| ACME COMMUNICATIONS INC Item 1A Risk Factors The following factors could have a material and adverse impact on our business: 15 _________________________________________________________________ Our operating results are primarily dependent on advertising revenue, and as a result, we may be more vulnerable to economic downturns than businesses in other industries |
| We derive substantially all of our revenues from advertisers in diverse industries |
| The success of our business depends in part upon factors beyond our control, such as: • national and local economic conditions; • industry-specific economic conditions; • whether political advertising is weak in a given year; • the relative popularity of the programming on our stations; and • the activities of our competitors |
| If a number of our advertisers reduce their expenditures due to a general economic downturn, or an economic downturn in one or more industries or regions, our operating results will be materially and adversely affected |
| Furthermore, our ratings depend partly upon unpredictable and volatile factors beyond our control, such as viewer preferences, competing programming and the availability of other entertainment activities |
| A shift in viewer preferences could cause our programming not to gain popularity or to decline in popularity, which could cause our advertising revenues to decline |
| In addition, we, and those on whom we rely for programming, may not be able to anticipate and react effectively to shifts in viewer tastes and interests in the markets |
| Our continuing television stations are relatively new in their markets and several stations have never generated positive cash flow |
| All of our continuing television stations are relatively new in their markets and are still developing |
| Several of them have never generated positive cash flow from operations and the group has never generated positive cash flow from operations |
| The developmental nature of our continuing stations poses risks to stockholders, including the following: • we have not generated positive operating cash flow from our continuing operations and our future performance will depend upon our ability to continue increasing our ratings and revenues in a relatively healthy advertising environment; • our ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes, might be impeded; and • we are more vulnerable to economic downturns and our ability to withstand competitive pressures is limited |
| We may not be able to generate sufficient cash flow to meet our debt service obligations, forcing us to refinance all or aportion of our indebtedness, sell assets or obtain additional financing |
| We are a net borrower, and our ability to make scheduled interest payments on our indebtedness will depend on our future performance, which, to a certain extent, will be subject to economic, financial, competitive and other factors beyond our control |
| Our business may not continue to generate sufficient cash flow from operations in the future to pay our indebtedness or to fund our other liquidity needs |
| As a result, we may need to refinance all or a portion of our indebtedness, on or before maturity, sell assets or obtain additional financing |
| We may not be able to refinance any of our indebtedness on commercially reasonable terms, if at all |
| If we are unable to generate sufficient cash flow or refinance our indebtedness on commercially reasonable terms, we may have to seek to restructure or replace our remaining debt obligations, which could have a material adverse effect on our results of operations and financial condition and the price of our Common Stock and the market, if any, for our debt |
| Furthermore, our history of operating and net losses may make it difficult to obtain restructured or replacement financing |
| 16 _________________________________________________________________ The terms of our debt limit our operating flexibility and growth opportunities and may put us at a greater risk of default and acceleration of our debt |
| Our senior credit facility contains restrictive covenants that may limit our ability to: • incur additional debt; • pay dividends; • merge, consolidate or sell assets; • make acquisitions or investments; and • change the nature of our business |
| Additionally, if and as we sell any of our stations, our availability under our senior credit facility will reduce since our maximum available borrowings are calculated as a declining percentage, based on number of stations owned at any given time, of lender appraised station values |
| We may evaluate strategic alternatives to sell some or substantially all of our Company’s assets, however we cannot assure you that a transaction will be successfully completed |
| We may commence a process to evaluate strategic alternatives to sell some or substantially all of our Company’s assets to maximize stockholder value |
| The process to evaluate strategic alternatives may or may not result in an agreement to sell some or substantially all of our assets |
| In addition, our ability to complete a transaction, if our Board decides to pursue one, will depend on numerous factors, some of which are outside of our control, including factors affecting the availability of financing for transactions or the financial markets in general |
| Even if a transaction is completed, there can be no assurance that it will have a positive effect on the price of our Common Stock |
| Finally, any process of evaluating strategic alternatives will likely be time consuming and expensive |
| Whether or not we pursue a transaction to sell our Company’s assets, there may be negative impacts on the Company as a result of the evaluation of strategic alternatives The financial results and operations of the Company may be adversely affected by the diversion of management resources to the process to evaluate strategic alternatives and uncertainty regarding the outcome of the process |
| For example, the uncertainty of whether we will continue to own this Company in the future could lead us to lose or fail to attract employees, customers or business partners |
| Although we have taken and would take further steps, if necessary to address these risks, including employee retention plans, there can be no assurance that any such losses or distractions will not adversely affect the operations or financial results of the Company |
| Our business is subject to significant rerun syndicated programming costs, and increased rerun syndication costs could adversely affect our operating results |
| In addition to our stations airing prime time network programming, our stations air syndicated programs |
| If the pricing for rerun syndication programming increases, such increases in costs could adversely affect our financial performance |
| In addition, as most rerun syndication programming is purchased well in advance of it becoming available for our stations to air, we are at risk of such acquired programming not achieving its expected ratings and the possibility that the revenues generated by such programs will not recoup the contractual programming costs |
| In some instances, we may have to replace programs before their costs have been fully amortized, resulting in write-offs that increase station operating costs |
| In addition, we are generally committed to purchasing all future network seasons of certain programming, irrespective of financial performance |
| If we are unable to obtain popular rerun syndicated programming, our ratings could decrease which could adversely affect the Company’s operating results |
| Competition for popular programming licensed from third parties is intense, and the Company may be outbid by its competitors for the rights to new popular syndicated rerun programming or in connection with the renewal of popular rerun syndicated programming the Company currently licenses |
| In addition, renewal costs could substantially exceed the existing contract costs |
| If the Company is unable to acquire certain popular programming, our ratings could decrease which could adversely affect our revenue |
| 17 _________________________________________________________________ We have a substantial amount of intangible assets, and if we are required to write down intangible assets in future periods, it would reduce net income, which in turn could materially and adversely affect the results of operations |
| We have a substantial amount of intangible assets and an adverse change in our performance or in economic conditions within our markets could lead to future impairments that could negatively affect our operating results |
| Approximately dlra83dtta2 million, or 52prca, of our total assets as of December 31, 2005 consists of unamortized intangible assets |
| Intangible assets principally include broadcast licenses and goodwill |
| SFAS Nodtta 142, “Goodwill and Other Intangible Assets,” requires, among other things, the impairment testing of goodwill and other intangible assets |
| If at any point in the future the value of these intangible assets decreased, we would be required to incur an impairment charge that could significantly adversely impact our reported results of operations |
| We recorded impairments of our broadcast licenses of dlra3dtta6 million, dlra3dtta0 million and dlra4dtta0 million for the years ended December 31, 2005, 2004 and 2003, respectively, due to lower valuations for certain of our stations’ FCC broadcast licenses |
| Our Chief Executive Officer might have conflicts of interest with our business |
| Jamie Kellner’s consulting agreement provides that, even while he serves as an officer of the Company, he may perform services for other businesses unaffiliated with ours that, in certain limited circumstances, may be competitive |
| Because of Mr |
| Kellner’s experience in the television broadcast industry, if Mr |
| Kellner provides services to a competing business, it could materially affect our operations |
| Additionally, although Mr |
| Kellner’s consulting agreement requires him to devote his time, attention, knowledge and skills to fulfill his duties as our Chairman and Chief Executive Officer, it does not require a minimum time commitment |
| Our business operations could be significantly disrupted if we lose members of our management team |
| Our success is largely dependent on the continued services of our senior management team, which includes Mr |
| Jamie Kellner, our Chairman and Chief Executive Officer, Mr |
| Doug Gealy, our President and Chief Operating Officer, and Tom Allen, our Executive Vice President and Chief Financial Officer |
| All three executives are employed under consulting/employment agreements that expire in September 2006 |
| If their employment is not secured beyond that expiration date, our operations might be adversely affected |
| Delaware corporate law and our certificate of incorporation and bylaws could hinder acquisition of our company, which could adversely affect the trading price of our Common Stock |
| Delaware corporate law and our certificate of incorporation and bylaws contain provisions that could delay, defer or prevent a change of control of our company or a change in our management, even if a change in control or a change in management would benefit us |
| These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions |
| As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our Common Stock |
| The Company faces risks relating to competition for the leisure and entertainment time of audiences, which has intensified in part due to advances in technology |
| The Company’s business is subject to risks relating to increasing competition for the leisure and entertainment time of consumers |
| The Company competes with all other sources of news, information and entertainment, including movies, live events, radio broadcasts, home video products, print media and the Internet |
| Furthermore, technological advancements, such as video on demand, new video formats and streaming capabilities and downloading via the Internet, have increased the number of media and entertainment choices available to consumers and intensified the challenges posed by audience fragmentation |
| The increasing number of choices available to audiences could negatively impact not only consumer demand for the Company’s stations, but also advertisers’ willingness to purchase advertising from the Company |
| If the Company does not respond appropriately to further increases in the leisure and entertainment choices available to consumers, it could have an adverse effect on the Company’s competitive position and revenues |
| The Company faces risks relating to competition from cable and satellite broadcasters which could reduce our ratings and harm our ability to generate advertising revenues |
| 18 _________________________________________________________________ Networks that air programming exclusively on cable or direct broadcast satellite television, continue to increase their aggregate share of overall television viewers |
| A continued decline in broadcast television viewership could result in reduced industry advertising revenues and adversely affect our business |
| Furthermore, cable operators have become increasingly aggressive and successful in competing for local market advertising revenue as they have been able to upgrade sales capabilities and continue to offer more targeted viewer audiences |
| This increased competition to local television broadcasters has, and will continue to have, an adverse effect on our business |
| New and emerging technologies may reduce advertising revenues |
| New and emerging technologies, such as digital video recorders (“DVR”) that allow viewers to digitally record and play back television programming, may cause changes in consumer behavior that could affect the attractiveness of our offerings to advertisers and could, therefore, adversely affect our revenues |
| The DVR penetration rate has increased dramatically over recent years as direct broadcast satellite and cable services are now including such devices for nominal fees in their current set-top boxes and we expect DVR penetration rates to continue to rise |
| In addition, further increases in the use of portable digital devices (eg, iPods) which allow users to view content of their own choosing, in their own time, while avoiding traditional commercial advertisements, could adversely affect our advertising revenues |
| Furthermore, an increasing number of consumers are accessing programs through downloading via the internet |
| Advertisers and agencies are increasingly raising concerns that this new technology is reducing the value of their commercial messages |
| Our industry is subject to a government-mandated analog-digital conversion process which may ultimately lead to reduced viewership and advertising revenues |
| Federal legislation now requires us to cease all analog transmissions by February 17, 2009 |
| According to industry reports, television sets with digital receivers are only present in approximately 12prca of US television households |
| Although the federal government has created a subsidy for households with analog over-the-air receivers to receive free digital converters, the subsidy may not be large enough to cover all households with over-the-air receivers and a significant percentage of such households may not learn of or choose to take advantage of the subsidy |
| Furthermore, we are unable to predict the extent of consumer demand for digital television or when that demand will arise |
| If we are required to cease analog operations before viewers have converted to digital television, our revenues and operating results will be adversely affected |
| FCC regulation of our business could adversely affect our licenses |
| Our operations are subject to extensive regulation by the FCC Our licenses, which provide us with the rights to broadcast our programming, are subject to periodic renewal by the FCC We have from time to time violated certain rules of the FCC and these violations, while unintentional, could adversely affect our license renewal and lead to fines assessed by the FCC or further sanctions |
| We have currently filed separate renewal applications for our five licenses that were scheduled to expire in 2005 |
| Those renewal applications are still pending before the FCC If the FCC finds that we have not complied with certain regulations or if a party files a complaint, the FCC could refuse to renew one of our FCC licenses or could issue the FCC license subject to conditions |
| The non-renewal or conditional renewal of one or more of our television broadcast licenses could harm our business |