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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended Commission file number:
June 30, 2003 333-02302
ALLBRITTON COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1803105
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
808 Seventeenth Street, N.W.
Suite 300
Washington, D.C. 20006-3910
(Address of principal executive offices)
Registrant's telephone number, including area code: 202-789-2130
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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Number of shares of Common Stock outstanding as of August 12, 2003: 20,000
shares.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING ITEM 2 "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THAT ARE NOT HISTORICAL FACTS AND INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF FACTORS THAT COULD
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, OUR
OUTSTANDING INDEBTEDNESS AND OUR HIGH DEGREE OF LEVERAGE; THE RESTRICTIONS
IMPOSED ON US BY THE TERMS OF OUR INDEBTEDNESS; THE HIGH DEGREE OF COMPETITION
FROM BOTH OVER-THE-AIR BROADCAST STATIONS AND PROGRAMMING ALTERNATIVES SUCH AS
CABLE TELEVISION, WIRELESS CABLE, IN-HOME SATELLITE DISTRIBUTION SERVICE,
PAY-PER-VIEW SERVICES AND HOME VIDEO AND ENTERTAINMENT SERVICES; THE IMPACT OF
NEW TECHNOLOGIES; CHANGES IN FEDERAL COMMUNICATIONS COMMISSION REGULATIONS;
DECREASES IN THE DEMAND FOR ADVERTISING DUE TO WEAKNESS IN THE ECONOMY; THE
VARIABILITY OF OUR QUARTERLY RESULTS AND OUR SEASONALITY; AND OUR ABILITY TO
REALIZE THE EXPECTED OPERATIONAL EFFICIENCIES FROM THE ALLNEWSCO ACQUISITION.
ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY ARE
EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH
REFLECT MANAGEMENT'S VIEW ONLY AS OF THE DATE HEREOF.
ALLBRITTON COMMUNICATIONS COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Operations and Retained Earnings
for the Three and Nine Months Ended June 30, 2002 and 2003... 1
Consolidated Balance Sheets as of September 30, 2002 and
June 30, 2003................................................ 2
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2002 and 2003................................. 3
Notes to Interim Consolidated Financial Statements........... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 19
Item 4. Controls and Procedures...................................... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 21
Item 6. Exhibits and Reports on Form 8-K............................. 21
Signatures............................................................. 22
Exhibit Index.......................................................... 23
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in thousands)
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2002 2003 2002 2003
---- ---- ---- ----
Operating revenues, net .......................... $ 51,348 $ 51,271 $ 147,600 $ 154,228
--------- --------- --------- ---------
Television operating expenses, excluding
depreciation and amortization ............... 31,674 31,002 95,064 93,783
Depreciation and amortization .................... 3,151 2,699 9,850 7,946
Corporate expenses ............................... 1,552 1,669 4,370 4,647
--------- --------- --------- ---------
36,377 35,370 109,284 106,376
--------- --------- --------- ---------
Operating income ................................. 14,971 15,901 38,316 47,852
--------- --------- --------- ---------
Nonoperating income (expense)
Interest income
Related party ........................... -- -- 92 88
Other ................................... 21 11 74 336
Interest expense
Related party ........................... (212) -- (596) --
Other ................................... (10,442) (9,285) (31,405) (31,387)
Loss on early repayment of debt ............. -- -- -- (23,194)
Other, net .................................. (328) (290) (260) (843)
--------- --------- --------- ---------
(10,961) (9,564) (32,095) (55,000)
--------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle ........................ 4,010 6,337 6,221 (7,148)
Provision for (benefit from) income taxes ........ 2,095 2,487 3,263 (2,523)
--------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle ........... 1,915 3,850 2,958 (4,625)
Cumulative effect of change in accounting
principle, net of income tax benefit
of $2,027 (Note 4) .......................... -- -- -- 2,973
--------- --------- --------- ---------
Net income (loss) ................................ 1,915 3,850 2,958 (7,598)
Retained earnings (deficit), beginning of period.. 5,017 (6,531) 3,974 4,917
--------- --------- --------- ---------
Retained earnings (deficit), end of period ....... $ 6,932 $ (2,681) $ 6,932 $ (2,681)
========= ========= ========= =========
See accompanying notes to interim consolidated financial statements.
1
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30,
September 30, 2003
2002 (unaudited)
Assets ------------- -----------
Current assets
Cash and cash equivalents ............................. $ 6,299 $ 5,156
Accounts receivable, net .............................. 37,167 38,708
Program rights ........................................ 19,272 4,153
Deferred income taxes ................................. 807 807
Other ................................................. 2,140 2,942
--------- ---------
Total current assets ............................. 65,685 51,766
Property, plant and equipment, net .......................... 56,573 54,790
Intangible assets, net ...................................... 128,150 123,024
Deferred financing costs and other .......................... 7,177 10,500
Cash surrender value of life insurance ...................... 10,362 10,872
Program rights .............................................. 1,047 455
--------- ---------
$ 268,994 $ 251,407
========= =========
Liabilities and Stockholder's Investment
Current liabilities
Current portion of long-term debt ..................... $ 574 $ 333
Accounts payable ...................................... 3,003 3,315
Accrued interest payable .............................. 11,313 1,716
Dividends payable ..................................... -- 5,000
Program rights payable ................................ 22,993 6,842
Accrued employee benefit expenses ..................... 4,906 4,355
Other accrued expenses ................................ 10,370 5,945
--------- ---------
Total current liabilities ........................ 53,159 27,506
Long-term debt .............................................. 439,869 482,440
Program rights payable ...................................... 1,886 850
Deferred rent and other ..................................... 3,089 4,344
Accrued employee benefit expenses ........................... 1,879 1,917
Deferred income taxes ....................................... 16,185 17,268
--------- ---------
Total liabilities ................................ 516,067 534,325
--------- ---------
Stockholder's investment
Preferred stock, $1 par value, 1,000 shares authorized,
none issued ........................................ -- --
Common stock, $.05 par value, 20,000 shares authorized,
issued and outstanding ............................. 1 1
Capital in excess of par value ........................ 49,631 49,631
Retained earnings (deficit) ........................... 4,917 (2,681)
Distributions to owners, net .......................... (301,622) (329,869)
--------- ---------
Total stockholder's investment ..................... (247,073) (282,918)
--------- ---------
$ 268,994 $ 251,407
========= =========
See accompanying notes to interim consolidated financial statements.
2
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Nine Months Ended
June 30,
-----------------
2002 2003
---- ----
Cash flows from operating activities:
Net income (loss) .................................................. $ 2,958 $ (7,598)
--------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ................................... 9,850 7,946
Cumulative effect of change in accounting principle ............. -- 2,973
Other noncash charges ........................................... 1,784 1,092
Noncash tax benefits ............................................ (1,223) --
Loss on early repayment of debt ................................. -- 23,194
Provision for doubtful accounts ................................. 418 398
Loss (gain) on disposal of assets ............................... 7 (41)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ....................................... (4,872) (1,939)
Program rights ............................................ 16,289 15,711
Other current assets ...................................... (883) (802)
Other noncurrent assets ................................... (1,102) (472)
Increase (decrease) in liabilities:
Accounts payable .......................................... 279 312
Accrued interest payable .................................. (3,369) (9,597)
Accrued interest payable - related party .................. 436 --
Program rights payable .................................... (15,906) (17,187)
Accrued employee benefit expenses ......................... (395) (513)
Other accrued expenses .................................... 2,084 (4,425)
Deferred rent and other liabilities ....................... 2,570 1,255
Deferred income taxes ..................................... 4,221 3,110
--------- ---------
10,188 21,015
--------- ---------
Net cash provided by operating activities ................. 13,146 13,417
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................... (14,989) (6,062)
Proceeds from disposal of assets ................................... 37 66
--------- ---------
Net cash used in investing activities ..................... (14,952) (5,996)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt ..................................... -- 451,949
Principal payments on long-term debt and capital lease obligations.. (1,242) (425,438)
Draws under line of credit, net .................................... 7,664 15,136
Redemption premiums and related costs of early repayment of debt ... -- (17,409)
Deferred financing costs ........................................... (63) (9,555)
Notes issued from Allnewsco to Perpetual ........................... 1,961 --
Distributions to owners, net of certain charges .................... (313,899) (27,256)
Repayments of distributions to owners .............................. 310,515 4,009
--------- ---------
Net cash provided by (used in) financing activities ....... 4,936 (8,564)
--------- ---------
Net increase (decrease) in cash and cash equivalents ..................... 3,130 (1,143)
Cash and cash equivalents, beginning of period ........................... 7,829 6,299
--------- ---------
Cash and cash equivalents, end of period ................................. $ 10,959 $ 5,156
========= =========
Non-cash investing and financing activities:
Equipment acquired under capital leases............................. $ 24 $ --
========= =========
Dividends declared and unpaid....................................... $ -- $ 5,000
========= =========
See accompanying notes to interim consolidated financial statements.
3
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share information)
(unaudited)
NOTE 1 - The accompanying unaudited interim consolidated financial statements of
Allbritton Communications Company (an indirectly wholly-owned subsidiary of
Perpetual Corporation) and its subsidiaries (collectively, the "Company") have
been prepared pursuant to instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted or condensed where permitted by
regulation. In management's opinion, the accompanying financial statements
reflect all adjustments, which were of a normal recurring nature, and
disclosures necessary for a fair presentation of the consolidated financial
statements for the interim periods presented. The results of operations for the
three and nine months ended June 30, 2003 are not necessarily indicative of the
results that can be expected for the entire fiscal year ending September 30,
2003. The interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended September 30, 2002 which are contained in the Company's Form
10-K.
NOTE 2 - On September 16, 2002, the Company acquired certain of the assets of
ALLNEWSCO, Inc. ("Allnewsco") in exchange for $20,000 in cash and the
cancellation of a $20,000 note receivable from Allnewsco. Allnewsco has been
controlled since its inception by Perpetual which also controls the Company.
Because both the Company and Allnewsco are controlled by Perpetual, the Company
was required to account for the acquisition as a transfer of assets within a
group under common control. Under this accounting, the Company and Allnewsco are
treated as if they have always been combined for accounting and financial
reporting purposes. As a result, the Company's consolidated financial statements
have been restated for all periods prior to the asset acquisition to reflect the
combined results of the Company and Allnewsco as of the beginning of the
earliest period presented. In addition to combining the separate historical
results of the Company and Allnewsco, the consolidated financial statements
include all adjustments necessary to conform accounting methods and
presentation, to the extent they were different, and to eliminate significant
intercompany transactions.
4
Selected combining financial data for the three and nine months ended June 30,
2002 is as follows:
The Company Allnewsco Adjustment Combined
----------- --------- ---------- --------
Three Months Ended June 30, 2002
Net operating revenues............... $ 48,495 $ 2,853 $ 51,348
Net income (loss).................... 2,436 (840) $ 319 1,915
Nine Months Ended June 30, 2002
Net operating revenues............... $139,489 $ 8,111 $147,600
Net income (loss).................... 4,954 (3,219) $1,223 2,958
The adjustment to net income represents the income tax benefit associated with
combining the Company and Allnewsco.
As the Company did not acquire all of the assets or assume all of the
liabilities of Allnewsco, certain expenses reported in the consolidated
financial statements will not be incurred subsequent to the asset acquisition.
Specifically, the Company did not acquire or assume amounts due from Allnewsco
to Perpetual. The accompanying consolidated financial statements include $212
and $596 of related party interest expense relating to amounts due from
Allnewsco to Perpetual during the three and nine months ended June 30, 2002,
respectively, that will not recur subsequent to the acquisition. Accordingly, no
such related party interest expense was incurred during the three or nine months
ended June 30, 2003.
NOTE 3 - On December 20, 2002, the Company issued $275,000 principal amount of
7 3/4% Senior Subordinated Notes due 2012 (the "7 3/4% Notes") at par. The net
proceeds, together with borrowings under the Company's senior credit facility,
were used to purchase and redeem the Company's $275,000 9 3/4% Senior
Subordinated Debentures due 2007 (the "9 3/4% Debentures") as well as to pay the
fees and expenses associated with the offering of the 7 3/4% Notes. As of
January 21, 2003, all of the 9 3/4% Debentures had been purchased or redeemed.
On February 6, 2003, the Company issued an additional $180,000 principal amount
of its 7 3/4% Notes at a price of 98.305%. The net proceeds were used to redeem
the Company's $150,000 8 7/8% Senior Subordinated Notes due 2008 (the "8 7/8%
Notes"), fund the redemption premium for the 8 7/8% Notes, pay the fees and
expenses associated with the offering of the additional 7 3/4% Notes and repay
borrowings outstanding under the Company's senior credit facility. On March 10,
2003, all of the 8 7/8% Notes were redeemed.
As a result of the purchase and redemption of its 9 3/4% Debentures as well as
the redemption of its 8 7/8% Notes, the Company recorded a pre-tax charge of
$23,194 during the quarter ended March 31, 2003 (see Note 6).
On February 14, 2003, the Company commenced a registered exchange offer of a new
series of 7 3/4% Notes in exchange for the initial series of 7 3/4% Notes issued
December 20, 2002 and consummated the exchange offer following its expiration on
March 17, 2003 by issuing the new series of notes in exchange for notes of the
initial series properly tendered. On June 17, 2003, the
5
Company commenced a registered exchange offer of the same new series of 7 3/4%
Notes in exchange for the initial series of 7 3/4% Notes issued February 6, 2003
and consummated the exchange offer following its expiration on July 16, 2003 by
issuing such new series of notes in exchange for notes of the initial series
properly tendered. The terms of the exchange notes are substantially identical
to those of the initial notes in each case, except that transfer restrictions
and registration rights relating to initial notes do not apply to the exchange
notes.
NOTE 4 - Effective October 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to periodic impairment tests. The Company's indefinite lived
intangible assets consist of broadcast licenses. Other intangible assets will
continue to be amortized over their useful lives of 11 to 25 years.
Upon adoption, the Company performed the first of the required impairment tests
on its indefinite lived intangible assets. The fair value of the Company's
broadcast licenses was determined by applying an estimated market multiple to
the broadcast cash flow generated by the respective market. Market multiples
were determined based on recent transactions within the industry, information
available regarding publicly traded peer companies and the respective station's
competitive position within its market. Appropriate allocation was made to each
of the station's tangible and intangible assets in determining the fair value of
the station's broadcast licenses. As a result of these tests, it was determined
that one of the Company's broadcast licenses was impaired. Accordingly, the
Company recorded a non-cash, after-tax impairment charge of $2,973 related to
the carrying value of its indefinite lived intangible assets. This charge was
recorded as a cumulative effect of a change in accounting principle during the
three months ended December 31, 2002. The carrying value of the Company's
broadcast licenses at September 30, 2002 and June 30, 2003 was $127,290 and
$122,290, respectively, with the decrease representing the $5,000 pre-tax
impairment charge discussed above.
Other intangible assets at September 30, 2002 and June 30, 2003 consisted of the
following:
September 30, June 30,
2002 2003
------------- --------
Gross carrying amount................... $ 6,174 $ 6,174
Accumulated amortization................ 5,314 5,440
------- -------
Net carrying amount..................... $ 860 $ 734
======= =======
6
The following table adjusts reported income before cumulative effect of change
in accounting principle and reported net income for the three and nine months
ended June 30, 2002 (prior to the adoption date of SFAS No. 142) to exclude
amortization of indefinite lived intangible assets:
Income Before
Cumulative Effect
Of Change in Net
Accounting Principle Income
-------------------- ------
Three Months Ended June 30, 2002
As reported......................................... $ 2,436 $ 2,436
Amortization of broadcast licenses, net of tax...... 686 686
------- -------
Adjusted............................................ $ 3,122 $ 3,122
======= =======
Nine Months Ended June 30, 2002
As reported......................................... $ 4,954 $ 4,954
Amortization of broadcast licenses, net of tax...... 2,058 2,058
------- -------
Adjusted............................................ $ 7,012 $ 7,012
======= =======
NOTE 5 - For the nine months ended June 30, 2002 and 2003, distributions to
owners and related activity consisted of the following:
Federal and
Distributions Allnewsco Virginia state Net
to Owners Notes Payable Income Tax Distributions
and Dividends to Perpetual Receivable to Owners
------------- ------------- -------------- -------------
Balance as of September 30, 2001..................... $ 301,670 $ (9,508) $ 17,586 $ 309,748
Cash advances to Perpetual........................... 312,410 312,410
Repayment of cash advances to Perpetual.............. (310,515) (310,515)
Issuance of notes payable to Perpetual............... (1,961) (1,961)
Charge for federal and state income taxes............ (144) (144)
Payment of income taxes.............................. 1,633 1,633
Tax benefit associated with combining
ACC and Allnewsco............................... 1,223 1,223
--------- --------- -------- ---------
Balance as of June 30, 2002.......................... $ 303,565 $ (11,469) $ 20,298 $ 312,394
========= ========= ======== =========
Balance as of September 30, 2002..................... $ 301,622 $ -- $ -- $ 301,622
Cash advances to Perpetual........................... 19,730 19,730
Repayment of cash advances to Perpetual.............. (4,009) (4,009)
Dividends declared and unpaid........................ 5,000 5,000
Benefit from federal and state income taxes.......... 5,104 5,104
Payment of income taxes.............................. 2,422 2,422
--------- --------- -------- ---------
Balance as of June 30, 2003.......................... $ 322,343 $ -- $ 7,526 $ 329,869
========= ========= ======== =========
7
During the three months ended June 30, 2003, the Company declared cash dividends
of $250 per common share, or $5,000, payable during the three months ending
September 30, 2003. The Company recorded these dividends in Distributions to
owners, net and Dividends payable when declared. No cash advances were made to
Perpetual during the three months ended June 30, 2003, and no cash advances are
anticipated to be made during the three months ending September 30, 2003.
The operations of the Company are included in a consolidated federal income tax
return and a combined Virginia state income tax return filed by Perpetual in
accordance with the terms of a tax sharing agreement between the Company and
Perpetual. For the nine months ended June 30, 2003, the Company recorded a
benefit for federal and Virginia state income taxes. To the extent that a
benefit for federal or Virginia state income taxes exists for the year ending
September 30, 2003, any such benefit will be effectively distributed to
Perpetual as such benefit will not be recognized in future years pursuant to the
tax sharing agreement between the Company and Perpetual.
The average amount of non-interest bearing advances outstanding was $328,587 and
$312,304 during the nine months ended June 30, 2002 and 2003, respectively.
NOTE 6 - SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," was issued in
April 2002 and primarily eliminates the requirement that gains or losses
associated with early debt extinguishments be accounted for as extraordinary
items. SFAS No. 145 will likely require any future gains or losses associated
with early extinguishments of debt to be recorded as a component of income from
continuing operations rather than as an extraordinary item. This standard is
effective for the Company's fiscal year ending September 30, 2003. As a result
of the purchase and redemption of its 9 3/4% Debentures in January 2003 and the
redemption of its 8 7/8% Notes in March 2003, the Company has recorded a pre-tax
charge of $23,194 during the quarter ended March 31, 2003. This loss has been
reflected as a component of income from continuing operations rather than net of
tax as an extraordinary item. The other provisions of SFAS No. 145 are not
expected to have a material effect on the Company's financial position or
results of operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(dollars in thousands except share information)
Overview
As used herein, the terms the "Company," "our," "us," or "we" refer to
Allbritton Communications Company and its subsidiaries and "ACC" refers solely
to Allbritton Communications Company.
We own ABC network-affiliated television stations serving seven geographic
markets: WJLA-TV in Washington, D.C.; WCFT-TV in Tuscaloosa, Alabama, WJSU-TV in
Anniston, Alabama and WBMA-LP, a low power television station licensed to
Birmingham, Alabama (we operate WCFT-TV and WJSU-TV in tandem with WBMA-LP
serving the viewers of the Birmingham, Tuscaloosa and Anniston market as a
single programming source); WHTM-TV in Harrisburg, Pennsylvania; KATV in Little
Rock, Arkansas; KTUL in Tulsa, Oklahoma; WSET-TV in Lynchburg, Virginia; and
WCIV in Charleston, South Carolina. We also provide 24-hour per day basic cable
television programming to the Washington, D.C. market, through NewsChannel 8,
primarily focused on regional and local news for the Washington, D.C.
metropolitan area. The operations of NewsChannel 8 have been integrated with
WJLA.
Our advertising revenues are generally highest in the first and third quarters
of each fiscal year, due in part to increases in retail advertising in the
period leading up to and including the holiday season and active advertising in
the spring. The fluctuation in our operating results is generally related to
fluctuations in the revenue cycle. In addition, advertising revenues are
generally higher during election years due to spending by political candidates,
which is typically heaviest during our first and fourth fiscal quarters.
Acquisitions and Basis of Financial Presentation
On September 16, 2002, we acquired certain of the assets of ALLNEWSCO, Inc.
("Allnewsco") in exchange for $20,000 in cash and the cancellation of a $20,000
note receivable from Allnewsco. Allnewsco has been controlled since its
inception by Perpetual which also controls ACC. Because both ACC and Allnewsco
are controlled by Perpetual, we were required to account for the acquisition as
a transfer of assets within a group under common control. Under this accounting,
the Company and Allnewsco are treated as if they have always been combined for
accounting and financial reporting purposes. As a result, our consolidated
financial statements have been restated for all periods prior to the asset
acquisition to reflect the combined results of the Company and Allnewsco as of
the beginning of the earliest period presented. In addition to combining the
separate historical results of the Company and Allnewsco, the consolidated
financial statements include all adjustments necessary to conform accounting
methods and presentation, to the extent they were different, and to eliminate
significant intercompany transactions.
As we did not acquire all of the assets or assume all of the liabilities of
Allnewsco, certain expenses reported in our consolidated financial statements
will not be incurred subsequent to the asset acquisition. Specifically, we did
not acquire or assume amounts due from Allnewsco to Perpetual. Our consolidated
financial statements include $212 and $596 of related party interest expense
relating to amounts due from Allnewsco to Perpetual during the three and nine
months
9
ended June 30, 2002, respectively, that will not recur subsequent to the
acquisition. Accordingly, no such related party interest expense was incurred
during the three or nine months ended June 30, 2003.
Financing Transactions
On December 20, 2002, we issued $275,000 principal amount of 7 3/4% senior
subordinated notes at par. As of January 21, 2003, we had used the net proceeds
from the offering, together with approximately $15,500 of borrowings under our
senior credit facility, to purchase and redeem all of our outstanding 9 3/4%
senior subordinated debentures as well as to pay the fees and expenses
associated with the offering of the 7 3/4% notes.
On February 6, 2003, we issued an additional $180,000 principal amount of our
7 3/4% notes at a price of 98.305%. We used the proceeds to redeem our existing
8 7/8% senior subordinated notes, fund the redemption premium for the 8 7/8%
notes, pay the fees and expenses associated with the offering of the additional
7 3/4% notes and repay borrowings outstanding under our senior credit facility.
On March 10, 2003, all of the 8 7/8% notes were redeemed.
The issuance of the 7 3/4% notes and the related purchase and redemption of the
9 3/4% debentures and the redemption of the 8 7/8% notes will reduce our annual
payments of interest on our debt by approximately $5,000. As a result of the
purchase and redemption of our 9 3/4% debentures and the redemption of our
8 7/8% notes, we recorded a pre-tax charge of $23,194 during the quarter ended
March 31, 2003. Such charge has been reflected as a nonoperating expense.
On February 14, 2003, we commenced a registered exchange offer of a new series
of 7 3/4% notes in exchange for the initial series of 7 3/4% notes issued
December 20, 2002 and consummated the exchange offer following its expiration on
March 17, 2003 by issuing the new series of notes in exchange for notes of the
initial series properly tendered. On June 17, 2003, we commenced a registered
exchange offer of the same new series of 7 3/4% notes in exchange for the
initial series of 7 3/4% notes issued February 6, 2003 and consummated the
exchange offer following its expiration on July 16, 2003 by issuing such new
series of notes in exchange for notes of the initial series properly tendered.
The terms of the exchange notes are substantially identical to those of the
initial notes in each case, except that transfer restrictions and registration
rights relating to initial notes do not apply to the exchange notes.
10
Results of Operations
Set forth below are selected consolidated financial data for the three and nine
months ended June 30, 2002 and 2003 and the percentage change between the
periods:
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
Percent Percent
2002 2003 Change 2002 2003 Change
---- ---- ------- ---- ---- -------
Operating revenues, net ............ $51,348 $51,271 -0.1% $147,600 $154,228 4.5%
Total operating expenses............ 36,377 35,370 -2.8% 109,284 106,376 -2.7%
------- ------- -------- --------
Operating income.................... 14,971 15,901 6.2% 38,316 47,852 24.9%
Nonoperating expenses, net.......... 10,961 9,564 -12.7% 32,095 55,000 71.4%
Income tax provision (benefit)...... 2,095 2,487 18.7% 3,263 (2,523) -177.3%
------- ------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle........................... 1,915 3,850 101.0% 2,958 (4,625) -256.4%
Cumulative effect of change in
accounting principle, net of income
tax benefit......................... -- -- -- -- 2,973 --
------- ------- -------- --------
Net income (loss)................... $ 1,915 $ 3,850 101.0% $ 2,958 $ (7,598) -356.9%
======= ======= ======== ========
Operating cash flow <F1>............ $18,122 $18,600 2.6% $ 48,166 $ 55,798 15.8%
======= ======= ======== ========
<FN>
- -------
<F1> Operating cash flow is not a measure of performance calculated in
accordance with GAAP. For a definition of operating cash flow and a
reconciliation of operating cash flow to operating income, please refer to
"Operating Cash Flow".
</FN>
Net Operating Revenues
The following table depicts the principal types of operating revenues, net of
agency commissions, earned by us for each of the three and nine months ended
June 30, 2002 and 2003, and the percentage contribution of each to our total
broadcast revenues, before fees:
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
2002 2003 2002 2003
---- ---- ---- ----
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- -------
Local and national <F1>....... $46,809 88.8 $47,231 90.0 $132,782 87.3 $132,687 83.9
Political <F2>................ 1,373 2.6 179 0.3 3,635 2.4 8,107 5.1
Network compensation <F3>..... 900 1.7 1,469 2.8 2,580 1.7 4,339 2.8
Trade and barter <F4>......... 1,844 3.5 1,750 3.3 5,503 3.6 5,233 3.3
Other revenue <F5>............ 1,807 3.4 1,882 3.6 7,549 5.0 7,718 4.9
------- ----- ------- ----- -------- ----- -------- -----
Broadcast revenues............ 52,733 100.0 52,511 100.0 152,049 100.0 158,084 100.0
===== ===== ===== =====
Fees <F6>..................... (1,385) (1,240) (4,449) (3,856)
------- ------- -------- --------
Operating revenues, net ...... $51,348 $51,271 $147,600 $154,228
======= ======= ======== ========
<FN>
- ----------
<F1> Represents sale of advertising time to local and national advertisers,
either directly or through agencies representing such advertisers, net of
agency commission.
<F2> Represents sale of advertising time to political advertisers.
<F3> Represents payment by networks for broadcasting or promoting network
programming.
<F4> Represents value of commercial time exchanged for goods and services
(trade) or syndicated programs (barter).
<F5> Represents other revenue, principally from cable and direct broadcast
satellite subscriber fees, the sales of University of Arkansas sports
programming to advertisers and radio stations as well as receipts from
tower rental and production of commercials.
<F6> Represents fees paid to national sales representatives and fees paid for
music licenses.
</FN>
11
Net operating revenues for the three months ended June 30, 2003 totaled $51,271,
a decrease of $77, or 0.1%, when compared to net operating revenues of $51,348
for the three months ended June 30, 2002. Net operating revenues increased
$6,628, or 4.5%, to $154,228 for the nine months ended June 30, 2003 as compared
to $147,600 for the same period in the prior year.
Local and national advertising revenues increased $422, or 0.9%, and decreased
$95, or 0.1%, during the three and nine months ended June 30, 2003,
respectively, versus the comparable periods in Fiscal 2002. Local and national
advertising revenue increased in a majority of our markets during the three
months ended June 30, 2003. Such increase was limited by decreased demand for
advertising related to the war in Iraq as well as a slight reduction in the
level of prime-time inventory available for sale as discussed below related to
network compensation. In addition to the factors related to the third fiscal
quarter, the decrease for the nine months ended June 30, 2003 was largely due to
the displacement of local and national advertisers during the peak political
advertising month of October 2002, partially offset by increased revenue related
to the broadcast of the Super Bowl by the ABC network in January 2003 (broadcast
by the Fox network in 2002).
Political advertising revenues decreased by $1,194 to $179 for the three months
ended June 30, 2003 as compared to the three months ended June 30, 2002. This
decrease was principally due to advertising related to primaries for
high-profile local political elections in the Birmingham, Harrisburg and Little
Rock markets during the three months ended June 30, 2002 with no comparable
advertising in the third quarter of Fiscal 2003. Political advertising revenues
increased $4,472, or 123.0%, during the nine months ended June 30, 2003 as
compared to the same period in Fiscal 2002. Political advertising revenue
increased in all but one of our markets due to several high-profile local
political races affecting our markets for the November 2002 elections, partially
offset by advertising leading up to the November 2001 local political election
affecting our Washington, D.C. and Lynchburg markets.
Network compensation revenue increased $569 and $1,759, or 63.2% and 68.2%,
during the three and nine months ended June 30, 2003 as compared to the same
periods in the prior year. The increases were principally due to the July 31,
2002 expiration of certain amendments to our network affiliation agreements.
Under these amendments, ABC, for a three-year period, provided our stations with
additional prime-time inventory, limited participation rights in a new cable
television "soap" channel, and enhanced program exclusivity and commercial
inventory guarantees in exchange for reduced annual network compensation, the
return of certain Saturday morning inventory from the stations, and more
flexibility in repurposing of ABC programming. Upon the expiration of these
amendments, compensation rates and inventory allocations reverted to their
pre-modification levels. We routinely consult with the network in relation to
the levels of program clearances, preemptions, compensation and inventory
availabilities.
No individual advertiser accounted for more than 5% of our broadcast revenues
during the three or nine months ended June 30, 2002 or 2003.
12
Total Operating Expenses
Total operating expenses for the three months ended June 30, 2003 totaled
$35,370, a decrease of $1,007, or 2.8%, compared to total operating expenses of
$36,377 for the three-month period ended June 30, 2002. This net decrease
consisted of a decrease in television operating expenses, excluding depreciation
and amortization, of $672, a decrease in depreciation and amortization of $452
and an increase in corporate expenses of $117.
Total operating expenses for the nine months ended June 30, 2003 totaled
$106,376, a decrease of $2,908, or 2.7%, compared to total operating expenses of
$109,284 for the nine-month period ended June 30, 2002. This net decrease
consisted of a decrease in television operating expenses, excluding depreciation
and amortization, of $1,281, a decrease in depreciation and amortization of
$1,904 and an increase in corporate expenses of $277.
Television operating expenses, excluding depreciation and amortization,
decreased $672 and $1,281, or 2.1% and 1.3%, for the three and nine months ended
June 30, 2003, respectively, as compared to the comparable periods in Fiscal
2002. These decreases were due to a $750 charge during the third quarter of
Fiscal 2002 for one-time lease-related costs associated with the then-pending
relocation of WJLA to new studio and office space, our continuing focus on
controlling programming and operating costs and expense savings related to the
integration of the operations of WJLA and NewsChannel 8.
Depreciation and amortization expense decreased $452 and $1,904, or 14.3% and
19.3%, respectively, for the three and nine months ended June 30, 2003 versus
the comparable periods in Fiscal 2002. These decreases were principally the
result of our adoption of SFAS No. 142 effective October 1, 2002. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to periodic impairment tests. Other
intangible assets will continue to be amortized over their useful lives. The
non-amortization provisions of SFAS No. 142 resulted in a $1,022 and $3,066
decrease in amortization expense during the three and nine months ended June 30,
2003, respectively, as compared to the same periods in the prior fiscal year.
Assuming we had adopted SFAS No. 142 at the beginning of Fiscal 2002,
depreciation and amortization expense for the three and nine months ended June
30, 2002 would have been $2,129 and $6,784, respectively. This would have
resulted in increases in depreciation and amortization expense during the three
and nine months ended June 30, 2003 of $570 and $1,162, or 26.8% and 17.1%,
respectively, due primarily to increased depreciation expense associated with
the buildout of studio and office space and acquisition of technical equipment
for the new WJLA/NewsChannel 8 facility.
Corporate expenses increased $117 and $277, or 7.5% and 6.3%, during the three
and nine months ended June 30, 2003, as compared to the respective periods of
the prior fiscal year. These increases were due primarily to increased key-man
life insurance expenses.
Operating Income
For the three months ended June 30, 2003, operating income of $15,901 increased
$930, or 6.2%, when compared to operating income of $14,971 for the three months
ended June 30, 2002. For the three months ended June 30, 2003, the operating
margin increased to 31.0% from 29.2% for the comparable period in Fiscal 2002.
Operating income of $47,852 for the nine months ended June 30, 2003 increased
$9,536, or 24.9%, when compared to operating income of $38,316 for the
13
same period in the prior fiscal year. For the nine months ended June 30, 2003,
the operating margin increased to 31.0% from 26.0% for the comparable period in
the prior fiscal year.
Assuming we had adopted SFAS No. 142 at the beginning of Fiscal 2002, operating
income would have been $15,993 and $41,382 for the three and nine months ended
June 30, 2002, respectively. Operating margin would have been 31.1% and 28.0%
for the three and nine months ended June 30, 2002, respectively. This would have
resulted in a decrease in operating income of $92, or 0.6%, for the three months
ended June 30, 2003 and an increase in operating income of $6,470, or 15.6%, for
the nine months ended June 30, 2003 as compared to the respective periods of the
prior fiscal year. The increase in operating income and margin during the nine
months ended June 30, 2003 was primarily the result of increased net operating
revenues as discussed above.
Operating Cash Flow
Operating cash flow of $18,600 for the three months ended June 30, 2003
increased $478, or 2.6%, as compared to $18,122 for the three-month period ended
June 30, 2002. Operating cash flow of $55,798 for the nine months ended June 30,
2003 increased $7,632, or 15.8%, as compared to $48,166 for the same period in
the prior fiscal year. The increase during the nine months ended June 30, 2003
was primarily the result of increased net operating revenues as discussed above.
We define operating cash flow as operating income plus depreciation and
amortization. Although operating cash flow is not a measure of performance
calculated in accordance with generally accepted accounting principles ("GAAP"),
we believe it is useful for investors in our debt securities and users of our
financial statements in understanding our results of operations. Management
believes that operating cash flow is useful because it is widely used in the
broadcasting industry as a measure of operating performance and is used by
investors and by analysts who report on the performance of broadcast companies.
Operating cash flow also is generally recognized as a tool in applying valuation
methodologies for companies in the media industry. In addition, management
closely monitors operating cash flow in determining our ability to maintain
compliance with certain financial covenants of our indebtedness. Nevertheless,
you should not consider operating cash flow in isolation from or as a substitute
for operating income, net income, cash flow from operating activities and other
operations or cash flow statement data prepared in accordance with GAAP, or as a
measure of performance or liquidity prepared in accordance with GAAP. Moreover,
because operating cash flow is not a measure calculated in accordance with GAAP,
this performance measure is not necessarily comparable to similarly titled
measures employed by other companies.
The following table provides a reconciliation of operating cash flow (a non-GAAP
financial measure) to operating income (as presented in our statements of
operations):
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
2002 2003 2002 2003
---- ---- ---- ----
Operating income................... $14,971 $15,901 $38,316 $47,852
Add:
Depreciation and amortization...... 3,151 2,699 9,850 7,946
------- ------- ------- -------
Operating cash flow................ $18,122 $18,600 $48,166 $55,798
======= ======= ======= =======
14
Nonoperating Expenses, Net
Interest Expense. Non-related party interest expense of $9,285 for the three
months ended June 30, 2003 decreased $1,157, or 11.1%, as compared to $10,442
for the three-month period ended June 30, 2002. This decrease was related to the
reduced weighted average interest rate on debt due to the two financing
transactions during the first half of Fiscal 2003, partially offset by higher
average debt balances outstanding during the three months ended June 30, 2003.
The average balance of debt outstanding, including capital lease obligations,
was $446,602 and $480,961 for the three months ended June 30, 2002 and 2003,
respectively, and the weighted average interest rate on debt was 9.3% and 7.6%
for the three months ended June 30, 2002 and 2003, respectively.
Non-related party interest expense of $31,387 for the nine months ended June 30,
2003 decreased $18, or 0.1%, as compared to $31,405 during the comparable period
of Fiscal 2002. This decrease was primarily the result of the reduced weighted
average interest rate on debt due to the two financing transactions during the
first half of Fiscal 2003. The decrease was substantially offset by incremental
interest expense associated with carrying both the newly issued 7 3/4% notes and
the 9 3/4% debentures from December 20, 2002 through January 21, 2003 during the
redemption notice period and the newly issued 7 3/4% notes and the 8 7/8% notes
from February 6, 2003 through March 10, 2003 during the redemption notice
period. Had we purchased or redeemed the 9 3/4% debentures on December 20, 2002
and the 8 7/8% notes on February 6, 2003, interest expense for the nine months
ended June 30, 2003 would have been $28,827, resulting in a decrease of $2,578,
or 8.2%, as compared to the nine months ended June 30, 2002. This reflects the
lower weighted average interest rate on debt, partially offset by higher average
balances of debt outstanding. In addition, the average balance of debt
outstanding, including capital lease obligations, for the nine months ended June
30, 2003 would have been $463,261, and the weighted average interest rate on
debt during the nine months ended June 30, 2003 would have been 8.1%. This
compares to an average balance of debt outstanding, including capital lease
obligations, for the nine months ended June 30, 2002 of $452,512 and a weighted
average interest rate on debt for the nine-month period ended June 30, 2002 of
9.2%.
Loss on Early Repayment of Debt. As a result of the purchase and redemption of
our 9 3/4% debentures and the redemption of our 8 7/8% notes during the quarter
ended March 31, 2003, we recorded a pre-tax charge of $23,194. Such charge has
been reflected as a nonoperating expense rather than as an extraordinary item in
accordance with our adoption of SFAS No. 145 during Fiscal 2003. See "New
Accounting Standards."
Income Taxes
The provision for income taxes for the three months ended June 30, 2003 totaled
$2,487, an increase of $392, or 18.7%, as compared to the provision for income
taxes of $2,095 for the three months ended June 30, 2002. The increase in the
provision for income taxes during the three months ended June 30, 2003 was due
to the $2,327, or 58.0%, increase in pre-tax income, partially offset by a
decrease in the Company's effective income tax rate.
The benefit from income taxes for the nine months ended June 30, 2003 totaled
$2,523, a decrease of $5,786 when compared to the provision for income taxes of
$3,263 for the nine months ended June 30, 2002. The increase in income tax
benefit during the nine months ended June 30, 2003 was primarily due to the
$23,194 loss on early repayment of debt during the quarter ended March 31, 2003.
15
Cumulative Effect of Change in Accounting Principle
Effective October 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses the financial accounting and
reporting for acquired goodwill and other intangible assets. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to periodic impairment tests. Our
indefinite lived intangible assets consist of broadcast licenses. Other
intangible assets will continue to be amortized over their useful lives of 11 to
25 years.
Upon adoption, we performed the first of the required impairment tests on our
indefinite lived intangible assets. The fair value of our broadcast licenses was
determined by applying an estimated market multiple to the broadcast cash flow
generated by the respective market. Market multiples were determined based on
recent transactions within the industry, information available regarding
publicly traded peer companies and the respective station's competitive position
within its market. Appropriate allocation was made to each of the station's
tangible and intangible assets in determining the fair value of the station's
broadcast licenses. As a result of these tests, we determined that one of our
broadcast licenses was impaired. Accordingly, we recorded a non-cash, after-tax
impairment charge of $2,973 related to the carrying value of our indefinite
lived intangible assets. This charge was recorded as a cumulative effect of a
change in accounting principle during the three months ended December 31, 2002.
Net Income
For the three and nine months ended June 30, 2003, the Company recorded net
income of $3,850 and a net loss of $7,598, respectively, as compared to net
income of $1,915 and $2,958 for the three and nine months ended June 30, 2002,
respectively. The increase of $1,935 during the three months ended June 30, 2003
and the decrease of $10,556 during the nine months ended June 30, 2003 were due
to the factors discussed above.
Balance Sheet
Significant balance sheet fluctuations from September 30, 2002 to June 30, 2003
consisted primarily of decreases in program rights and program rights payable
which reflect the annual cycle of the underlying program contracts which
generally begins in September of each year. Additionally, accrued interest
payable decreased due to scheduled payments of interest on long-term debt, and
long-term debt increased due to financing the costs associated with the issuance
of our 7 3/4% notes and the related purchase and redemption of our 9 3/4%
debentures and the redemption of our 8 7/8% notes during Fiscal 2003.
Liquidity and Capital Resources
As of June 30, 2003, our cash and cash equivalents aggregated $5,156, and we had
an excess of current assets over current liabilities of $24,260.
Cash Provided by Operations. Our principal source of working capital is cash
flow from operations and borrowings under our senior credit facility. As
discussed above, our operating results are cyclical in nature primarily as a
result of seasonal fluctuations in advertising revenues, which are generally
highest in the first and third quarters of each fiscal year. Our cash flow from
operations is also impacted on a quarterly basis by the timing of cash
collections and interest
16
payments on debt. Cash receipts are usually much greater during the second and
fourth fiscal quarters as the collection of advertising revenue typically lags
the period in which such revenue is recorded. Scheduled semi-annual interest
payments on our long-term fixed interest rate debt have been higher during the
first and third fiscal quarters, and as a result of the redemption of our 8 7/8%
notes, will now occur only in such quarters. As a result, our cash flows from
operating activities as reflected in our consolidated financial statements are
generally significantly higher during our second and fourth fiscal quarters, and
such quarters comprise a substantial majority of our cash flows from operating
activities for the full fiscal year.
As reported in the consolidated statements of cash flows, our net cash provided
by operating activities was $13,146 and $13,417 for the nine months ended June
30, 2002 and 2003, respectively. As described above, the timing and amount of
our scheduled semi-annual interest payments on our long-term fixed interest rate
debt has now changed. As a result, interest payments on our long-term fixed
interest rate debt increased from $33,469 for the nine months ended June 30,
2002 to $39,693 for the nine months ended June 30, 2003. Accordingly, accrued
interest payable decreased by $9,597 during the nine months ended June 30, 2003
as compared to a decrease of $3,369 during the nine months ended June 30, 2002.
Cash provided by operating activities for the nine months ended June 30, 2003
increased by only $271, or 2.1% as a result of the change in timing and amount
of our interest payments on our long-term fixed interest rate debt, which
substantially offset the $6,470 increase in operating income for the period
(adjusted for the adoption of SFAS No. 142). We have no scheduled interest
payments on our long-term fixed interest rate debt for the fourth fiscal quarter
ending September 30, 2003 as compared to payments of $6,656 for the same quarter
in the prior year.
Transactions with Owners. We have periodically made advances in the form of
distributions to Perpetual Corporation ("Perpetual"). During the nine months
ended June 30, 2002 and 2003, we made cash advances, net of repayments, to
Perpetual of $1,895 and $15,721, respectively. The advances to Perpetual are
non-interest bearing and, as such, do not reflect market rates of
interest-bearing loans to unaffiliated third parties. No cash advances were made
to Perpetual during the three months ended June 30, 2003, and no cash advances
are anticipated to be made during the three months ending September 30, 2003.
At present, the primary source of repayment of the net advances is through our
ability to pay dividends or make other distributions, and there is no immediate
intent for the amounts to be repaid. Accordingly, these advances have been
treated as a reduction of stockholder's investment and are described as
"distributions" in our consolidated financial statements.
Under the terms of the agreements relating to our indebtedness, future advances,
distributions and dividends to related parties are subject to certain
restrictions. We anticipate that, subject to such restrictions, applicable law
and payment obligations with respect to our indebtedness, we will make advances,
distributions or dividends to related parties in the future.
During the three months ended June 30, 2003, we declared cash dividends of $250
per common share, or $5,000, payable during the three months ending September
30, 2003. We recorded these dividends in Distributions to owners, net and
Dividends payable when declared.
17
During the nine months ended June 30, 2002 and 2003, we made interest-bearing
advances of tax payments to Perpetual in accordance with the terms of the tax
sharing agreement between Perpetual and us of $1,633 and $2,422, respectively.
We were charged by Perpetual for federal and state income taxes totaling $144
during the nine months ended June 30, 2002. During the nine months ended June
30, 2003, we were not charged for federal and state income taxes, but rather, we
recorded a benefit for federal and Virginia state taxes of $5,104. Such benefit
has been reflected in distributions to owners, net at June 30, 2003; however,
any such benefit remaining at the end of the year ending September 30, 2003 will
be effectively distributed to Perpetual as we will receive no future benefit for
federal or Virginia state taxes in accordance with the terms of our tax sharing
agreement. Additionally, because Perpetual has historically filed consolidated
federal and Virginia state income tax returns including the operating results of
both the Company and Allnewsco, certain tax benefits were realized by Perpetual
associated with Allnewsco's net operating losses in the consolidated tax
returns. In accordance with SFAS No. 109, the combined results of the Company
and Allnewsco for the nine months ended June 30, 2002 have been adjusted to
reflect the historical tax benefit of $1,223 which would have been recorded for
financial reporting purposes by the combined entity.
Perpetual historically advanced cash to Allnewsco in the form of unsecured
demand notes bearing interest at a rate of 7.5%. Notes issued during the nine
months ended June 30, 2002 amounted to $1,961, with no cash repayments during
this period. The notes payable from Allnewsco to Perpetual are included in
distributions to owners in our consolidated financial statements, conforming the
presentation of cash transactions between ACC, Allnewsco and Perpetual. As we
did not acquire or assume amounts due from Allnewsco to Perpetual, no amount was
outstanding from us under such notes at June 30, 2003.
Stockholder's deficit amounted to $282,918 at June 30, 2003, an increase of
$35,845, or 14.5%, from the September 30, 2002 deficit of $247,073. The increase
was due to the net loss for the period of $7,598, cash advances, net of
repayments, to Perpetual of $15,721, dividends declared and unpaid of $5,000,
tax payments to Perpetual of $2,422 and the federal and state income tax benefit
at June 30, 2003 of $5,104.
Indebtedness. Our total debt, including the current portion of long-term debt,
increased from $440,443 at September 30, 2002 to $482,773 at June 30, 2003. This
debt, net of applicable discounts, consisted of $452,032 of 7 3/4% senior
subordinated notes due December 15, 2012, $30,000 of draws under our senior
credit facility and $741 of capital lease obligations at June 30, 2003. The
increase of $42,330 in total debt from September 30, 2002 to June 30, 2003 was
primarily due to an additional $30,000 in senior subordinated notes, which
approximated the amount of redemption premiums, fees and expenses associated
with the issuance of the new 7 3/4% notes, the purchase and redemption of the
9 3/4% debentures and the redemption of the 8 7/8% notes.
Our $70,000 senior credit facility is secured by the pledge of stock of ACC and
its subsidiaries and matures March 27, 2006. Interest is payable quarterly at
various rates from prime plus 0.25% or LIBOR plus 1.50% depending on certain
financial operating tests.
Under the existing borrowing agreements, we are subject to restrictive covenants
that place limitations upon payments of cash dividends, issuance of capital
stock, investment transactions, incurrence of additional obligations and
transactions with affiliates. In addition, under the senior
18
credit facility, we must maintain compliance with certain financial covenants.
Compliance with the financial covenants is measured at the end of each quarter,
and as of June 30, 2003, we were in compliance with those financial covenants.
The senior credit facility was amended as of December 6, 2002 to adjust certain
of the financial covenants for the remaining term of the facility. We are also
required to pay a commitment fee ranging from 0.5% to 0.75% per annum based on
the amount of any unused portion of the senior credit facility.
Other Uses of Cash. We anticipate that capital expenditures for Fiscal 2003 will
be in the approximate range of $8,000 to $10,000 and will be primarily for the
implementation of DTV service in our remaining markets and the acquisition of
technical equipment and vehicles to support ongoing operations across our
stations. We expect that the source of funds for these anticipated capital
expenditures will be cash provided by operations and borrowings under the senior
credit facility. Capital expenditures during the nine months ended June 30, 2003
totaled $6,062.
Based upon our current level of operations, we believe that available cash,
together with cash flows generated by operating activities and amounts available
under the senior credit facility, will be adequate to meet our anticipated
future requirements for working capital, capital expenditures, declared dividend
payments and scheduled payments of interest on our debt.
New Accounting Standards
SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections," was issued in April 2002 and
primarily eliminates the requirement that gains or losses associated with early
debt extinguishments be accounted for as extraordinary items. SFAS No. 145 will
likely require any future gains or losses associated with early extinguishments
of debt to be recorded as a component of income from continuing operations
rather than as an extraordinary item. This standard is effective for our fiscal
year ending September 30, 2003. As a result of the purchase and redemption of
our 9 3/4% debentures in January 2003 and the redemption of our 8 7/8% notes in
March 2003, we recorded a pre-tax charge of $23,194 during the quarter ended
March 31, 2003. This charge has been reflected as a component of income from
continuing operations rather than net of tax as an extraordinary item. The other
provisions of SFAS No. 145 are not expected to have a material effect on our
financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2003, we had other financial instruments consisting primarily of
long-term fixed interest rate debt. Such debt, with future principal payments of
$455,000, matures December 15, 2012. At June 30, 2003, the carrying value of
such debt was $452,032, the fair value was $468,650 and the interest rate was
7 3/4%. The fair market value of long-term fixed interest rate debt is subject
to interest rate risk. Generally, the fair market value of fixed interest rate
debt will increase as interest rates fall and decrease as interest rates rise.
We estimate the fair value of our long-term debt using either quoted market
prices or by discounting the required future cash flows under our debt using
borrowing rates currently available to us, as applicable. We actively monitor
the capital markets in analyzing our capital raising decisions.
19
Item 4. Controls and Procedures
We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify our financial reports and to other
members of senior management.
Based on their evaluation as of June 30, 2003, the principal executive officer
and principal financial officer of the Company have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
There were no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of their
most recent evaluation.
20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
We currently and from time to time are involved in litigation incidental to the
conduct of our business, including suits based on defamation and employment
activity. We are not currently a party to any lawsuit or proceeding which, in
our opinion, if decided adverse to us, would be likely to have a material
adverse effect on our consolidated financial condition, results of operations or
cash flows.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index on pages 23-26.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLBRITTON COMMUNICATIONS COMPANY
(Registrant)
August 12, 2003 /s/ Robert L. Allbritton
- ----------------------------- ------------------------------------
Date Name: Robert L. Allbritton
Title: Chairman and Chief
Executive Officer
August 12, 2003 /s/ Stephen P. Gibson
- ----------------------------- ------------------------------------
Date Name: Stephen P. Gibson
Title: Senior Vice President
and Chief Financial Officer
22
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
1.1 Purchase Agreement dated December 6, 2002 by and among ACC, *
Deutsche Bank Securities Inc. and Fleet Securities, Inc.
(Incorporated by reference to Exhibit 1 of the Company's
Form 10-K, No. 333-02302, dated December 17, 2002)
1.2 Purchase Agreement dated January 28, 2003 by and among ACC, *
Deutsche Bank Securities Inc. and Fleet Securities, Inc.
(Incorporated by reference to Exhibit 1.2 of the Company's
Quarterly Report on Form 10-Q, No. 333-02302, dated February
3, 2003)
2.1 Asset Purchase Agreement between ALLNEWSCO, Inc. and *
Allbritton Communications Company, dated as of March 5,
2002. (Incorporated by reference to Exhibit 2.1 of the
Company's Report on Form 8-K, No. 333-02302, dated March 5,
2002)
3.1 Certificate of Incorporation of ACC. (Incorporated by *
reference to Exhibit 3.1 of Company's Registration Statement
on Form S-4, No. 333-02302, dated March 12, 1996)
3.2 Bylaws of ACC. (Incorporated by reference to Exhibit 3.2 of *
Registrant's Registration Statement on Form S-4, No.
333-02302, dated March 12, 1996)
4.1 Indenture dated as of December 20, 2002 between ACC and *
State Street Bank and Trust Company, as Trustee, relating to
the 7 3/4% Senior Subordinated Notes due 2012. (Incorporated
by reference to Exhibit 4.1 of the Company's Report on Form
8-K, No. 333-02302, dated December 23, 2002)
4.2 Supplemental Indenture dated as of February 6, 2003 between *
ACC and U.S. Bank National Association
(successor-in-interest to State Street Bank and Trust
Company), as Trustee, to the Indenture dated as of December
20, 2002 between ACC and State Street Bank and Trust
Company, as Trustee, relating to the 7 3/4% Senior
Subordinated Notes due 2012. (Incorporated by reference to
Exhibit 4.1 of the Company's Report on Form 8-K, No.
333-02302, dated February 6, 2003)
4.3 Form of 7 3/4% Series B Senior Subordinated Notes due 2012. *
(Incorporated by reference to Exhibit 4.7 of the Company's
Quarterly Report on Form 10-Q, No. 333-02302, dated February
3, 2003)
23
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
4.4 Amended and Restated Revolving Credit Agreement dated as of *
March 27, 2001 by and among Allbritton Communications
Company, certain financial institutions, and Fleet National
Bank, as Agent, and Deutsche Banc Alex. Brown Inc., as
Documentation Agent. (Incorporated by reference to Exhibit
4.4 of the Company's Quarterly Report on Form 10-Q, No.
333-02302, dated May 10, 2001)
4.5 First Amendment dated as of December 19, 2001 to the Amended *
and Restated Revolving Credit Agreement. (Incorporated by
reference to Exhibit 4.5 of the Company's Form 10-K, No.
333-02302, dated December 27, 2001)
4.6 Second Amendment dated as of May 15, 2002 to the Amended and *
Restated Revolving Credit Agreement. (Incorporated by
reference to Exhibit 4.6 of the Company's Quarterly Report
on Form 10-Q, No. 333-02302, dated August 14, 2002)
4.7 Third Amendment dated as of December 6, 2002 to the Amended *
and Restated Revolving Credit Agreement. (Incorporated by
reference to Exhibit 4.6 of the Company's Form 10-K, No.
333-02302, dated December 17, 2002)
10.1 Registration Rights Agreement by and among ACC, Deutsche *
Bank Securities Inc. and Fleet Securities Inc. dated
December 20, 2002. (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q, No.
333-02302, dated February 3, 2003)
10.2 Registration Rights Agreement by and among ACC, Deutsche *
Bank Securities Inc. and Fleet Securities Inc. dated
February 6, 2003. (Incorporated by reference to Exhibit 10.2
of the Company's Registration Statement on Form S-4, No.
333-02302, dated April 11, 2003)
10.3 Network Affiliation Agreement (Harrisburg Television, Inc.). *
(Incorporated by reference to Exhibit 10.3 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.4 Network Affiliation Agreement (First Charleston Corp.). *
(Incorporated by reference to Exhibit 10.4 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
24
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
10.5 Network Affiliation Agreement (WSET, Incorporated). *
(Incorporated by reference to Exhibit 10.5 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.6 Network Affiliation Agreement (WJLA-TV). (Incorporated by *
reference to Exhibit 10.6 of Company's Pre-effective
Amendment No. 1 to Registration Statement on Form S-4, dated
April 22, 1996)
10.7 Network Affiliation Agreement (KATV Television, Inc.). *
(Incorporated by reference to Exhibit 10.7 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.8 Network Affiliation Agreement (KTUL Television, Inc.). *
(Incorporated by reference to Exhibit 10.8 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.9 Network Affiliation Agreement (TV Alabama, Inc.). *
(Incorporated by reference to Exhibit 10.9 of Company's
Pre-effective Amendment No. 1 to Registration Statement on
Form S-4, dated April 22, 1996)
10.10 Amendment to Network Affiliation Agreement (TV Alabama, *
Inc.) dated January 23, 1997. (Incorporated by reference to
Exhibit 10.15 of the Company's Quarterly Report on Form
10-Q, No. 333-02302, dated February 14, 1997)
10.11 Tax Sharing Agreement effective as of September 30, 1991 by *
and among Perpetual Corporation, ACC and ALLNEWSCO, Inc.,
amended as of October 29, 1993. (Incorporated by reference
to Exhibit 10.11 of Company's Registration Statement on Form
S-4, No. 333-02302, dated March 12, 1996)
10.12 Second Amendment to Tax Sharing Agreement effective as of *
October 1, 1995 by and among Perpetual Corporation, ACC and
ALLNEWSCO, Inc. (Incorporated by reference to Exhibit 10.9
of the Company's Form 10-K, No. 333-02302, dated December
22, 1998)
10.13 Master Lease Finance Agreement dated as of August 10, 1994 *
between BancBoston Leasing, Inc. and ACC, as amended.
(Incorporated by reference to Exhibit 10.16 of Company's
Registration Statement on Form S-4, No. 333-02302, dated
March 12, 1996)
25
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
10.14 Master Equipment Lease Agreement dated as of November 22, *
2000 between Fleet Capital Corporation and ACC.
(Incorporated by reference to Exhibit 10.19 of the Company's
Form 10-K, No. 333-02302, dated December 28, 2000)
10.15 Amended and Restated Pledge Agreement dated as of March 27, *
2001 by and among ACC, Allbritton Group, Inc., Allfinco,
Inc., and Fleet National Bank, as Agent. (Incorporated by
reference to Exhibit 10.20 of the Company's Quarterly Report
on Form 10-Q, No. 333-02302, dated May 10, 2001)
10.16 Supplement No. 1 dated as of December 13, 2002 to the *
Amended and Restated Pledge Agreement dated as of March 27,
2001 by and among ACC, Allbritton Group, Inc., Allfinco,
Inc. and Fleet National Bank, as Agent. (Incorporated by
reference to Exhibit 10.15 of the Company's Quarterly Report
on Form 10-Q, No. 333-02302, dated February 3, 2003)
10.17 Joinder Agreement dated as of December 13, 2002 by ACC *
Licensee, Inc. to the Amended and Restated Pledge Agreement
dated as of March 27, 2001 by and among ACC, Allbritton
Group, Inc., Allfinco, Inc. and Fleet National Bank, as
Agent. (Incorporated by reference to Exhibit 10.16 of the
Company's Quarterly Report on Form 10-Q, No. 333-02302,
dated February 3, 2003)
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of Senior Vice President and Chief Financial
Officer pursuant to Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended.
32.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 15d-14(b) of the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. Section 1350.
32.2 Certification of Senior Vice President and Chief Financial
Officer pursuant to Rule 15d-14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
- -----------------
* Previously filed
26