
Executive Vice President of KATV, KTUL, WSET, WCIV, Harrisburg Television, TV
Alabama, AJI and Allnewsco. He previously served as Chief of Staff to former
President Ronald Reagan (1989-95) and Assistant to the President in the White
House (1982-89). Prior to his government service, Mr. Ryan was an attorney with
the Los Angeles firm of Hill, Farrer and Burrill. Mr. Ryan presently serves as a
Director of Ford's Theatre, Vice Chairman of the Ronald Reagan Presidential
Library Foundation and Trustee of Ronald Reagan Institute of Emergency Medicine
at George Washington University. Mr. Ryan is a member of the Board of
Consultants for Riggs Bank and a Director of Riggs Bank Europe Ltd. in London
since 1996.
JERALD N. FRITZ has been a Vice President of ACC since 1987, serving as its
General Counsel and overseeing strategic planning and governmental affairs. He
also has served as a Vice President of Westfield and ATP since 1988, a Vice
President of Allnewsco since 1989 and a Vice President of 78 Inc. and Allfinco
since 1995. He has been a Vice President of AGI since 1996. From 1981 to 1987,
Mr. Fritz held several positions with the FCC, including Chief of Staff, Legal
Counsel to the
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Chairman and Chief of the Common Carrier Bureau's Tariff Division. Mr. Fritz
practiced law with the Washington, D.C. firm of Pierson, Ball & Dowd,
specializing in communications law from 1978 to 1981 and from 1980 to 1983 was
on the adjunct faculty of George Mason University Law School teaching
communications law and policy. Mr. Fritz began his legal career with the FCC in
1976 and began his career in broadcasting in 1973 with WGN-TV, Chicago. He
currently serves as a member of the Governing Committee of the Communications
Forum of the American Bar Association, Futures and Copyright Committees of the
National Association of Broadcasters and Legislative Committee of the ABC
Affiliates Association.
STEPHEN P. GIBSON has been a Vice President of ACC since 1997 when he joined the
Company. He served as Vice President and Controller and was named Chief
Financial Officer in November 1998. He is also Vice President of AGI, KATV,
KTUL, WSET, WCIV, Allfinco, Harrisburg Television, TV Alabama, ATP, ANB, AJI and
Allnewsco. Prior to joining ACC, Mr. Gibson served as Controller for COMSAT RSI
Plexsys Wireless Systems, a provider of wireless telecommunications equipment
and services, from 1994 to 1997. From 1987 to 1994, Mr. Gibson held various
positions with the accounting firm of Price Waterhouse LLP, the latest as Audit
Manager.
RAY P. GRIMES II has been with ACC since September 1993. He was Director of
Cable Enterprises/New Business Development for ACC from April 1994 until April
1995 when he became Vice President of Broadcast Operations and Deputy Chief
Operating Officer. He has also served as the Acting General Manager for WJLA
from December 1994 until March 1995 and the Acting General Manager for WHTM from
November 1996 until February 1997 and from October 1998 to the present. Since
1995 he has been a Vice President of Harrisburg Television and TV Alabama. Prior
to joining ACC, Mr. Grimes was associated with United Cable/United Artist/TCI
Cable from 1988 through 1993.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid to the Company's Chief
Executive Officer and the four most highly compensated Company executive
officers for Fiscal 1998, 1997 and 1996:
Summary Compensation Table (1)
Name and Fiscal Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation
------------------ ---- ------ ----- ------------ ------------
Joe L. Allbritton 1998 $550,000 $106,300
Chairman of the Executive 1997 550,000 115,500
Committee 1996 550,000 115,500
Lawrence I. Hebert
Chairman and Chief
Executive Officer 1998 150,000 $50,000
Frederick J. Ryan, Jr. 1998 150,000 55,000 4,700
Chief Operating Officer 1997 150,000 4,000
1996 150,000 3,500
Jerald N. Fritz 1998 160,000 55,000 5,200
Vice President, Legal 1997 150,000 50,000 4,800
and Strategic Affairs 1996 140,000 50,000 5,300
Henry D. Morneault 1998 160,000 50,000 5,000
Former Chief Financial Officer 1997 150,000 55,000 4,900
1996 136,000 50,000 5,400
Ray P. Grimes II 1998 190,000 20,000 $34,600 4,000
Deputy Chief Operating 1997 185,000 30,000 30,200 4,700
Officer 1996 185,000 25,000 38,400 3,800
- ----------
Lawrence I. Hebert, Chairman and Chief Executive Officer of ACC, and
Robert L. Allbritton, President of ACC, are paid cash compensation by
Perpetual for services to Perpetual and other interests of Joe L.
Allbritton, including ACC. Except for Mr. Hebert for Fiscal 1998, the
allocated portion of such compensation to ACC is less than $100,000,
and is, therefore, not included herein.
In April 1998, Lawrence I. Hebert was named Chairman and Chief
Executive Officer of ACC, succeeding Joe L. Allbritton.
Represents the imputed premium cost related to certain split
dollar life insurance policies on the life of Mr. Allbritton.
The annual premiums on such policies are paid by ACC. Upon the death of
the insured, ACC will receive the cash value of the policies up to the
amount of its investments, and the remaining proceeds will be paid to
the insured's beneficiary. The imputed premium cost is calculated on
the difference between the face value of the policy and the cash
surrender value.
Frederick J. Ryan, Jr. receives additional compensation from Perpetual
for services to Perpetual and other interests of Joe L. Allbritton,
including the Company. This additional compensation is not allocated
among these interests, and the Company does not reimburse Perpetual for
any portion of this additional compensation to Mr. Ryan. The portion of
the additional compensation paid by Perpetual to Mr. Ryan that may be
attributable to his services to the Company has not been quantified.
Such portion is not material to the consolidated financial condition or
results of operations of the Company.
These amounts reflect annual contributions by ACC to the Company's
401(k) Plan.
Jerald N. Fritz is paid compensation by ACC for services to the Company
and Perpetual. Perpetual has reimbursed ACC for $12,000, $4,400 and
$4,600 of Mr. Fritz's compensation in Fiscal 1996, 1997 and 1998,
respectively.
Henry D. Morneault was paid compensation by ACC for services to the
Company and Perpetual. Perpetual has reimbursed ACC for $33,800,
$37,500 and $24,000 of Mr. Morneault's compensation in Fiscal 1996,
1997 and 1998, respectively. Mr. Morneault served as Chief Financial
Officer of ACC from 1994 until November 1998.
Represents in Fiscal 1998, the compensation related to an incentive
trip ($10,600) and other miscellaneous items; in Fiscal 1997, the
compensation related to country club fees ($18,100) and other
miscellaneous items; and in Fiscal 1996, the compensation related to a
company-provided automobile ($10,200), incentive trip ($11,600) and
country club fees ($16,600).
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The Company does not have a Compensation Committee of its Board of Directors.
Compensation of executive officers is determined by Joe L. Allbritton, Lawrence
I. Hebert and Robert L. Allbritton. Directors of the Company are not separately
compensated for membership on the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The authorized capital stock of ACC consists of 20,000 shares of common stock,
par value $0.05 per share (the "ACC Common Stock"), all of which is outstanding,
and 1,000 shares of preferred stock, 200 shares of which have been designated
for issue as Series A Redeemable Preferred Stock, par value $1.00 per share (the
"Series A Preferred Stock"), no shares of which are issued and outstanding.
ACC Common Stock
Joe L. Allbritton controls Perpetual. Perpetual owns 100% of the outstanding
common stock of AGI, and AGI owns 100% of the outstanding ACC Common Stock.
There is no established public trading market for ACC Common Stock.
Each share of ACC Common Stock has an equal and ratable right to receive
dividends when and as declared by the Board of Directors of ACC out of assets
legally available therefor.
In the event of a liquidation, dissolution or winding up of ACC, holders of ACC
Common Stock are entitled to share ratably in assets available for distribution
after payments to creditors and to holders of any preferred stock of ACC that
may at the time be outstanding. The holders of ACC Common Stock have no
preemptive rights to subscribe to additional shares of capital stock of ACC.
Each share of ACC Common Stock is entitled to one vote in elections for
directors and all other matters submitted to a vote of ACC's stockholder.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Dollars in thousands)
Distributions to Related Parties
The Company periodically makes advances in the form of distributions to
Perpetual. For Fiscal 1998, the Company made cash advances to Perpetual of
$137,992. In Fiscal 1998, Perpetual made repayments on these cash advances of
$118,755. In addition, during Fiscal 1998, the Company was charged for federal
income taxes by Perpetual in the amount of $433. As a result, the net change in
distributions to related parties during Fiscal 1998 was $18,804. 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 net advances is through the
ability of the Company 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 the Company's Consolidated Financial Statements.
During Fiscal 1991, the Company made a $20,000 11.06% loan to Allnewsco. This
amount has been reflected in the Company's Consolidated Financial Statements on
a consistent basis with other distributions to owners. The loan had stated
repayment terms consisting of annual principal installments of approximately
$2,220 commencing January 1997 through January 2005 and payments of interest
semi-annually. During Fiscal 1997 and 1998, the Company deferred the first two
annual principal installment payments pending renegotiation of the repayment
terms. Effective July 1, 1998, the note was amended to extend the maturity date
to January 2008 and defer all principal installments until maturity, with the
principal balance also due upon demand. In exchange for the amendment, Allnewsco
paid to the Company the amount of $650. Interest payments on the loan have been
made in accordance with the terms of the note, and the Company expects it will
continue to receive such payments on a current basis. To date, interest payments
from Allnewsco have been funded by advances from Perpetual to Allnewsco. The
Company anticipates that such payments will be funded in a similar manner for
the foreseeable future. However, there can be no assurance that Allnewsco will
have the ability to make such interest payments in the future.
Under the terms of the Company's borrowing agreements, future advances,
distributions and dividends to related parties are subject to certain
restrictions. The Company anticipates that, subject to such restrictions, ACC
will make distributions and loans to related parties in the future. Subsequent
to September 30, 1998 and through November 13, 1998, the Company made additional
net distributions to owners of approximately $15,813.
Management Fees
Management fees of $344 were paid to Perpetual by the Company for Fiscal 1998.
The Company also paid executive compensation in the form of management fees to
Joe L. Allbritton and Robert L. Allbritton for Fiscal 1998 in the amount of $550
and $60, respectively. The Company expects to
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pay management fees to Perpetual, Mr. Joe L. Allbritton and Mr. Robert L.
Allbritton during Fiscal 1999 of approximately $500, $550 and $80, respectively.
The Company believes that payments to Perpetual, Mr. Joe L. Allbritton and Mr.
Robert L. Allbritton will continue in the future and that the amount of the
management fees is at least as favorable to the Company as those prevailing for
comparable transactions with or involving unaffiliated parties.
Income Taxes
The operations of the Company are included in a consolidated federal income tax
return filed by Perpetual. In accordance with the terms of a tax sharing
agreement between the Company and Perpetual, the Company is required to pay to
Perpetual its federal income tax liability, computed based upon statutory
federal income tax rates applied to the Company's consolidated taxable income.
Taxes payable to Perpetual are not reduced by losses generated in prior years by
the Company. In addition, the amount payable by the Company to Perpetual under
the tax sharing agreement is not reduced if losses of other members of the
Perpetual group are utilized to offset taxable income of the Company for
purposes of the consolidated federal income tax return.
The Company files state income tax returns in the District of Columbia,
Virginia, Maryland, Arkansas, Oklahoma and South Carolina. Separate state income
tax returns are filed by the Company's subsidiaries, except for KATV, KTUL, WCIV
and WSET. The operations of KATV, KTUL and WCIV are included in the Company's
state income tax returns due to their status as single-member limited liability
companies. The operations of WSET as well as the Company's Virginia-apportioned
operations are included in a combined state income tax return filed with other
affiliates. The resulting state income tax liability is not reduced if losses of
the affiliates are used to offset the Virginia taxable income of WSET and the
Company for purposes of the combined state income tax return.
The provision for income taxes is determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires that the consolidated amount of current and deferred income tax
expense for a group that files a consolidated income tax return be allocated
among members of the group when those members issue separate financial
statements. Perpetual, and prior to the Contribution, Westfield, allocated a
portion of their respective consolidated current and deferred income tax expense
to the Company as if the Company and its subsidiaries were separate taxpayers.
The Company records deferred tax assets, to the extent it is considered more
likely than not that such assets will be realized in future periods, and
deferred tax liabilities for the tax effects of the differences between the
bases of its assets and liabilities for tax and financial reporting purposes. To
the extent a deferred tax asset would be recorded due to the incurrence of
losses for federal income tax purposes, any such benefit recognized is
effectively distributed to Perpetual as such benefit will not be recognized in
future years pursuant to the tax sharing agreement.
Office Space
ACC leases corporate headquarters space from Riggs Bank which owns office
buildings in Washington, D.C. Riggs Bank is a wholly-owned subsidiary of Riggs,
approximately 37.9% of the
-46-
common stock of which is deemed to be beneficially owned by Riggs' Chairman,
Joe L. Allbritton, including 6.6% over which he may be deemed to share
beneficial ownership with Barbara B. Allbritton. During Fiscal 1998, ACC
incurred expenses to Riggs Bank of $263 for this space. ACC expects to pay
approximately $265 for such space during Fiscal 1999. Management believes
the same terms and conditions would have prevailed had they been negotiated with
a nonaffiliated company. Local Advertising Revenues
Although WJLA did not receive any local advertising revenues from Riggs Bank
during Fiscal 1998, it is anticipated that Riggs Bank may advertise on WJLA in
the future. The amount of advertising it may purchase is unknown. Management
believes that the terms of the transactions would be substantially the same or
at least as favorable to ACC as those prevailing for comparable transactions
with or involving nonaffiliated companies.
-47-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
See Index on p. F-1 hereof.
(2) Financial Statement Schedule II - Valuation and Qualifying Accounts
and Reserves
See Index on p. F-1 hereof.
(3) Exhibits
See Index on p. A-1 hereof.
(b) No reports on Form 8-K were filed during the fourth quarter of Fiscal 1998.
-48-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ALLBRITTON COMMUNICATIONS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants..................................... F-2
Consolidated Balance Sheets as of September 30, 1997 and 1998......... F-3
Consolidated Statements of Operations and Retained Earnings
for the Years Ended September 30, 1996, 1997 and 1998................ F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998................................... F-5
Notes to Consolidated Financial Statements........................... F-6
Financial Statement Schedule for the Years Ended
September 30, 1996, 1997 and 1998
II- Valuation and Qualifying Accounts and Reserves.................. F-21
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
Allbritton Communications Company
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Allbritton Communications Company (an indirectly wholly-owned subsidiary of
Perpetual Corporation) and its subsidiaries at September 30, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
November 13, 1998
F-2
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share information)
September 30,
-------------
1997 1998
---- ----
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 7,421 $ 13,849
Accounts receivable, less allowance for doubtful
accounts of $1,618 and $1,371....................................... 34,569 33,568
Program rights......................................................... 15,244 17,199
Deferred income taxes.................................................. 2,617 1,706
Interest receivable from related party................................. 492 492
Other.................................................................. 2,405 2,003
-------- ---------
Total current assets................................................ 62,748 68,817
Property, plant and equipment, net.......................................... 51,921 47,559
Intangible assets, net...................................................... 150,493 144,804
Deferred financing costs and other.......................................... 10,477 10,856
Cash surrender value of life insurance...................................... 4,674 5,648
Program rights ............................................................. 664 1,837
-------- ---------
$280,977 $279,521
======= =======
LIABILITIES AND STOCKHOLDER'S INVESTMENT
Current liabilities
Current portion of long-term debt...................................... $ 1,320 $ 1,436
Accounts payable....................................................... 3,620 2,648
Accrued interest payable............................................... 10,765 11,156
Program rights payable................................................. 19,718 20,249
Accrued employee benefit expenses...................................... 3,728 4,860
Other accrued expenses................................................. 5,079 4,257
-------- ---------
Total current liabilities........................................... 44,230 44,606
Long-term debt ............................................................. 414,402 428,255
Program rights payable...................................................... 966 1,722
Deferred rent and other..................................................... 3,067 3,436
Accrued employee benefit expenses........................................... 1,836 1,977
Deferred income taxes....................................................... 2,039 3,301
-------- ----------
Total liabilities................................................... 466,540 483,297
------- -------
Commitments and contingent liabilities (Note 10)
Stockholder's investment
Preferred stock, $1 par value, 800 shares authorized, none issued.... -- --
Common stock, $.05 par value, 20,000 shares authorized, issued
and outstanding..................................................... 1 1
Capital in excess of par value....................................... 6,955 6,955
Retained earnings.................................................... 44,835 45,426
Distributions to owners, net (Note 8)................................ (237,354) (256,158)
------- -------
Total stockholder's investment...................................... (185,563) (203,776)
------- -------
$280,977 $279,521
======= =======
See accompanying notes to consolidated financial statements.
F-3
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in thousands)
Years Ended September 30,
1996 1997 1998
---- ---- ----
Operating revenues, net................................... $155,573 $172,828 $182,484
------- ------- -------
Television operating expenses, excluding
depreciation and amortization........................... 92,320 105,630 106,147
Depreciation and amortization............................. 10,257 19,652 18,922
Corporate expenses........................................ 5,112 4,382 4,568
-------- --------- ---------
107,689 129,664 129,637
------- ------- -------
Operating income.......................................... 47,884 43,164 52,847
Nonoperating income (expense)
Interest income
Related party........................................ 2,212 2,212 2,222
Other .............................................. 1,032 221 1,117
Interest expense........................................ (35,222) (42,870) (44,340)
Other, net.............................................. (1,101) (1,193) (513)
--------- -------- --------
Income before income taxes, minority interest and
extraordinary loss...................................... 14,805 1,534 11,333
Provision for income taxes................................ 7,812 1,110 5,587
-------- --------- ---------
Income before minority interest and extraordinary
loss................................................... 6,993 424 5,746
Minority interest in net losses of consolidated
subsidiaries........................................... 1,300 -- --
Extraordinary loss on early repayment of debt,
net of income tax benefit of $5,387 in 1996
and $3,176 in 1998................................... (7,750) -- (5,155)
---------- ----------- ----------
Net income................................................ 543 424 591
Retained earnings, beginning of year...................... 62,940 45,102 44,835
Dividend from WSET and WCIV to
Westfield (Note 8)..................................... (18,371) -- --
Tax benefit distributed................................... (10) (691) --
---------- ---------- -----------
Retained earnings, end of year............................ $ 45,102 $ 44,835 $ 45,426
======= ======= =======
See accompanying notes to consolidated financial statements.
F-4
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended September 30,
-------------------------
1996 1997 1998
---- ---- ----
Cash flows from operating activities:
Net income............................................. $ 543 $ 424 $ 591
------- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........................ 10,257 19,652 18,922
Minority interest in net losses of
consolidated subsidiaries........................... (1,300) -- --
Other noncash charges................................ 997 1,182 1,267
Noncash tax benefit distributed...................... -- (691) --
Extraordinary loss on early repayment of debt........ 7,750 -- 5,155
Provision for doubtful accounts...................... 752 576 268
Loss (gain) on disposal of assets.................... 90 28 (53)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable............................... (1,130) (5,926) 733
Program rights.................................... (1,240) 1,042 (3,128)
Receivable from related party..................... (1,578) 1,578 --
Other current assets.............................. 21 (342) 525
Other noncurrent assets........................... (1,370) (545) (270)
Deferred income taxes............................. 1,686 971 --
Increase (decrease) in liabilities:
Accounts payable.................................. 3,483 (2,471) (972)
Accrued interest payable.......................... 6,249 41 391
Program rights payable............................ 1,589 (906) 1,287
Accrued employee benefit expenses................. 547 815 1,273
Other accrued expenses............................ 887 257 (682)
Deferred rent and other liabilities............... 137 (134) 369
Deferred income taxes............................. -- -- 2,346
-------- ------- --------
Total adjustments ............................ 27,827 15,127 27,431
-------- ------- -------
Net cash provided by operating activities 28,370 15,551 28,022
-------- ------- -------
Cash flows from investing activities:
Capital expenditures .................................. (20,838) (12,140) (8,557)
Purchase of option to acquire assets of WJSU........... (10,000) (5,348) --
Proceeds from disposal of assets....................... 85 125 367
Acquisitions, net of cash acquired..................... (135,656) -- --
Minority interest investment in
consolidated subsidiaries............................. 1,300 -- --
-------- ------- -----------
Net cash used in investing activities......... (165,109) (17,363) (8,190)
------- ------ -------
Cash flows from financing activities:
Proceeds from issuance of debt......................... 285,725 -- 150,000
Deferred financing costs............................... (7,605) -- (4,481)
Prepayment penalty on early repayment
of debt............................................. (12,934) -- (5,842)
(Repayments) draws under lines of credit, net.......... (5,000) 10,600 (12,700)
Principal payments on long-term debt and
capital leases...................................... (80,365) (571) (124,322)
Distributions to owners, net of certain charges........ (47,397) (52,597) (134,814)
Repayments of distributions to owners.................. 12,785 39,693 118,755
Other.................................................. (178) -- --
-------- --------- --------
Net cash provided by (used in) financing activities 145,031 (2,875) (13,404)
------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 8,292 (4,687) 6,428
Cash and cash equivalents, beginning of year............ 3,816 12,108 7,421
-------- ------- ---------
Cash and cash equivalents, end of year.................. $ 12,108 $ 7,421 $ 13,849
======== ======== =========
See accompanying notes to consolidated financial statements.
F-5
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Allbritton Communications Company (the Company) is an indirectly wholly-owned
subsidiary of Perpetual Corporation (Perpetual), a Delaware corporation, which
is controlled by Mr. Joe L. Allbritton. The Company owns and/or programs ABC
network-affiliated television stations serving seven diverse geographic markets:
Station Market
WJLA Washington, D.C.
WBMA/WCFT/WJSU Birmingham (Anniston and Tuscaloosa), Alabama
WHTM Harrisburg-Lancaster-York-Lebanon, Pennsylvania
KATV Little Rock, Arkansas
KTUL Tulsa, Oklahoma
WSET Roanoke-Lynchburg, Virginia
WCIV Charleston, South Carolina
The Company also engages in various activities relating to the production and
distribution of television programming.
Consolidation-The consolidated financial statements include the accounts of the
Company and its wholly and majority-owned subsidiaries after elimination of all
significant intercompany accounts and transactions. Minority interest represents
a minority owner's 20% share of the net losses of two of the Company's
subsidiaries, to the extent of the minority interest investment.
Use of estimates and assumptions-The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates
and assumptions.
Revenue recognition-Revenues are generated principally from sales of commercial
advertising and are recorded as the advertisements are broadcast net of agency
and national representative commissions and music license fees. For certain
program contracts which provide for the exchange of advertising time in lieu of
cash payments for the rights to such programming, revenue is recorded as
advertisements are broadcast at the estimated fair value of the advertising time
given in exchange for the program rights.
F-6
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
Cash and cash equivalents-The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
Program rights-The Company has entered into contracts for the rights to
television programming. Payments related to such contracts are generally made in
installments over the contract period. Program rights which are currently
available and the liability for future payments under such contracts are
reflected in the consolidated balance sheets. Program rights are amortized
primarily using the straight-line method over the twelve month rental period.
Certain program rights with lives greater than one year are amortized using
accelerated methods. Program rights expected to be amortized in the succeeding
year and amounts payable within one year are classified as current assets and
liabilities, respectively. The program rights are reflected in the consolidated
balance sheets at the lower of unamortized cost or estimated net realizable
value based on management's expectation of the net future cash flows to be
generated by the programming.
Property, plant and equipment-Property, plant and equipment are recorded at cost
and depreciated over the estimated useful lives of the assets. Maintenance and
repair expenditures are charged to expense as incurred and expenditures for
modifications and improvements which increase the expected useful lives of the
assets are capitalized. Depreciation expense is computed using the straight-line
method for buildings and straight-line and accelerated methods for furniture,
machinery and equipment. Leasehold improvements are amortized using the
straight-line method over the lesser of the term of the related lease or the
estimated useful lives of the assets. The useful lives of property, plant and
equipment for purposes of computing depreciation and amortization expense are:
Buildings................................................. 15-40 years
Leasehold improvements.................................... 5-32 years
Furniture, machinery and equipment
and equipment under capital leases................. 3-20 years
Intangible assets-Intangible assets consist of values assigned to broadcast
licenses and network affiliations, favorable terms on contracts and leases and
the option to acquire the assets of WJSU (the Option) (see Note 3). The amounts
assigned to intangible assets were based on the results of independent
valuations and are amortized on a straight-line basis over their estimated
useful lives. Broadcast licenses and network affiliations are amortized over 40
years, the premiums for favorable terms on contracts and leases are amortized
over the terms of the related contracts and leases (19 to 25 years), and the
Option is amortized over the term of the Option and the associated local
marketing agreement (10 years). The Company assesses the recoverability of
intangible assets on an ongoing basis by evaluating whether amounts can be
recovered through undiscounted cash flows over the remaining amortization
period. Deferred financing costs-Costs incurred in connection with the
issuance of long-term debt are deferred and amortized to other nonoperating
expense on a straight-line basis over the term of the
F-7
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
underlying financing agreement. This method does not differ significantly
from the effective interest rate method.
Deferred rent-Rent concessions and scheduled rent increases in connection with
operating leases are recognized as adjustments to rental expense on a
straight-line basis over the associated lease term.
Concentration of credit risk-Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of certain cash and
cash equivalents and receivables from advertisers. The Company invests its
excess cash with high-credit quality financial institutions and at September 30,
1998 had an overnight repurchase agreement with a financial institution for
$12,401. Concentrations of credit risk with respect to receivables from
advertisers are limited as the Company's advertising base consists of large
national advertising agencies and high-credit quality local advertisers. As is
customary in the broadcasting industry, the Company does not require collateral
for its credit sales which are typically due within thirty days.
Income taxes-The operations of the Company are included in a consolidated
federal income tax return filed by Perpetual. In accordance with the terms of a
tax sharing agreement between the Company and Perpetual, the Company is required
to pay to Perpetual its federal income tax liability, computed based upon
statutory federal income tax rates applied to the Company's consolidated taxable
income. Taxes payable to Perpetual are not reduced by losses generated in prior
years by the Company. In addition, the amount payable by the Company to
Perpetual under the tax sharing agreement is not reduced if losses of other
members of the Perpetual group are utilized to offset taxable income of the
Company for purposes of the Perpetual consolidated federal income tax return.
Prior to the Contribution (see Note 2), the operations of WSET and WCIV were
included in a consolidated federal income tax return filed by Westfield News
Advertiser, Inc. (Westfield), an affiliate of the Company which is 100% owned by
Mr. Joe L. Allbritton. In accordance with the terms of tax sharing agreements
between Westfield and WSET and WCIV, federal income tax liabilities of WSET and
WCIV were paid to Westfield and were computed based upon statutory federal
income tax rates applied to each entity's taxable income. For periods subsequent
to the Contribution, the operations of WSET and WCIV are included in the
consolidated federal income tax return filed by Perpetual in accordance with the
tax sharing agreement between the Company and Perpetual.
A District of Columbia income tax return is filed by the Company, and separate
state income tax returns are filed by the Company's subsidiaries, except for
WSET. The operations of WSET are
included in a combined state income tax return filed with other affiliates.
WSET's state income tax liability is not reduced if losses of the affiliates
are used to offset the taxable income of WSET for purposes of the combined
state income tax return.
F-8
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
The provision for income taxes is determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires that the consolidated amount of current and deferred income tax
expense for a group that files a consolidated income tax return be allocated
among members of the group when those members issue separate financial
statements. Perpetual, and prior to the Contribution, Westfield, allocate a
portion of their respective consolidated current and deferred income tax expense
to the Company as if the Company and its subsidiaries were separate taxpayers.
The Company records deferred tax assets, to the extent it is more likely than
not that such assets will be realized in future periods, and deferred tax
liabilities for the tax effects of the differences between the bases of its
assets and liabilities for tax and financial reporting purposes. To the extent a
deferred tax asset would be recorded due to the incurrence of losses for federal
income tax purposes, any such benefit recognized is effectively distributed to
Perpetual as such benefit will not be recognized in future years pursuant to the
tax sharing agreement.
Fair value of financial instruments-The carrying amount of the Company's cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and program rights payable approximate fair value due to the short maturity of
those instruments. The Company estimates the fair value of its long-term debt
using either quoted market prices or by discounting the required future cash
flows under its debt using borrowing rates currently available to the Company,
as applicable.
Earnings per share-Earnings per share data are not presented since the Company
has only one shareholder.
New pronouncements-SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" are
effective during the Company's fiscal year 1999, but will not effect the
Company's consolidated financial statements.
NOTE 2 - CONTRIBUTION OF WSET AND WCIV
The common stock of WSET and WCIV, which was formerly held by Westfield, was
contributed to the Company on March 1, 1996 (the Contribution). Since the
Contribution represents a transfer of assets between entities under common
control, the amounts transferred were recorded at historical cost. Further, as
the Company, WSET and WCIV were indirectly owned by Mr. Joe L. Allbritton for
all periods in which the consolidated financial statements are presented, the
Company's consolidated financial statements for the year ended September 30,
1996 have been retroactively restated to reflect the Contribution (See Note 8).
F-9
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
NOTE 3 - ACQUISITIONS, LOCAL MARKETING AGREEMENT AND ASSOCIATED OPTION
In March 1996, the Company acquired an 80% interest in the assets and certain
liabilities of WHTM and WCFT for approximately $135,656. The acquisitions were
accounted for as purchases and accordingly, the cost of the acquired entities
was assigned to the identifiable tangible and intangible assets acquired and
liabilities assumed based on their fair values at the respective dates of the
purchases. The results of operations of WHTM and WCFT are included in the
Company's consolidated financial statements for the period subsequent to the
acquisitions.
In December 1995, the Company, through an 80%-owned subsidiary, entered into a
ten-year local marketing agreement (LMA) with the owner of WJSU, a television
station operating in Anniston, Alabama. The LMA provides for the Company to
supply program services to WJSU, to operate the station and to retain all
revenues from advertising sales. In exchange, the Company pays all station
operating expenses and certain management fees to the station's owner. The
operating revenues and expenses of WJSU are therefore included in the Company's
consolidated financial statements since December 1995. In connection with the
LMA, the Company entered into the Option to acquire the assets of WJSU. The cost
of the Option totaled $15,348, of which $10,000 was paid in December 1995 and
$5,348 was paid in January 1997. The Option is exercisable through December
2005, subject to certain conditions, for additional consideration of $3,337.
The following pro forma summary presents the unaudited consolidated results of
operations of the Company for the year ended September 30, 1996 as if the above
acquisitions, LMA and associated financing transaction (see Note 6) had occurred
at the beginning of fiscal year 1996. The results presented in the pro forma
summary do not necessarily reflect the results that would have actually been
obtained if the offering, acquisitions and LMA had occurred at the beginning of
the year.
(Unaudited)
Year Ended September 30, 1996
-----------------------------
Operating revenues, net....................... $164,933
Income before extraordinary item.............. 4,204
Net loss...................................... (3,546)
F-10
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
September 30,
-------------
1997 1998
---- ----
Buildings and leasehold improvements..................... $ 20,391 $ 20,537
Furniture, machinery and equipment....................... 97,685 103,498
Equipment under capital leases........................... 7,277 7,864
--------- ---------
125,353 131,899
Less accumulated depreciation............................ (78,353) (89,075)
-------- --------
47,000 42,824
Land..................................................... 2,508 2,880
Construction-in-progress................................. 2,413 1,855
-------- --------
$ 51,921 $ 47,559
======= =======
Depreciation and amortization expense was $6,723, $14,155 and $13,233 for the
years ended September 30, 1996, 1997 and 1998, respectively, which includes
amortization of equipment under capital leases.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30,
-------------
1997 1998
---- ----
Broadcast licenses and network affiliations.............. $150,243 $150,243
Option to purchase the assets of WJSU.................... 15,348 15,348
Other intangibles........................................ 7,648 7,648
--------- ---------
173,239 173,239
Less accumulated amortization............................ (22,746) (28,435)
-------- --------
$150,493 $144,804
======= =======
Amortization expense was $3,534, $5,497 and $5,689 for the years ended September
30, 1996, 1997 and 1998, respectively. The Company does not separately allocate
amounts between broadcast licenses and network affiliations.
F-11
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
NOTE 6 - LONG-TERM DEBT
Outstanding debt consists of the following:
September 30,
-------------
1997 1998
---- ----
Senior Subordinated Debentures, due November 30, 2007
with interest payable semi-annually at 9.75%.............................. $275,000 $275,000
Senior Subordinated Debentures, due August 15, 2004
with interest payable semi-annually at 11.5%, mandatory
sinking fund payment of $60,500 and $62,500 due
August 15, 2003 and 2004, respectively.................................. 123,000 --
Senior Subordinated Notes, due February 1, 2008
with interest payable semi-annually at 8.875%......................... -- 150,000
Revolving Credit Agreement, maximum amount of $40,000,
expiring April 16, 2001, secured by the outstanding stock of the Company and
its subsidiaries, interest payable quarterly at various rates from prime or
LIBOR plus 1% to 2%, depending on certain financial operating tests ($10,000
at 8.22%
and $2,700 at 9.75% at September 30, 1997).............................. 12,700 --
Master Lease Finance Agreement, maximum amount of $10,000, secured by the assets
acquired, interest payable monthly at variable rates as determined on the
acquisition date for each asset purchased (7.56%-8.93% at
September 30, 1998) (See Note 10)........................................ 6,444 5,756
--------- ---------
417,144 430,756
Less unamortized discount ................................................. (1,422) (1,065)
--------- ---------
415,722 429,691
Less current maturities.................................................... (1,320) (1,436)
--------- ---------
$414,402 $428,255
======= =======
On January 22, 1998, the Company completed a $150,000 offering of its 8.875%
Senior Subordinated Notes due 2008 (the Notes). The cash proceeds of the
offering, net of offering expenses, were used to redeem the Company's 11.5%
Senior Subordinated Debentures due 2004 (the 11.5% Debentures) on March 3, 1998
with the balance used to repay certain amount outstanding under the Company's
Revolving Credit Agreement. A prepayment penalty on the early repayment of the
11.5% Debentures and the accelerated amortization of the related unamortized
deferred financing costs totaled approximately $8,331 before applicable income
tax benefit of approximately $3,176. This loss was reflected as an
extraordinary loss of $5,155 in the consolidated statement of operations for
the year ended September 30, 1998.
F-12
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
On February 6, 1996, the Company completed a $275,000 offering of its 9.75%
Senior Subordinated Debentures due 2007 (the 9.75% Debentures) at a discount of
$1,375. A portion of the proceeds of the offering were used to finance the
acquisitions of WHTM, WCFT and the Option and to repay amounts outstanding under
certain previously existing financing facilities. A prepayment penalty on the
early repayment of one of the facilities and the accelerated amortization of the
related unamortized deferred financing costs totaled approximately $13,137
before applicable income tax benefit of approximately $5,387. This loss was
reflected as an extraordinary loss of $7,750 in the consolidated statement of
operations for the year ended September 30, 1996.
Unamortized deferred financing costs of $8,935 and $10,018 at September 30, 1997
and 1998, respectively, are included in deferred financing costs and other
noncurrent assets in the consolidated balance sheets. Amortization of the
deferred financing costs for the years ended September 30, 1996, 1997 and 1998
was $835, $1,031 and $1,136, respectively, which is included in other
nonoperating expenses.
Under the existing financing agreements, the Company agrees to abide by
restrictive covenants which place limitations upon payments of cash dividends,
issuance of capital stock, investment transactions, incurrence of additional
obligations and transactions with Perpetual and other related parties. In
addition, the Company must maintain specified levels of operating cash flow
and/or working capital and comply with other financial covenants. The Company is
also required to pay a commitment fee of .375% per annum based on any unused
portion of the Revolving Credit Agreement.
The Company estimates the fair value of its Senior Subordinated Debentures,
Senior Subordinated Notes and amounts outstanding under its Revolving Credit
Agreement to be approximately $416,800 and $428,200 at September 30, 1997 and
1998, respectively.
F-13
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Years ended September 30,
1996 1997 1998
---- ---- ----
Current
Federal................. $5,297 $ (691) $3,178
State................... 812 830 63
-------- ------ -------
6,109 139 3,241
------- ------ -----
Deferred
Federal.................. 215 1,443 1,185
State.................... 1,488 (472) 1,161
----- ------ -------
1,703 971 2,346
----- ------ -----
$7,812 $1,110 $5,587
===== ===== =====
Prepayment penalties on the early repayment of certain debt during the years
ended September 30, 1996 and 1998 resulted in extraordinary losses (see Note 6).
For the year ended September 30, 1998, the extraordinary loss of $5,155 is
presented net of the applicable income tax benefit in the accompanying
consolidated statement of operations. The $3,176 benefit for income taxes
arising from the extraordinary loss consisted of a $2,745 benefit for federal
income tax purposes, a $258 benefit for local income tax purposes and a $173
deferred tax benefit. For the year ended September 30, 1996, the extraordinary
loss of $7,750 is presented net of the applicable income tax benefit in the
accompanying consolidated statement of operations. The $5,387 benefit for income
taxes arising from the extraordinary loss consisted of a $4,598 benefit for
federal income tax purposes at the statutory rate of 35% and a $789 benefit for
local income tax purposes, net of the federal effect.
F-14
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
The components of deferred income tax assets (liabilities) are as follows:
September 30,
1997 1998
Deferred income tax assets:
State and local operating loss carryforwards........ $2,924 $2,716
Deferred rent....................................... 1,118 1,091
Accrued employee benefits........................... 1,134 1,326
Allowance for accounts receivable................... 653 545
Other............................................... 657 346
------ ------
6,486 6,024
Less: valuation allowance........................... (1,675) (2,013)
----- -----
4,811 4,011
----- -----
Deferred income tax liabilities:
Depreciation and amortization ...................... (4,233) (5,606)
----- -----
Net deferred income tax assets (liabilities)........... $ 578 $(1,595)
====== ======
The Company has approximately $54,560 in state and local operating loss
carryforwards in certain jurisdictions available for future use for state and
local income tax purposes which expire in various years from 2004 through 2013.
The change in the valuation allowance for deferred tax assets of $1,020, $(233)
and $338 during the years ended September 30, 1996, 1997 and 1998, respectively,
principally resulted from management's evaluation of the recoverability of the
loss carryforwards.
F-15
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
The following table reconciles the statutory federal income tax rate to the
Company's effective income tax rate for income before extraordinary loss:
Years ended September 30,
------------------------
1996 1997 1998
---- ---- ------
Statutory federal income tax rate................................ 35.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit............ 4.8 20.2 7.6
Non-deductible expenses, principally amortization of
certain intangible assets, insurance premiums and
meals and entertainment........................................ 4.5 33.2 4.7
Change in valuation allowance.................................... 6.9 (15.2) 3.0
Other, net....................................................... 1.6 0.2 --
----- ----- ------
Effective income tax rate........................................ 52.8% 72.4% 49.3%
==== ==== ====
NOTE 8 - TRANSACTIONS WITH OWNERS AND RELATED PARTIES
In the ordinary course of business, the Company makes cash advances in the form
of distributions to Perpetual. Prior to the Contribution, WSET and WCIV made
cash advances to Westfield. At present, the primary source of repayment of the
net advances from the Company is through the ability of the Company to pay
dividends or make other distributions. There is no immediate intent for these
amounts to be repaid. Accordingly, such amounts have been treated as a reduction
of stockholder's investment and described as "distributions" in the Company's
consolidated balance sheets.
F-16
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
The following summarizes these and certain other transactions with related
parties:
Years ended September 30,
-------------------------
1996 1997 1998
---- ---- ----
Distributions to owners, beginning of
year.............................................. $203,775 $224,450 $237,354
Cash advances....................................... 52,667 52,597 137,992
Repayment of cash advances.......................... (12,785) (39,693) (118,755)
(Charge) benefit for federal income taxes........... (826) 691 (433)
Dividends declared by WSET
and WCIV......................................... (18,371) -- --
Tax benefit distributed............................. (10) (691) --
---------- ---------- ------------
Distributions to owners, end of year................. $224,450 $237,354 $256,158
======= ======= =======
Weighted average amount of non-interest
bearing advances outstanding during
the year.......................................... $197,205 $218,026 $230,642
======= ======= =======
Subsequent to September 30, 1998 and through November 13, 1998, the Company made
additional net distributions to owners of approximately $15,813.
In connection with the transactions by which the Contribution was consummated,
WSET and WCIV declared non-cash dividends to Westfield in the amount of $18,371
which represented the cumulative net advances made from WSET and WCIV to
Westfield as of the date of the Contribution. The dividend has therefore been
reflected as a reduction to retained earnings and distributions to owners during
the year ended September 30, 1996.
Included in distributions to owners is a $20,000 loan made in 1991 by the
Company to ALLNEWSCO, Inc. (Allnewsco), an affiliate of the Company which is
controlled by Mr. Joe L. Allbritton. This amount has been included in the
consolidated financial statements on a consistent basis with other cash advances
to related parties. The $20,000 note receivable from Allnewsco had stated
repayment terms consisting of annual principal installments approximating $2,220
commencing January 1997 through January 2005. During the years ended September
30, 1997 and 1998, the Company deferred the first two annual principal
installment payments pending renegotiation of the repayment terms. Effective
July 1, 1998, the note was amended to extend the maturity to January 2008 and
defer all principal installments until maturity, with the principal balance also
due upon demand. In exchange for the amendment, Allnewsco paid to the Company
the amount of $650. This amount is included in other noncurrent liabilities in
the accompanying consolidated balance sheet and is being amortized as an
adjustment of interest income over the remaining term of the amended note using
the interest method. The note has a stated interest rate of 11.06% and interest
is payable semi-annually. During each of the years ended September 30, 1996,
1997 and 1998, the Company earned interest income from this note of
approximately $2,200.
F-17
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
At September 30, 1997 and 1998, interest receivable from Allnewsco under this
note totaled $492. Allnewsco is current on its interest payments.
Management fees of $180, $343 and $344 were paid to Perpetual by the Company for
the years ended September 30, 1996, 1997 and 1998, respectively. The Company
also paid management fees to Mr. Joe L. Allbritton in the amount of $550 for
each of the years ended September 30, 1996, 1997 and 1998 and to Mr. Robert L.
Allbritton in the amount of $60 for the year ended September 30, 1998.
Management fees are included in corporate expenses in the consolidated
statements of operations and management believes such charges to be reasonable.
Charitable contributions of approximately $685 were paid to the Allbritton
Foundation by the Company during the year ended September 30, 1996.
The Company maintains banking relationships with and leases certain office space
from Riggs Bank N.A. (Riggs). Riggs is a wholly-owned subsidiary of Riggs
National Corporation, of which Mr. Joe L. Allbritton is the Chairman of the
Board of Directors and a significant stockholder. The majority of the Company's
cash and cash equivalents was on deposit with Riggs at September 30, 1997 and
1998. Additionally, the Company incurred $192, $220 and $263 in rental expense
related to office space leased from Riggs for the years ended September 30,
1996, 1997 and 1998, respectively.
On July 1, 1995, 78, Inc., also a wholly-owned subsidiary of Perpetual, was
formed to provide sales, marketing and related services to both the Company and
Allnewsco. Certain employees of the Company became employees of 78, Inc. The
Company was charged approximately $7,163 during the year ended September 30,
1996 for services provided by 78, Inc., which represents the Company's share of
78, Inc.'s costs relating to the provision of such services, determined based on
the Company's usage of such services. These costs are included in television
operating expenses in the consolidated statements of operations. Effective
October 1, 1996, the Company ceased utilizing 78, Inc. for the provision of
these services and re-established these functions internally.
NOTE 9 - RETIREMENT PLANS
A defined contribution savings plan is maintained for eligible employees of the
Company and certain of its affiliates. Under the plan, employees may contribute
a portion of their compensation subject to Internal Revenue Service limitations
and the Company contributes an amount equal to 50% of the contribution of the
employee not to exceed 6% of the compensation of the employee. The amounts
contributed to the plan by the Company on behalf of its employees totaled
approximately $602, $691 and $825 for the years ended September 30, 1996, 1997
and 1998, respectively.
F-18
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
The Company also contributes to certain other multi-employer union pension plans
on behalf of certain of its union employees. The amounts contributed to such
plans totaled approximately $308, $316 and $392 for the years ended September
30, 1996, 1997 and 1998, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office and studio facilities and machinery and equipment
under operating and capital leases expiring in various years through 2004.
Certain leases contain provisions for renewal and extension. Future minimum
lease payments under operating and capital leases which have remaining
noncancelable lease terms in excess of one year as of September 30, 1998 are as
follows:
Operating Capital
Year ending September 30, Leases Leases
1999........................................ $ 3,525 $ 1,935
2000........................................ 3,429 1,909
2001........................................ 3,210 1,612
2002........................................ 3,088 782
2003........................................ 3,091 70
2004 and thereafter......................... 1,917 --
------- ---------
$18,260 6,308
======
Less: amounts representing imputed interest..... (552)
------
5,756
Less: current portion........................... (1,436)
------
Long-term portion of capital lease obligations.. $ 4,320
======
Rental expense under operating leases aggregated approximately $2,700, $2,900
and $2,900 for the years ended September 30, 1996, 1997 and 1998, respectively.
F-19
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands)
The Company has entered into contractual commitments in the ordinary course of
business for the rights to television programming which is not yet available for
broadcast as of September 30, 1998. Under these agreements, the Company must
make specific minimum payments approximating the following:
Year ending September 30,
1999.............................................. $ 1,948
2000.............................................. 16,673
2001.............................................. 9,074
2002.............................................. 6,061
2003.............................................. 828
2004 and thereafter............................... 1,728
-------
$36,312
The Company has entered into various employment contracts. Future payments under
such contracts as of September 30, 1998 approximate $5,609, $1,305, $688, $196
and $111 for the years ending September 30, 1999, 2000, 2001, 2002 and 2003,
respectively.
The Company has entered into various deferred compensation agreements with
certain employees. Under these agreements, the Company is required to make
payments aggregating approximately $2,629 during the years 2000 through 2012. At
September 30, 1997 and 1998, the Company has recorded a deferred compensation
liability of approximately $1,035 and $1,177, respectively, which is included as
a component of noncurrent accrued employee benefit expenses in the consolidated
balance sheets.
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business, including suits based on defamation. The Company
is not currently a party to any lawsuit or proceeding which, in the opinion of
management, if decided adverse to the Company, would be likely to have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.
NOTE 11 - SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest totaled $28,973, $42,829 and $43,949 during the years
ended September 30, 1996, 1997 and 1998, respectively. Cash paid for state
income taxes totaled $679, $792 and $105 during the years ended September 30,
1996, 1997 and 1998, respectively. Non-cash investing and financing activities
consist of entering into capital leases totaling $3,554, $2,549 and $634 during
the years ended September 30, 1996, 1997 and 1998, respectively, and declaring a
non-cash dividend from WSET and WCIV to Westfield of $18,371 during the year
ended September 30, 1996.
F-20
ALLBRITTON COMMUNICATIONS COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
SCHEDULE II
Balance at Charged Balance at
beginning to costs Charged to end of
Classification of year and expenses other accounts Deductions year
- -------------- ------- ------------ -------------- ---------- ----
Year ended September 30, 1996:
Allowance for doubtful
accounts................ $ 1,068 $ 752 -- $(435) $1,385
===== ====== ======== === =====
Valuation allowance
for deferred income
tax assets.............. $ 888 $1,750 -- $(730) $1,908
====== ===== ======== === =====
Year ended September 30, 1997:
Allowance for doubtful
accounts................ $1,385 $ 576 -- $(343) $1,618
===== ====== ======== === =====
Valuation allowance
for deferred income
tax assets.............. $1,908 $ 574 -- $(807) $1,675
===== ====== ======== === =====
Year ended September 30,1998:
Allowance for doubtful
accounts................. $1,618 $ 268 -- $(515) $1,371
===== ====== ======== === =====
Valuation allowance
for deferred income
tax assets............... $1,675 $ 338 -- $ -- $2,013
===== ====== ======== ======= =====
Represents valuation allowance established related to certain net
operating loss carryforwards and other deferred tax assets for state
income tax purposes.
Write-off of uncollectible accounts, net of recoveries and collection fees.
Represents net reduction of valuation allowance relating to certain net
operating loss carryforwards.
F-21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLBRITTON COMMUNICATIONS COMPANY
By: /s/ Lawrence I. Hebert
-----------------------------
Lawrence I. Hebert
Chairman and Chief Executive Officer
Date: December 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Joe L. Allbritton Chairman of the Executive December 22, 1998
- --------------------------- Committee and Director
Joe L. Allbritton *
/s/ Barbara B. Allbritton Vice President and December 22, 1998
- --------------------------- Director
Barbara B. Allbritton *
/s/ Lawrence I. Hebert Chairman, Chief Executive December 22, 1998
- --------------------------- Officer and Director
Lawrence I. Hebert (principal executive officer)
/s/ Robert L. Allbritton President and Director December 22, 1998
- ---------------------------
Robert L. Allbritton *
/s/ Frederick J. Ryan, Jr. Vice Chairman, Executive December 22, 1998
- --------------------------- Vice President, Chief
Frederick J. Ryan, Jr. * Operating Officer and Director
/s/ Stephen P. Gibson Vice President and December 22, 1998
- --------------------------- Chief Financial Officer
Stephen P. Gibson (principal financial and
accounting officer)
*By Attorney-in-Fact
/s/ Jerald N. Fritz
Jerald N. Fritz
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
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 February 6, 1996 between ACC and State Street Bank and *
Trust Company, as Trustee, relating to the Debentures. (Incorporated by
reference to Exhibit 4.1 of Company's Registration Statement on Form S-4,
No. 333-02302, dated March 12, 1996.)
4.2 Indenture dated as of January 22, 1998 between ACC and State Street Bank and *
Trust Company, as Trustee, relating to the Notes. (Incorporated by reference
to Exhibit 4.1 of Company's Registration Statement on Form S-4, No.
333-45933, dated February 9, 1998.)
4.3 Form of 9.75% Series B Senior Subordinated Debentures due 2007. *
(Incorporated by reference to Exhibit 4.3 of Company's Registration
Statement on Form S-4, No. 333-02302, dated March 12, 1996.)
4.4 Revolving Credit Agreement dated as of April 16, 1996 by and among *
Allbritton Communications Company certain Banks, and The First National Bank
of Boston, as agent. (Incorporated by reference to Exhibit 4.4 of
Company's Quarterly Report on Form 10-Q, No. 333-02302, dated August 14,
1996.)
4.5 Modification No. 1 dated as of June 19, 1996 to Revolving Credit Agreement *
(Incorporated by reference to Exhibit 4.5 of Company's Quarterly Report on
Form 10-Q, No. 333-02302, dated May 15, 1997).
4.6 Modification No. 2 dated as of December 20, 1996 to Revolving Credit *
Agreement (Incorporated by reference to Exhibit 4.6 of Company's Quarterly
Report on Form 10-Q, No. 333-02302, dated May 15, 1997).
A-1
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
4.7 Modification No. 3 dated as of May 14, 1997 to Revolving Credit Agreement *
(Incorporated by reference to Exhibit 4.7 of Company's Quarterly Report on
Form 10-Q, No. 333-02302, dated May 15, 1997).
4.8 Modification No. 4 dated as of September 30, 1997 to Revolving Credit *
Agreement (Incorporated by reference to Exhibit 4.8 of Company's Form 10-K,
No. 333-02302, dated December 22, 1997).
10.1 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.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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.)
10.6 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.)
10.7 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.)
10.8 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.)
A-2
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
10.9 Second Amendment to Tax Sharing Agreement effective as of October 1, 1995 by *
and among Perpetual Corporation, ACC and ALLNEWSCO, Inc.
Time Brokerage Agreement dated as of December 21, 1995 by and between RKZ
10.10 Television, Inc. and ACC. (Incorporated by reference to Exhibit 10.11 of *
Company's Registration Statement on Form S-4, No. 333-02302, dated March 12,
1996.)
10.11 Option Agreement dated December 21, 1995 by and between ACC and RKZ *
Television, Inc. (Incorporated by reference to Exhibit 10.12 of Company's
Registration Statement on Form S-4, No. 333-02302, dated March 12, 1996.)
10.12 Amendment dated May 2, 1996 by and among TV Alabama, Inc., RKZ Television, *
Inc. and Osborn Communications Corporation to Option Agreement dated
December 21, 1995 by and between ACC and RKZ Television, Inc. (Incorporated
by reference to exhibit 10.13 of Company's Form 10-K, No. 333-02302, dated
December 30, 1996.)
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.)
10.14 Amendment to Network Affiliation Agreement (TV Alabama, Inc.) dated January *
23, 1997 (Incorporated by reference to Exhibit 10.15 to the Company's Form
10-Q, No. 333-02302, dated February 14, 1997).
10.15 Pledge of Membership Interests Agreement dated as of September 30, 1997 by *
and among ACC; KTUL, LLC; KATV, LLC; WCIV, LLC; and BankBoston, N.A. as
Agent (Incorporated by reference to Exhibit 10.16 of Company's Form 10-K,
No. 333-02302, dated December 22, 1997).
10.16 $20,000,000 Promissory Note of ALLNEWSCO, Inc. payable to KTUL, LLC.
21. Subsidiaries of the Registrant
24. Powers of Attorney
27. Financial Data Schedule (Electronic Filing Only)
________________
*Previously filed
A-3