ITEM 1. Business
(ABBREVIATED PURSUANT TO GENERAL INSTRUCTION I(2)(d) OF FORM 10-K).
ACME Communications, Inc. (“ACME Parent”) was formed on July 23, 1999, in preparation for and in conjunction with an initial public offering of its stock.
On September 27, 1999, the Board of Advisors of ACME Television Holdings, LLC (the parent company of ACME Intermediate Holdings, LLC - “ACME Intermediate”) and its members and the Board of Directors and stockholder of ACME Parent approved a merger and reorganization (the “Reorganization”), whereby ACME Parent became the direct parent of ACME Television Holdings. As a result of the Reorganization, ACME Communications is the ultimate parent of ACME Intermediate, and its wholly owned subsidiary, ACME Television, LLC (“ACME Television”). All transactions contemplated as part of the Reorganization closed on October 5, 1999.
This integrated Form 10-K is filed pursuant to the Securities Exchange Act of 1934, as amended, for each of ACME Intermediate and its subsidiary, ACME Television. Separate financial information has been provided for each entity and, where appropriate, separate disclosure. Unless the context requires otherwise, references to the “Company” refers to both ACME Intermediate and ACME Television.
The Company owns and operates ten commercially licensed broadcast television stations in medium-sized markets across the United States. Nine of our stations are network affiliates of The WB Network, making us the third largest WB Network affiliated station group in the country. Our television stations broadcast in markets that cover, in aggregate, approximately 5.4% of the total U.S. television households. Mr. Kellner, ACME Parent’s Chairman and Chief Executive Officer, is also a founder and Chief Executive Officer of The WB Network, and was President of Fox Broadcasting Company from its inception in 1986 through 1993. In March 2001, Mr. Kellner also became Chairman and Chief Executive Officer of AOL Time Warner’s Television Networks division.
Since our formation in 1997, we have focused primarily on acquiring independently-owned stations, under-performing stations and construction permits for new stations in markets that we believe have the growth potential and demographic profile to support a successful WB Network affiliate. We believe that medium-sized markets provide advantages such as fewer competitors and lower operating costs compared to large markets. Our strategy is to capitalize on these advantages and to grow our revenues and cash flow with an emphasized focus on local sales. Since we centralize many of our stations’ administrative functions and primarily provide entertainment programming, our station general managers are able to focus on increasing sales and improving operating margins. Additionally, since many of the stations we own are in markets where the Federal Communications Commission allows dual ownership of broadcast television stations (“duopoly”), our long-term strategy also includes acquiring such second stations.
Like The WB Network, we target our programming at younger audiences, in particular, young adults, teens and kids. We believe that these younger audiences are a growing and increasingly important demographic target for advertisers, and that our affiliation with The WB Network affords us a significant competitive advantage over other network affiliated television broadcasters in attracting these younger audiences. Since its launch in 1995 and through the 2000/2001 season, The WB Network was the only English-language broadcast network in the United States to increase its audience share in these key target demographic groups. To build and retain our audience share during non-network hours, we also acquire the broadcast rights to popular syndicated programming that we believe complements The WB Network programming. In addition, we broadcast local programming such as news in St. Louis, local weather updates and local and regional sports programming in selected markets. We believe this programming enhances our ability to sell advertising time to local and regional advertisers and increase audience awareness of our newly launched stations.
Our Competition
Broadcast television stations compete for advertising revenues primarily with other broadcast television stations in their respective markets and, to a lesser but increasing extent, with radio stations, cable television system operators, newspapers, billboard companies, direct mail and internet sites. ABC, CBS, NBC and Fox programming generally achieve higher household audience levels than that of The WB Network, UPN and syndicated programming aired by independent stations which is attributable to a number of factors, including:
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the traditional networks’ efforts to reach a 	broader audience; 	
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historically, less competition; 	
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generally better channel positions; 	
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more network programming being broadcast weekly; 	
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the traditional networks’ cross-promotions; 	and 	
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the traditional networks’ more established 	market presence than The WB Network. 	
However, because The WB Network and UPN provide fewer hours of programming per week than the traditional networks, we have a significantly higher inventory of advertising time for our own use and, therefore, our programs achieve a share of television market advertising revenues greater than their share of the market’s audience. We believe that this available advertising time, combined with our efforts to attract (via our programming) the audiences that are key targets of advertisers, and our focus on advertising sales allows us to compete effectively for advertising revenues within our stations’ markets.
The broadcasting industry is continuously faced with technical changes and innovations, the popularity of competing entertainment and communications media, changes in labor conditions, and governmental restrictions or actions of federal regulatory bodies, including the FCC, any of which could possibly have an adverse effect on a television station’s operations and profits. Sources of video service other than conventional television stations, the most common being cable television, can increase competition for a broadcast television station by bringing distant broadcasting signals not otherwise available to the station’s audience, serving as a distribution system for national satellite-delivered programming and other non-broadcast programming originated on a cable system and selling advertising time to local advertisers. Other principal sources of competition include home video exhibition, direct-to-home broadcast satellite television, entertainment services and multi-channel multi-point distribution services. Currently, two FCC permittees, DirecTV and Echostar, provide subscription DBS services via high-power communications satellites and small dish receivers, and other companies provide direct-to-home video service using lower powered satellites and larger receivers.
Other technology advances and regulatory changes affecting programming delivery through fiber optic telephone lines and video compression could lower entry barriers for new video channels and encourage the development of increasingly specialized niche programming. The Telecommunications Act of 1996 permits telephone companies to provide video distribution services via radio communication, on a common carrier
basis, as cable systems or as open video systems, each pursuant to different regulatory schemes. We cannot predict the effect that these and other technological and regulatory changes will have on the broadcast television industry or on the future profitability and value of a particular broadcast television station.
Broadcast television stations compete with other television stations in their designated market areas for the acquisition of programming. Generally, cable systems do not compete with local stations for programming, but various national cable networks do from time to time and on an increasing basis acquire programming that could have been offered to local television stations. Public broadcasting stations generally compete with commercially-rated broadcasters for viewers, but do not compete for advertising revenues. Historically, the cost of programming has increased because of an increase in the number of independent stations and a shortage of quality programming.
Federal Regulation of Television Broadcasting
Television broadcasting is a regulated industry and is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended from time to time. The Communications Act prohibits the operation of television broadcasting stations except under a license issued by the FCC. The Communications Act empowers the FCC, among other things:
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to issue, revoke and modify broadcast licenses; 	
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to decide whether to approve a change of 	ownership or control of station licenses; 	
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to regulate the equipment used by stations; and 	
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to adopt and implement regulations to carry out 	the provisions of the Communications Act. 	
Failure to observe FCC or other governmental rules and policies can result in the imposition of various sanctions, including monetary forfeitures, the grant of short, or less than maximum, license renewal terms or, for particularly egregious violations, the denial of a license renewal application, the revocation of a license or denial of FCC consent to acquire additional broadcast properties.
License Grant, Renewal, Transfer and Assignment. A party must obtain a construction permit from the FCC to build a new television station. Once a station is constructed and commences broadcast operations, the permittee will receive a license which must be renewed by the FCC at the end of each license term (which may be as long as eight years under current law). The FCC grants renewal of a broadcast license if it finds that the station has served the public interest, convenience, and necessity, there have been no serious violations by the licensee of the Communications Act or FCC rules and policies, and there have been no other violations of the Communications Act and FCC rules and policies which, taken together, would constitute a pattern of abuse. If the FCC finds that a licensee has failed to meet these standards, the FCC may deny renewal, condition renewal, or impose some other sanction (such as a forfeiture). Any other party with standing may petition the FCC to deny a broadcaster’s application for renewal. However, only if the FCC issues an order denying renewal will the FCC accept and consider applications from other parties for a construction permit for a new station to operate on that channel. The FCC may not consider any new applicant for the channel in making determinations concerning the grant or denial of the licensee’s renewal application. Although renewal of licenses is granted in the majority of cases even when petitions to deny have been filed, we cannot be sure our station licenses will be renewed for a full term or without modification.
Our current licenses expire as follows:
We have also entered into an Asset Purchase Agreement for the acquisition of WHPN-TV in the Madison, Wisconsin market. We anticipate that the closing of that acquisition will probably occur sometime before July 1, 2002. The expiration date for that station’s FCC license is December 1, 2005.
The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to permit the assignment or transfer of control of, or the grant or renewal of, a broadcast license, the FCC considers a number of factors pertaining to the licensee, including:
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compliance with various rules limiting common 	ownership of media properties; 	
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the character of the licensee and those persons 	holding attributable interests therein; and 	
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compliance with the Communications Act’s 	limitations on alien ownership. 	
Character generally refers to the likelihood that the licensee or applicant will comply with applicable law and regulation. Attributable interests generally refer to the level of ownership or other involvement in station operations which would result in the FCC attributing ownership of that station or other media outlet to the person or entity in determining compliance with FCC ownership limitations.
To obtain the FCC’s prior consent to assign a broadcast license or transfer control of a broadcast licensee, an application must be filed with the FCC. If the application involves a substantial change in ownership or control, the application must be placed on public notice for a period of no less than 30 days during which petitions to deny the application may be filed by interested parties, including certain members of the public. If the FCC grants the application, interested parties have no less than 30 days from the date of public notice of the grant to seek reconsideration or review of that grant by the commission or, as the case may be, a court of competent jurisdiction. The full FCC commission has an additional 10 days to set aside on its own motion any action taken by the FCC’s staff. When passing on an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be better served by an assignment or transfer to any party other than the assignee or transferee specified in the application.
Ownership Restrictions. The officers, directors and equity owners of 5% or more of our outstanding voting stock or the voting stock of a company holding one or more broadcast licenses are deemed to have attributable interests in the broadcast company. Also, specified institutional investors, including mutual funds, insurance companies and banks acting in a fiduciary capacity, may own up to (but not as much as) 20% of the outstanding voting stock without being subject to attribution if they exercise no control over the management or policies of the broadcast company. Finally, even if it owns non-voting stock, a third party could be deemed to have an attributable interest if it owns more than 33 percent of a station’s (or the Company’s) asset value (which is generally defined by the FCC to mean the aggregate of equity plus debt) and either has another attributable interest in the same market as the station(s) or provides more than 15 percent of the weekly programming for the station(s).
The FCC rules generally prohibit the issuance of a license to any party, or parties under common control, for a television station if that station’s Grade B contour overlaps with the Grade B contour of another television station in the same DMA in which that party or those parties already have an attributable interest. FCC rules provide an exception to that general prohibition and allow ownership of two television stations with overlapping Grade B contours under any one of the following circumstances:
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there will be eight independent full-power 	television stations in the DMA after the acquisition or merger 	and one of the two television stations owned by the same party 	is not among the top four-ranked stations in the DMA based on 	audience share; 	
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the station to be acquired is a 	“failing” station under FCC rules and policies; 	
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the station to be acquired is a 	“failed” station under FCC rules and policies; or 	
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the acquisition will result in the construction 	of a previously unbuilt station. 	
FCC regulations also prohibit one owner from having attributable interests in television broadcast stations that reach in the aggregate more than 35% of the nation’s television households. For purposes of this calculation, stations in the UHF band, which covers channels 14 - 69, are attributed with only 50% of the households in their respective markets (while 100% of the market households are attributed to stations in the VHF band, which covers channels 2 - 13). A recent court decision concluded that the FCC’s 35% limitation is not adequately supported by sufficient evidence in the public record and directed the FCC to conduct further proceedings to determine whether a limitation on national television attribution can be justified and, if so, what that limitation should be.
The same court decision vacated pre-existing FCC rules which prohibited common ownership of a television station and cable television system in the same community. The court did not directly question other FCC ownership rules which generally allow the holder of an attributable interest in a television station to have an attributable interest in:
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up to six radio stations in a market with 20 	independent media voices; 	
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up to four radio stations in a market with 10 	independent media voices; and 	
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at least one radio station in any market. 	
At the same time, FCC rules generally prohibit a party with an attributable interest in a television station from owning a daily newspaper serving a community located within the relevant coverage area of that television station. Those rules are the subject of a pending rulemaking proceeding in which the FCC is seeking evidence and argument to decide whether those rules should be retained, modified, or repealed in their entirety.
Restrictions on Foreign Ownership. The Communications Act prohibits the issuance of broadcast licenses to, or the holding of a broadcast license by, foreign citizens or any corporation of which more than 20% of the capital stock is owned of record or voted by non-U.S. citizens or their representatives or by a foreign government or a representative thereof, or by any corporation organized under the laws of a foreign country. The Communications Act also authorizes the FCC to prohibit the issuance of a broadcast license to, or the holding of a broadcast license by, any corporation controlled by any other corporation of which more than 25% of the capital stock is owned of record or voted by aliens. The FCC has interpreted these restrictions to apply to other forms of business organizations, including partnerships. As a result of these provisions, the licenses granted to our subsidiaries that hold FCC licenses could be revoked if more than 25% of our stock were directly or indirectly owned or voted by aliens. Our certificate of incorporation contains limitations on alien ownership and control substantially similar to those contained in the Communications Act. Pursuant to our certificate of incorporation, we have the right to refuse to sell shares to aliens or to repurchase alien-owned shares at their fair market value to the extent necessary, in the judgment of our board of directors, to comply with the alien ownership restrictions.
Programming and Operation. The Communications Act requires broadcasters to serve the public interest, convenience and necessity. The FCC has gradually restricted or eliminated many of the more
formalized procedures it had developed to promote the broadcast of programming responsive to the needs of the station’s community of license. Licensees continue to be required, however, to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Complaints from viewers concerning a station’s programming will be considered by the FCC when it evaluates the licensee’s renewal application, but these complaints may be filed and considered at any time.
Stations must also pay regulatory and application fees and follow various FCC rules that regulate, among other things:
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political advertising; 	
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children’s programming; 	
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the broadcast of obscene or indecent programming; 	
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sponsorship identification; and 	
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technical operations. 	
Failure to observe these or other rules and policies can result in the imposition of various sanctions, including monetary forfeitures, the grant of short, less than the maximum, renewal terms, or for particularly egregious violations, the denial of a license renewal application or the revocation of a license.
Review of Must Carry Rules. FCC regulations implementing the Cable Television Consumer Protection and Competition Act of 1992 require each television broadcaster to elect, at three-year intervals beginning October 1, 1993, to either:
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require carriage of its signal by cable systems 	in the station’s market which is referred to as must carry 	rules; or 	
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negotiate the terms on which such broadcast 	station would permit transmission of its signal by the cable 	systems within its market, which is referred to as 	retransmission consent. 	
The United States Supreme Court upheld the must-carry rules in a 1997 decision. These must carry rights are not absolute, and their exercise is dependent on a variety of factors such as:
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the number of active channels on the cable system; 	
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the location and size of the cable system; and 	
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the amount of programming on a broadcast station 	that duplicates the programming of another broadcast station 	carried by the cable system. 	
Therefore, under certain circumstances, a cable system may decline to carry a given station. We have elected must carry for each of our stations on all of the cable systems where such carriage can be elected. See also Digital Television Services below.
Local Marketing Agreements. Under FCC rules, the licensee of a television station providing more than 15% of another television station’s programming under a local marketing agreement is considered to have an attributable interest in the other station for purposes of the FCC’s national and local multiple ownership rules if both stations are located in the same market. The FCC also adopted a grandfathering policy providing that local marketing agreements that are in compliance with the previous FCC rules and policies and were entered into before November 5, 1996, would be permitted to continue in force until the FCC conducts its biennial review of regulations in 2004. Local marketing agreements entered into after November 5, 1996 but prior to the adoption of the new FCC rules in 1999 were grandfathered until August 2001.
Prior to the adoption of the FCC’s new rules, we did, from time to time, enter into local marketing agreements, generally in connection with pending station acquisitions. By using local marketing agreements, we can provide programming and other services to a station that we have agreed to acquire before we receive all applicable FCC and other governmental approvals. We are obligated to and will enter into a local
marketing agreement on or about April 1, 2002 in conjunction with our proposed acquisition of WHPN-TV in the Madison, Wisconsin market.
Subject to ownership restrictions in the new FCC rules and policies, FCC rules and policies generally permit local marketing agreements if the station licensee retains ultimate responsibility for and control of the applicable station, including finances, personnel, programming and compliance with the FCC’s rules and policies. We cannot be sure that we will be able to air all of our scheduled programming on a station with which we may have a local marketing agreement or that we would receive the revenue from the sale of advertising for such programming. In the case of the local marketing agreement for WHPN, for example, we are obligated to honor pre-existing programming agreements.
Digital Television Services. The FCC has adopted rules for implementing digital television service in the United States. Implementation of digital television will improve the technical quality of television signals and provide broadcasters the flexibility to offer new services, including high-definition television and data broadcasting.
The FCC has established service rules and adopted a table of allotments for digital television. Under the table, all eligible broadcasters with a full-power television station are allocated a separate channel for digital television operation. Stations will be permitted to phase in their digital television operations over a period of years, after which they will be required to surrender their license to broadcast the analog, or non-digital, television signal. Affiliates of the top four networks in the top thirty markets are already required to be on the air with a digital signal. FCC rules required our stations to be on the air with a digital signal by May 1, 2002. However, the FCC invited television owners to request an extension of that deadline for their respective stations if they needed it, and we filed six-month extensions requests for all of our stations and were granted such extensions in March 2002.
In announcing its receptivity to extensions of digital television construction deadlines, the FCC recognized the practical and technical difficulties of requiring television broadcasters to implement digital television. For those same reasons, the FCC suspended most of the construction and service deadlines that had previously been imposed. However, the FCC did not suspend the current regulation (which is mirrored in the Communications Act) that requires television broadcasters to return their analog license to the government by 2006 unless specified conditions exist that, in effect, limit the public’s access to digital television transmissions in a particular market.
The Communications Act and the FCC’s rules impose certain conditions on the FCC’s implementation of digital television service. Among other requirements, the FCC must:
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limit the initial eligibility for licenses to 	existing television broadcast licensees or permittees (who held 	those licenses or permits by April 3, 1997); 	
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allow digital television licensees to offer 	ancillary and supplementary services; and 	
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charge appropriate fees to broadcasters that 	supply ancillary and supplementary services for which such 	broadcasters derive certain non-advertising revenues. 	
Equipment and other costs associated with the digital television transition, including the necessity of temporary dual-mode operations, will impose some near-term financial costs on television stations providing the services. The potential also exists for new sources of revenue to be derived from digital television. We cannot predict the overall effect the transition to digital television might have on our business.
Another major issue surrounding the implementation of digital television is the scope of a local cable television system’s obligation to carry the signals of local broadcast television stations. The FCC has issued an order stating that, for the present, a cable television system is only obligated to carry a television’s digital signal if the station does not have an analog signal. The FCC has not yet determined the scope of a cable television system’s “must carry” obligations when a broadcast television station has both an analog signal and a digital signal that each has a substantial audience.
Children’s Television Act. FCC rules limit the amount of commercial matter that a television station may broadcast during programming directed primarily at children 12 years old and younger. FCC rules further require television stations to serve the educational and informational needs of children 16 years old and younger through the stations’ own programming as well as through other means. Television broadcasters must file periodic reports with the FCC to document their compliance with foregoing obligations.
Other FCC and Legislative Matters. The FCC repealed the rule which prohibited one of the major television networks (ABC, CBS, NBC or Fox) from owning another television network. Viacom utilized that change in FCC rules to acquire an interest in UPN. We cannot predict how or when the relaxation of the dual network rule may affect our business.
The Satellite Home Viewer Act and related FCC regulations allow satellite carriers to deliver broadcast programming to subscribers who are unable to obtain television network programming over the air from local television stations. Congress later amended the act to facilitate the ability of satellite carriers to provide subscribers with programming from both local and non-local television stations (regardless of the subscribers’ ability to receive the television signals over the air). The FCC has adopted rules to implement certain of those legislative changes and is conducting rulemaking proceedings to implement others. A principal component of the new regulation requires satellite carriers to carry all local television stations in a market if they carry one. We have taken advantage of that regulation to require carriage of our stations on satellite systems in the St. Louis, Portland, Salt Lake City and Albuquerque-Santa Fe markets.
On February 2, 2000, the FCC released a Report and Order which adopted new rules that would have required broadcast licensees to provide equal employment opportunities. The new rules would have required broadcast licensees to widely disseminate information on employment vacancies and to promote diversification in their employment. The new rules were intended to supplement a broadcaster’s obligation to refrain from racial or other prohibited discrimination in its employment practices under other applicable federal as well as state and local laws and regulations. On January 16, 2001, the United States Court of Appeals for the District of Columbia Circuit declared certain portions of those new EEO rules to be unconstitutional, and on January 31, 2001, the FCC suspended implementation of all of its EEO rules. On, December 12, 2001, the FCC inaugurated a new rulemaking proceeding to consider the adoption of new EEO rules that the FCC hoped would satisfy the court’s objections. It cannot be predicted when any new rules will be adopted and what their precise formulation will be.
Federal regulatory agencies and Congress from time to time consider proposals for additional or revised rules. We cannot predict how those proposals or other issues discussed above will be resolved, although their outcome could have an adverse or favorable impact on the broadcasting industry generally or us specifically.
The foregoing summary of FCC and other governmental regulations is not intended to be comprehensive. For further information concerning the nature and extent of federal regulation of broadcast stations, you should refer to the Communications Act, other Congressional acts, FCC rules, and the public notices and rulings of the FCC.
Employees
At December 31, 2001, we had 348 employees, including 41 who were subject to collective bargaining agreements. We believe that our relationships with our employees and the union representing our unionized employees are good.
Item 2.
Item 2. Properties
All of our leased studio, office and tower facilities are leased pursuant to long-term leases. We believe that all facilities and equipment are adequate, with minor changes and additions, for conducting operations as presently contemplated. Set forth below is information with respect to our studios and other facilities for our current stations. Information as to tower size reflects the height above average terrain of the antenna radiation center.
(1)
Tower owned on leased property. 	
(2)
Represents partnership interests in digital 	television towers in the Salt Lake and Portland markets. 	
(3)
Lease commences in 2002. 	
Item 3.
Item 3. Legal Proceedings
We are, from time to time, involved in litigation incidental to the conduct of our business. We maintain comprehensive general liability and other insurance that we believe to be adequate for the
purpose. We are not currently a party to any lawsuit or proceeding that we believe could have a material adverse effect on our financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity 	and Related Stockholder Matters
All of the membership units of ACME Intermediate are directly or indirectly owned by ACME Communications, Inc. All of the membership units of ACME Television are directly or indirectly owned by ACME Intermediate.
No Distributions on ACME Intermediate or ACME Television membership units have ever been declared or paid. The right of ACME Television to make any distributions in the future is subject to restrictions imposed by both the revolving credit facility loan agreement and the indenture governing ACME Television’s 10 7/8% senior discount notes. The right of ACME Intermediate to make any distributions is subject to restrictions contained in the indenture governing its 12% senior secured notes.
Item 6.
Item 6.
Selected Financial Data
Omitted under the reduced disclosure format pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7.
Item 7.
Management’s Discussion and Analysis 	of Financial Condition and Results of Operations
(ABBREVIATED PURSUANT TO GENERAL INSTRUCTION I(2)(a) OF FORM 10-K).
Results of Operations
Years Ended December 31, 2001 compared 	to Year Ended December 31, 2000
Net revenues for the year ended December 31, 2001 decreased $3.3 million (5%) to $70.1 million as compared to $73.4 million for the year ended December 31, 2000. While our revenue grew 8% at our nine developing stations - reflecting gains in market shares that outstripped market revenue declines - these increases were more than offset by a 17% decline in revenue at KPLR, our station serving the St. Louis marketplace, where market revenue declines were compounded by a slight loss in KPLR’s market share. These market share gains and losses track generally with gains and losses in audience shares, while the decreases in market revenues reflect weak demand for advertising experienced throughout the media industry in 2001.
Station operating expenses increased to $56.5 million compared to the prior year’s operating expenses of $54.1 million. This increase of 4% was attributable primarily to our continued investment in programming and sales staffing and related costs at our Developing Stations.
Depreciation and amortization expense for the year was $20.3 million compared to $19.8 million for 2000. This $.4 million increase primarily reflects the higher depreciation expense related to our ongoing transmission upgrades (relating to both analog and digital facilities) that were placed in service during 2001.
Corporate expenses for 2001 increased to $3.4 million from $3.3 million in 2000. Corporate expenses increased 4% in 2001 over 2000 levels due primarily to increased professional fees incurred in connection with potential strategic transactions and increased insurance costs.
Equity-based compensation of $529,000 in 2000 and 2001 relates to options granted below market value in 1999 to senior management in exchange for their participation in the Company’s previously established long-term incentive plan.
Interest expense for the current year was $29.3 million and $21.4 million for ACME Intermediate and ACME Television, respectively, as compared to $27.3 million and $20.4 million, respectively, for 2000. These increases in interest expense are the result of increasing principal balances arising from continued amortization of original issuance discounts on both ACME Television’s 10 7/8% Senior Discount Notes due 2004 (the “Television Notes”) and ACME Intermediate’s 12% Senior Secured Discount Notes due 2005 (the “Intermediate Notes”).
The tax benefit for 2001 for ACME Intermediate was $13.0 million and for ACME Television $10.0 million, representing an effective tax rate of 33% and 31%, respectively. The tax benefit for 2000 was $8.7 and $6.1 million for ACME Intermediate and ACME Television, respectively. The difference in the statutory federal rate of 34% and the Company’s effective tax rate relates to the impact of non-deductible expenses, principally the amortization of goodwill at KPLR.
Our net loss for the current year of $26.9 and $22.1 million, for ACME Intermediate and ACME Television, respectively, as compared with losses of $21.4 and $17.2 million, respectively, that were incurred in 2000, the increases in our net losses are primarily the result of our increased operating loss and increased interest expense.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures 	About Market Risk
The Company’s revolving credit facility has a variable interest rate. Accordingly, the Company’s interest expense could be materially affected by future fluctuations in the applicable interest rate. At December 31, 2001, the Company had no borrowings under the revolving credit facility.
We are also exposed to risk from a change in interest rates to the extent we are required to refinance existing fixed rate indebtedness at rates higher than those prevailing at the time the existing indebtedness was incurred. As of December 31, 2001, we have senior discount notes totaling $175.0 million and senior secured discount notes totaling $71.6 million due in the years 2004 and 2005, respectively. Effective October 1, 2000, the senior discount notes began accruing cash interest. The interest payment on these notes amounts to approximately $9.5 million every six months. Cash interest on the senior secured discount notes is payable semi-annually, in arrears, commencing on March 31, 2003. Based upon the quoted market price, the fair value of the senior discount notes and senior secured discount notes was $168.0 and $52.0 million, respectively, as of December 31, 2001.
Item 8.
Item 8. Financial Statements and Supplemental Data
INDEPENDENT AUDITORS’ REPORT
The Members
ACME Intermediate Holdings, LLC
ACME Television, LLC:
We have audited the accompanying consolidated balance sheets of ACME Intermediate Holdings, LLC and Subsidiaries and ACME Television, LLC (a wholly-owned subsidiary of ACME Intermediate Holdings, LLC) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, member’s capital and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedules listed in the index of Item 14. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACME Intermediate Holdings, LLC and Subsidiaries and ACME Television, LLC and Subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ KPMG LLP 	
Los Angeles, California
February 13, 2002
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
Consolidated Balance Sheets
See the notes to the consolidated financial statements
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
Consolidated Statements of Operations
(1)
Equity-based compensation is comprised of station 	operating expenses and corporate expenses of $132,000 and 	$39.7 million, respectively, in 1999 and $313,000 and 	$216,000, respectively, in 2000 and 2001. 	
See the notes to the consolidated financial statements
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
Consolidated Statements of Members’ Capital
ACME Intermediate Holdings, LLC
ACME Television, LLC
See the notes to the consolidated financial statements
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
See the notes to the consolidated financial statements
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of the Business and Formation
Presentation
Financial statements are presented for each of ACME Intermediate Holdings, LLC (“ACME Intermediate”) and its wholly-owned subsidiary, ACME Television, LLC (“ACME Television”). Unless the context states otherwise, references to the “Company” refers to both ACME Intermediate and ACME Television. Segment information is not presented since all of the Company’s revenue is attributed to a single reportable segment.
Reorganization of Parent
ACME Communications, Inc. was formed on July 23, 1999, in preparation for and in conjunction with an initial public offering of its stock.
On September 27, 1999, the Board of Advisors of ACME Television Holdings, LLC (the parent company of ACME Intermediate) and its members and the Board of Directors of ACME Communications, Inc. and its stockholder approved a merger and reorganization (the “Reorganization”), whereby ACME Communications, Inc. became the direct parent of ACME Television Holdings, LLC. As a result of the Reorganization, ACME Communications, Inc. is the ultimate parent of ACME Intermediate and its wholly-owned subsidiary ACME Television. All transactions contemplated as part of the Reorganization closed on October 5, 1999. References to “ACME Parent” herein refer to either ACME Television Holdings, or, subsequent to the Reorganization, ACME Communications, Inc.
Formation
ACME Intermediate was formed on August 8, 1997. Upon formation, ACME Intermediate received a contribution from ACME Parent, of ACME Parent’s wholly-owned subsidiaries - ACME Television of Oregon, LLC (“ACME Oregon”) and ACME Television of Tennessee, LLC (“ACME Tennessee”) and certain other net assets. This Contribution of $25,455,000 (including cash of $2,380,000) was made in exchange for membership units in ACME Intermediate and was treated as a transaction between entities under common control, similar to a pooling of interests, and accordingly, the transaction was recorded at historical cost. In addition, on September 30, 1997, ACME Parent made an additional contribution of $21,746,000 in exchange for membership units in the Company.
ACME Television was formed on August 8, 1997. Upon formation, ACME Television received a contribution from ACME Parent through ACME Intermediate of ACME Parent’s wholly-owned subsidiaries - ACME Oregon and ACME Tennessee and certain other net assets. This Contribution of $25,455,000 (including cash of $2,380,000) was made in exchange for membership units in the Company and was treated as a transaction between entities under common control, similar to a pooling of interests, and accordingly the transaction was recorded at historical cost. In addition, on September 30, 1997, ACME Intermediate made an additional contribution of $60,061,000 in exchange for membership units in ACME Television.
ACME Parent owns directly or indirectly, 100% of the outstanding membership units of ACME Intermediate. ACME Intermediate owns, directly or indirectly, 100% of the outstanding membership units of ACME Television.
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Nature of Business
ACME Intermediate is a holding company with no independent operations other than its wholly-owned subsidiary, ACME Television. ACME Television, through its wholly-owned subsidiaries, owns and operates the following ten commercially licensed broadcast television stations located throughout the United States:
(2) Summary of Significant Accounting Policies
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions have been eliminated.
Revenue Recognition
Revenue from the sale of airtime related to advertising and contracted time is recognized at the time of broadcast. The Company records such revenues net of commissions of advertising agencies and national sales representatives.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and claims to cash that are restricted as to their withdrawal and/or use are considered restricted cash.
Accounts Receivable
Accounts receivable are presented net of the related allowance for doubtful accounts which totaled $1,009,000 and $1,193,000 at December 31, 2000 and 2001, respectively.
Concentration of Credit Risk and Fair Value 	of Financial Statements
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable and cash. Due to the short-term nature of these instruments, the carrying value approximates the fair market value. The Company believes that concentrations of credit risk with respect to accounts receivable, which are unsecured, are limited due to the Company’s ongoing relationship with its clients. The Company provides its estimate of uncollectible accounts. The Company has not experienced significant losses relating to accounts receivable. The estimated fair market value of the
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12% senior discount notes and the 10 7/8% senior secured notes was approximately $52 million and $168 million, respectively, at December 31, 2001.
Program Rights
Program rights represent costs incurred for the right to broadcast certain features and syndicated television programs. Program rights are stated, on a gross basis, at the lower of amortized cost or estimated realizable value. The cost of such program rights and the corresponding liability are recorded when the initial program becomes available for broadcast under the contract. Generally, program rights are amortized over the life of the contract on a straight-line basis related to the usage of the program. The portion of the cost estimated to be amortized within one year and after one year are reflected in the balance sheets as current and non-current assets, respectively. The gross payments under these contracts that are due within one year and after one year are similarly classified as current and non-current liabilities.
Property and Equipment
Property and equipment are stated at cost. The cost of maintenance is expensed when incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in the results of current operations. The principal lives used in determining depreciation rates of various assets are as follows:
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation, as a liability, in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. The Company is also required to record a corresponding asset that is depreciated over the useful life of the asset. Under SFAS No. 143, the asset retirement liability is to be adjusted each accounting period to reflect the passage of time and any changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003.
Intangible Assets
Intangible assets consist of broadcast licenses and goodwill, both of which are amortized on a straight-line basis over a 20-year life.
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In June 2001, the Financial Accounting Standards Board (the “FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 , Business Combinations, and SFAS No. 142 , Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that must be met before intangible assets acquired in a purchase method business combination can be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead, tested for impairment (at least annually) in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed Of”.
The Company adopted the provisions of SFAS No. 141 in June 2001 and will adopt SFAS No. 142 effective January 1, 2002. In accordance with SFAS No. 142, Goodwill and other intangible assets acquired in business combinations that were completed before July 1, 2001 were amortized until the adoption of SFAS No. 142.
As the Company represents one reporting unit, as defined by SFAS No. 142, goodwill has been evaluated on a consolidated basis. In addition, as prescribed by SFAS No. 142, the Company will no longer amortize goodwill beginning January 1, 2002.
In the connection with the adoption with Statement 142, the Company determined that its intangible assets have an indefinite life. Accordingly, the Company will be required to test these intangible assets in accordance with the provisions of Statement 142 and will no longer amortize these intangibles beginning January 1, 2002.
As of the proposed date of adoption, January 1, 2002, the Company has unamortized goodwill in the amount of $106.4 million and unamortized identifiable intangible assets in the amount of $165.0 million, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill and intangible assets was $16.4 million for the year ended December 31, 2001.
Barter and Trade Transactions
Revenue and expenses associated with barter agreements in which broadcast time is exchanged for programming rights are recorded at the estimated average rate of the airtime exchanged. Trade transactions, which represent the exchange of advertising time for goods or services, are recorded at the estimated fair value of the products or services received. Barter and trade revenue is recognized when advertisements are broadcast. Merchandise or services received from airtime trade sales are charged to expense or capitalized when used or received.
Local Marketing Agreements
In connection with station acquisitions, and pending FCC approval of the transfer of license assets, the Company generally enters into local marketing agreements with the sellers. Under the terms of these agreements, we obtain the right to program and sell advertising time on 100% of the station’s inventory of broadcast time, incur certain operating expenses and may make payments to the sellers. As the holder of the FCC license, the seller/licensee retains ultimate control and responsibility for all programming broadcast on the station. We, in turn, record revenues from the sale of advertising time and operating expenses for costs incurred. Included in the accompanying consolidated statements of operations for the years ended December 31, 1999, 2000, and 2001 are net revenues of $125,000, $0 and $0, respectively, that relate to local
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
marketing agreements. Payments of fees to the sellers for the years ended December 31, 1999, 2000, and 2001 were $27,500, $0, and $0 respectively. At December 31, 2001, the Company was not obligated for any future payments to sellers.
Carrying Value of Long-Lived 	Assets
The Company follows Statement of Financial Accounting Standards No. 121 (Statement 121), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” The carrying value of long-lived assets (tangible, identifiable intangible, and goodwill) is reviewed if the facts and circumstances suggest that they may be impaired. For purposes of this review, assets are grouped at the station level, which is the lowest level for which there are identifiable cash flows. If this review indicates that an asset’s carrying value will not be recoverable, as determined based on future expected, undiscounted cash flows, the carrying value is reduced to fair market value.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 (Opinion 30), Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in Opinion 30). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale. The Company is required to adopt SFAS No. 144 no later than the year beginning after December 15, 2001, and plans to adopt its provisions for the quarter ending March 31, 2002. The adoption of SFAS No. 144 for long-lived assets held for use will not have an impact on the Company’s financial statements. The provisions of SFAS No. 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities.
Debt Discount
ACME Intermediate issued 12% Senior Secured Discount Notes and ACME Television issued 10 7/8% Senior Discount Notes at a discount from the face value of the notes. ACME Television’s 10 7/8% Senior Discount Notes are fully accreted, ACME Intermediate’s 12% Senior Secured Discount Notes are accreted using the level yield method.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” In accordance with SFAS No. 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Prior to the Reorganization, the Company was a non-taxable entity, therefore, no income taxes have been provided for its operations other than at its subsidiary ACME Television of Missouri, Inc. which is a “C” corporation subject to federal and state taxation. Any liability or benefit from the Company’s non-taxable entities’ consolidated income or loss prior to the Reorganization is the responsibility of, or benefit to, the individual members.
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In conjunction with the Reorganization, the Company became part of a consolidated taxable group. As of the Reorganization date, the Company recorded deferred tax assets and liabilities for the difference between the financial statement carrying value of the Company’s assets and liabilities and their associated tax basis.
Accounting for Stock Options
ACME Parent has issued stock options to the executives of ACME Parent and the Company and to certain Company employees. The Company has adopted Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” which establishes a fair value based method of accounting for stock-based compensation. SFAS No. 123 encourages but does not require entities to adopt its provisions in place of the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees”. SFAS No. 123 permits entities to recognize the expense of all stock-based awards over the vesting period of the awards. The expense is calculated based on the fair value at the date of grant. Alternatively, APB No. 25 requires that the expense of stock-based employee compensation be recognized based on the difference, if any, between the quoted market price of the stock and the amount the employee must pay to acquire the stock. APB No. 25 specifies various dates to be used to determine the quoted market price, depending on whether the terms of the stock-based compensation award are fixed or variable. Under SFAS No. 123 if an entity elects to follow APB No. 25 it must provide pro forma net income disclosure for employee stock option grants made, as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Use of Estimates in the Preparation of 	Financial Statements
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include the allowance for doubtful accounts net of the realizable value of programming rights and the evaluation of the recoverability of intangible assets. Actual results could differ from those estimates.
Reclassifications
Certain amounts previously reported for 1999 and 2000 have been reclassified to conform to the 2001 financial statement presentation.
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) Property and Equipment
Property and equipment consist of the following:
Included in property and equipment are assets subject to capital leases with a total cost of $12,844,000 and $18,551,000 and the associated accumulated depreciation of $3,648,000 and $5,009,000 at December 31, 2000 and 2001, respectively.
(4) Acquisitions
During 1997, the Company entered into an agreement that provided it with the right to: (i) acquire 49% of the licensee of KUPX (formerly KZAR) in exchange for membership units valued at $6.0 million, and (ii) pay $3.0 million for an option to acquire the remaining 51% interest in the licensee of KUPX for $5.0 million, exercisable immediately after the station commences on-air operations. On December 15, 1997, the Company acquired the 49% interest in the licensee of KUPX, paid $3.0 million to acquire the option and loaned the sellers $4.0 million (to be applied to the subsequent majority interest purchase price). On January 22, 1998, the Company issued $6.0 million of its member units to the sellers for the 49% interest in the license of KUPX in connection with the above transaction. The amount of the issuance was based upon a fixed dollar amount of consideration. The Company accounted for the 49% investment using the equity method of accounting. On February 16, 1999, the Company acquired the remaining 51% interest in KUPX. The $4.0 million loan was applied against the remaining purchase price of $5.0 million.
In May 1998 the Company and the majority owners of KUPX entered into an agreement with another broadcaster in Salt Lake City to (i) swap KUPX for KUWB, subject to FCC approval (ii) enable the Company to operate KUWB under a local marketing agreement and (iii) enable the owner of KUWB to operate KUPX under a local marketing agreement. Pursuant to the LMA’s, the Company retains all operating revenues and expenses (excluding depreciation and amortization) of KUWB and the owner of KUWB retains all operating revenues and expenses (excluding depreciation and amortization) of KUPX. In March 1999, the FCC approved the swap of KUPX for KUWB and the transaction closed during the third quarter of 1999. The Company has accounted for the swap as a business combination and has recorded KUPX at its fair value. There was no significant difference between the fair value of KUPX and the historical cost of KUWB.
On August 22, 1997, the Company entered into an agreement with affiliates of the sellers of KZAR to acquire 100% of the interests in the construction permit for KAUO for a consideration of $10,000. This agreement was consummated on January 22, 1998. Subsequently, the call letters of KAUO were changed to KWBQ. Construction of KWBQ was completed and the station commenced broadcasting in March 1999.
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On April 23, 1999, the Company acquired the non-FCC license assets of three Paxson Communication Corporation (“PCC”) stations serving the Dayton, OH, Green Bay, WI and Champaign-Decatur, IL markets for $32.0 million. On June 23, 1999, following FCC approval of the transfer of the FCC licenses, the Company acquired the licenses and completed the acquisition of the three stations by making a final payment to PCC of $8.0 million. The Company entered into local marketing agreements with the seller wherein the Company, effective June 2, 1999, retained all revenues generated by the stations, bore all operating expenses of the stations (excluding amortization) and had the right to program the stations (subject to the seller’s ultimate authority for programming) and the stations’ existing programming commitments. The local marketing agreement terminated upon the consummation of the acquisition. Consequently, under the local marketing agreement the revenues and operating expenses (excluding amortization) of the station are included in the Company’s results of operations from June 2, 1999 to June 23, 1999. The purchase of the FCC licenses was recorded on the consolidated balance sheet of the Company on June 23, 1999 and the Company’s results of operations includes revenues and expenses (including amortization of intangible assets) beginning June 24, 1999. The Company financed this $40.0 million transaction by a $25.0 million borrowing under its revolving credit agreement and the issuance of $15.0 million in redeemable preferred units by ACME Intermediate (see Notes 7 and 11). The acquisition was accounted for using the purchase method. The excess of the purchase price over the fair market value of the assets acquired of approximately $35.6 million has been recorded as intangible broadcast licenses and goodwill, all of which are being amortized over a period of 20 years.
On December 3, 1999, the Company acquired substantially all of the assets and assumed certain liabilities of station KASY TV-50, serving the Albuquerque - Santa Fe, New Mexico market, from Ramar Communications (“Ramar”) for approximately $27 million. The Company entered into an interim LMA arrangement with Ramar to begin operating the station effective November 1, 1999. The interim LMA terminated upon the completion of the acquisition. Under the local marketing agreement, all of the revenues and operating expenses (excluding depreciation and amortization) of the station are included in the Company’s results of operations from November 1, 1999 to December 3, 1999. The purchase transaction was recorded on December 3, 1999 and the Company’s results of operations (including depreciation and amortization) beginning December 3, 1999.
The unaudited pro forma financial information for the year ended December 31, 1999, set forth below reflects the net revenues and net loss assuming the KUWB, KWBQ, KASY, WBDT, WBUI and WIWB transactions had taken place at the beginning of each respective year. This unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisitions occurred on January 1, 1999.
(5) Unit Offering and 12% Senior Secured Discount Notes
On September 30, 1997, ACME Intermediate issued 71,634 Units (the Unit Offering) consisting of 71,634 membership units (representing 8% of the ACME Intermediate’s outstanding membership equity) and $71,634,000 (par value at maturity) in 12% senior secured discount notes due 2005 (Intermediate Notes). Cash interest on the Intermediate Notes is payable semi-annually in arrears, commencing with the six-month period ending March 31, 2003. The Notes mature on September 30, 2005 and may not be prepaid prior to September 30, 2000 and subsequently, may not be prepaid without penalty prior to October 1, 2003. The net proceeds from the Unit Offering, after the deduction of underwriter fees and other related offering costs, were
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$38.3 million and were received by the Company on September 30, 1997. The Company has allocated approximately $4.2 million of such net proceeds to minority interest, $35.6 million to the Intermediate notes and $1.5 million to prepaid financing costs - the latter which is being amortized over the eight-year term of the notes. The Intermediate Notes contain certain covenants and restrictions including restrictions on future indebtedness and restricted payments, as defined, and limitations on liens, investments, transactions with affiliates and certain asset sales. The Company was in compliance with all such covenants and restrictions at December 31, 2000. In connection with the Reorganization the membership units issued in the Unit Offering (representing a minority interest) were acquired by ACME Parent for shares of its common stock. The acquisition of minority interest was recorded based upon the fair market value of the stock issued.
The Intermediate Notes are secured by a first priority lien on the limited liability company interests in ACME Television and ACME Subsidiary Holdings II, LLC, both of which are direct wholly-owned subsidiaries of ACME Intermediate. ACME Subsidiary Holdings II, LLC was formed solely to own a 0.5% interest in ACME Television, has no other assets or operations and does not constitute a substantial portion of the collateral for the Intermediate Notes.
(6) 10 7/8% Senior Discount Notes
On September 30, 1997, ACME Television issued 10 7/8% senior discount notes due 2004 (the “Television Notes”) with a face value of $175,000,000 and received $127,370,000 in gross proceeds from such issuance. The Television Notes provide for semi-annual cash interest payments starting on March 31, 2001. At December 31, 2000 and 2001 $4,758,000 in accrued interest on the Television Notes was included in current accrued liabilities. The Television Notes are effectively subordinated to ACME Television’s bank revolver and to ACME Television’s capital equipment finance facilities. The Television Notes mature on September 30, 2004. The Television Notes may not be prepaid without penalty prior to October 1, 2003.
The Television Notes contain certain covenants and restrictions including restrictions on future indebtedness and limitations on investments, and transactions with affiliates. ACME Television was in compliance with all such covenants and restrictions at December 31, 2001.
Costs associated with the issuance of these notes, including the underwriters fees and related professional fees are included in long-term other assets and are being amortized over the seven year term of the Television Notes.
ACME Television’s subsidiaries (hereinafter referred to in this section collectively as Subsidiary Guarantors) are fully, unconditionally, and jointly and severally liable for ACME Television’s Notes. The Subsidiary Guarantors are wholly owned and constitute all of ACME Television’s direct and indirect subsidiaries except for ACME Finance Corporation, a wholly owned finance subsidiary of ACME Television with essentially no assets or independent operations that is jointly and severally liable with the Company on the Television Notes. The Company has not included separate financial statements of the aforementioned subsidiaries because (i) ACME Television is a holding company with no independent operations other than its investments in its subsidiaries and (ii) the separate financial statements and other disclosures concerning such subsidiaries are not deemed material to investors.
(7) Issuance of Redeemable Preferred Membership Units
On April 23, 1999, in connection with the acquisition of the non-FCC assets of the three Paxson Communications Corporation stations, ACME Intermediate issued 7,000 units of a newly created class of mandatory redeemable preferred membership units to ACME Parent in exchange for a $7 million cash contribution. On June 23, 1999, an additional $8 million contribution was received by ACME Intermediate
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
from ACME Parent in exchange for an additional 8,000 redeemable preferred units. ACME Intermediate, on the same days of receipt from ACME Parent, contributed to ACME Television the aggregate $15 million.
The terms of the ACME Intermediate preferred units provided for dividend accruals at the rate of 22.5% per annum for the first six months following issuance and were mandatorily redeemable to ACME Parent on the earlier of (a) the completion of new permanent financing, including an initial public offering or a debt offering or (b) October 1, 2005. ACME Intermediate redeemed all of the preferred units at the close of ACME Parent’s initial public offering on October 5, 1999.
(8) Bank Revolver
ACME Television had a revolving credit facility (the “Loan Agreement”) with Canadian Imperial Bank Corporation (CIBC), as agent and lead lender. Under the terms of the Loan Agreement, advances bore interest at a base rate, that at our option, was either the bank’s prime rate or LIBOR, plus a spread. Commitment fees were charged at a rate of .5% per annum, paid quarterly, on the unused portion of the facility. On December 29, 2000, the Loan Agreement was amended to provide less restrictive financial covenants and the Company voluntarily reduced the Banks’ aggregate commitment from $36 million to $30 million as of December 31, 2000 and the commitment amortization rate was reduced throughout the balance of the term. The aggregate commitment at December 31, 2001 was $22 million. The term of the agreement was to end September 30, 2002. As of December 31, 2000 and 2001 there were no outstanding balances under the Loan Agreement. ACME Television was not in compliance with all of the material covenants of the Loan Agreement at December 31, 2001.
In February 2002, the Company completed the replacement of the revolving credit facility with Foothill Capital Corporation, as both agent and lender. The new revolving facility, which like its predecessor is secured by all of the Company’s television station assets, allows for borrowings up to $30 million, contains less restrictive financial covenants and expires May 31, 2004. The agent is obligated to use its best efforts to increase the facility to $40 million via the placement of additional syndication, but there is no assurance such a placement will be completed. Under this agreement, the Company has the option to borrow at an interest rate determined by either a base rate (Wells Fargo Banks’ prime rate) plus 3 percentage points, or at the LIBOR rate plus 4.25 percentage points. The financial covenants, which are quarterly tests beginning March 31, 2002, included in the new facility are (a) minimum EBITDA, (b) maximum total leverage, (c) minimum cash interest coverage, (d) minimum net tangible worth and (e) maximum capital expenditures (annual basis only). In addition to the financial covenants, the facility contains negative covenants which require the lender’s approval for certain station acquisitions and dispositions.
Costs associated with the procuring of bank credit facilities, including loan fees and related professional fees, are included in long-term other assets and are amortized over the term of the facilities. There is approximately $292,000 in capitalized cost related to the CIBC facility as of December 31, 2001 that will be expensed in the first quarter of 2002.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) Commitments and Contingencies
Obligations Under Operating 	Leases
The Company is obligated under non-cancelable operating leases for office space, office equipment, broadcast equipment and transmission sites. Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more as of December 31, 2001, are:
Total rental expense under operating leases for the twelve months ended December 31, 1999, 2000 and 2001 was approximately $850,000, $1,740,000 and $1,785,000 respectively.
Obligations Under Capital 	Leases
As of December 31, 2001, certain equipment was leased under capital equipment facilities. These capital lease obligations expire over the next five years. Future minimum lease payments under capital leases as of December 31, 2001 are:
Program Rights Payable
Commitments for program rights that have been executed, but which have not been recorded in the accompanying financial statements, as the underlying programming is not yet available for broadcast, were approximately $50,768,000 as of December 31, 2001.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Maturities on the Company’s program rights payables (including commitments not recognized in the accompanying financial statements due to the lack of current availability for broadcast) for each of the next five years are:
Certain Compensation 	Arrangements
In June 1997, ACME Parent issued an aggregate of 100 management carry units to certain executives. These units entitled holders to certain distribution rights upon achievement of certain returns by non-management investors and were subject to forfeiture or repurchase by ACME Parent in the event of termination of each individual’s employment by the Company under certain specified circumstances. These management carry units were accounted for as a variable plan resulting in an expense when it is probable that any such distributions will be made. The Company determined the value of these at the issuance date to be immaterial. Upon the closing of ACME Parent’s IPO these management carry units were exchanged for fully vested shares of ACME Parent’s common stock. The issuance of the management carry units related to management services provided to the Company by the executives and therefore all expense recognized in connection with these awards were charged to the Company by ACME Parent and have been treated as a capital contribution by ACME Parent to the Company. During 1999, the Company recorded an expense of $39.6 million relating to the units. No expense was recorded relating to these units in 2000 or 2001.
Legal Proceedings
The Company is, from time to time, involved in litigation incidental to the conduct of our business. The Company is not currently a party to any lawsuit or proceeding that we believe would have a material adverse effect on our financial condition, results of operations or liquidity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) Income Taxes
The income tax benefit consists of the following:
The differences between the income tax benefit and income taxes computed using the U.S. Federal statutory income tax rates (34%) consist of the following:
Prior to the Reorganization, the Company was a non-taxable entity, therefore no income taxes have been provided for its operations other than at its subsidiary ACME Television of Missouri, Inc. which is a C corporation subject to federal and state taxation. Any liability or benefit from the Company’s non-taxable entities’ consolidated income or loss prior to the Reorganization is the responsibility of, or benefit to, the
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
individual members. The 1999 data listed below take into consideration the tax effect to the Company after its Reorganization.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in specific tax jurisdictions during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based primarily upon the reversal of temporary differences which will become deductible, management has concluded that it is more likely than not that the Company will realize the benefits of these deductible differences at December 31, 2001 and 2000.
(11) Related Party Transactions
The Company’s stations have entered into affiliation agreements and, from time to time, related marketing arrangements with The WB Network. Jamie Kellner, ACME Parent’s Chief Executive Officer, is the chief executive officer of The WB Network.
In connection with the acquisition of WBUI, WIWB and WBDT in June of 1999, we paid CEA, Inc. a broker’s fee of $125,000. CEA, Inc. also received compensation from the seller in connection with the purchase of WBUI, WIWB and WBDT. At the time of the transaction, one of ACME Parent’s directors, Mr. Collis, was an officer of an affiliate of CEA Inc. Mr. Collis is no longer affiliated with CEA, Inc. or its affiliate.
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(12) Defined Contribution Plan
In 1998, the Company established a 401(k) defined contribution plan (the Plan) which covers all eligible employees (as defined in the Plan). Participants are allowed to make non-forfeitable contributions up to 15% of their annual salary, but may not exceed the annual maximum contribution limitations established by the Internal Revenue Service. The Company currently matches 50% of the amounts contributed by each participant but does not match participants’ contributions in excess of 6% of their contribution per pay period. The Company contributed and expensed $173,000 to the Plan for the year ended December 31, 1999, $273,000 for the year ended December 31, 2000 and $331,000 for the year ended December 31, 2001.
(13) Stock Option Compensation
ACME Parents’ 1999 Stock Incentive Plan provides additional means to attract, motivate, reward and retain key personnel. All of the options granted to date under the Plan have been to Company employees or to executives of ACME Parent who render services to the Company. The administrator has the authority to grant different types of stock and cash incentive awards and to select participants. While only stock options and restricted stock awards are contemplated at this time, other forms of awards may be granted to give us flexibility to structure future incentives. Our employees, officers, directors, and consultants may be selected to receive awards under the plan.
A maximum of 4,200,000 shares of ACME Parent’s common stock may be issued under the plan, (approximately 25.08% of our outstanding shares). The number of shares subject to stock options and stock appreciation rights granted under the plan to any one person in a calendar year cannot exceed 1,000,000 shares. The number of shares subject to all awards granted under the plan to any one person in a calendar year cannot exceed 1,000,000 shares. Performance-based awards payable solely in cash that are granted under the plan to any one person in a calendar year cannot provide for payment of more than $1,000,000.
Each share limit and award under the plan is subject to adjustment for certain changes in our capital structure, reorganizations and other extraordinary events. Shares subject to awards that are not paid or exercised before they expire or are terminated are available for future grants under the plan.
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock option activity during the year consisted of the following:
The following table summarizes information concerning currently outstanding and exercisable options:
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations, in accounting for stock options. Accordingly, no compensation cost has been recognized for options granted at or above fair market value at the time of grant. For the grants that were made at an option price lower than fair market value at the time of grant, compensation expense of $132,000 was recognized in the fourth quarter of
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1999 (the first quarter of the vesting period) and $529,000 for the years ended December 31, 2000 and 2001. The options granted at below fair market value at the date of grant were granted upon conversion of the Company’s Long Term Incentive Plan (LTIP). The Company recognized compensation expense under the LTIP of $338,000 during the year ended December 31, 1999. All amounts expensed prior to the conversion of the LTIP ($738,000) are netted against the total of the below market option compensation expense to arrive at the expense to be recognized over the vesting period of such options.
Had the Company chosen to adopt the provisions of Statement of Financial Accounting Standards No. 123, and recognized compensation cost based upon the fair value of all options granted (including those granted at or above fair market value) at the date of grant, the Company’s net loss (in thousands) for the year ended December 31, 1999 and 2000 would have been as follows:
The fair value of the options granted were used to calculate the pro forma net income and net income per common share above, on the date of grant, using a binomial option-pricing model with the following weighted average assumptions:
Item 9.
Item 9.
Changes in and Disagreements with 	Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the 	Registrant
Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11.
Item 11.
Executive Compensation
Omitted under the reduced disclosure format pursuant to General Instruction I (2)(c) of Form 10-K.
Item 12.
Item 12.
Security Ownership of Certain Beneficial 	Owners and Management
Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13.
Item 13.
Certain Relationships and Related 	Transactions
Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K.
PART IV
Item 14.
Item 14.
Exhibits, Financial Statement Schedules and 	Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements are included in Item 8:
ACME Intermediate Holdings, LLC and Subsidiaries 	and ACME Television, LLC and Subsidiaries: 	
•
Consolidated Balance Sheets as of 	December 31, 2000 and 2001. 	
•
Consolidated Statements of Operations for the 	years ended December 31, 1999, 2000 and 2001. 	
•
Consolidated Statements of Members’ Capital 	for the years ended December 31, 1999, 2000 and 2001. 	
•
Consolidated Statements of Cash Flows for the 	years ended December 31, 1999, 2000 and 2001. 	
•
Notes to the Consolidated Financial Statements. 	
(a) 2. Financial Statement Schedules
The following financial statement schedules are included in Item 14 (d):
Schedule I - Condensed Financial 	Information of ACME Intermediate Holdings, LLC and ACME 	Television, LLC (Parent Companies): 	
•
Balance Sheets as of December 31, 2000 and 	2001. 	
•
Statements of Operations for the years ended 	December 31, 1999, 2000 and 2001. 	
•
Statements of Cash Flows for the years ended 	December 31, 1999, 2000 and 2001. 	
•
Notes to the Condensed Financial Information. 	
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto, included in Item 8 herewith.
(a) 3. Exhibits
*
Filed herewith. 	
(1)
Incorporated by reference to the Registration 	Statement for ACME Intermediate Holdings, LLC on Form S-4, 	File No. 333-4027, filed on November 14, 1997. 	
(2)
Incorporated by reference to the Registration 	Statement for ACME Television, LLC on Form S-4, File 	No. 333-40281, filed on November 14, 1997. 	
(3)
Incorporated by reference to ACME Intermediate 	Holdings LLC’s Quarterly Report on Form 10-Q for the 	period ending March 31, 1998. 	
(4)
Incorporated by reference to ACME Intermediate 	Holdings LLC’s Quarterly Report on Form 10-Q for the 	period ending September 30, 1998. 	
(5)
Incorporated by reference to the Registration 	Statement for ACME Communications, Inc. on Form S-1, File 	No. 333-84191, filed on September 29, 1999. 	
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three months ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Sections 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.
ACME INTERMEDIATE HOLDINGS, LLC 	
/s/ THOMAS ALLEN 	
Thomas Allen 	
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
Date: April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURES
Pursuant to the requirements of Sections 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.
ACME TELEVISION, LLC 	
/s/ THOMAS ALLEN 	
Thomas Allen 	
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
Date: April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SCHEDULE I.
ACME INTERMEDIATE HOLDINGS, LLC AND ACME TELEVISION, LLC
(Parent Companies)
Condensed Financial Information
Balance Sheets
See accompanying notes to condensed financial information.
ACME INTERMEDIATE HOLDINGS, LLC
ACME TELEVISION, LLC
(Parent Companies)
Condensed Financial Information
Statement of Operations
See accompanying notes to condensed financial information.
ACME INTERMEDIATE HOLDINGS, LLC AND ACME TELEVISION, LLC
(PARENT COMPANIES)
Condensed Financial Information
Statement of Cash Flows
Continued on next page
See accompanying notes to condensed financial information.
ACME INTERMEDIATE HOLDINGS, LLC AND ACME TELEVISION, LLC
(PARENT COMPANIES)
Condensed Financial Information
Statement of Cash Flows (Continued)
See accompanying notes to condensed financial information.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial Statements of ACME Intermediate Holdings, LLC and ACME Television, LLC, do not include all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles. It is therefore suggested that these Condensed Financial Statements be read in conjunction with the Consolidated Financial Statements and Notes thereto included at Item 8 of this filing.
The accompanying condensed financial statements are presented for ACME Intermediate Holdings, LLC and ACME Television, LLC.
2. Cash Dividends
There have been no cash dividends declared by either ACME Intermediate Holdings, LLC or ACME Television, LLC.
3. Long-Term Debt
There are no cash interest payments due on ACME Intermediate Holdings, LLC’s Senior Secured Discount Notes until March 31, 2003. At December 31, 2000 and 2001, ACME Television, LLC has $4,758,000 included in accrued liabilities for the interest payment due March 31, 2000 and 2001 on ACME Television, LLC’s Senior Discount Notes.
SCHEDULE II
ACME INTERMEDIATE HOLDINGS, LLC
AND
ACME TELEVISION, LLC
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 2000 AND DECEMBER 31,
EXHIBIT INDEX
*
Filed herewith. 	
(1)
Incorporated by reference to the Registration 	Statement for ACME Intermediate Holdings, LLC on Form S-4, 	File No. 333-4027, filed on November 14, 1997. 	
(2)
Incorporated by reference to the Registration 	Statement for ACME Television, LLC on Form S-4, File 	No. 333-40281, filed on November 14, 1997. 	
(3)
Incorporated by reference to ACME Intermediate 	Holdings LLC’s Quarterly Report on Form 10-Q for the 	period ending March 31, 1998. 	
(4)
Incorporated by reference to ACME Intermediate 	Holdings LLC’s Quarterly Report on Form 10-Q for the 	period ending September 30, 1998. 	
(5)
Incorporated by reference to the Registration 	Statement for ACME Communications, Inc. on Form S-1, File 	No. 333-84191, filed on September 29, 1999.