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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-29555
PROSPECTUS
OFFER FOR ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES DUE 2007
IN EXCHANGE FOR
11% SENIOR SUBORDINATED NOTES DUE 2007
OF
STC BROADCASTING, INC.
STC Broadcasting, Inc. ("STC" or the "Company") hereby offers, upon the terms
and subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange $1,000 principal amount of registered 11% Senior Subordinated Notes due
2007 (the "New Notes") issued by the Company for each $1,000 principal amount of
unregistered 11% Senior Subordinated Notes due 2007 (the "Old Notes") issued by
the Company, of which an aggregate principal amount of $100,000,000 is
outstanding. The Company will issue up to $100,000,000 aggregate principal
amount of New Notes in the Exchange Offer. The form and terms of the New Notes
are identical to the form and terms of the Old Notes except that the New Notes
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and will not bear any legends restricting their transfer. The
New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture (as defined)
governing the Old Notes. The Exchange Offer is being made in order to satisfy
certain contractual obligations of the Company. See "The Exchange Offer" and
"Description of New Notes." The New Notes and the Old Notes are sometimes
collectively referred to herein as the "Notes."
Interest on the New Notes will be payable semiannually on March 15 and September
15 of each year, commencing on September 15, 1997. The New Notes will mature on
March 15, 2007. Except as described below, the Company may not redeem the New
Notes prior to March 15, 2002. On and after such date, the Company may redeem
the New Notes, in whole or in part, at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the redemption date. In
addition, at any time and from time to time on or prior to March 15, 2000, the
Company may, subject to certain requirements, redeem up to 25% of the aggregate
principal amount of the New Notes with the net cash proceeds from one or more
Public Equity Offerings (as defined) at a redemption price equal to 111% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
redemption date, provided that after any such redemption, at least 75% of the
aggregate principal amount of the New Notes originally issued remain outstanding
immediately after each such redemption. The New Notes will not be subject to any
sinking fund requirements. Upon a Change of Control (as defined), (i) the
Company will have the option, at any time on or prior to March 15, 2002, to
redeem the New Notes, in whole but not in part, at a redemption price equal to
100% of the principal amount thereof, plus accrued and unpaid interest plus the
Applicable Premium (as defined) and (ii) if the New Notes are not redeemed or if
such Change of Control occurs after March 15, 2002, the Company will be required
to offer to repurchase the New Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the
repurchase date. See "Description of New Notes."
The New Notes will be unsecured and will be subordinated in right of payment to
all existing and future Senior Indebtedness (as defined) of the Company. The New
Notes will rank pari passu with any future Senior Subordinated Indebtedness (as
defined) of the Company and will rank senior to all other subordinated
indebtedness of the Company. The Indenture under which the New Notes will be
issued (the "Indenture") will permit the Company and its Subsidiaries (as
defined) to incur additional indebtedness, including Senior Indebtedness,
subject to certain limitations. See "Description of Notes." The net proceeds
from the sale of the Old Notes were used by the Company to repay outstanding
indebtedness incurred in connection with the recent acquisition of certain
commercial television broadcast station assets (the "Acquisition"). See "The
Acquisition" and "Use of Proceeds." As of June 30, 1997, on a pro forma basis
after giving effect to the Acquisition, the Original Offering (as defined) and
the proposed acquisitions of WJAC (as defined) and ARTC (as defined), there
would have been approximately $29.3 million of Senior Indebtedness outstanding,
and the Company would have had no Senior Subordinated Indebtedness outstanding
other than the New Notes and no indebtedness subordinated to the New Notes
outstanding. See "Description of New Notes -- Ranking and Subordination."
- --------------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES.
- --------------------------------------------------------------------------------
The Company will accept for exchange any and all Old Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on September 26, 1997,
unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes
may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is
subject to certain customary conditions. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. Any broker-dealer that resells New Notes received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal accompanying this Prospectus (the "Letter of
Transmittal") states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed, for a period of
90 days after the Expiration Date, to make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
No public market existed for the Old Notes before the Exchange Offer. The
Company currently does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system, and no active public market for the New Notes is currently anticipated.
The Company will pay all the expenses incident to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange pursuant to the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 26, 1997.
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AVAILABLE INFORMATION
As a result of the filing under the Securities Act of 1933, as amended (the
"Securities Act") of the Registration Statement on Form S-1 with respect to the
New Notes (the "Registration Statement"), of which this Prospectus is a part,
the Company will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
may be inspected and copied at the public reference facilities of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60611, and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates by writing to
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which have been omitted pursuant to the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is hereby made to such exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. Copies of the Registration
Statement and the exhibits thereto are on file with the Commission and may be
examined without charge at the public reference facilities of the Commission
described above. Copies of such materials can also be obtained at prescribed
rates by writing to the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The reports, proxy
statements and other information filed by the Company with the Commission may
also be obtained from the web site that the Commission maintains at
http://www.sec.gov.
The Company is required by the Indenture to furnish the holders of the New
Notes with copies of the annual reports and of the information, documents and
other reports specified in Sections 13 and 15(d) of the Exchange Act, so long as
any New Notes are outstanding.
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CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA
As used in this Prospectus, unless the context otherwise requires, (i) the
"Company" or "STC" refers to STC Broadcasting, Inc. and its subsidiaries; (ii)
the "Stations" collectively refer to WEYI-TV, Saginaw, Michigan ("WEYI"),
WROC-TV, Rochester, New York ("WROC"), KSBW-TV, Salinas, California ("KSBW"),
and WTOV-TV, Steubenville, Ohio ("WTOV"); (iii) "Holdings" refers to Sunrise
Television Corp., which owns all of the capital stock of the Company; and (iv)
"SBP" refers to Smith Broadcasting Partners, L.P. and "SBG" refers to Smith
Broadcasting Group, Inc., each an affiliate of Robert N. Smith. SBP and SBG had
interests in the Stations prior to the Acquisition and continue to have
interests through their indirect ownership in Holdings. In addition, as used in
this Prospectus, references to the "Company" in the context of WTOV refers to
the Company's 100% non-voting and 99% equity interest in Smith Acquisition
Company ("SAC"), which owns and operates WTOV. See "The Acquisition."
The terms "broadcast cash flow" and "operating cash flow" are referred to
in various places in this Prospectus. "Broadcast cash flow" is defined as
station operating income (loss) plus depreciation of property and equipment,
amortization of intangible assets and amortization of program rights, minus
payments on program rights. "Operating cash flow" is defined as station
operating income (loss) plus depreciation of property and equipment,
amortization of intangible assets and amortization of program rights, minus
payments on program rights and corporate expenses. Although broadcast cash flow
and operating cash flow are not measures of performance calculated in accordance
with generally accepted accounting principles ("GAAP"), management believes that
broadcast cash flow is useful to a prospective investor because it is a measure
widely used in the broadcast industry to evaluate a television broadcast
company's operating performance and that operating cash flow is useful to a
prospective investor because it is widely used in the broadcast industry to
evaluate a television broadcast company's ability to service debt. Neither
broadcast cash flow nor operating cash flow should be considered in isolation or
as a substitute for net income (loss), cash flows from operating activities and
other income and cash flow statement data prepared in accordance with GAAP or as
a measure of liquidity or profitability. These terms may not be comparable to
other similarly titled items for other companies.
Designated market area ("DMA") rankings are from Investing In Television,
May 1997, BIA Publications, Inc. ("BIA"). There are 211 generally-recognized
television "markets" or DMAs in the United States, which are ranked in size
according to various factors based upon actual or potential audience. Unless
otherwise indicated herein, (i) market revenue, market revenue share, projected
advertising revenue growth and station revenue share data have been obtained
from Investing in Television 1993, 1994, 1995 and 1996, BIA; (ii) television
household data has been obtained from the Nielsen Station Index for November of
the appropriate year as estimated by the A.C. Nielsen Company ("Nielsen"); (iii)
audience share and audience rankings, except where specifically stated to the
contrary, have been derived from Nielsen estimates (November of the appropriate
year) of the percentage of persons in the DMA tuned into the relevant station
from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv)
general market economic data has been obtained from BIA and the chambers of
commerce in each Station's market; (v) the term "station" or "commercial
station" means a television broadcast station and does not include public
television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or
stations that do not meet the minimum Nielsen reporting standards (i.e., weekly
cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to
1:00 a.m.); and (vi) the term "independent" describes a commercial television
station that is not affiliated with the ABC, CBS, NBC or Fox television
networks.
The year ended December 31, 1996, when used with reference to financial
information of the Stations, refers to the period that the Stations were owned
by Jupiter/Smith TV Holdings, L.P. ("Jupiter") and operated by SBP during 1996,
which period began on January 3 with respect to WEYI, WROC and WTOV and January
17 with respect to KSBW. Management does not consider the results of operations
of the Stations from January 1, 1996 to the dates the Stations were acquired to
be significant to the combined results of operations of the Stations for the
year ended December 31, 1996.
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SUMMARY
The following summary should be read in conjunction with the more detailed
information, financial statements and notes thereto appearing elsewhere in this
Prospectus. For additional information relating to certain defined terms and
financial reporting periods used herein, as well as the sources for the market
and other industry data contained herein, see "Certain Definitions and Market
and Industry Data." Unless the context otherwise requires, references herein to
the New Notes following the consummation of the Exchange Offer assume that all
outstanding Old Notes are tendered and exchanged for New Notes in the Exchange
Offer.
THE COMPANY
The Company currently owns and operates four network-affiliated television
broadcast stations located in four distinct and geographically diverse markets,
ranging in size from the 62nd to the 139th largest DMAs in the United States.
Three of the Stations are network affiliates of NBC (one of which is also a
secondary affiliate of ABC) and one Station is a network affiliate of CBS.
The Company was recently organized by management and Hicks, Muse, Tate &
Furst Incorporated ("Hicks Muse") with the goal of becoming a leading owner and
operator of network-affiliated television broadcast stations, serving select
"middle-to-small markets" (i.e., those DMAs ranked from approximately 50 to 150
by Nielsen). Management believes that these markets provide greater opportunity
for the Company to successfully apply its business strategy of increasing
revenues while controlling operating costs and other expenses. Commercial
stations in the Company's target markets generally face limited competition from
other over-the-air broadcasters for audience, syndicated programming and
advertising revenues.
For the year ended December 31, 1996 (throughout which the Stations were
operated by the Company's current management), the Stations' net revenues and
broadcast cash flow increased 14.1% and 78.6%, respectively, from $32.9 million
and $8.6 million, respectively, in 1995 to $37.6 million and $15.4 million,
respectively, in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In 1996, none of the Stations accounted
for more than 30.0% of the Stations' aggregate net revenues. The Company is
actively pursuing additional acquisitions of television broadcast stations in
other middle-to-small markets that it believes will provide similar
opportunities to increase broadcast cash flow.
The four markets in which the Company currently operates offer geographic
diversity that reduces the impact on the Company of changes in respective market
economies and provide favorable competitive operating environments. Three of
these markets range from the 62nd to the 70th largest markets in the United
States based on reported market revenues. In the Wheeling, West
Virginia-Steubenville, Ohio DMA, the Company's Station is one of only two
commercial television broadcast stations and in the Flint-Saginaw-Bay City,
Michigan and Rochester, New York DMAs, the Company's Stations are one of only
four commercial television broadcast stations. In the six station
Monterey-Salinas, California DMA, the Company's Station effectively has the only
over-the-air VHF signal capable of reaching a majority of the households in this
market due to the natural barrier formed by the mountains surrounding the
Monterey Bay, which tends to interfere with the competing VHF station located in
San Jose, California. The Company's Stations are the number one ranked station
in the Monterey-Salinas and Wheeling-Steubenville DMAs and the number three
ranked station in the Flint-Saginaw-Bay City and Rochester DMAs. The Company
believes that the Stations are well positioned to achieve long-term growth in
audience share and revenue share because of (i) the limited competition for
viewers from other over-the-air television broadcasters in these markets, (ii)
the strength of the Company's management and (iii) the Stations' favorable
and/or improving rankings within their DMAs. In addition, management believes
that the limited number of other television broadcast stations in these markets
enables the Company to purchase syndicated programming at favorable rates.
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The following table summarizes certain information regarding each Station
and its respective DMA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
PRIMARY/ NUMBER OF -----------------------------
MARKET SECONDARY COMMERCIAL STATION STATION NET % OF
STATION/CHANNEL: DMA REVENUE NETWORK TV STATIONS RANK IN AUDIENCE REVENUES(1) TOTAL NET
DMA RANK RANK AFFILIATION IN DMA DMA SHARE (IN THOUSANDS) REVENUES
---------------- ---- ------- ----------- ----------- ------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEYI/25:
Flint-Saginaw-Bay City, MI.... 62 70 NBC 4 3 13% $ 8,061 21.5%
WROC/8:
Rochester, NY................. 74 62 CBS 4 3 18% $10,994 29.3%
KSBW/8:
Monterey-Salinas, CA.......... 122 69 NBC 6(2) 1 22% $10,486 27.9%
WTOV/9:
Wheeling, WV- Steubenville,
OH.......................... 139 160 NBC/ABC 2 1 22% $ 8,018 21.3%
</TABLE>
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(1) Includes trade and barter revenues and net of agency and sales
representative commissions.
(2) The Company's Station effectively has the only over-the-air VHF signal
capable of reaching a majority of the households in this market. In
addition, of the six stations in this DMA, two are Spanish-language
stations. See "Business -- The Stations -- KSBW: Monterey-Salinas,
California."
The Company was incorporated on November 1, 1996 and is a wholly-owned
subsidiary of Holdings. The Company acquired the Stations on February 28, 1997
through the Acquisition. SBP, an affiliate of Robert N. Smith (the President of
Holdings and the Chief Executive Officer and a Director of Holdings and the
Company), had an ownership interest in and managed the Stations prior to the
Acquisition. Mr. Smith is the majority owner of SBG, which is a partner in SBP.
See "The Acquisition" and "Certain Transactions."
BUSINESS STRATEGY
The Company's business strategy is to acquire and operate television
broadcast stations and maximize operating cash flow through both revenue growth
and improved cost control. The Company believes that revenue growth and cost
control may be achieved simultaneously, principally because many of the costs
associated with operating a television station are fixed. The Company's
management team has successfully implemented this strategy with other television
broadcast stations as well as with the Stations. Key components of the Company's
business strategy include:
Controlling Costs. The Company seeks to selectively reduce costs at
acquired stations without adversely affecting growth. Since management assumed
operations of the Stations in January 1996, broadcast cash flow margins at the
Stations increased from 26.2% for 1995 to 41.0% for 1996, in part due to an
approximately $2.2 million reduction in station operating expenses. Broadcast
cash flow margins at each of the Stations increased from 1995 to 1996, including
significant improvements at WEYI (from 13.0% for 1995 to 45.5% for 1996) and
WTOV (from 33.4% for 1995 to 49.0% for 1996). This financial success resulted in
part from management's aggressive cost saving initiatives such as the
elimination of unnecessary sales expenses. After acquiring a station, management
implements a cost control strategy stressing the elimination of unnecessary
costs, budgeting, accountability and disciplined credit and collection
procedures. Management believes that it has created an operating structure that
can profitably accommodate revenue growth. See "Certain Transactions."
Intensifying Sales Efforts. The Company implements an aggressive approach
to sales and marketing designed to increase market revenue share. Management
believes that increases in revenue share are not necessarily dependent on
increases in audience share. Since management assumed operations of the Stations
in January 1996, net revenues of the Stations increased by 14.1% over 1995, due,
in part, to newly implemented initiatives such as: (i) the restructuring and
expansion of the local sales departments at three of the Stations (including the
hiring of new sales management and experienced sales personnel with local market
knowledge); (ii) the engagement
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of a new national sales representative firm for three of the Stations; (iii) the
sponsorship and broadcasting of local events and activities, such as
highly-rated high school football, offering local advertisers value-added
community identity; and (iv) the institution of more efficient sales incentives.
Building on Local News Franchises. The Company seeks to increase revenues
by developing a highly-rated, well-differentiated local news product designed to
build viewer loyalty and target specific demographic audiences that appeal to
advertisers. Through the implementation of its strategy, management has
succeeded in strengthening the top-rated local news positions of KSBW (four
times the audience ratings of its nearest news competitor) and WTOV (winner of
10 Associated Press awards in Ohio and West Virginia) in their respective DMAs.
At WROC and WEYI, the local news programming has been redirected through several
initiatives including: (i) the hiring of a new news director at WROC with prior
successful experience redirecting news operations (whose responsibilities also
include overseeing the news programming at the other Stations); (ii) the hiring
of new, experienced on-air talent (including new anchor teams); (iii) the
creation of a new on-air appearance at WROC through improved set lighting,
music, graphics and news room production equipment; (iv) the reprogramming of
local newscasts to include more exclusive/investigative stories with greater
audience appeal; and (v) the careful selection of top-rated syndicated
programming that is broadcast just prior to and after the local news.
Managing Program Selection. Each Station seeks to cost effectively purchase
first-run and off-network syndicated programming to target specific demographic
audiences. The Stations have been able to purchase syndicated programming at
rates that management believes are attractive, in part because of the limited
competition for such programming in the Stations' DMAs. WROC, WTOV and KSBW have
contracts (expiring in 1999 and 2000) to air highly-rated programming, such as
The Oprah Winfrey Show, Jeopardy and Wheel of Fortune. In September 1996, WEYI
began airing programming such as Hard Copy and Entertainment Tonight, which had
previously been broadcast by a local competitor. Additional highly-rated
syndicated programming aired by the Stations includes Rosie O'Donnell on WROC
(through September 1997), WTOV and KSBW (beginning in September 1997) and
Seinfeld and Mad About You on WTOV.
Positioning and Branding Stations. The Company seeks to increase revenues
by developing and maintaining a unique, local "brand image" for each Station
within its respective market with which viewers and advertisers can identify.
This strategy integrates local news, programming, promotion and sales efforts
for each Station based on its market's demographics, competition, dynamics and
opportunities. By covering local events in more of the 12 Ohio Valley counties
(including the Wheeling, West Virginia market) than its competitors, WTOV has
been able to increase its profile with viewers and advertisers and differentiate
itself from its local competitors. KSBW continues to reinforce its identity with
viewers as the "Monterey-Salinas" television station with highly-recognized,
established on-air talent, as well as comprehensive local news coverage and
community involvement. WEYI has benefited from its network affiliation and
positioned itself as mid-Michigan's NBC station.
Pursuing Selective Acquisitions. The Company actively seeks to acquire
underperforming television stations that management believes can benefit from
its business strategy. Targeted stations generally have one or more of the
following characteristics: (i) attractive acquisition terms, which may include
station-for-station exchanges; (ii) opportunities to implement effective cost
controls; (iii) opportunities for increased advertising revenue; (iv)
opportunities for increased audience share through improved newscasts and
programming; (v) limited competition from other television broadcasters; and
(vi) market locations that possess attractive projected growth in advertising
revenues. The Company generally targets network-affiliated stations, which
typically have established audiences for their news, sports and entertainment
programming, located in DMAs generally ranked from 50 to 150. Management
believes that these stations can achieve operating margins comparable to larger
market stations, yet may be purchased for lower multiples of cash flow. The
Company believes that because of the limited competition from other television
broadcast-
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ers in these middle-to-small markets, there is an opportunity for local stations
to attract large local audience share and thus compete successfully for
advertising revenues with alternative media, such as cable television, radio and
newspapers.
MANAGEMENT AND OWNERSHIP
Management, together with Hicks Muse, organized the Company in order to
pursue the business strategy described previously. Management and Hicks Muse
have combined their efforts in the belief that the ability of the Company's
management team to implement successfully its business strategy would be further
enhanced by Hicks Muse's extensive experience in the capital markets as well as
with other broadcasting ventures.
The Company's management team, led by Robert N. Smith, President and Chief
Executive Officer, has over 17 years of extensive and diverse experience in the
television broadcast industry as well as experience in managing within the
constraints of leveraged capital structures. Members of the Company's management
team have worked together since 1986 and have successfully implemented an
operating strategy similar to the Company's at other television stations. The
Company's management team assumed the operations of and obtained an ownership
interest in the Stations in January 1996 through their ownership of SBP. SBP is
a partnership of which Robert N. Smith (through his majority ownership of SBG),
Sandy DiPasquale, David A. Fitz and John M. Purcell are partners. During the
year ended December 31, 1996, net revenues and broadcast cash flow of the
Stations increased $4.7 million, or 14.1%, and $6.8 million, or 78.6%,
respectively. The Company's senior executive officers and other Station general
managers have invested approximately $1.9 million in the Company as part of the
Acquisition. See "The Acquisition."
Hicks Muse is a private investment firm with offices in Dallas, New York,
St. Louis and Mexico City that specializes in leveraged acquisitions,
recapitalizations and other principal investing activities. Hicks Muse
(including its predecessor firm) has completed or has pending approximately 90
leveraged acquisitions having a combined transaction value of approximately $19
billion. All of the common stock of Holdings is owned by Sunrise Television
Partners, L.P. (the "Partnership"), of which the ultimate managing general
partner is Thomas O. Hicks, an affiliate of Hicks Muse. The Partnership, Hicks,
Muse, Tate & Furst Equity Fund III, L.P. ("Fund III") and HM3 Coinvestors, L.P.
("HM3"), each an investment partnership controlled by Hicks Muse, invested
approximately $75.0 million in the Company in connection with the Acquisition.
Approximately $68.0 million was invested by Fund III and HM3, including their
respective investments in the Partnership. See "The Acquisition" and "Certain
Transactions."
Hicks Muse has extensive experience using leveraged acquisition platforms
in the radio broadcast and other industries. It is the founder of Chancellor
Broadcasting Company ("Chancellor") and Capstar Broadcasting Partners, Inc.
("Capstar"), which have been active acquirors and successful operators of radio
broadcast stations. Both Chancellor and Capstar employ acquisition and operating
strategies similar to the strategy of the Company. When Hicks Muse formed
Chancellor in 1994 and Capstar in 1996, neither company owned or operated any
radio stations. On a pro forma basis assuming the consummation of certain
pending transactions, Chancellor and Capstar would own and operate, or provide
services to, approximately 103 and 120 radio stations, respectively. See "Risk
Factors -- Potential Conflicts of Interest" and "Business -- Federal Regulation
of Television Broadcasting -- Other Ownership Matters."
RECENT DEVELOPMENT
On May 8, 1997, the Company entered into an agreement and plan of merger
(the "WJAC Merger Agreement") with WJAC, Incorporated ("WJAC"), pursuant to
which WJAC will become a wholly owned subsidiary of the Company. WJAC, channel
6, is a VHF NBC-affiliated station serving the Johnstown/Altoona, Pennsylvania
market, which is the 92nd largest DMA in the United States.
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The approximate purchase price will be $36.0 million including certain working
capital, and the expected closing date will be early in the fourth quarter of
1997. The Company intends to finance this transaction with borrowings under the
Revolving Credit Facility, cash on hand and additional equity financing. The
WJAC Merger Agreement is subject to customary conditions and no assurances can
be given as to whether, or on what terms, such transaction or such financings
will be consummated by the Company.
On July 8, 1997, the Company entered into a stock purchase agreement (the
"ARTC Purchase Agreement") with Abilene Radio and Television Company ("ARTC"),
pursuant to which the Company will acquire KRBC-TV ("KRBC") and KACB-TV
("KACB"). KRBC, channel 9, is a VHF NBC-affiliated station serving the Abilene,
Texas market, which is the 160th largest DMA in the United States. KACB, channel
3, is a VHF NBC-affiliated station serving the San Angelo, Texas market, which
is the 195th largest DMA in the United States. The approximate purchase price
will be $12.0 million and the expected closing date will be the fourth quarter
of 1997. The Company intends to finance this transaction with borrowings under
the Revolving Credit Facility, cash on hand and additional equity financing. The
ARTC Purchase Agreement is subject to customary conditions and no assurances can
be given as to whether, or on what terms, such transaction or such financings
will be consummated by the Company.
The Company is in discussions with respect to other possible acquisitions
of television broadcast stations, although no agreements have been reached.
Consideration for such acquisitions would consist of available cash, plus the
proceeds of future debt and/or equity financings. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
5
<PAGE> 9
THE EXCHANGE OFFER
The Exchange Offer......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, Old Notes representing $100
million aggregate principal amount are
outstanding. The terms of the New Notes and the
Old Notes are substantially identical in all
material respects, except that the New Notes will
be freely transferable by the holders thereof
except as otherwise provided herein. See
"Description of New Notes."
Based on an interpretation by the Commission's
staff set forth in no-action letters issued to
third parties unrelated to the Company, the
Company believes that New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes
may be offered for resale, sold and otherwise
transferred by any person receiving the New
Notes, whether or not that person is the
registered holder (other than any such holder or
such other person that is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that (i) the New
Notes are acquired in the ordinary course of
business of that holder or such other person,
(ii) neither the holder nor such other person is
engaging in or intends to engage in a
distribution of the New Notes, and (iii) neither
the holder nor such other person has an
arrangement or understanding with any person to
participate in the distribution of the New Notes.
See "The Exchange Offer -- Purpose and Effect."
Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes, where
those Old Notes were acquired by the
broker-dealer as a result of its market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of these New Notes.
See "Plan of Distribution."
Registration Rights
Agreement................ The Old Notes were sold by the Company on March 25,
1997, in a private placement in reliance on
Section 4(2) of the Securities Act and
immediately resold by the initial purchasers
thereof in reliance on Rule 144A under the
Securities Act (the "Original Offering"). In
connection with the Original Offering, the
Company entered into an Exchange and Registration
Rights Agreement with the initial purchasers of
the Old Notes (the "Registration Rights
Agreement") requiring the Company to make the
Exchange Offer. See "The Exchange
Offer -- Purpose and Effect."
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, September 26, 1997, or such later
date and time to which it is extended by the
Company.
Withdrawal................. The tender of the Old Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the
Expiration Date. Any Old Notes not accepted for
ex-
6
<PAGE> 10
change for any reason will be returned without
expense to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer.
Interest on the New
Notes and Old Notes...... Interest on each New Note will accrue from the date
of issuance of the Old Note for which the New
Note is exchanged or from the date of the last
periodic payment of interest on such Old Note,
whichever is later. No additional interest will
be paid on Old Notes tendered and accept for
exchange.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the
Company. See "The Exchange Offer -- Certain
Conditions to Exchange Offer."
Procedures for Tendering
Old
Notes.................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a copy thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver the
Letter of Transmittal, or the copy, together with
the Old Notes and any other required
documentation, to the Exchange Agent (as defined)
at the address set forth herein. Persons holding
the Old Notes through the Depository Trust
Company ("DTC") and wishing to accept the
Exchange Offer must do so pursuant to the DTC's
Automated Tender Offer Program, by which each
tendering participant will agree to be bound by
the Letter of Transmittal. By executing or
agreeing to be bound by the Letter of
Transmittal, each holder will represent to the
Company that, among other things, (i) the New
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business
of the person receiving such New Notes, whether
or not such person is the registered holder of
the Old Notes, (ii) neither the holder nor any
such other person is engaging in or intends to
engage in a distribution of such New Notes, (iii)
neither the holder nor any such other person has
an arrangement or understanding with any person
to participate in the distribution of such New
Notes, and (iv) neither the holder nor any such
other person is an "affiliate," as defined under
Rule 405 promulgated under the Securities Act, of
the Company. Pursuant to the Registration Rights
Agreement, the Company is required to file a
"shelf" registration statement for a continuous
offering pursuant to Rule 415 under the
Securities Act in respect of the Old Notes if (i)
because of any change in law or applicable
interpretations of the staff of the Commission,
the Company is not permitted to effect the
Exchange Offer, (ii) the Exchange Offer is not
consummated within 225 days of the Original
Offering, (iii) any holder of Private Exchange
Securities (as defined) requests within 60 days
after the Exchange Offer, (iv) any applicable law
or interpretations do not permit any holder of
Old Notes to participate in the Exchange Offer,
(v) any holder of Old Notes participates in the
Exchange Offer
7
<PAGE> 11
and does not receive freely transferrable New
Notes in exchange for Old Notes or (iv) the
Company so elects.
Acceptance of Old Notes and
Delivery of New Notes.... The Company will accept for exchange any and all
Old Notes which are properly tendered (and not
withdrawn) in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
Exchange Agent............. U.S. Trust Company of Texas, N.A., is serving as
Exchange Agent (the "Exchange Agent") in
connection with the Exchange Offer.
Federal Income Tax
Considerations........... The exchange pursuant to the Exchange Offer will
not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Effect of Not Tendering.... Old Notes that are not tendered or that are
improperly tendered and not accepted will,
following the completion of the Exchange Offer,
continue to be subject to the existing
restrictions upon transfer thereof. The Company
will have no further obligation to provide for
the registration under the Securities Act of such
Old Notes.
8
<PAGE> 12
THE NEW NOTES
Issuer..................... STC Broadcasting, Inc.
Securities Offered......... $100,000,000 aggregate principal amount of 11%
Senior Subordinated Notes due 2007 (the "New
Notes").
Maturity................... March 15, 2007.
Interest Payment Dates..... March 15 and September 15 of each year, commencing
on September 15, 1997.
Sinking Fund............... None.
Optional Redemption........ Except as described below, the Company may not
redeem the New Notes prior to March 15, 2002. On
and after such date, the Company may redeem the New
Notes, in whole or in part, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the redemption date. In
addition, at any time and from time to time on or
prior to March 15, 2000, the Company may redeem up
to 25% of the aggregate principal amount of the New
Notes with the net cash proceeds of one or more
Public Equity Offerings, at a redemption price
equal to 111% of the principal amount thereof plus
accrued and unpaid interest, if any, to the
redemption date; provided, however, that after any
such redemption at least 75% of the aggregate
principal amount of New Notes would remain
outstanding immediately after each such redemption.
See "Description of New Notes -- Optional
Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, (i) the
Company will have the option, at any time on or
prior to March 15, 2002, to redeem the New Notes,
in whole but not in part, at a redemption price
equal to 100% of the principal amount thereof, plus
accrued and unpaid interest plus the Applicable
Premium and (ii) if the Company does not so redeem
the New Notes or if a Change of Control occurs
after March 15, 2002, the Company will be required
to make an offer to repurchase the New Notes at a
price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest,
if any, to the repurchase date. See "Description of
New Notes -- Change of Control."
Ranking.................... The New Notes will be unsecured and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Company,
including indebtedness outstanding under the Credit
Agreement. The New Notes will rank pari passu with
any future Senior Subordinated Indebtedness of the
Company and will rank senior to all other
subordinated indebtedness of the Company. In
addition, the New Notes will be effectively
subordinated to all indebtedness of subsidiaries of
the Company. As of June 30, 1997, on a pro forma
basis after giving effect to the Acquisition, the
Original Offering and the proposed acquisitions of
WJAC and ARTC, there would have been approximately
$29.3 million of Senior Indebtedness outstanding
and the Company would have had no Senior
Subordinated Indebtedness outstanding other than
the New Notes and no indebtedness subordinated to
the New Notes outstanding. See "Description of New
Notes -- Ranking and Subordination."
9
<PAGE> 13
Restrictive Covenants...... The Indenture will limit, among other things, (i)
the incurrence of additional indebtedness by the
Company and its Subsidiaries, (ii) the payment of
dividends on, and redemption of, capital stock of
the Company and its Subsidiaries, (iii)
investments, (iv) the sale or swap of assets, (v)
transactions with affiliates and (vi)
consolidations, mergers and transfers of all or
substantially all of the Company's assets. The
Indenture also will prohibit certain restrictions
on distributions from Subsidiaries. However, all of
those limitations and prohibitions will be subject
to a number of important qualifications and
exceptions. See "Description of New
Notes -- Certain Covenants."
USE OF PROCEEDS
There will be no cash proceeds to the Company from the exchange pursuant to
the Exchange Offer.
The net proceeds from the Original Offering were used (i) to repay
borrowings under the Credit Agreement incurred to finance the Acquisition and
(ii) to pay certain expenses incurred in connection with the Original Offering.
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" for risks involved with an investment in
the New Notes.
10
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth as of the dates and for the periods
indicated (i) summary historical financial information of the Stations and (ii)
summary pro forma financial information of the Stations and the Company. The
historical financial information for the three years ended December 31, 1996 has
been derived from the audited financial statements of the Stations and have been
audited by Arthur Andersen LLP, independent auditors, and are included elsewhere
herein. Statement of Operations Data below station operating income and related
Other Financial Data, as well as Balance Sheet Data, for the Stations for the
years ended, or at, December 31, 1994 through December 31, 1995 have not been
presented because such information is not meaningful for the following reasons:
(i) during such periods the Stations were owned and/or operated by persons other
than the Company and management; (ii) they were not owned or operated as a
single unit for any of such periods; and (iii) they were operated as part of
larger units, and therefore, allocations of corporate expenses, interest and
long term debt cannot appropriately be made to the Stations. The summary pro
forma information gives effect to the Acquisition, the Original Offering and the
proposed acquisitions of WJAC and ARTC, but does not purport to represent what
the Company's results actually would have been if such transactions had occurred
at the dates indicated, nor does such information purport to project the results
of the Company for any future period. See "Unaudited Pro Forma Financial
Information," "Selected Historical Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------- --------------------------
SIX MONTHS
YEARS ENDED DECEMBER 31, YEAR ENDED ENDED
----------------------------- DECEMBER 31, JUNE 30,
1994 1995 1996(1) 1996(1)(2) 1997(1)(2)
------- ------- --------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $31,043 $32,905 $ 37,559 $ 50,776 $ 24,962
Station operating expenses................ 19,822 20,729 18,564 27,040 13,843
Amortization of program rights............ 3,123 3,181 3,581 4,570 2,414
Depreciation and amortization............. 3,695 4,119 10,146 19,927 9,948
------- ------- --------- -------- --------
Station operating income (loss)......... $ 4,403 $ 4,876 5,268 (761) (1,243)
======= =======
Corporate expenses(3)..................... 840 1,250 625
--------- -------- --------
Operating income (loss)................. 4,428 (2,011) (1,868)
Interest expense.......................... 6,072 13,637 6,818
Other income(4)........................... 1,552 1,622 177
--------- -------- --------
Loss before income taxes.................. (92) (14,026) (8,509)
Provision for income taxes(5)............. -- 200 100
--------- -------- --------
Net loss................................ $ (92) (14,226) (8,609)
=========
Dividends and accretion on Redeemable
Preferred Stock(6)...................... 4,332 2,166
-------- --------
Loss applicable to common shares.......... $(18,558) $(10,775)
======== ========
OTHER FINANCIAL DATA:
Net cash provided by (used in):
Operating activities.................... $ 7,215 $ 6,898 9,646
Investing activities.................... (1,287) (750) (108,298)
Financing activities.................... (5,680) (5,978) 101,405
Broadcast cash flow(7).................... $ 7,822 $ 8,624 $ 15,405 $ 19,484 $ 8,741
Broadcast cash flow margin(8)............. 25.2% 26.2% 41.0% 38.4% 35.0%
Operating cash flow(9).................... $ 14,565 $ 18,234 $ 8,116
Capital expenditures(10).................. $ 1,287 $ 750 2,966 3,365 1,478
Payments for program rights............... 3,399 3,552 3,590 4,252 2,378
Ratio (deficiency) of earnings to fixed
charges(11)............................. 1.0x $(18,358) $(10,675)
BALANCE SHEET DATA (AT YEAR END):
Cash and cash equivalents................. $ 2,753 $ -- $ 3,205
Total assets.............................. 106,608 225,843 258,118
Total long-term debt, including current
portion................................. 65,000 126,300 129,300
Redeemable Preferred Stock(12)............ -- 28,500 29,946
Partners'/Common stockholder's equity..... 36,313 65,937 57,894
See notes on following page.
</TABLE>
11
<PAGE> 15
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
- ---------------
(1) Financial information for 1996 reflects the period that the Stations were
owned by Jupiter and operated by management during 1996, which began on
January 3 with respect to WEYI, WROC and WTOV and January 17 with respect
to KSBW. Management does not consider the results of operations of the
Stations from January 1, 1996 to the dates the Stations were acquired to be
significant to the results of operations of the Stations for the year ended
December 31, 1996.
(2) Pro forma Statement of Operations Data gives effect to the Acquisition, the
Original Offering and the proposed acquisitions of WJAC and ARTC as if such
transactions occurred on January 1, 1996. Pro forma Balance Sheet Data
gives effect to the Acquisition, the Original Offering and proposed
acquisitions of WJAC and ARTC as if such transactions occurred on June 30,
1997.
(3) Corporate expenses consist primarily of management fees and other corporate
expenses, including corporate salaries.
(4) Other income consists primarily of approximately $1.5 million of
nonrecurring revenues for consulting services provided during 1996.
(5) No provision for income taxes has been reflected for historical 1996 since
the Stations operated as partnerships and the net loss of such partnerships
was reported by the partners. No pro forma provision for federal income
taxes has been reflected due to the pro forma net loss. Pro forma state tax
provisions of $200,000 and $100,000 have been reflected for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively.
(6) Reflects accrued dividends and accretion on the Redeemable Preferred Stock.
(7) "Broadcast cash flow" consists of station operating income plus
depreciation on property and equipment, amortization of intangible assets
and amortization of program rights minus payments on program rights.
Broadcast cash flow is not a measure of performance calculated in
accordance with GAAP and should not be considered in isolation or as a
substitute for net income (loss), cash flows from operating activities and
other income or cash flow statement data prepared in accordance with GAAP
or as a measure of liquidity or profitability.
(8) "Broadcast cash flow margin" is broadcast cash flow divided by net revenues
expressed as a percentage.
(9) "Operating cash flow" consists of station operating income plus
depreciation of property and equipment, amortization of intangible assets
and amortization of program rights minus payments on program rights and
corporate expenses. Operating cash flow is not a measure of performance
calculated in accordance with GAAP and should not be considered in
isolation or as a substitute for net income (loss), cash flows from
operating activities and other income or cash flow statement data prepared
in accordance with GAAP or as a measure of liquidity or profitability.
(10) The Company anticipates capital expenditures to be approximately $2.8
million for 1997, and approximately $1.6 million per year thereafter.
(11) For purposes of this calculation, "earnings" consist of income (loss)
before income taxes and fixed charges. "Fixed charges" consist of interest
expense, amortization of deferred financing charges, the component of
rental expense believed by management to be representative of the interest
factor thereon and preferred stock dividend requirements and related
accretion. If the ratio is less than 1.0x, the deficiency is shown.
(12) Consists of 14% Exchangeable Redeemable Preferred Stock (the "Redeemable
Preferred Stock"), mandatorily redeemable in 2008 with an aggregate
liquidation preference of $30.0 million. Dividends are cumulative and
payable quarterly, which prior to 2002 may, at the option of the Company,
be paid in additional shares of Redeemable Preferred Stock. In addition,
the Redeemable Preferred Stock is exchangeable at any time, at the option
of the Company, for debt of the Company. The Credit Agreement and the
Indenture will limit the Company's ability to pay cash dividends prior to
2002 and the Company's ability to exchange the Redeemable Preferred Stock
for debt of the Company. See "Description of Redeemable Preferred Stock."
12
<PAGE> 16
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following risk factors
before purchasing the Notes offered hereby.
ABSENCE OF OPERATING HISTORY; RECENT ACQUISITION OF STATIONS
The Company has been newly formed and has not yet conducted substantial
operations; therefore, there are limited historical financial results of the
Company for investors to evaluate. While this Prospectus contains historical
results of operations of the Stations, the Stations were only under the
operating management of certain members of management of the Company since
January 1996. Consequently, there is limited information about the performance
of the Stations under the Company's management for prospective purchasers of the
New Notes to evaluate. In addition, historical and predecessor results of
operations are not necessarily indicative of future results. See "Business."
The Acquisition has been accounted for using the purchase method of
accounting and the total purchase price has been allocated to the assets and
liabilities acquired, based upon their respective fair values. As a result, the
Company will have significant non-cash charges for depreciation and amortization
expense related to the fixed assets and goodwill that were acquired in the
Acquisition. In addition, the Company has incurred substantial indebtedness in
connection with the Acquisition for which it will have significant debt service
requirements. For the foregoing reasons, the Company expects that it will report
net losses for the foreseeable future.
RISKS RELATED TO THE ABILITY TO IMPLEMENT THE COMPANY'S OPERATING AND
ACQUISITION STRATEGY
No assurances can be given that the Company or its management team will be
able to implement successfully the operating strategy described herein,
including the ability to identify, negotiate and consummate future acquisitions
on favorable terms. While management may have successfully implemented similar
operating strategies in the past for particular stations, no assurances can be
given as to what degree the Company or its management will be able to implement
successfully such strategies for the Company in the future.
The ability of the Company to implement its operating strategy and to
consummate future acquisitions will require significant additional debt and/or
equity capital and no assurances can be given as to whether, and on what terms,
such additional debt and/or equity capital will be available. The Company
intends to finance the acquisitions of WJAC and ARTC with approximately $7.0
million of cash on hand, $29.3 million of borrowings under the Revolving Credit
Facility and approximately $13.0 million of equity financing from Hicks Muse or
its affiliates. To the extent that the Company is not able to obtain such equity
financing from Hicks Muse or another source, or to the extent the Company is
unable to obtain future debt and/or equity financings in connection with future
acquisitions, the Company may be unable to implement its acquisition strategy,
which could have a material adverse effect on the Company's future business.
SUBSTANTIAL LEVERAGE AND INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
The Company has indebtedness that is substantial in relation to its
stockholder's equity. As of June 30, 1997, on a pro forma basis after giving
effect to the Acquisition and the Original Offering (but excluding the proposed
acquisition of WJAC), the Company would have had approximately $100.0 million of
indebtedness outstanding, and there would have been approximately $35.0 million
available for future borrowings under the Revolving Credit Facility. See
"Capitalization," "Description of the Credit Agreement" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." On a pro forma basis after
giving effect to the Acquisition, the Original Offering and the proposed
acquisitions of WJAC and ARTC, the Company's earnings would have been
insufficient to cover fixed charges by $18.4 million for the year ended December
31, 1996. The Company may incur additional indebtedness in the future,
13
<PAGE> 17
subject to certain limitations contained in the Indenture and the Credit
Agreement, and intends to do so in order to fund future acquisitions as part of
its operating strategy. The Company does not anticipate that the limitations
contained in the Indenture and the Credit Agreement will impede the Company's
ability to finance the proposed acquisitions of WJAC or ARTC. The Company
intends to finance such acquisitions with approximately $29.3 million of
borrowing under the Revolving Credit Facility, approximately $7.0 million of
cash on hand and approximately $13.0 million of equity financing. See
"Business -- Business Strategy," "Description of New Notes" and "Description of
the Credit Agreement."
The Company's high degree of leverage could have several important
consequences to the holders of the New Notes, including, but not limited to, the
following: (i) the Company will have significant cash requirements to service
debt, reducing funds available for operations and future business opportunities
and increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (ii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes, may be limited; and (iii) the
Company's leveraged position and the covenants that will be contained in the
Indenture and the Credit Agreement could limit the Company's ability to compete,
as well as its ability to expand, including through acquisitions, and to make
capital improvements.
The Company's ability to pay interest and principal under the Credit
Agreement and the New Notes and to satisfy its other debt obligations will
depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control. Based on the current level of
operations and anticipated future growth (both internally generated as well as
through acquisitions, including the proposed acquisitions of WJAC and ARTC), the
Company anticipates that its cash flow from operations, together with borrowings
under the Credit Agreement, should be sufficient to meet its anticipated
requirements for working capital, capital expenditures, interest payments and
scheduled principal payments for at least the next twelve months; provided,
however, that the purchase price of any future acquisition, including WJAC and
ARTC, may require additional debt and/or equity financings. There can be no
assurance, however, that the Company's business will generate cash flow at or
above projected levels or that anticipated future growth can be achieved. If the
Company is unable to service its indebtedness, whether in the ordinary course of
business or upon acceleration of such indebtedness, the Company will be forced
to pursue one or more alternative strategies, such as restructuring or
refinancing its indebtedness, selling assets or seeking additional equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all, or that the approval of the Federal
Communications Commission (the "FCC") could be obtained on a timely basis, or at
all, for the transfer of any of the Stations' licenses in connection with a
proposed sale of assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Federal Regulation of Television Broadcasting."
SUBORDINATION
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the New Notes will be subordinated to the prior
payment in full of all existing and future Senior Indebtedness of the Company
(including, without limitation, the Credit Agreement). In addition, the Credit
Agreement, but not the New Notes, is secured by all tangible and intangible
assets of the Company and its subsidiaries and is unconditionally guaranteed, on
a senior basis, by each of the present and future subsidiaries of the Company.
In the event of the bankruptcy, liquidation, dissolution, reorganization or
other winding-up of the Company, the assets of the Company will be available to
pay obligations on the New Notes only after all Senior Indebtedness (including
amounts outstanding under the Credit Agreement) has been so paid in full;
accordingly, there may not be sufficient assets remaining to pay amounts due on
any or all of the New Notes then outstanding. In addition, under certain
circumstances, the Company may not pay principal of,
14
<PAGE> 18
premium, if any, or interest on, or any other amounts owing in respect of the
New Notes, or purchase, redeem or otherwise retire the New Notes, in the event
of certain defaults with respect to Senior Indebtedness, including Senior
Indebtedness under the Credit Agreement. As of June 30, 1997, on a pro forma
basis after giving effect to the Acquisition, the Original Offering and the
proposed acquisitions of WJAC and ARTC, there would have been approximately
$29.3 million of Senior Indebtedness outstanding. Senior Indebtedness may be
incurred by the Company from time to time, subject to certain restrictions. See
"Description of New Notes -- Ranking and Subordination," "-- Limitation on
Incurrence of Additional Indebtedness and Issuance of Disqualified Capital
Stock" and "Description of the Credit Agreement."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture and the Credit Agreement contain certain covenants that
restrict, among other things, the Company's ability to incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, impose restrictions on the ability of a subsidiary to pay dividends
or make certain payments to the Company, merge or consolidate with any other
person or sell, assign, transfer, lease, convey, or otherwise dispose of all or
substantially all of the assets of the Company. These restrictive covenants
limit the Company's ability to pay cash dividends in respect of the Redeemable
Preferred Stock prior to May 31, 2002 and the Company's ability to effect any
redemption of the Redeemable Preferred Stock. In addition, the Credit Agreement
contains certain other and more restrictive covenants and requires the Company
to maintain specified financial ratios and to satisfy certain financial
condition tests. The Company's ability to meet these financial ratio and
financial condition tests can be effected by events beyond its control and there
can be no assurance that the Company will meet those tests. A breach of any of
these covenants could result in a default under the Credit Agreement or the
Indenture. In the event of an event of default under the Credit Agreement or the
Indenture the lenders thereunder could elect to declare all amounts outstanding
thereunder, together with accrued interest, to be immediately due and payable.
In the case of the Credit Agreement, if the Company were unable to pay those
amounts, the lenders thereunder could proceed against the collateral granted to
them to secure that indebtedness. Substantially all the assets of the Company,
including the stock of its subsidiaries that will hold the Company's FCC
licenses, will be pledged as collateral to secure the Company's obligations
under the Credit Agreement. If the indebtedness under the Credit Agreement were
to be accelerated, there can be no assurance that the assets of the Company
would be sufficient to repay in full that indebtedness and the other
indebtedness of the Company, including the New Notes. See "Description of New
Notes -- Certain Covenants" and "Description of the Credit Agreement."
DEPENDENCE ON ADVERTISING REVENUES; EFFECT OF ECONOMIC CONDITIONS
The television industry is affected by prevailing economic conditions.
Because the Company relies on sales of advertising time for substantially all
its revenues, the Company's operating results are sensitive to general and
regional economic conditions. Consequently, declines in advertising budgets,
particularly in recessionary periods, adversely affect the broadcast industry,
and as a result may contribute to a decrease in the revenues of broadcast
television stations. The Station's revenues in 1996 were positively affected by
significantly increased advertising revenues as a result of the occurrence in
that year of both the presidential election and the NBC broadcast of both the
United States-based Summer Olympic Games and the Super Bowl. The Company does
not expect a similar event or events to positively impact advertising revenues
in 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
CONTROL OF COMPANY
All of the common stock of Holdings is owned by the Partnership, of which
the ultimate general partner is Thomas O. Hicks, an affiliate of Hicks Muse. As
a result, Hicks Muse is effectively able to
15
<PAGE> 19
elect all of the members of the Board of Directors of Holdings and therefore
direct the management and policies of the Company. The interests of Hicks Muse
and its affiliates may differ from the interests of holders of the New Notes.
See " -- Potential Conflicts of Interest," "The Acquisition," "Securities
Ownership of Certain Beneficial Ownership" and "Certain Transactions."
POTENTIAL CONFLICTS OF INTEREST
Hicks Muse is in the business of making significant investments in existing
or newly formed companies and may from time to time acquire and hold controlling
or noncontrolling interests in television broadcast assets (other than through
the Company), or other businesses that may directly or indirectly compete with
the Company, including competition for advertising revenues. Although it
currently has no intention to do so, Hicks Muse and its affiliates may from time
to time identify, pursue and consummate acquisitions of television stations or
other broadcast related businesses that may be complementary to the business of
the Company and therefore such acquisition opportunities may not be available to
the Company. In addition, Hicks Muse may from time to time identify and
structure acquisitions for the Company and will receive fees in connection with
such transactions. Certain affiliates of Hicks Muse have entered, and in the
future may enter, into business relationships with the Company or its
subsidiaries. See "Certain Transactions."
Robert N. Smith (through SBG) currently holds a controlling interest in
seven television broadcast stations and has interests in two television cable
stations (other than through the Company), none of which are located in markets
in which the Company currently competes. The employment agreement among the
Company, Holdings and Mr. Smith requires him to devote his best efforts and such
time, attention, knowledge and skill to the operation of the Stations as is
necessary to manage and supervise the Stations and the Company. In addition, Mr.
Smith's employment agreement permits him to invest in, become employed by or
otherwise render services to or for (i) another business enterprise (other than
the Company) having an interest in or operating a television station within
certain excluded markets in which Mr. Smith currently holds an interest in a
television station (the "Excluded Markets") and (ii) after an opportunity to
acquire or invest shall have been presented to the Company and the Company shall
have declined in writing to make such acquisition or investment, up to three
additional excluded stations (the "Excluded Stations"). As a result, potential
conflicts of interest with the Company could arise in the allocation of his time
and resources. See "Management and Directors -- Executive Compensation."
Pursuant to an employment agreement among the Company, Holdings and David
A. Fitz, Mr. Fitz is required to devote his best efforts and his working time,
attention, knowledge and skill solely to the operation of the Stations;
provided, however, that Mr. Fitz is permitted to devote reasonable time to
advisory services and oversight duties in connection with Mr. Smith's
investments in Excluded Markets and any acquisitions or investments in Excluded
Stations. In addition, Mr. Fitz's employment agreement permits him to invest in,
become employed by or otherwise render services to or for another business
enterprise (other than the Company) having an interest in or operating a
television station within the Excluded Markets. As a result, potential conflicts
of interest with the Company could arise in the allocation of his time and
resources. See "Management and Directors -- Executive Compensation."
The number of television stations the Company may acquire in any market is
limited by FCC rules and may vary depending upon whether the interests in other
television stations or certain other media properties of certain individuals
affiliated with the Company are attributable to those individuals under FCC
rules. In addition, the FCC's radio/television cross-ownership rule generally
prohibits a single individual or entity from having an attributable interest in
both a television station and a radio station serving the same market. The FCC
generally applies its ownership limits to "attributable" interests held by an
individual, corporation, partnership or other association. The broadcast
interests of the Company's officers, directors and majority stockholder are
generally attributable to the Company, which may limit the Company from
acquiring or owning television
16
<PAGE> 20
stations in certain markets. See "Summary -- Management and Ownership,"
"Business -- Federal Regulation of Television Broadcasting -- Television" and
"-- Other Ownership Matters."
As a result of the current or future ownership of television and radio
broadcast stations by entities in which Hicks Muse, Mr. Smith and other members
of management of the Company have significant equity interests (other than
through the Company), regulatory and other restrictions may restrict or prohibit
the Company from entering the markets in which those other stations operate or
intend to operate. See "Summary -- Management and Ownership."
DEPENDENCE UPON KEY PERSONNEL
The Company believes that its success will continue to be dependent upon
its ability to attract and retain skilled managers and other personnel,
including its present officers, regional directors and general managers. The
loss of the services of its Chief Executive Officer, Robert N. Smith, its
President, Sandy DiPasquale, or its Senior Vice President and Chief Financial
Officer, David A. Fitz, may have a material adverse effect on the operations of
the Company. In connection with the Acquisition, each executive officer entered
into five-year employment agreements with Holdings and the Company. See
"-- Potential Conflicts of Interests" and "Management and Directors -- Executive
Compensation."
CHANGE OF CONTROL
Upon a Change of Control, the Company may be required to offer to purchase
all of the New Notes then outstanding at 101% of their principal amount, plus
accrued interest to the date of repurchase. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient funds to
pay the purchase price for all of the New Notes that the Company might be
required to purchase. In the event that the Company were required to purchase
New Notes pursuant to a Change of Control Offer (as defined), the Company
expects that it would require third party financing. However, there can be no
assurance that the Company would be able to obtain such financing on favorable
terms, if at all. In addition, the Credit Agreement will restrict the Company's
ability to repurchase the New Notes, including pursuant to a Change of Control
Offer. A Change of Control will result in an event of default under the Credit
Agreement and may cause the acceleration of other Senior Indebtedness, if any,
in which case the subordination provisions of the New Notes would require
payment in full of the Credit Agreement and any other such Senior Indebtedness
before repurchase of the New Notes. See "Description of New Notes -- Ranking and
Subordination" and " -- Change of Control" and "Description of the Credit
Agreement." The inability to repay Senior Indebtedness, if accelerated, and to
purchase all of the tendered New Notes, would constitute an event of default
under the Indenture.
DEPENDENCE ON NETWORK AFFILIATIONS
Three of the Stations are affiliated with NBC (one of which is also a
secondary affiliate of ABC) and one Station is affiliated with CBS. The
television viewership levels for each of the Stations are materially dependent
upon programming provided by the network with which each Station is affiliated.
There can be no assurance that such programming will achieve or maintain
satisfactory viewership levels in the future. In addition, the Company received
approximately $2.8 million in the year ended December 31, 1996 from revenues
from affiliation agreements, which expire between January 2002 and December
2005. Although the Company expects to be able to renew its affiliation
agreements, there can be no assurance to that effect. The non-renewal or
termination of one or more of these network affiliation agreements may have a
material adverse effect on the Company's results of operations. See
"Business -- Network Affiliations."
LABOR RELATIONS
As of June 30, 1997, approximately 45% of the Company's employees worked
under various collective bargaining agreements. While the Company believes that
its relations with its employees at all the Stations are good, there can be no
assurance that the Stations' collective bargaining
17
<PAGE> 21
agreements will be renewed in the future. A prolonged labor dispute (which could
include a work stoppage) could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Employees."
COMPETITIVE NATURE AND RISK OF CHANGES IN THE TELEVISION INDUSTRY
The television industry is highly competitive. The Stations compete for
audience and advertising revenues with other television stations (including
other network and non-network(independent) television broadcast stations
available over-the-air and through local cable systems) as well as with other
media such as newspapers, radio stations, magazines, outdoor advertising,
transit advertising, yellow page directories and direct mail. During the past
decade, the entry of strong independent broadcast stations, new networks such as
Fox, the Warner Brothers Network ("WB") and the United Paramount Network ("UPN")
and other programming alternatives such as cable television, home satellite
delivery, home video and, more recently, direct broadcast satellite ("DBS")
television and video signals delivered over telephone lines have subjected, and
will continue to subject, traditional network-affiliated television stations to
new types of competition. Competition for programming involves negotiating with
national program distributors or syndicators for exclusive rights to broadcast
first run or rerun packages of programming in each respective market.
The ability of each of the Stations to generate advertising revenues is
dependent, to a significant degree, upon its audience ratings, which, in turn,
are dependent on successful programming. There can be no assurance that any of
the Stations will be able to maintain or increase the popularity of its
programming, audience share or advertising revenues. To the extent certain of
the Company's competitors have, or in the future obtain, greater financial
resources than the Company, the Company's ability to compete successfully in its
broadcasting markets may be impeded. See "Business -- Competition."
The television industry is subject to technological and regulatory changes
that could adversely affect the Company. Video compression technology currently
under development, as well as other technological developments, have the
potential to provide vastly expanded programming to targeted audiences.
Competition in the television industry in the future may come from interactive
video and data services that may provide two-way interaction. The Company is
unable to predict the effect that these or other technological changes will have
on the television industry or the future results of the Company's operations. On
April 3, 1997, the FCC adopted a table of digital channel allotments and rules
for the implementation of digital television service ("DTV") in the United
States, including high-definition television ("HDTV"). The digital table of
allotments provides each existing television station licensee or permittee with
a second broadcast channel to be used during the transition to DTV, conditioned
upon the surrender of one of the channels at the end of the DTV transition
period. Implementation of DTV will improve the technical quality of television.
Furthermore, the implementing rules permit broadcasters to use their assigned
digital spectrum flexibly to provide either standard- or high-definition video
signals and additional services, including, for example, data transfer,
subscription video, interactive material, and audio signals. However, the
digital table of allotments was devised on the basis of certain technical
assumptions which have not been subjected to extensive field testing and which,
along with specific digital channel assignments, are the subject of petitions
for reconsideration of the FCC's April 3, 1997 decision. Conversion to DTV may
reduce the geographic reach of the Company's stations or result in increased
interference, with, in either case, a corresponding loss of population coverage.
DTV implementation will impose additional costs on the Company, primarily due to
the capital costs associated with construction of DTV facilities and increased
operating costs both during and after the transition period. The FCC has set a
target date of 2006 for expiration of the transition period, subject to biennial
reviews to evaluate the progress of DTV, including the rate of consumer
acceptance.
Advances in technology and changes in the regulatory climate may increase
competition for household audiences, programs and advertisers. The Company
cannot predict how the combination of business, regulatory and technological
changes will affect the broadcast industry or the Com-
18
<PAGE> 22
pany, including its capital needs, results of operations or business prospects.
See "Business -- Federal Regulation of Television Broadcasting."
REGULATORY MATTERS
The broadcasting industry is subject to regulation by the FCC under the
Communications Act of 1934, as amended (the "Communications Act"). Approval by
the FCC is required for the issuance, renewal, transfer of control or assignment
of television station operating licenses. In particular, the Company's
television business is dependent upon its continuing ability to hold television
broadcast licenses from the FCC, which, generally, prior to the enactment of the
Telecommunications Act, had been issued for five-year terms. However, the
Telecommunications Act directs the FCC to extend the term of television
broadcast licenses to eight years for license applications filed after May 1,
1995. The FCC has issued an order implementing this statutory mandate. The
Company's existing television station licenses expire between October 1, 1997
and June 1, 1999. There can be no assurance that any of the Company's television
broadcast licenses will be renewed at their expiration dates for their full
terms, or at all. The non-renewal or limitation of one or more of the Company's
television broadcast licenses would have a material adverse effect on the
Company. The Telecommunications Act also addresses a wide variety of matters
(including technological changes) that affect the operation and ownership of the
Company's television stations. The Telecommunications Act eliminates the
restrictions on the number of television stations an entity may own, operate or
control nationally and increases the national audience reach limitation to 35%.
The FCC has been directed to adopt rules relating to the retention, modification
or elimination of local ownership limitations and spectrum flexibility in
connection with the issuance of additional licenses for advanced television
services, including how to establish and collect fees from broadcasters for the
implementation of ancillary and supplementary services. See "Business -- Federal
Regulation of Television Broadcasting."
The FCC has been directed to revise its rules to permit cross-ownership
interests between a broadcast network and a cable system, and, if necessary, to
revise its rules to ensure carriage, channel positioning and non-discriminatory
treatment of non-affiliated broadcast stations by cable systems affiliated with
a broadcast network. The FCC has been directed to review its television
ownership rules every two years and currently has several broadcast related
rulemaking proceedings underway. There can be no assurance that any such
rulemaking or resulting changes would not materially adversely affect the
Company and/or increase competition. See "Business -- Federal Regulation of
Television Broadcasting" and "Business -- Competition."
LACK OF PUBLIC MARKET FOR THE NEW NOTES
The Old Notes were issued on March 25, 1997 and the Company is not aware
that any active trading market for the Old Notes has developed. The Company does
not intend to apply for a listing of the New Notes on a securities exchange or
on any automated dealer quotation system. There can be no assurances that a
market will develop for the New Notes or as to the liquidity of any market that
may develop for the New Notes, the ability of the holders of the New Notes to
sell their New Notes or the prices at which such holders would be able to sell
their New Notes. If such markets were to exist, the New Notes could trade at
prices that may fluctuate significantly depending upon many factors, including
prevailing interest rates and the markets for similar securities.
The liquidity of, and trading market, if any, for, the New Notes also may
be adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
19
<PAGE> 23
THE ACQUISITION
Holdings and the Company are newly formed corporations organized by Hicks
Muse and the Company's management. Holdings owns 100% of the capital stock of
the Company. See "Management and Directors," "Certain Transactions" and
"Securities Ownership of Certain Beneficial Owners."
In January 1996, Jupiter acquired the Stations for approximately $105.4
million (including working capital and fees). SBP had an ownership interest in
and managed the Stations pursuant to a contract with Jupiter. Robert N. Smith
(through SBG), Sandy DiPasquale, John M. Purcell and David A. Fitz are partners
in SBP.
On February 28, 1997, the Company purchased substantially all the assets of
the Stations from Jupiter for approximately $157.0 million (the "Acquisition").
Certain members of the Company's management or companies controlled by
management received an aggregate of approximately $10.0 million (subject to
possible increase after certain post-closing adjustments) of the Acquisition
consideration. The Company's senior executive officers and other station general
managers have invested $1.9 million in the Company as part of the Acquisition.
The total cost of the Acquisition (including related fees and expenses) was
$167.3 million. The Company financed the Acquisition through (i) $29.8 million
in borrowings under the $35.0 million secured revolving credit facility (the
"Revolving Credit Facility"), (ii) $60.0 million in borrowings under the secured
term loan facility (the "Term Loan," together with the Revolving Credit
Facility, the "Credit Agreement"), (iii) proceeds of $28.5 million from the
issuance of the Redeemable Preferred Stock ($30.0 million aggregate liquidation
preference) and (iv) proceeds of $49.0 million from the issuance of common
equity to Holdings. The Company used a portion of the proceeds from the Original
Offering to repay all borrowings under the Term Loan and the Revolving Credit
Facility. See "Use of Proceeds," "Description of the Credit Agreement" and
"Description of Redeemable Preferred Stock."
The Company acquired WTOV through SAC and has filed an application with the
FCC to consolidate SAC with and into the Company after the Offering. The Company
owns 100% of the nonvoting stock of SAC, which represents 99% of the equity, and
SBG owns 100% of the voting stock of SAC, which represents 1% of the equity. The
FCC licenses for the Stations are held by subsidiaries of the Company.
RECENT DEVELOPMENT
On May 8, 1997, the Company entered into the WJAC Merger Agreement with
WJAC, pursuant to which WJAC will become a wholly owned subsidiary of the
Company. WJAC, channel 6, is a VHF NBC-affiliated station serving the
Johnstown/Altoona, Pennsylvania market, which is the 92nd largest DMA in the
United States. The approximate purchase price will be $36.0 million including
certain working capital, and the expected closing date will be early in the
fourth quarter of 1997. The Company intends to finance this transaction with
borrowings under the Revolving Credit Facility, cash on hand and additional
equity financing. The WJAC Merger Agreement is subject to customary conditions
and no assurances can be given as to whether, or on what terms, such transaction
or such financings will be consummated by the Company.
On July 8, 1997, the Company entered into the ARTC Purchase Agreement,
pursuant to which the Company will acquire KRBC and KACB. KRBC, channel 9, is a
VHF NBC-affiliated station serving the Abilene, Texas market, which is the 160th
largest DMA in the United States. KACB, channel 3, is a VHF NBC-affiliated
station serving the San Angelo, Texas market, which is the 195th largest DMA in
the United States. The approximate purchase price will be $12.0 million and the
expected closing date will be the fourth quarter of 1997. The Company intends to
finance this transaction with borrowings under the Revolving Credit Facility,
cash on hand and additional equity financing. The ARTC Purchase Agreement is
subject to customary conditions and no assurances
20
<PAGE> 24
can be given as to whether, or on what terms, such transaction or such
financings will be consummated by the Company.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the exchange pursuant
to the Exchange Offer.
The net proceeds from the Original Offering (approximately $95.9 million)
were used (i) to repay the $60.0 million of borrowings outstanding under the
Term Loan and (ii) to repay approximately $30.8 million of borrowings
outstanding under the Revolving Credit Facility. See "Capitalization" and
"Description of the Credit Agreement."
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<PAGE> 25
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the (i) historical
capitalization of the Company and (ii) the pro forma consolidated capitalization
of the Company after giving effect to the proposed acquisitions of WJAC and
ARTC. The information set forth below should be read in conjunction with the
"Selected Historical Financial Information," the "Unaudited Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements of the Company and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
ACTUAL PRO FORMA
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 9,385 $ 3,205
======== ========
Long-term debt:
Revolving Credit Facility(1).............................. $ -- 29,300
11% Senior Subordinated Notes due 2007.................... 100,000 100,000
-------- --------
Total long-term debt................................... 100,000 129,300
Redeemable Preferred Stock(2)............................... 29,946 29,946
Common stockholders' equity:
Common stock, par value $.01 per share; 1,000 shares
issued and outstanding................................. -- --
Additional paid-in capital................................ 49,012 62,012
Accumulated deficit....................................... (4,118) (4,118)
-------- --------
Total common stockholders' equity...................... 44,894 57,894
-------- --------
Total capitalization................................. $174,840 $217,140
======== ========
</TABLE>
- ---------------
(1) The Revolving Credit Facility, which expires in 2004, provides for
borrowings of up to $35.0 million in the aggregate, with permanent quarterly
commitment reductions beginning in 2000. See "Description of the Credit
Agreement."
(2) Consists of 14% Exchangeable Redeemable Preferred Stock, mandatorily
redeemable in 2008 with an aggregate liquidation preference of $30.0
million. Dividends are cumulative and payable quarterly, which prior to 2002
may, at the option of the Company, be paid in additional shares of
Redeemable Preferred Stock. In addition, the Redeemable Preferred Stock is
exchangeable at any time, at the option of the Company, for debt of the
Company. The Credit Agreement and the Indenture limit the Company's ability
to pay cash dividends prior to 2002 and the Company's ability to exchange
the Redeemable Preferred Stock for debt of the Company. See "Description of
Redeemable Preferred Stock."
22
<PAGE> 26
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth the selected historical financial
information of the Stations as of the dates and for the periods indicated. The
historical financial information for the three years ended December 31, 1996 has
been derived from the audited financial statements of the Stations and has been
audited by Arthur Andersen LLP, independent auditors, and is included elsewhere
herein. The historical financial information for the two years ended December
31, 1993 has been derived from unaudited financial data of the Stations. The
unaudited information for the six months ended June 30, 1996 has been derived
from the financial records of the Stations for the periods that management owned
and operated the Stations, and information for the six months ended June 30,
1997 has been derived from the financial records of the Stations and the
Company. Statement of Operations Data below station operating income, as well as
Balance Sheet Data, for the Stations for the years ended, or at, December 31,
1992 through December 31, 1995 have not been presented because such information
is not meaningful for the following reasons: (i) during such period the Stations
were owned and/or operated by persons other than the Company and management;
(ii) they were not owned or operated as a single unit for any of such periods;
and (iii) they were operated as part of larger units and therefore, allocations
of corporate expenses, interest and long term debt can not appropriately be made
to the Stations. Cash flows from operating activities, investing activities and
financing activities calculated in accordance with GAAP are not available for
years prior to 1994. As such, Other Financial Data are not presented for years
prior to 1994. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and the related notes
thereto included elsewhere in this Prospectus.
23
<PAGE> 27
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ---------------------
1992 1993 1994 1995 1996(1) 1996(1) 1997(1)
------- ------- ------- ------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $27,219 $28,120 $31,043 $32,905 $ 37,559 $ $17,090 $ 18,667
Station operating expenses..... 16,680 17,616 19,822 20,729 18,564 8,953 9,570
Amortization of program
rights....................... 3,375 3,599 3,123 3,181 3,581 1,746 1,833
Depreciation and
amortization................. 3,398 3,567 3,695 4,119 10,146 5,152 6,311
------- ------- ------- ------- -------- --------- ---------
Station operating income
(loss)..................... $ 3,766 $ 3,338 $ 4,403 $ 4,876 5,268 $ 1,239 $ 953
======= ======= ======= =======
Corporate expenses(2).......... 840 340 604
-------- --------- ---------
Operating income (loss)...... 4,428 899 349
Interest expense............... 6,072 3,046 4,520
Other income(3)................ 1,552 1,515 161
-------- --------- ---------
Loss before income taxes....... (92) (632) (4,010)
Provision for income
taxes(4)..................... -- -- 24
-------- --------- ---------
Net loss..................... $ (92) $ (632) (4,034)
======== =========
Dividends and accretion on
Redeemable Preferred
Stock(5)..................... 1,446
---------
Loss applicable to common
shares....................... $ (5,480)
=========
OTHER FINANCIAL DATA:
Net cash provided by (used in):
Operating activities......... $ 7,215 $ 6,898 $ 9,646 $ 4,470 $ 6,029
Investing activities......... (1,287) (750) (108,298) (106,333) (174,848)
Financing activities......... (5,680) (5,978) 101,405 104,205 177,512
Broadcast cash flow(6)......... 7,822 8,624 15,405 6,396 7,245
Broadcast cash flow margin(7).. 25.2% 26.2% 41.0% 37.4% 38.8%
Operating cash flow(8)......... $ 14,565 $ 6,056 $ 6,641
Capital expenditures(9)........ $ 1,287 $ 750 2,966 1,179 1,207
Payments for program rights.... 3,399 3,552 3,590 1,741 1,852
Ratio of earnings to fixed
charges(11).................. 1.0x $ (632) $ (5,456)
BALANCE SHEET DATA (AT YEAR
END):
Cash and cash equivalents...... $ 2,753 $ 2,342 $ 9,385
Total assets................... 106,608 117,872 190,188
Total long-term debt, including
current portion.............. 65,000 67,800 --
Senior subordinated debt....... -- -- 100,000
Partners' equity............... 36,313 35,774 --
Redeemable Preferred Stock..... -- -- 29,946
Stockholders' equity........... -- -- 44,894
</TABLE>
See notes on following page.
24
<PAGE> 28
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
- ---------------
(1) Financial information for 1996 reflects the period that the Stations were
owned by Jupiter during 1996, which began on January 3 with respect to
WEYI, WROC and WTOV and January 17 with respect to KSBW. Management does
not consider the results of operations of the Stations from January 1, 1996
to the dates the Stations were acquired to be significant to the results of
operations of the Stations for the year ended December 31, 1996 or the six
months ended June 30, 1996. Information for the six months ended June 30,
1997 include two months of combined results of the Stations and four months
of operations of the Company.
(2) Corporate expenses consist primarily of management fees and other corporate
expenses, including corporate salaries.
(3) Other income consists primarily of approximately $1.5 million of
nonrecurring revenues for consulting services provided during 1996.
(4) No provision for income taxes has been reflected for the 1996 periods since
the Stations operated as partnerships and the net loss of such partnerships
was reported by the partners. State tax provision of $24,000 has been
reflected in the 1997 period and no federal tax provision has been provided
due to the anticipated losses for the 10 month period ended December 31,
1997.
(5) Reflects dividend requirements and accretion on the Redeemable Preferred
Stock for the four months ended June 30, 1997.
(6) "Broadcast cash flow" consists of station operating income (loss) plus
depreciation of property and equipment, amortization of intangible assets
and amortization of program rights minus payments on program rights.
Broadcast cash flow is not a measure of performance calculated in
accordance with GAAP and should not be considered in isolation or as a
substitute for net income (loss), cash flows from operating activities and
other income or cash flow statement data prepared in accordance with GAAP
or as a measure of liquidity or profitability.
(7) "Broadcast cash flow margin" is broadcast cash flow divided by net revenues
expressed as a percentage.
(8) "Operating cash flow" consists of station operating income (loss) plus
depreciation of property and equipment, amortization of intangible assets
and amortization of program rights minus payments on program rights,
obligations and corporate expenses. Operating cash flow is not a measure of
performance calculated in accordance with GAAP and should not be considered
in isolation or as a substitute for net income (loss), cash flows from
operating activities and other income or cash flow statement data prepared
in accordance with GAAP or as a measure of liquidity or profitability.
(9) Company anticipates capital expenditures to be approximately $2.8 million
for 1997, and approximately $1.6 million per year thereafter.
(10) For purposes of this calculation, net total long-term debt consists of
total long-term debt outstanding, including current portion, net of cash
and cash equivalents.
(11) For purposes of this calculation, "earnings" consist of income (loss)
before income taxes and fixed charges. "Fixed charges" consist of interest
expense, amortization of deferred financing charges, the component of
rental expense believed by management to be representative of the interest
factor thereon and preferred stock dividend requirements and related
accretion. If the ratio is less than 1.0x, the deficiency is shown.
25
<PAGE> 29
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information (the "Pro Forma
Financial Information") is based on the year ended December 31, 1996 and the two
month period ended February 28, 1997 Financial Statements of the Stations and
the June 30, 1997 Financial Statements of the Company, which are included
elsewhere in this Prospectus, and has been prepared to illustrate the effects of
the transactions described below.
The following unaudited pro forma statements of operations for the year
ended December 31, 1996 and the six months ended June 30, 1997 gives effect to
the Acquisition, the Original Offering, and the proposed acquisitions of WJAC
and ARTC, as if such transactions had occurred on January 1, 1996. The Stations
historical statement of operations for the year ended December 31, 1996,
includes the period that the Stations were owned by Jupiter and operated by SBP
during 1996, which period began on January 3 with respect to WEYI, WROC and WTOV
and January 17 with respect to KSBW. Management does not consider the results of
operations of the Stations from January 1, 1996 to the dates the Stations were
acquired to be significant to the results of operations of the Stations for the
year ended December 31, 1996. The pro forma unaudited balance sheet as of June
30, 1997 has been prepared as if the acquisitions of WJAC and ARTC had occurred
on that date.
The Acquisition and the proposed acquisitions of WJAC and ARTC will be
accounted for using the purchase method of accounting. The total purchase costs
of the Acquisition (approximately $167.3 million) has been allocated to the
tangible and intangible assets and liabilities acquired based upon their
respective fair values. The total purchase costs of the proposed WJAC
acquisition (approximately $37.3 million) and the proposed ARTC acquisition
(approximately $12.0 million, including approximately $1.2 million of property
improvements) will be allocated to the tangible and intangible assets and
liabilities acquired based upon their respective fair values. The allocation of
the aggregate purchase price reflected in the Pro Forma Financial Information is
preliminary. The final allocation of the purchase price is contingent upon the
receipt of final appraisals of the acquired assets; however, that allocation is
not expected to differ materially from the preliminary allocation.
The Pro Forma Financial Information is based on the historical financial
statements of the Stations and the Company and the assumptions and adjustments
described in the accompanying notes. The unaudited pro forma statements of
operations do not purport to represent what the Station's results of operations
actually would have been if the Acquisition, the Original Offering and the
proposed acquisitions of WJAC and ARTC had occurred as of the date indicated or
what results will be for any future periods. The Pro Forma Financial Information
is based upon assumptions that the Company believes are reasonable and should be
read in conjunction with the Financial Statements and the related notes thereto
included elsewhere in this Prospectus.
26
<PAGE> 30
STC BROADCASTING, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY WJAC ARTC PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and short-
term investments.................. $ 9,385 $ 4,508 $ 820 $(11,508)(a) $ 3,205
Accounts receivable, net............ 7,931 1,767 892 (123)(b) 10,467
Current portion of program rights... 3,556 142 -- -- 3,698
Other current assets................ 1,086 661 32 (29)(b) 1,750
-------- ------- ------ -------- --------
TOTAL CURRENT ASSETS......... 21,958 7,078 1,744 (11,660) 19,120
-------- ------- ------ -------- --------
PROPERTY AND EQUIPMENT, net........... 26,633 2,334 471 12,173(c) 41,611
PROGRAM RIGHTS, net of current
portion............................. 6,006 55 -- -- 6,061
INTANGIBLE ASSETS, net................ 127,587 144 91 52,085(c) 179,907
DEFERRED ACQUISITION AND FINANCING
COSTS, net.......................... 8,004 -- -- 2,050(c) 10,054
OTHER ASSETS.......................... -- 1,365 -- -- 1,365
-------- ------- ------ -------- --------
TOTAL ASSETS................. $190,188 $10,976 $2,306 $ 54,648 $258,118
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.......................... $ 5,416 $ 583 $ 172 $ (193)(b) $ 5,978
Current portion of program rights
payable........................... 3,539 97 -- -- 3,636
-------- ------- ------ -------- --------
TOTAL CURRENT LIABILITIES.... 8,955 680 172 (193) 9,614
-------- ------- ------ -------- --------
PROGRAM RIGHTS PAYABLE, net of current
portion............................. 6,393 38 -- -- 6,431
SENIOR SUBORDINATED NOTES............. 100,000 -- -- -- 100,000
LONG-TERM DEBT, net of current
portion............................. -- -- -- 29,300(a) 29,300
DEFERRED INCOME TAXES................. -- -- -- 22,550(c) 22,550
OTHER LIABILITIES..................... -- 2,383 -- -- 2,383
-------- ------- ------ -------- --------
TOTAL LIABILITIES............ 115,348 3,101 172 51,657 170,278
-------- ------- ------ -------- --------
REDEEMABLE PREFERRED STOCK............ 29,946 -- -- -- 29,946
COMMON STOCKHOLDERS' EQUITY........... 44,894 7,875 2,134 2,991(a) 57,894
-------- ------- ------ -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY....... $190,188 $10,976 $2,306 $ 54,648 $258,118
======== ======= ====== ======== ========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Balance Sheet
27
<PAGE> 31
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(DOLLARS IN THOUSANDS)
The following reflects the components of the adjustments for the WJAC and
ARTC acquisitions:
(a) Reflects the financing of the proposed WJAC and ARTC acquisitions:
<TABLE>
<CAPTION>
WJAC ARTC TOTAL
-------- ------- --------
<S> <C> <C> <C>
Sources of Funds for the proposed acquisitions
of WJAC and ARTC:
Revolving Credit Facility..................... $ 21,300 $ 8,000 $ 29,300
Cash and cash equivalents..................... 6,000 1,000 7,000
Capital contributed by Holdings............... 10,000 3,000 13,000
-------- ------- --------
$ 37,300 $12,000 $ 49,300
======== ======= ========
The adjustment to cash consists of:
Cash and short-term investments not being
acquired (see (b) below)................... $ (4,508) $ -- $ (4,508)
Cash used in purchase of WJAC and ARTC........ (6,000) (1,000) (7,000)
-------- ------- --------
$(10,508) $(1,000) $(11,508)
======== ======= ========
The adjustment to common stockholders' equity
consists of:
Equity contributed by Holdings................ $ 10,000 $ 3,000 $ 13,000
Less equity of WJAC and ARTC at June 30,
1997....................................... (7,875) (2,134) (10,009)
-------- ------- --------
$ 2,125 $ 866 $ 2,991
======== ======= ========
</TABLE>
(b) This adjustment reflects the elimination of assets that are not being
acquired and the elimination of liabilities that are not being assumed in
the proposed acquisition of WJAC and ARTC:
<TABLE>
<CAPTION>
WJAC ARTC TOTAL
------- ---- -------
<S> <C> <C> <C>
Assets:
Cash and short-term investments (see (a) above).... $(4,508) $ -- $(4,508)
Receivables........................................ (75) (48) (123)
Prepaids........................................... (29) -- (29)
Liabilities:
Accounts payable and accrued expenses.............. (193) -- (193)
------- ---- -------
Net assets not being acquired........................ $(4,419) $(48) $(4,467)
------- ---- -------
</TABLE>
28
<PAGE> 32
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(c) Reflects the acquisitions of WJAC and ARTC. The proposed WJAC and ARTC
acquisitions will be accounted for using the purchase method of accounting.
The Company has not yet determined the final allocation of the purchase
price and, accordingly, the amounts shown below may differ from the amounts
ultimately determined.
The preliminary pro forma allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
WJAC ARTC TOTAL
-------- ------- --------
<S> <C> <C> <C>
Purchase price and estimated acquisition and
financing costs............................... $ 37,300 $12,000 $ 49,300
Less:
Elimination of WJAC stockholders' equity
(adjusted for net assets not being
acquired)..................................... (3,456) -- (3,456)
Elimination of ARTC stockholder's equity
(adjusted for net assets not being
acquired)..................................... -- (2,086) (2,086)
-------- ------- --------
Excess of purchase price over historical amounts
to be allocated............................... $ 33,844 $ 9,914 $ 43,758
======== ======= ========
Allocation of excess purchase price based on
preliminary estimated values:
Property and equipment........................ $ 5,144 $ 7,029 $ 12,173
Intangible assets............................. 45,950 6,135 52,085
Deferred acquisition and financing costs...... 1,300 750 2,050
Deferred income taxes......................... (18,550) (4,000) (22,550)
-------- ------- --------
$ 33,844 $ 9,914 $ 43,758
======== ======= ========
</TABLE>
29
<PAGE> 33
STC BROADCASTING, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
STATION WJAC ARTC PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues................................... $37,559 $10,882 $3,315 $ (980)(a) $ 50,776
Station operating expenses..................... 18,564 7,150 2,538 (1,212)(a) 27,040
Amortization of program rights................. 3,581 865 124 -- 4,570
Depreciation and amortization.................. 10,146 566 144 9,071(b) 19,927
------- ------- ------ -------- --------
Station operating income....................... 5,268 2,301 509 (8,839) (761)
Corporate expenses............................. 840 -- -- 410(d) 1,250
------- ------- ------ -------- --------
Operating income (loss)........................ 4,428 2,301 509 (9,249) (2,011)
Interest expense............................... 6,072 -- -- 7,565(e) 13,637
Other income, net.............................. 1,552 280 70 (280)(f) 1,622
------- ------- ------ -------- --------
Income (loss) before income taxes.............. (92) 2,581 579 (17,094) (14,026)
Income taxes................................... -- 1,071 196 (1,067)(g) 200
------- ------- ------ -------- --------
Net income (loss).............................. (92) 1,510 383 (16,027) (14,226)
Dividends and accretion on Redeemable Preferred
Stock........................................ -- -- -- 4,332(h) 4,332
------- ------- ------ -------- --------
Income (loss) applicable to common shares...... $ (92) $ 1,510 $ 383 $(20,359) $(18,558)
======= ======= ====== ======== ========
</TABLE>
STC BROADCASTING, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
STATION AND
COMPANY WJAC ARTC PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $18,667 $5,286 $1,561 $ (552)(a) $ 24,962
Station operating expenses................ 9,570 3,593 1,249 (569)(a) 13,843
Amortization of program rights............ 1,833 531 50 -- 2,414
Depreciation and amortization............. 6,311 344 63 3,230(b) 9,948
Other operating charges................... -- 1,515 -- (1,515)(c) --
------- ------ ------ --------- ---------
Station operating income (loss)........... 953 (697) 199 (1,698) (1,243)
Corporate expenses........................ 604 -- -- 21(d) 625
------- ------ ------ --------- ---------
Operating income (loss)................... 349 (697) 199 (1,719) (1,868)
Interest expense.......................... 4,520 -- -- 2,298(e) 6,818
Other income, net......................... 161 101 16 (101)(f) 177
------- ------ ------ --------- ---------
Income (loss) before income taxes......... (4,010) (596) 215 (4,118) (8,509)
Income tax provision (benefits)........... 24 (158) 71 163(g) 100
------- ------ ------ --------- ---------
Net profit (loss)......................... (4,034) (438) 144 (4,281) (8,609)
Dividends and accretion on Redeemable
Preferred Stock......................... 1,446 -- -- 720(h) 2,166
------- ------ ------ --------- ---------
Income (loss) applicable to common
shares.................................. $(5,480) $ (438) $ 144 $ (5,001) $ (10,775)
======= ====== ====== ========= =========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Statements of Operations.
30
<PAGE> 34
STC BROADCASTING, INC AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Reflects the revenues and expenses of certain operations of WJAC which are
not being acquired by the Company. A summary of such revenues and expenses
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ---------------
<S> <C> <C>
Net revenues....................................... (980) (552)
Station operating expenses......................... (1,212) (569)
</TABLE>
(b) Reflects the incremental change in depreciation and amortization expense
due to purchase accounting adjustments to property and equipment and
intangible assets consistent with the depreciation and amortization
policies utilized by the Company and the incremental change in deferred
financing charges and organizational costs, less the depreciation and
amortization related to certain operations of WJAC which are not being
acquired by the Company.
(c) Reflects the elimination of certain one-time charges aggregating $1.51
million including a $1.03 million charge for the settlement of an
employment contract at WJAC-TV and the writedown, of $0.48 million, for the
impairment in carrying value of the hockey team.
(d) Reflects the incremental change in management fees and other corporate
expenses including corporate salaries.
(e) Reflects incremental interest expense associated with the Notes and the
proposed acquisitions of WJAC and ARTC, including related borrowings under
the Revolving Credit Facility. The Notes bear interest at 11% per annum and
the Revolving Credit Facility bears interest at various options, which
approximate 9% per annum for the periods presented.
(f) Reflects reduction in interest earned on marketable securities and cash at
WJAC since these assets will not be acquired by Company.
(g) No pro forma federal tax provision has been reflected due to the pro forma
federal net loss. A provision of $200,000 and $100,000 have been provided
for the year ended December 31, 1996 and the six months ended June 30,
1997, respectively, for state income taxes.
(h) Reflects accrued dividends and accretion on the Redeemable Preferred Stock.
31
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The revenues of the Stations are primarily advertising revenues and, to a
much lesser extent, compensation paid by the networks to the Stations for
broadcast network programming and revenues from tower rentals and commercial
production activities. The Stations' primary operating expenses are employee
compensation and related benefits, news gathering and film and syndicated
programming expenditures and promotional costs. A high proportion of the
operating expenses of the Stations are fixed in nature.
In general, television stations receive revenues from advertising sold for
placement within and adjoining its local programming and national network
programming. Advertising is sold in time increments and is priced primarily on
the basis of a program's popularity within the demographic group an advertiser
desires to reach, as measured principally by audience surveys conducted in
February, May and November of each year. The ratings of local television
stations affiliated with a national television network can be affected by
ratings of network programming. In addition, advertising rates are affected by
the number of advertisers competing for the available time, the size and
demographic makeup of the markets served by the television station and the
availability of alternative advertising media in the market areas. Advertising
rates are highest during the most desirable viewing hours, generally during
local news programming, access (the hour before prime time), early fringe (3:00
p.m. to 5:00 p.m.) and prime time.
Most advertising contracts are short-term and generally run for only a few
weeks. A majority of the revenues of the Stations is generated from local
advertising, which is sold primarily by a Station's sales staff, and the
remainder of the advertising revenues represents national advertising, which is
sold by independent national advertising sales representatives. See
"Business -- Advertising Sales." The Stations generally pay commissions to
advertising agencies on local and national advertising, and on national
advertising the Stations also pay additional commissions to the national sales
representatives. Three Stations are represented by Katz Media Corporation and
one Station is represented by TeleRep, Inc. , each an independent national
advertising sales representative firm operating under an agreement that provides
for exclusive representation within the particular market of the Station. In
1996, local advertising comprised 55.8% of the Company's gross spot revenues
(excluding political advertising), and national advertising comprised 44.2% of
the Company's gross spot revenues (excluding political advertising). The net
broadcast revenues of the Stations are generally highest in the second and
fourth quarters of each year, due in part to increases in consumer advertising
in the spring and retail advertising in the period leading up to and including
the holiday season. On a quarterly basis for 1996, first, second, third and
fourth quarter advertising revenues constituted 19.8%, 25.6%, 24.0% and 30.6%,
respectively, of annual advertising revenues. In addition, advertising revenues
are generally higher during election years due to spending by political
candidates, which spending is typically heaviest during the fourth quarter. In
1996, the Stations' advertising revenues benefited from presidential and
congressional elections as well as the NBC broadcast of both the United
States-based Olympic Games and the Super Bowl. Management does not anticipate
that the Company will benefit from any comparable events in 1997.
"Broadcast Cash flow" is defined as station operating income (loss) plus
depreciation of property and equipment, amortization of intangible assets and
amortization of program rights, less payments for program rights. The Company
has included broadcast cash flow data because such data are commonly used as a
measure of performance for broadcast companies and are used by investors to
measure a company's ability to service debt. Broadcast cash flow is not, and
should not be used as an indicator or alternative to operating income, net loss
or cash flow as reflected in the accompanying financial statements, is not
intended to represent funds available for debt service, dividends, reinvestment
or other discretionary uses, is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as a substitute
32
<PAGE> 36
for measures of performance prepared in accordance with generally accepted
accounting principles.
The financial information for the six months ended June 30, 1996 set forth
in the tables below includes operations of KSBW since January 1, 1996, and
differs from the presentation under "Selected Historical Financial Information,"
which includes operations of KSBW since January 17, 1996, which is the date
management began operating KSBW.
The following table sets forth certain data for the three years ended
December 31, 1996 and the six months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Station operating income................ $ 4,403 $ 4,876 $ 5,268 $ 1,119 $ 953
Add:
Amortization of program rights........ 3,123 3,181 3,581 1,782 1,833
Depreciation and amortization......... 3,695 4,119 10,146 5,280 6,311
Less:
Payments for program rights........... (3,399) (3,552) (3,590) (1,778) (1,852)
------- ------- ------- ------- ------
Broadcast cash flow..................... $ 7,822 $ 8,624 $15,405 $ 6,403 $7,245
======= ======= ======= ======= ======
Percentage increase in broadcast cash
flow from prior period................ 10.25% 78.63% 13.15%
======= ======= ======
</TABLE>
TELEVISION REVENUES
The Company's primary types of programming and their contribution by
approximate percentages of 1996 net revenues were NBC and CBS prime time
(18.3%), local news (25.4%), access (9.9%), early fringe (9.1%) and other
programming (25.3%). Similarly, the Company's two largest categories of
advertisers and their approximate percentages of 1996 net revenues were
automotive (20.8%) and retail (8.2%). No individual advertiser accounted for
more than 5.0% of any individual Station's total net revenues in 1996.
Set forth below are the principal types of revenues for the Stations for
the periods indicated and the percentage contribution of each to the total gross
revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------- ----------------------------------
1994 1995 1996 1996 1997
--------------- --------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Local(1)............... $16,574 45.3% $18,991 49.5% $20,207 45.8% $ 9,310 45.6% $10,651 48.7%
National(1)............ 14,138 38.6 14,808 38.6 15,980 36.2 8,281 40.5% 8,650 39.5%
Political.............. 2,332 6.4 201 0.5 3,513 8.0 670 3.3% -- --%
Trade and barter(2).... 1,293 3.5 1,225 3.2 969 2.2 474 2.3% 703 3.2%
Network
compensation......... 1,698 4.6 2,545 6.6 2,752 6.2 1,438 7.0% 1,440 6.6%
Other.................. 553 1.6 587 1.6 744 1.6 274 1.3% 439 2.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$36,588 100.0% $38,357 100.0% $44,165 100.0% $20,447 100.0% $21,883 100.0%
Agency and national sales
representative
commissions(3)......... 5,545 15.2 5,452 14.2 6,606 14.9 3,048 14.9% 3,216 14.7%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net revenues..... $31,043 84.8% $32,905 85.8% $37,559 85.1% $17,399 85.1% $18,667 85.3%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) National sales of approximately $0.9 million and $1.0 million for 1994 and
1995, respectively, have been reclassified as local to maintain consistency
with a reclassification of certain national sales in 1996.
33
<PAGE> 37
(2) Represents value of commercial time exchanged for syndicated programs and
commercial time exchanged for goods and services (trade outs).
(3) Represents commissions paid to local and national advertising agencies and
to national sales representatives.
RESULTS OF OPERATIONS
Prior to January 1996, the Stations (i) were owned and/or operated by
persons other than the Company and the Company's current management, (ii) were
not owned or operated as a single unit and (iii) were operated as part of larger
groups of stations.
Set forth below is a summary of the operations of the Stations for the
years indicated and their percentage of net revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------ % %
1994 1995 1996 CHANGE CHANGE
------------------ ------------------ ------------------ 1995 1996
% OF NET % OF NET % OF NET VERSUS VERSUS
$ REVENUES $ REVENUES $ REVENUES 1994 1995
------- -------- ------- -------- ------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues...................... $31,043 100.0% $32,905 100.0% $37,559 100.0% 6.0% 14.1%
------- ------- -------
Engineering expenses............ 2,024 6.5 2,073 6.3 1,753 4.7 2.4 (15.4)
Program/Production expenses..... 2,843 9.2 2,750 8.4 2,695 7.2 (3.3) (2.0)
News expenses................... 4,650 15.0 5,215 15.8 4,543 12.1 12.2 (12.9)
Sales/Traffic expenses.......... 3,925 12.6 4,136 12.6 3,333 8.9 5.4 (19.4)
Promotion expenses.............. 517 1.7 559 1.7 381 1.0 8.1 (31.8)
General and administrative
expenses...................... 4,941 15.9 4,975 15.1 4,800 12.8 0.7 (3.5)
Trade and barter expenses....... 922 3.0 1,021 3.1 1,059 2.8 10.7 3.7
------- ------- -------
Total station operating
expenses.................... 19,822 63.9 20,729 63.0 18,564 49.5 4.6 (10.4)
------- ------- -------
Amortization of program rights.... 3,123 10.1 3,181 9.7 3,581 9.5 1.9 12.6
Depreciation and amortization..... 3,695 11.9 4,119 12.5 10,146 27.0 11.5 146.3
------- ------- -------
Station operating income........ $ 4,403 14.1% $ 4,876 14.8% $ 5,268 14.0% 10.7% 8.0%
======= ======= =======
Broadcast cash flow............. $ 7,822 25.2% $ 8,624 26.2% $15,405 41.0% 10.3% 78.6%
======= ======= =======
</TABLE>
Set forth below is a summary of the operations of the Stations for the
six-month periods indicated and their percentage of net revenues.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1996 1997 % CHANGE
-------------------- -------------------- 1997
% OF NET % OF NET VERSUS
$ REVENUES $ REVENUES 1996
------- --------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues............................ $17,399 100.0% $18,667 100.0% 7.3%
Engineering expenses.................. 967 5.6 822 4.4 (15.0)
Program/Production expenses........... 1,255 7.2 1,265 6.8 0.8
News expense.......................... 2,316 13.3 2,294 12.3 (0.9)
Sales/Traffic expenses................ 1,606 9.2 1,741 9.3 8.4
Promotion expense..................... 206 1.2 293 1.6 42.2
General and administrative expenses... 2,465 14.2 2,534 13.6 2.8
Trade and barter expenses............. 403 2.3 621 3.3 54.1
------- ----- ------- ----- -----
Total station operating
expense..................... 9,218 53.0 9,570 51.3 3.8
Amortization of program rights.......... 1,782 10.2 1,833 9.8 2.9
Depreciation and amortization........... 5,280 30.4 6,311 33.8 19.5
------- ----- ------- ----- -----
Station operating income...... $ 1,119 6.4% $ 953 5.1% (14.8)%
======= ===== ======= ===== =====
Broadcast cash flow........... $ 6,403 36.8% $ 7,245 33.8% 13.2%
======= ===== ======= ===== =====
</TABLE>
34
<PAGE> 38
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Net Revenues. Net revenues increased by $1.3 million, or 7.3%, to 18.7
million for the six months ended June 30, 1997 from $17.4 million for the six
months ended June 30, 1996. Local and national revenues were up 14.4% and 4.4%,
respectively, over the prior comparative period. The majority of the revenue
increase was generated by KSBW and WEYI and resulted from sales initiatives
started in 1996. WROC was down $0.4 million in national sales over the prior
comparative period. WTOV revenues were essentially flat with the prior year. The
six months ended June 30, 1996 had approximately $0.7 million of political
revenues compared to none in the six months ended June 30, 1997.
Stations Operating Expenses. Station operating expenses were $9.6 million
for the six months ended June 30, 1997 compared to $9.2 million for the six
months ended June 30, 1996, an increase of 3.8%. A majority of the expense
increase related to higher costs assigned to barter film contracts and increased
sales expense, due to increased staff at WROC and increased commissions on
increased local sales.
Amortization of Syndicated Program and Film Rights. Amortization of
syndicated program and film rights increased by 2.9% in 1997 over the comparable
period in 1996. This increase reflects the increased costs of continuing
programs and the replacement of certain programs at WEYI with more expensive,
higher quality programming.
Depreciation and Amortization. Depreciation and amortization increased $1.0
million to $6.3 million for the six months ended June 30, 1997 from $5.3 million
for the comparable period in 1996, due to the revaluation of assets at the time
of the purchase of the Stations by the Company on March 1, 1997.
Station Operating Income. Station operating income decreased by $0.17
million to an income of $0.95 million for the six months ended June 30, 1997
from an income of $1.1 million for the six months ended June 30, 1996, due to
the reasons set forth above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Revenues. Net revenues increased by $4.7 million, or 14.1%, to $37.6
million for the year ended December 31, 1996 from $32.9 million for the year
ended December 31, 1995. Local revenues (net of commissions) in 1996 increased
by approximately $1.0 million, or 6.0%, as compared to 1995, while national
revenues (net of commissions) in 1996 increased by approximately $1.0 million,
or 7.6%, as compared to 1995. Local and national revenues at the Stations were
favorably affected by political elections and primaries, strong economic
activity in each of the Stations' markets and the NBC broadcast of both the
Super Bowl and the United States-based Olympic Games. Advertising in the
automotive and retail categories was particularly strong and amounted to $6.9
million and $2.7 million, respectively. Local revenues increased, in part, due
to the hiring of new sales management and experienced sales personnel, the
sponsorship and broadcasting of local sports and other popular events and the
institution of more efficient sales incentives. National revenues increased, in
part, due to the engagement of the new national sales representative firm at
three of the Stations. Network revenues increased in 1996 by approximately $0.2
million as compared to 1995 as a result of management's renegotiation of a
higher compensation rate at KSBW. Political revenues (net of commissions)
increased in 1996 by approximately $2.7 million as compared to 1995 due to
congressional and presidential primaries and elections. Trade and barter
revenues in 1996 were $0.3 million lower as compared to 1995 due to management's
reduction in the use of trade and barter for general merchandise items. Revenues
associated with production and rental income increased in 1996 by $0.2 million
as compared to 1995 due to higher rental rates and increased local production of
commercials.
Station Operating Expenses. Station operating expenses decreased by $2.2
million, or 10.4%, to $18.5 million for the year ended December 31, 1996 from
$20.7 million for the year ended
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<PAGE> 39
December 31, 1995. Engineering expenses decreased in 1996 by $0.3 million from
1995 due to personnel reductions, the transfer of certain employees to the
production department and lower maintenance costs on new operating equipment.
Program and production expenses were flat compared to the prior year even with
the transfer of employees from the engineering department. Operating expenses
associated with the news department decreased in 1996 by $0.7 million as
compared to the prior year as a result of personnel reductions, elimination of
certain outside services and consultants, lower maintenance costs on newer
equipment and the elimination of unnecessary travel. Sales and traffic operating
expenses decreased by $0.8 million for the period as compared to 1995 through
personnel reductions, compensation plan changes, unfilled sales and marketing
positions and elimination of unnecessary sales promotion programs. The two open
sales management positions at WEYI were filled by mid-year 1996 and an open
sales management position at WROC was filled in February 1997. On an overall
basis, management of the Company has made an effort to reduce trades on all
items other than film barter. Film barter costs represent a majority of the
trade and barter expense for both years.
Amortization of Syndicated Program and Film Rights. Amortization of
syndicated program and film rights increased by $0.4 million, or 12.6%, to $3.6
million for the year ended December 31, 1996 from $3.2 million for the year
ended December 31, 1995 due to the increased cost of continuing programs and the
replacement of certain programs at WEYI (beginning in September 1996) with more
expensive, high-quality programming intended to generate higher ratings in early
fringe and access, which management believes should increase ratings in access.
Depreciation and Amortization. Depreciation and amortization increased by
$6.0 million to $10.1 million for the year ended December 31, 1996 from $4.1
million for the year ended December 31, 1995 due to the revaluation of assets at
the time of the purchase of the Stations by Jupiter.
Station Operating Income. Station operating income increased by $0.4
million, or 8.0%, to $5.3 million for the year ended December 31, 1996 from $4.9
million for the year ended December 31, 1995 due to the reasons outlined above.
Corporate Expenses. Corporate expenses were $0.8 million for the year ended
December 31, 1996. Prior to the acquisition of the Stations by Jupiter in
January 1996, administrative management fees were not allocated to the station
levels by the prior owners of the Stations.
Operating Income. Operating income decreased by $0.5 million to $4.4
million for the year ended December 31, 1996 from $4.9 million for the year
ended December 31, 1995 due to the reasons outlined above.
Other Income. Other income consists primarily of approximately $1.5 million
of non-recurring revenues from an unaffiliated national television network for
services provided during 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Prior to January 1996, the Stations (i) were owned and/or operated by
persons other than the Company and the Company's current management, (ii) were
not owned or operated as a single unit and (iii) were operated as part of larger
groups of stations, and therefore, allocations of corporate expenses cannot be
appropriately made to the Stations.
Net Revenues. Net revenues increased by $1.9 million, or 6.0%, to $32.9
million for the year ended December 31, 1995 from $31.0 million for the year
ended December 31, 1994. Local revenues (net of commissions) increased in the
year ended December 31, 1995 by approximately $2.2 million, or 15.4%, as
compared to 1994, while national revenues (net of commissions) increased by
approximately $0.4 million, or 3.6%, as compared to 1994. Local revenues in the
other three markets were strong in 1995 due to improved programming, the
strength of automotive advertising and the continued resurgence in the local
Monterey-Salinas economy after the 1992 closing of the Fort Ord military base.
Network revenues were $0.8 million higher for 1995 when compared to 1994 due to
all
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<PAGE> 40
Stations entering into new long-term affiliation agreements with their
respective networks. Political revenues (net of commissions) were down $1.6
million for 1995 compared to 1994 due to the numerous congressional and local
elections in 1994.
Station Operating Expenses. Station operating expenses increased
approximately $0.9 million, or 4.6%, to $20.7 million for the year ended
December 31, 1995 compared to $19.8 million for the year ended December 31,
1994. Management believes that overall expenditures for 1995 were held down due
to the pending sale of the Stations to Jupiter. Expenses associated with the
Stations' news departments for 1995 increased by approximately $0.6 million as
compared to 1994 due primarily to the expansion of the number of newscasts at
WTOV and WEYI. Expenses associated with the Stations' sales and traffic
departments increased approximately $0.2 million for 1995 when compared to 1994.
A majority of this increase was related to sales incentive trips at WEYI. Costs
associated with promotions in 1995 were flat relative to 1994, with increased
expenditures at WEYI in connection with its network affiliation switch and
decreased expenditures at WROC due to cost restraints related to the sale of the
Station to Jupiter. General and administrative expenses were flat for 1995
compared to 1994. Trade and barter and other expenses were flat for 1995 as
compared to 1994.
Amortization of Syndicated Program and Film Rights. Syndicated program and
film rights amortization amounted to approximately $3.1 million for both the
year ended December 31, 1995 and the year ended December 31, 1994.
Depreciation and Amortization. Depreciation and amortization increased by
$0.4 million to $4.1 million in the year ended December 31, 1995 when compared
to the year ended December 31, 1994 due to the purchase of KSBW in late 1994,
which resulted in a revaluation of the Station's assets at the time of purchase.
Station Operating Income. Station operating income increased by $0.5
million, or 10.7%, to $4.9 million for the year ended December 31, 1995 from
$4.4 million for the year ended December 31, 1994 due to the reasons outlined
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs consist primarily of debt service
requirements resulting from indebtedness incurred in connection with the
Acquisition, working capital needs, the funding of capital expenditures,
acquisitions and dividend payment requirements on the Redeemable Preferred
Stock. The Company may incur additional indebtedness in the future, subject to
certain limitations contained in the Indenture and the Credit Agreement and
intends to do so in order to fund future acquisitions as part of its business
strategy. At June 30, 1997, the Company's consolidated long-term indebtedness
consisted solely of the Old Notes. The ability of the Company to implement its
business strategy and to consummate future acquisitions will require significant
additional debt and/or equity capital and no assurances can be given as to
whether, and on what terms, such additional debt and/or equity capital will be
available. The degree to which the Company is leveraged could have a significant
effect on its results of operations.
Interest payments under the Notes represent significant liquidity
requirements for the Company. Loans under the Credit Agreement bear interest at
floating rates based upon the interest rate option selected by the Company. In
addition, the Redeemable Preferred Stock is cumulative, with dividends payable
quarterly, and prior to 2002 may, at the option of the Company be paid in
additional shares of Redeemable Preferred Stock. In the event dividends on the
Redeemable Preferred Stock are paid in cash, dividends would amount to $4.2
million annually. The Credit Agreement and the Indenture limit the Company's
ability to pay cash dividends prior to 2002 and the Company's ability to
exchange the Redeemable Preferred Stock for debt of the Company. See
"Description of the Credit Agreement" and "Description of the Redeemable
Preferred Stock."
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<PAGE> 41
The Company's capital expenditures were $1.3 million, $0.8 million and $3.0
million in 1994, 1995 and 1996, respectively. Capital expenditures in 1994 and
1995 consisted primarily of maintenance capital expenditures. Capital
expenditures in 1996 were intended to improve the overall operating efficiencies
of all the Stations. The Company estimates that for 1997, approximately $2.8
million of capital expenditures (of which $1.2 million was spent in the first
six months of 1997) will be made as the Company continues to improve the news
gathering and production capabilities of KSBW, WROC and WEYI. Maintenance
capital expenditures for the Stations are estimated to be approximately $1.6
million per year beginning in 1998. The Company's ability to make capital
expenditures is subject to certain restrictions under the Credit Agreement. See
"Description of the Credit Agreement."
The Company's principal source of cash to fund its liquidity needs will be
net cash from operating activities, existing cash and cash equivalents and
borrowings under the Revolving Credit Facility. Net cash from operating
activities for the year ended December 31, 1996 was $9.6 million, an increase of
$2.7 million from $6.9 million in the year ended December 31, 1995, primarily as
a result of an increase in broadcast cash flow. The Revolving Credit Facility
contains an initial commitment of $35.0 million, all of which is available for
acquisitions and working capital needs. Commitments under the Revolving Credit
Facility will be automatically and permanently reduced at the end of each fiscal
quarter by 5.0% of the total commitment beginning in 2000. Amounts available
under the Revolving Credit Facility may be used for working capital and general
corporate purposes (including acquisitions), subject to certain limitations. The
Credit Agreement contains certain financial covenants that require, among other
things, the Company to maintain specified financial ratios and to satisfy
certain financial condition tests. In addition, the Company will be limited in
the amount of annual payments that may be made for capital expenditures and
corporate overhead. The breach of any of these covenants could result in a
default under the Credit Agreement, which could have a material adverse effect
on the Company's results of operations. See "Description of the Credit
Agreement."
Based on the current level of operations and anticipated future growth
(both internally generated as well as through acquisitions, including the
proposed acquisitions of WJAC and ARTC), the Company anticipates that its cash
flow from operations, together with borrowings under the Revolving Credit
Facility should be sufficient to meet its anticipated requirements for working
capital, capital expenditures, interest payments and scheduled principal
payments for at least the next twelve months; provided, however, that the
purchase price of any future acquisitions, including WJAC and ARTC, may require
additional debt and/or equity financings. The Company's future operating
performance and ability to service or refinance the Notes and to extend or
refinance the Revolving Credit Facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control. The Company regularly enters into program
contracts for the right to broadcast television programs produced by others and
program commitments for the right to broadcast programs in the future. Such
programming commitments are generally made to replace expiring or canceled
program rights. Payments under such contracts are made in cash or the concession
of advertising spots to the program provider to resell, or a combination of
both.
On May 8, 1997, the Company entered into the WJAC Merger Agreement pursuant
to which WJAC will become a wholly owned subsidiary of the Company. WJAC,
channel 6, is a VHF NBC-affiliated station serving the Johnstown/Altoona,
Pennsylvania market, which is the 92nd largest DMA in the United States. The
approximate purchase price will be $36.0 million including certain working
capital, and the expected closing date will be early in the fourth quarter of
1997. The Company intends to finance this transaction with borrowings under the
Revolving Credit Facility, cash on hand and additional equity financing. The
WJAC Merger Agreement is subject to customary conditions and no assurances can
be given as to whether, or on what terms, such transaction or such financings
will be consummated by the Company.
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On July 8, 1997, the Company entered into the ARTC Purchase Agreement,
pursuant to which the Company will acquire KRBC and KACB. KRBC, channel 9, is a
VHF NBC-affiliated station serving the Abilene, Texas market, which is the 160th
largest DMA in the United States. KACB, channel 3, is a VHF NBC-affiliated
station serving the San Angelo, Texas market, which is the 195th largest DMA in
the United States. The approximate purchase price will be $12.0 million and the
expected closing date will be the fourth quarter of 1997. The Company intends to
finance this transaction with borrowings under the Revolving Credit Facility,
cash on hand and additional equity financing. The ARTC Purchase Agreement is
subject to customary conditions and no assurances can be given as to whether, or
on what terms, such transaction or such financings will be consummated by the
Company.
To the extent that the Company is not able to obtain future debt and/or
equity financings in connection with future acquisitions, the Company may be
unable to implement its acquisition strategy, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPRECIATION, AMORTIZATION AND INTEREST
Because the Company incurred substantial indebtedness in the Acquisition
for which it has significant debt service requirements, and because the Company
has significant non-cash charges relating to the depreciation and amortization
expense of the fixed assets and goodwill that were acquired in the Acquisition,
the Company expects that it will report net losses for the foreseeable future.
The Acquisition has been accounted for using the purchase method of
accounting, and the total purchase price has been allocated to the assets and
liabilities acquired based upon their respective fair values. As a result, the
Company expects to record depreciation and amortization expenses, as well as
interest expenses, that are significantly in excess of historical levels for the
Stations.
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<PAGE> 43
BUSINESS
THE COMPANY
The Company currently owns and operates four network-affiliated television
broadcast stations located in four distinct and geographically diverse markets,
ranging in size from the 62nd to the 139th largest DMAs in the United States.
Three of the Stations are network affiliates of NBC (one of which is also a
secondary affiliate of ABC) and one Station is a network affiliate of CBS.
The Company was recently organized by management and Hicks Muse with the
goal of becoming a leading owner and operator of network-affiliated television
broadcast stations, serving select "middle-to-small markets" (i.e., those DMAs
ranked from approximately 50 to 150 by Nielsen). Management believes that these
markets provide greater opportunity for the Company to successfully apply its
business strategy of increasing revenues while controlling operating costs and
other expenses. Commercial stations in the Company's target markets generally
face limited competition from other over-the-air broadcasters for audience,
syndicated programming and advertising revenues.
For the year ended December 31, 1996 (throughout which the Stations were
operated by the Company's current management), the Stations' net revenues and
broadcast cash flow increased 14.1% and 78.6%, respectively, from $32.9 million
and $8.6 million, respectively, in 1995 to $37.6 million and $15.4 million,
respectively, in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In 1996, none of the Stations accounted
for more than 30.0% of the Stations' aggregate net revenues. The Company is
actively pursuing additional acquisitions of television broadcast stations that
it believes will provide similar opportunities to increase broadcast cash flow.
The four markets in which the Company currently operates offer geographic
diversity that reduces the impact on the Company of changes in respective market
economies and provide favorable competitive operating environments. Three of
these markets range from the 62nd to the 70th largest markets in the United
States based on reported market revenues. In the Wheeling, West
Virginia-Steubenville, Ohio DMA, the Company's Station is one of only two
commercial television broadcast stations and in the Flint-Saginaw-Bay City,
Michigan and Rochester, New York DMAs, the Company's Stations are one of only
four commercial television broadcast stations. In the six station
Monterey-Salinas, California DMA, the Company's Station effectively has the only
over-the-air VHF signal capable of reaching a majority of the households in this
market due to the natural barrier formed by the mountains surrounding the
Monterey Bay, which tends to interfere with the competing VHF station located in
San Jose, California. The Company's Stations are the number one ranked station
in the Monterey-Salinas and Wheeling-Steubenville DMAs and the number three
ranked station in the Flint-Saginaw-Bay City and Rochester DMAs. The Company
believes that the Stations are well positioned to achieve long-term growth in
audience share and revenue share because of (i) the limited competition for
viewers from other over-the-air television broadcasters in these markets, (ii)
the strength of the Company's management and (iii) the Stations' favorable
and/or improving rankings within their DMAs. In addition, management believes
that the limited number of other television broadcast stations in these markets
enables the Company to purchase syndicated programming at favorable rates.
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The following table summarizes certain information regarding each Station
and its respective DMA:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
PRIMARY/ NUMBER OF -----------------------------
MARKET SECONDARY COMMERCIAL STATION STATION NET % OF
STATION/CHANNEL: DMA REVENUE NETWORK TV STATIONS RANK IN AUDIENCE REVENUES(1) TOTAL NET
DMA RANK RANK AFFILIATION IN DMA DMA SHARE (IN THOUSANDS) REVENUES
---------------- ---- ------- ----------- ----------- ------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEYI/25:
Flint-Saginaw-Bay City, MI..... 62 70 NBC 4 3 13% $ 8,061 21.5%
WROC/8:
Rochester, NY.................. 74 62 CBS 4 3 18% $10,994 29.3%
KSBW/8:
Monterey-Salinas, CA........... 122 69 NBC 6(2) 1 22% $10,486 27.9%
WTOV/9:
Wheeling, WV-Steubenville,
OH........................... 139 160 NBC/ABC 2 1 22% $ 8,018 21.3%
</TABLE>
- ---------------
(1) Includes trade and barter revenues and net of agency and sales
representative commissions.
(2) The Company's Station effectively has the only over-the-air VHF signal
capable of reaching a majority of the households in this market. In
addition, of the six stations in this DMA, two are Spanish-language
stations. See "Business -- The Stations -- KSBW: Monterey-Salinas,
California."
The Company was incorporated on November 1, 1996 and is a wholly-owned
subsidiary of Holdings. The Company acquired the Stations on February 28, 1997
through the Acquisition. SBP, an affiliate of Robert N. Smith (the President of
Holdings and the Chief Executive Officer and a Director of Holdings and the
Company), had an ownership interest in and managed the Stations prior to the
Acquisition. Mr. Smith is the majority owner of SBG, which is a partner in SBP.
See "The Acquisition" and "Certain Transactions."
BUSINESS STRATEGY
The Company's business strategy is to acquire and operate television
broadcast stations and maximize operating cash flow through both revenue growth
and improved cost control. The Company believes that revenue growth and cost
control may be achieved simultaneously, principally because many of the costs
associated with operating a television station are fixed. The Company's
management team has successfully implemented this strategy with other television
broadcast stations as well as with the Stations. Key components of the Company's
business strategy include:
Controlling Costs. The Company seeks to selectively reduce costs at
acquired stations without adversely affecting growth. Since management assumed
operations of the Stations in January 1996, broadcast cash flow margins at the
Stations increased from 26.2% for 1995 to 41.0% for 1996, in part due to an
approximately $2.2 million reduction in station operating expenses. Broadcast
cash flow margins at each of the Stations increased from 1995 to 1996, including
significant improvements at WEYI (from 13.0% for 1995 to 45.5% for 1996) and
WTOV (from 33.4% for 1995 to 49.0% for 1996). This financial success resulted in
part from management's aggressive cost saving initiatives such as the
elimination of unnecessary sales expenses. After acquiring a station, management
implements a cost control strategy stressing the elimination of unnecessary
costs, budgeting, accountability and disciplined credit and collection
procedures. Management believes that it has created an operating structure that
can profitably accommodate revenue growth. See "Certain Transactions."
Intensifying Sales Efforts. The Company implements an aggressive approach
to sales and marketing designed to increase market revenue share. Management
believes that short-term revenue increases are not necessarily dependent on
increases in audience share because increased efficiencies and improved
management of advertising sales can increase revenues over the short term;
however, management believes that revenue increases over the next three to five
years will be dependent on the audience share generated by the Stations' news
and syndicated programming. Since management assumed operations of the Stations
in January 1996, net revenues of the
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Stations increased by 14.1% over 1995, due, in part, to newly implemented
initiatives such as: (i) the restructuring and expansion of the local sales
departments at three of the Stations (including the hiring of new sales
management and experienced sales personnel with local market knowledge); (ii)
the engagement of a new national sales representative firm for three of the
Stations; (iii) the sponsorship and broadcasting of local events and activities,
such as highly-rated high school football, offering local advertisers
value-added community identity; and (iv) the institution of more efficient sales
incentives.
Building on Local News Franchises. The Company seeks to increase revenues
by developing a highly-rated, well-differentiated local news product designed to
build viewer loyalty and target specific demographic audiences that appeal to
advertisers. Through the implementation of its strategy, management has
succeeded in strengthening the top-rated local news positions of KSBW (four
times the audience ratings of its nearest news competitor) and WTOV (winner of
10 Associated Press awards in Ohio and West Virginia) in their respective DMAs.
At WROC and WEYI, the local news programming has been redirected through several
initiatives including: (i) the hiring of a new news director at WROC with prior
successful experience redirecting news operations (whose responsibilities also
include overseeing the news programming at the other Stations); (ii) the hiring
of new, experienced on-air talent (including new anchor teams); (iii) the
creation of a new on-air appearance at WROC through improved set lighting,
music, graphics and news room production equipment; (iv) the reprogramming of
local newscasts to include more exclusive/investigative stories with greater
audience appeal; and (v) the careful selection of top-rated syndicated
programming that is broadcast just prior to and after the local news.
Managing Program Selection. Each Station seeks to cost-effectively purchase
first-run and off-network syndicated programming to target specific demographic
audiences. The Stations have been able to purchase syndicated programming at
rates that management believes are attractive, in part because of the limited
competition for such programming in the Stations' DMAs. WROC, WTOV and KSBW have
contracts (expiring in 1999 and 2000) to air highly-rated programming, such as
The Oprah Winfrey Show, Jeopardy and Wheel of Fortune. In September 1996, WEYI
began airing programming such as Hard Copy and Entertainment Tonight, which had
previously been broadcast by a local competitor. Additional highly-rated
syndicated programming aired by the Stations includes Rosie O'Donnell on WROC
(through September 1997), WTOV and KSBW (beginning in September 1997) and
Seinfeld and Mad About You on WTOV.
Positioning and Branding Stations. The Company seeks to increase revenues
by developing and maintaining a unique, local "brand image" for each Station
within its respective market with which viewers and advertisers can identify.
This strategy integrates local news, programming, promotion and sales efforts
for each Station based on its market's demographics, competition, dynamics and
opportunities. By covering local events in more of the 12 Ohio Valley counties
(including the Wheeling, West Virginia market) than its competitors, WTOV has
been able to increase its profile with viewers and advertisers and differentiate
itself from its local competitors. KSBW continues to reinforce its identity with
viewers as the "Monterey-Salinas" television station with highly-recognized,
established on-air talent, as well as comprehensive local news coverage and
community involvement. WEYI has benefited from its network affiliation and
positioned itself as mid-Michigan's NBC station.
Pursuing Selective Acquisitions. The Company actively seeks to acquire
underperforming television stations that management believes can benefit from
its business strategy. Targeted stations generally have one or more of the
following characteristics: (i) attractive acquisition terms, which may include
station-for-station exchanges; (ii) opportunities to implement effective cost
controls; (iii) opportunities for increased advertising revenue; (iv)
opportunities for increased audience share through improved newscasts and
programming; (v) limited competition from other television broadcasters; and
(vi) market locations that possess attractive projected growth in advertising
revenues. The Company generally targets network-affiliated stations, which
typically have established audiences for their news, sports and entertainment
programming, located in DMAs
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<PAGE> 46
generally ranked from 50 to 150. Management believes that these stations can
achieve operating margins comparable to larger market stations, yet may be
purchased for lower multiples of cash flow. The Company believes that because of
the limited competition from other television broadcasters in these
middle-to-small markets, there is an opportunity for local stations to attract
large local audience share and thus compete successfully for advertising
revenues with alternative media, such as cable television, radio and newspapers.
NETWORK AFFILIATIONS
Each of the Stations is affiliated with a major broadcast network pursuant
to a long-term affiliation agreement. Each affiliation agreement generally
provides the Station with the right to broadcast all programs transmitted by the
network with which the Station is affiliated. In return, the network has the
right to sell nearly all of the advertising time during its broadcasts and pays
a specified network compensation fee to the Station. These payments are subject
to increase or decrease by the network during the term of an affiliation
agreement with provisions for advance notice and a right of termination by the
Station in the event of a reduction. The agreements are generally for 10-year
terms and contain customary renewal provisions, which generally provide for
automatic renewal for successive terms, subject to either party's right to
terminate the agreement at the end of any term upon proper notice. WROC's
network affiliation agreement with CBS expires on January 31, 2005, and WEYI's,
KSBW's and WTOV's network affiliation agreements with NBC expire on January 31,
2005, December 31, 2005 and January 1, 2002, respectively. In addition, WTOV has
a secondary network affiliation agreement with ABC that provides WTOV the right
of first refusal to carry ABC programming events in WTOV's market. This
secondary network affiliation agreement may be terminated at any time by either
party upon notice.
ADVERTISING SALES
General. Television station revenues are primarily derived from the sale of
local and national advertising. Advertising rates are based upon a program's
popularity among the viewers that an advertiser wishes to target, the number of
advertisers competing for the available time, the size and the demographic
composition of the market served by the station, the availability of alternative
advertising media in the market area and the effectiveness of the stations'
sales force. Advertising revenues are positively affected by strong local
economies, national and regional political election campaigns and certain events
such as the Olympic Games or the Super Bowl. Consequently, because television
broadcast stations rely on advertising revenues, declines in advertising
budgets, particularly in recessionary periods, adversely affect the broadcast
industry, and as a result may contribute to a decrease in the revenues of
broadcast television stations. The Company seeks to manage its advertising spot
inventory efficiently to maximize advertising revenues and return on programming
costs.
Local Sales. Approximately 55.8% of net broadcast revenues (excluding
political advertising) in 1996 came from the sale of local advertising time.
Local advertising time is sold by each Station's local sales staff who call upon
advertising agencies and local businesses, which typically include car
dealerships, retail stores and restaurants. Compared to revenues from national
advertising accounts, revenues from local advertising generally are more stable
and, due to a lower cost of sales, more profitable. The Company seeks both to
attract new advertisers to television and to increase the amount of advertising
time sold to existing local advertisers by relying on experienced local sales
forces with strong community ties, producing news and other programming with
local advertising appeal, sponsoring or co-promoting local events and activities
that give local advertisers value-added community identity. The Company places a
strong emphasis on experience of its local sales staff and maintains an on-going
training program for sales personnel. To increase accountability of the
Stations' sales forces, management has implemented initiatives whereby sales
managers are responsible for the effective management of commercial inventory
using input from account executives who are responsible for preparing detailed
reports and projections. To enhance local
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<PAGE> 47
sale revenues, WEYI, which had previously operated with no sales management and
only two account executives, has become fully staffed by hiring two sales
managers and six additional account executives. WROC, which, throughout 1996,
had operated with only one sales manager responsible for both national and local
sales, recently began restructuring its sales department by hiring a local sales
manager and is currently recruiting a national sales manager and additional
experienced sales personnel. At WTOV and KSBW, management's objective has been
to increase the accountability of their already successful local sales forces
with respect to each Station's success in generating advertising revenues. WTOV
has also promoted a new general sales manager and a new local sales manager from
within the Station. Management believes that these new managers should have a
positive impact on sales based on their familiarity with the Station, its
advertisers and the local market.
National Sales. Approximately 44.2% of net broadcast revenues (excluding
political advertising) in 1996 came from the sale of national advertising time.
National advertising time is sold through national sales representative firms
retained by the Company, which firms call upon businesses, which typically
include automobile manufacturers and dealer groups, telecommunications
companies, fast food franchisors and national retailers (all of which may also
advertise locally). Each Station has a sales manager assigned to work with the
national sales representatives to increase the awareness of the Stations with
national advertisers and, as a result, increase national advertising
expenditures with the Stations. In December 1995, a new national sales
representative, Katz Media Corporation, was engaged for WEYI, WROC and WTOV,
which management believes resulted in increased national sales for these
Stations. The Company believes that the representation of three Stations by the
same agency increases the Company's ability to effectively sell national
advertising. KSBW has a national sales representative agreement with TeleRep,
Inc., which the Company believes contributed to an increase in its national
sales in 1996.
RATINGS
The price of advertising spots is determined in part by a station's overall
ratings and share in a given market, as well as a station's rating among the
particular demographic group that an advertiser may be targeting. There are 211
generally-recognized television "markets" or DMAs in the United States, which
are ranked in size according to various factors based upon actual or potential
audience. Each market is defined as an exclusive geographic area consisting of
all counties in which the home-market commercial stations receive the greatest
percentage of total viewing hours. Currently, Nielsen periodically publishes
data on estimated audiences for the television stations in the various markets
throughout the country. The estimates are expressed in terms of the percentage
of the total potential audience in a market viewing a particular station (the
station's "rating") and the percentage of households actually viewing television
(the station's "share"). In the Stations' DMAs, Nielsen measures viewership by
periodic surveys of selected television viewers through a manual diary system.
44
<PAGE> 48
THE STATIONS
WEYI: FLINT-SAGINAW-BAY CITY, MICHIGAN.
Market Overview. WEYI, channel 25, is a UHF NBC-affiliated station serving
Flint, Saginaw and Bay City, Michigan. This DMA is the 62nd largest television
market in the United States with approximately 439,000 television households in
14 counties in eastern Michigan. WEYI is located in a two VHF-station market,
which is one of nine DMAs in the top 75 that have only four commercial
television broadcast stations. WEYI competes directly with a VHF CBS affiliate,
an ABC owned and operated VHF station and a UHF Fox affiliate. The limited
competition in this DMA has contributed to WEYI obtaining favorable advertising
rates and programming costs. See "-- Competition." The economies of Flint,
Saginaw and Bay City, Michigan are centered on manufacturing (primarily
automotive), construction, wholesale and retail trade, health services and
agriculture. Prominent employers in this market include General Motors, Genesys
Health Care System and Citizens Bank. In 1995 (the most recent year for which
actual information is available), total television advertising revenues in this
DMA were reported to be approximately $48.3 million and were projected to grow
at 4.9% per year through 1999.
Station Performance and Strategy. WEYI is ranked third in its DMA based on
its sign-on to sign-off audience share (6:00 a.m. to 2:00 a.m.). Since changing
its affiliation from CBS to NBC in January 1995, WEYI has shown improvement in
its revenue market share and local commercial audience share. The switch to NBC
eliminated certain broadcasting signal overlaps from other CBS affiliates in
adjacent markets and positioned the Company to benefit from the audience
established in the DMA by the previous NBC affiliate, which historically has
been the number one ranked station in this DMA. Since management assumed
operations of WEYI in January 1996, net revenues have increased by approximately
$2.1 million, or 34.7%, primarily through the implementation of several
initiatives, including the complete restructuring of the Station's sales
department. In addition to the engagement of a new national sales representative
firm, management hired a new general sales manager and a new local sales
manager, while recruiting experienced sales personnel from the competing local
television stations, resulting in a more professional image among local
advertising agencies and clients. In 1996, management reduced operating expenses
by approximately $0.7 million, or 14.3%, primarily through the elimination of
unnecessary sales promotions and personnel reductions. To complement the NBC
network programming provided to WEYI, management, in September 1996, added new
syndicated programming, including Hard Copy, Maury Povich and Entertainment
Tonight.
Management believes there are further opportunities for revenue growth at
WEYI through continued implementation of its operating strategy. In this regard,
management is in the process of making significant changes in WEYI's local news
programming including the recent hiring of a new news director. The Station also
intends to hire a new anchor team in the near future.
45
<PAGE> 49
The following table sets forth certain information regarding WEYI and the
DMA in which it operates:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995 1996
------- ------- ------- -------
(DOLLARS AND HOUSEHOLDS IN THOUSANDS)
<S> <C> <C> <C> <C>
MARKET DATA:
Market revenues(1)...................... $44,000 $48,000 $48,300 $51,400
Market revenue growth over prior
period(1)............................. 6% 8% 1% 6%
DMA household rank(2)................... 60 60 60 62
Market revenue rank(3).................. -- -- 69 70
Television households(2)................ 448 452 450 439
Total commercial stations (V/U)(2)...... 2/2 2/2 2/2 2/2
STATION DATA:
WEYI broadcast cash flow margin......... 22.4% 13.3% 13.0% 45.5%
WEYI audience rank in market(2)(4)...... 2 3 3 3
WEYI audience share(2)(5)............... 12% 10% 13% 13%
WEYI local commercial audience
share(2)(6)........................... 26% 15% 21% 22%
</TABLE>
- ---------------
(1) Source: BIA, Investing in Television, July 1996; 1996 data is estimated.
(2) Source: Nielsen Station Index: Viewers in Profile; data is for November of
each year reported.
(3) Source: BIA, Investing in Television, July of each year reported; market
revenue rank not reported prior to 1995.
(4) Ranking based on local commercial audience share from sign-on to sign-off
(Sunday to Saturday, 6:00 a.m. to 2:00 a.m.).
(5) Represents the number of television households in the DMA tuned to the
Station as a percentage of the number of television households in the DMA
with a television turned on.
(6) Represents an estimate of the DMA household four-week share of viewing
received by the Station in comparison to the other commercial stations in
the market.
46
<PAGE> 50
WROC: ROCHESTER, NEW YORK.
Market Overview. WROC, channel 8, is a VHF CBS-affiliated station serving
Rochester, New York. This DMA is the 74th largest television market in the
United States with approximately 367,000 television households in four counties
in western New York State and is the 62nd largest DMA in terms of market
revenues. WROC is located in one of nine DMAs in the top 75 with only four
commercial television broadcast stations and competes directly with a VHF ABC
affiliate, a VHF NBC affiliate and a UHF Fox affiliate. See "-- Competition." In
the past four years all four stations in the DMA have changed ownership,
creating an opportunity for WROC to improve its position in its market. The
economy of the Rochester market is centered on manufacturing (primarily high
tech industries), wholesale and retail trade services and agriculture. Prominent
employers with corporate headquarters in this market include Eastman Kodak,
Xerox, Bausch & Lomb and Wegmans Food Markets. In 1995 (the most recent year for
which actual information is available), total advertising revenues in this DMA
were approximately $59.0 million and were projected to grow at 5.5% per year
through 1999.
Station Performance and Strategy. WROC ranked third in its DMA based on its
sign-on to sign-off audience share (6:00 a.m. to 2:00 a.m.). Since management
assumed operations of the Station in January 1996, management has made
significant changes in its local news programming and presentation, including
(i) the hiring of a new news director with past experience redirecting news
operations (whose responsibilities also include overseeing the news programming
at the other Stations); (ii) the hiring of new experienced on-air talent
(including a new anchor team); (iii) the creation of a new on-air appearance
through improved set lighting, music, graphics and production equipment; (iv)
the reprogramming of local newscasts to include more exclusive/investigative
stories with greater audience appeal and (v) the careful selection of top-rated
syndicated programming to lead into and follow the local news. Throughout 1996,
WROC had operated with only one sales manager responsible for both national and
local sales. While net revenues at WROC increased by $0.3 million, or 2.4%, in
1996, broadcast cash flow increased by $0.9 million, or 30.9%, primarily through
personnel reductions and the elimination of unnecessary sales promotions. WROC's
network affiliation provides access to CBS programming, including Big East
Football, NCAA Basketball and the NCAA Basketball Championship Tournament.
Additionally, WROC has purchased the television rights to certain Syracuse
University football and basketball games through the 1998/1999 season that
provides significant viewership in Rochester due to the Station's proximity to
Syracuse. WROC's syndicated programming has helped the ratings of its local news
programming and includes The Oprah Winfrey Show, Jeopardy, Wheel of Fortune,
Coach and Maury Povich.
Management believes that there are further opportunities for revenue growth
at WROC through continued implementation of its business strategy. In this
regard, management has recently hired a local sales manager and is recruiting a
national sales manager and additional sales personnel.
47
<PAGE> 51
The following table sets forth certain information regarding WROC and the
DMA in which it operates:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995 1996
------- ------- ------- -------
(DOLLARS AND HOUSEHOLDS IN THOUSANDS)
<S> <C> <C> <C> <C>
MARKET DATA:
Market revenues(1)...................... $52,900 $58,100 $59,000 $63,200
Market revenue growth over prior
period(1)............................. 9% 2% 2% 7%
Market household rank(2)................ 71 71 73 74
DMA revenue rank(3)..................... -- -- 58 62
Television households(2)................ 364 369 367 367
Total commercial stations (V/U)(2)...... 3/1 3/1 3/1 3/1
STATION DATA:
WROC broadcast cash flow margin......... 18.8% 24.5% 27.1% 34.6%
WROC audience rank in market(2)(4)...... 3 3 3 3
WROC audience share(2)(5)............... 19% 18% 18% 18%
WROC local commercial audience
share(2)(6)........................... 26% 27% 27% 28%
</TABLE>
- ---------------
(1) Source: BIA, Investing in Television, July 1996; 1996 data is estimated.
(2) Source: Nielsen Station Index: Viewers in Profile; data is for November of
each year reported.
(3) Source: BIA, Investing in Television, July of each year reported; market
revenue rank not reported prior to 1995.
(4) Ranking based on local commercial audience share from sign-on to sign-off
(Sunday to Saturday, 6:00 a.m. to 2:00 a.m.).
(5) Represents the number of television households in the DMA tuned to the
Station as a percentage of the number of television households in the DMA
with a television turned on.
(6) Represents an estimate of the DMA household four-week share of viewing
received by the Station in comparison to the other commercial stations in
the market.
48
<PAGE> 52
KSBW: MONTEREY-SALINAS, CALIFORNIA.
Market Overview. KSBW, channel 8, is a VHF NBC-affiliated station serving
Monterey-Salinas, California. This DMA is the 122nd largest television market in
the United States with approximately 203,000 television households in three
counties in central California and is the 69th largest DMA in terms of market
revenue. The mountains surrounding the Monterey Bay form a natural barrier to
outside television signals and create a market in which KSBW effectively has the
only over-the-air VHF signal capable of reaching a majority of the households in
the DMA. KSBW competes directly with a UHF CBS affiliate, a UHF Fox affiliate,
and, to a lesser extent, as a result of the geography of the DMA, a VHF ABC
affiliate in San Jose. Currently, the Fox affiliate provides services to the CBS
affiliate through a local marketing agreement. In addition, the Station competes
with two Spanish-language stations, a UHF Univision affiliate and a UHF
independent station. See "-- Competition." The economy of the Monterey-Salinas
market is centered on agriculture, tourism, retail trade, services and
government. Salinas is a rich agricultural center and one of the nation's major
vegetable producing areas. Prominent employers in this market include Dole
Vegetable Company, University of California at Santa Cruz, Tanimura & Antle,
Household Credit and the Counties of Monterey and Salinas. In 1995 (the most
recent year for which actual information is available), total advertising
revenues in this DMA were approximately $48.5 million and were projected to grow
at 5.3% per year through 1999.
Station Performance and Strategy. KSBW ranked first in its DMA based on its
sign-on to sign-off audience share (6:00 a.m. to 2:00 a.m.) and had twice the
audience share of any other station in its market. As an example of the
Station's involvement in the community, KSBW and community leaders created
PeaceBuilders, a year-round, antiviolence program currently in its third year of
existence. KSBW is the leader in local news programming with over three hours of
local news programming each weekday, which earned an audience share four times
greater than its nearest news competitor. Since management acquired KSBW in
January 1996, net revenues increased $1.0 million, or 11.1%, while broadcast
cash flow increased $1.3 million, or 49.3%, primarily through personnel
reductions and reduced programming costs. In addition to network programming
provided by KSBW's affiliation with NBC, KSBW's syndicated programming includes
The Oprah Winfrey Show, Jeopardy, Wheel of Fortune and (beginning in September
1997) Rosie O'Donnell.
Management believes that there are further opportunities to increase
revenues through the implementation of its operating strategy, including the
development of more sophisticated pricing packages, sales incentives and
accountability systems.
49
<PAGE> 53
The following table sets forth certain information regarding KSBW and the
DMA in which it operates:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995 1996
------- ------- ------- -------
(DOLLARS AND HOUSEHOLDS IN THOUSANDS)
<S> <C> <C> <C> <C>
MARKET DATA:
Market revenues(1)...................... $43,500 $46,000 $48,500 $51,100
Market revenue growth over prior
period(1)............................. 7% 5% 5% 5%
DMA household rank(2)................... 114 115 122 122
Market revenue rank(3).................. -- -- 71 69
Television households(2)................ 207 207 200 203
Total commercial stations (V/U)(2)...... 2/4 2/4 2/4 2/4
STATION DATA:
KSBW broadcast cash flow margin......... 29.8% 26.7% 28.4% 38.2%
KSBW audience rank in market(2)(4)...... 1 1 1 1
KSBW audience share(2)(5)............... 21% 23% 19% 22%
KSBW local commercial audience
share(2)(6)........................... 33% 38% 33% 38%
</TABLE>
- ---------------
(1) Source: BIA, Investing in Television, July 1996; 1996 data is estimated.
(2) Source: Nielsen Station Index: Viewers in Profile; data is for November of
each year reported.
(3) Source: BIA, Investing in Television, July of each year reported; market
revenue rank not reported prior to 1995.
(4) Ranking based on local commercial audience share from sign-on to sign-off
(Sunday to Saturday, 6:00 a.m. to 2:00 a.m.).
(5) Represents the number of television households in the DMA tuned to the
Station as a percentage of the number of television households in the DMA
with a television turned on.
(6) Represents an estimate of the DMA household four-week share of viewing
received by the Station in comparison to the other commercial stations in
the market.
50
<PAGE> 54
WTOV: WHEELING, WEST VIRGINIA-STEUBENVILLE, OHIO.
Market Overview. WTOV, channel 9, is a VHF NBC-affiliated station serving
Wheeling, West Virginia and Steubenville, Ohio. This DMA is the 139th largest
television market in the United States with 158,000 television households in 12
counties in southern Ohio, western Pennsylvania and northern West Virginia.
Wheeling-Steubenville is one of two markets in the top 150 DMAs with only two
commercial television stations. This competitive environment results in
favorable network compensation (approximately $1.0 million at WTOV per year),
advertising rates and programming costs. WTOV competes with a VHF CBS-affiliated
station in Wheeling, and to a lesser extent with ABC programming originating
from Pittsburgh, Pennsylvania. See "-- Competition." In addition, WTOV and the
CBS affiliate are secondary ABC affiliates, however WTOV has the right of first
refusal to carry ABC programming events. The economy of the
Wheeling-Steubenville market is centered on manufacturing (primarily steel),
medical services and government. Prominent employers in this market include
Weirton Steel, Wheeling-Pittsburgh Steel, Ohio Edison and the St. John's Medical
Center. In 1995 (the most recent year for which actual information is
available), total television advertising revenues in this DMA were approximately
$10.6 million and were projected to grow at 5.0% per year until 1999.
Station Performance and Strategy. WTOV ranked first in its DMA based on its
sign-on to sign-off audience share (6:00 a.m. to 2:00 a.m.). WTOV has well
established local news programming serving the Ohio Valley, which has won 10
Associated Press awards in Ohio and West Virginia. The Station's five o'clock
local news segment has regularly achieved a leading 30% to 40% share of the
total viewing audience since its introduction in the fall of 1995. WTOV carries
the Pittsburgh Steelers and provides extensive coverage of college football,
including Ohio State University, and highly-rated Ohio Valley high school
football. Through its annual sponsorship of the "Jamboree in the Hills," an Ohio
Valley country music festival, WTOV offers viewers a popular alternative
unavailable elsewhere and advertisers receive the opportunity to reach those
viewers. In addition to network programming provided by WTOV's affiliation with
NBC, WTOV's syndicated programming includes The Oprah Winfrey Show, Jeopardy,
Wheel of Fortune, Mad About You, Seinfeld, Sally Jessy Raphael and Rosie
O'Donnell. Since management acquired WTOV in January 1996, net revenues have
increased $1.3 million, or 18.8%, through the implementation of several
initiatives, including hiring a new general sales manager and a local sales
manager who were promoted from within the Station, implementing new sales
incentives and accountability systems and engaging a new national sales
representative firm. During the same period, broadcast cash flow has increased
$1.7 million, or 74.1%, as management reduced operating expenses, primarily
through the elimination of unnecessary sales promotions and personnel
reductions.
Management believes there are further opportunities to increase revenues
through continued implementation of its operating strategy, such as more
comprehensive local coverage, broadcasting new and other special events
throughout the Ohio Valley and the development of more sophisticated pricing for
the packages it offers advertisers.
51
<PAGE> 55
The following table sets forth certain information regarding WTOV and the
DMA in which it operates:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995 1996
------- ------- ------- -------
(DOLLARS AND HOUSEHOLDS IN THOUSANDS)
<S> <C> <C> <C> <C>
MARKET DATA:
Market revenues(1)...................... $12,400 $11,600 $10,600 $11,200
Market revenue growth (decline) over
prior period(1)....................... 5% (7)% (9)% 5%
DMA household rank(2)................... 138 138 138 139
Market revenue rank(3).................. -- -- 148 160
Television households(2)................ 158 158 157 158
Total commercial stations (V/U)(2)...... 2/0 2/0 2/0 2/0
STATION DATA:
WTOV broadcast cash flow margin......... 27.6% 34.1% 33.4% 49.0%
WTOV rank in market(2)(4)............... 2 1 1 1
WTOV audience share(2)(5)............... 21% 22% 23% 22%
WTOV local commercial audience
share(2)(6)........................... 48% 61% 57% 56%
</TABLE>
- ---------------
(1) Source: BIA, Investing in Television, July 1996; 1996 data is estimated.
(2) Source: Nielsen Station Index: Viewers in Profile; data is for November of
each year reported.
(3) Source: BIA, Investing in Television, July of each year reported; market
revenue rank not reported prior to 1995.
(4) Ranking based on local commercial audience share from sign-on to sign-off
(Sunday to Saturday, 6:00 a.m. to 2:00 a.m.).
(5) Represents the number of television households in the DMA tuned to the
Station as a percentage of the number of television households in the DMA
with a television turned on.
(6) Represents an estimate of the DMA household four-week share of viewing
received by the Station in comparison to the other commercial stations in
the market.
52
<PAGE> 56
INDUSTRY BACKGROUND
General. Commercial television broadcasting began in the United States on a
regular basis in the 1940s over a portion of the broadcast spectrum commonly
known as the "VHF Band" (very-high frequency broadcast channels numbered 2
through 13). Television channels were later assigned by the FCC under additional
broadcast spectrum commonly known as the "UHF Band" (ultra-high frequency
broadcast channels numbered 14 through 83; channels 70 through 83 have since
been reallocated to non-broadcast services). The license to operate a broadcast
station is granted by the FCC, and due to spacing requirements and other
considerations, the number of licenses allocated to any one market is limited.
Although UHF stations and VHF stations compete in the same market, UHF
stations historically have suffered a competitive disadvantage, in part because
(i) receivers of many households were originally designed only for VHF
reception, (ii) UHF signals were more affected by terrain and other obstructions
than VHF signals and (iii) VHF stations were able to provide higher quality
signals to a wider area. This historic disadvantage of UHF stations has
gradually declined through (a) carriage on cable systems, (b) improvement in
television receivers, (c) improvement in television transmitters, (d) wider use
of all channel antennae, (e) increased availability of programming and (f) the
development of new networks such as Fox and UPN.
All television stations throughout the United States are grouped into 211
generally recognized DMAs, which are ranked in size according to various
formulae based upon actual or potential audience. Each DMA is defined as an
exclusive geographic area consisting of all counties in which the home-market
commercial stations receive the greatest percentage of total viewing hours.
Television Networks. A majority of commercial television stations in the
United States are affiliated with ABC, CBS or NBC (the "Major Networks"). Each
Major Network provides the majority of its affiliates' programming each day
without charge in exchange for nearly all of the available advertising time in
the programs supplied. Each Major Network sells this advertising time and
retains the revenues. The affiliate receives compensation from the Major Network
and retains the revenue from time sold by the affiliate during breaks in and
between network programs and in programming the affiliate produces or purchases
from non-network sources.
In contrast to stations affiliated with Major Networks, an independent
station supplies over-the-air programming through the acquisition of rights to
broadcast programs through syndication. This syndicated programming is generally
acquired by the independent stations for cash and occasionally barter.
Independent stations that acquire a program through syndication are usually
given exclusive rights to show the program in the station's market for either a
period of years or a number of episodes agreed upon between the independent
station and the syndicator of the programming. Types of syndicated programs
aired on the independent stations include feature films, popular series
previously shown on network television and series produced for direct
distribution to television stations.
Fox has established an affiliation of independent stations, commonly known
as the "fourth network," which operates on a basis similar to the Major
Networks. However, the number of hours per week of programming supplied by Fox
to its affiliates is significantly less than the number of hours supplied by the
Major Networks. As a result, Fox affiliates retain a significantly higher
portion of the available inventory of broadcast time for their own use than
Major Network affiliates.
During 1994, UPN established an affiliation of independent stations that
began broadcasting in January 1995 and operates on a basis similar to Fox.
However, UPN currently supplies fewer hours of programming per week to its
affiliates than Fox. As a result, UPN affiliates retain a significantly higher
portion of the available inventory of broadcast time for their own use than
affiliates of Fox or the Major Networks. UPN has indicated its intention to
increase the amount of programming supplied to its affiliates. In 1994, WB
announced its intention to establish separate affiliations of independent
television stations similar to UPN, and began broadcasting in January 1995.
53
<PAGE> 57
Television Advertising. Television stations derive their revenues primarily
from the sale of local and national advertising. All network-affiliated
stations, including those affiliated with Fox and others, are required to carry
spot advertising sold by their networks. This reduces the amount of advertising
available for sale by the stations. Network affiliates are generally compensated
for the broadcast of network programming according to a formula. Stations
directly sell all of the remaining advertising to be inserted in network
programming and all of the advertising in non-network programming, retaining all
of the revenues received from these sales of advertising, less any commissions
paid. Through barter and cash-plus-barter arrangements, however, a national
syndicated program distributor typically retains a portion of the available
advertising time for programming it supplies, in exchange for no or reduced fees
to the station for such programming.
Since 1975, advertising dollars received by commercial television stations
(excluding trade and barter) have increased at a 9.7% compound annual rate from
$3.0 billion in 1975 to $18.9 billion in 1995, according to Veronis, Suhler &
Associates, an industry research firm. While advertising expenditures fluctuate
with the general economy, declining advertising expenditures have occurred in
only one year since 1975. The Company believes that advertising expenditures on
local television stations will continue to grow due to improved network
programming and the availability of high quality syndicated programming. The
Company believes that it is able to capitalize on these favorable trends as a
result of network affiliations, strong relationships with programming
distributors, national sales representatives and advertisers and local
advertisers.
Advertisers wishing to reach a national audience usually purchase time
directly from the Major Networks, Fox, UPN or WB, or advertise nationwide on an
ad hoc basis. National advertisers who wish to reach a particular region or
local audience often buy advertising time directly from local stations through
national advertising sales representative firms. Additionally, local businesses
purchase advertising time directly from the stations' local sales staffs.
Advertising rates are based upon factors that include the size of the DMA in
which the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic characteristics of the DMA served by the
station, the availability of alternative advertising media in the DMA,
aggressive and knowledgeable sales forces and development of projects, features
and marketing programs that tie advertiser messages to programming. Because
broadcast television stations rely on advertising revenues, declines in
advertising budgets, particularly in recessionary periods, will adversely affect
the broadcast business. Conversely, increases in advertising budgets targeting
specific demographic groups are based upon the superior coverage of broadcast
television stations or the dominant competitive position of a particular station
and may contribute to an increase in the revenues and operating cash flow of a
particular broadcast television station.
Television Viewing Audience. Nielsen is a national audience measuring
service that periodically publishes data on estimated audiences for television
stations in various DMAs throughout the country. The estimates are expressed in
terms of the percentage of the total potential audience in the DMA viewing a
station, referred to as the station's "rating," and of the percentage of the
audience actually watching the television station, referred to as the station's
"share." This rating service provides such data on the basis of total television
households and of selected demographic groupings in the media markets being
measured. Nielsen uses one of two methods of measuring the station's actual
viewership. In larger DMAs, ratings are determined by a combination of meters
connected directly to selected television sets and periodic surveys of
television viewing, while in smaller DMAs only periodic surveys are completed.
In 1996, all of the DMAs in which the Company operated were survey markets.
54
<PAGE> 58
The following schedule indicates the national household ratings/shares of
the four principal broadcast television networks during the periods indicated:
NATIONAL HOUSEHOLD RATINGS/SHARES
<TABLE>
<CAPTION>
BROADCAST SEASON(A) NBC CBS ABC FOX
- ----------------------------------------------- ------- ------- ------- ------
<S> <C> <C> <C> <C>
1995-1996...................................... 11.6/20 8.8/15 9.6/17 6.5/11
1994-1995...................................... 10.6/18 9.9/17 11.0/19 6.8/11
1993-1994...................................... 10.2/17 12.2/21 11.5/20 6.8/11
1992-1993...................................... 10.4/18 11.9/21 11.3/20 7.0/12
1991-1992...................................... 11.6/20 11.8/21 10.8/19 7.2/13
</TABLE>
- ---------------
(a) Based on Nielsen Television Index; prime time rating from September to
September.
COMPETITION
Competition in the television industry exists on several levels, including
competition for audience, advertisers and programming (including local news).
Competition is continually affected by technological change and innovation,
fluctuations in the popularity of competing entertainment and communications
media (including newspapers, magazines and direct mail), and governmental
restrictions or actions by Congress and federal regulatory bodies (including the
FCC and the Federal Trade Commission), any of which could have a material
adverse effect on the Company's operations. Competition in the television
broadcasting industry occurs primarily in individual DMAs. Generally, a
television broadcast station in one DMA does not compete with television
broadcast stations in other DMAs. Certain competitors are part of larger
organizations with substantially greater financial, technical and other
resources than the Company.
Audience. Stations compete for audience share primarily on the basis of
program popularity, which has a direct effect on advertising rates. A large
amount of the Stations' prime time programming is supplied by NBC and CBS and is
therefore dependent upon the performance of such network programs in attracting
viewers. Non-network time periods are programmed by the Station primarily with
syndicated programs purchased for cash, cash and barter, or barter-only, and
also through self-produced news, public affairs and other entertainment
programming.
The development of methods of television transmission other than
over-the-air broadcasting, and in particular the growth of cable television, has
significantly altered competition for audience share in the television industry.
These other transmission methods can increase competition faced by a broadcast
station by bringing into its market distant broadcasting signals not otherwise
available to the station's audience and also by serving as a distribution system
for programming that originates on the cable system.
Other sources of competition for audience include home entertainment
systems (including video cassette recorder and playback systems, videodiscs and
television game devices), low-power television multipoint distribution systems,
multichannel multipoint distribution systems, wireless cable, internet services,
satellite master antenna television systems and some low-power, in-home
satellite services. In addition, telephone companies may provide channels for
program suppliers to deliver video programming to the home, an arrangement that
the FCC calls "video dial tone." The Company's television stations also face
competition from high-powered direct broadcast satellite services that transmit
programming directly to homes equipped with special receiving antennas or to
cable television systems for transmission to their subscribers. Various
television stations and networks have recently filed suit in federal court
against certain providers of direct broadcast satellite service. The suits
allege that such DBS providers have impermissibly distributed the signals of
distant over-the-air television stations over their systems, in violation of the
Satellite Home Viewer Act. The suits are presently pending.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now under development
for use with current cable
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<PAGE> 59
channels and direct broadcast satellites, are expected to reduce the bandwidth
required for television signal transmission. These compression techniques, as
well as other technological developments, are applicable to all video delivery
systems, including over-the-air broadcasting, and have the potential to provide
vastly expanded programming to highly targeted audiences. Reduction in the cost
of creating additional channel capacity could lower entry barriers for new
channels and encourage the development of increasingly specialized "niche"
programming. This ability to reach very defined audiences may alter the
competitive dynamics for advertising expenditures. The Company is unable to
predict the effect that technological changes will have on the broadcast
television industry or the future results of the Company's operations.
Advertising. Advertising revenues and advertising rates are based upon
factors that include the size of the DMA in which the station operates, a
program's popularity among the viewers that an advertiser wishes to attract, the
number of advertisers competing for the available time, the demographic makeup
of the DMA served by the station, the availability of alternative advertising
media in the DMA, aggressive and knowledgeable sales forces and development of
projects, features and programs that tie advertiser messages to programming.
Prior to and through the 1970s, over-the-air television broadcasting
enjoyed virtual dominance in viewership and television advertising revenues
because over-the-air television stations competed only with each other in most
local markets. Although cable television systems were initially used to
retransmit broadcast television programming to paid subscribers in areas with
poor broadcast signal reception, significant increases in penetration into homes
did not occur until the 1970s and 1980s, notwithstanding signal reception
problems. As the technology of satellite program delivery to cable systems
advanced in the late 1970s, development of programming for cable television
accelerated dramatically, resulting in the emergence of multiple national-scale
program alternatives and the rapid expansion of cable television and higher
subscriber growth rates. Historically, cable operators generally have not sought
to compete with over-the-air broadcast stations for a share of the local news
audience. To the extent they elect to do so, increased competition from cable
operators for local news audiences could have a material adverse effect on the
Company's advertising revenues.
Cable television penetration in the Flint, Rochester, Monterey-Salinas and
Wheeling-Steubenville markets is 65%, 73%, 78% and 78%, respectively, according
to the November 1996 Nielsen Television Market Report. The Stations have elected
both must-carry and retransmission consent rights in connection with their
carriage by local cable providers. Cable-originated programming has emerged as a
competitor for viewers of over-the-air broadcast television programming,
although no single cable programming network regularly attains audience levels
amounting to more than a small fraction of any over-the-air programming. Since
1980, the advertising share of cable networks has increased significantly.
Notwithstanding such increases in cable viewership and advertising, over-the-air
broadcasting remains the dominant distribution system for mass market television
advertising.
Programming. The Company also competes for programming, which involves
negotiating with national program distributors or syndicators that sell
first-run and rerun packages of programming. The Stations compete for exclusive
access to those programs against in-market broadcast station competitors for
syndicated products. Cable systems generally do not compete with local stations
for programming, although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local television
stations.
Other factors that are material to a television station's competitive
position include signal coverage, local program acceptance, network affiliation,
audience characteristics and assigned broadcast frequency. Historically, UHF
stations have suffered a competitive disadvantage in comparison to stations with
VHF broadcast frequencies. This historic disadvantage has gradually declined
through (i) carriage on cable systems, (ii) improvement in television receivers,
(iii) improvement in television transmitters, (iv) wider use of all channel
antennae, (v) increased
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availability of programming, and (vi) the development of new networks such as
Fox and UPN. In addition, the broadcasting industry is continuously faced with
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media, and governmental restrictions
or actions of federal regulatory bodies, including the FCC and the Federal Trade
Commission, any of which could possibly have a material effect on the Company's
operations and results.
FEDERAL REGULATION OF TELEVISION BROADCASTING
General. The ownership, operation and sale of television stations are
subject to the jurisdiction of the FCC, which acts under authority granted by
the Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and operating
power of stations; issues, renews, revokes and modifies station licenses;
regulates equipment used by stations; adopts and implements regulations and
policies that directly or indirectly affect the ownership, operation and
employment practices of stations; and has the power to impose penalties for
violations of its rules or the Communications Act.
The following is a brief summary of certain provisions of the
Communications Act, the Telecommunications Act of 1996 (the "Telecommunications
Act") and specific FCC regulations and policies. Reference should be made to the
Communications Act, the Telecommunications Act, FCC rules and the public notices
and rulings of the FCC for further information concerning the nature and extent
of federal regulation of broadcast stations.
License Grant and Renewal. Television stations operate pursuant to
broadcasting licenses that, in the past, usually were granted by the FCC for
terms of five years. However, in January 1997, pursuant to the terms of the
Telecommunications Act, the FCC increased the terms of such licenses and their
renewal to eight years.
Television licenses are subject to renewal upon application to the FCC.
Under the Telecommunications Act, the FCC is required to grant the renewal
application if it finds (i) that the station has served the public interest,
convenience and necessity; (ii) that there have been no serious violations by
the licensee of the Communications Act or the rules and regulations of the FCC;
and (iii) there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when taken
together, would constitute a pattern of abuse.
All of the Stations are presently operating under regular licenses with
terms expiring as follows: October 1, 1997 (WEYI), June 1, 1999 (WROC), December
1, 1998 (KSBW) and October 1, 1997 (WTOV). There can be no assurance that the
licenses of such stations will be renewed.
Ownership Matters.
General. 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. The Company has filed an application seeking FCC consent to
transfer control of WJAC to the Company. The Company intends to file an
application seeking FCC consent to transfer control of WTOV to the Company.
Although the Company believes that such applications will be granted by the FCC,
there can be no assurance that such applications will be granted.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding, or through subsidiaries controlling, broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or 10%
or more of such stock in the case of insurance companies, investment companies
and bank trust departments that are passive investors) are generally
attributable, except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. In addition, under its "cross-interest" policy,
the FCC considers
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and may prohibit the common ownership of an attributable interest in one media
outlet and a non-attributable but significant equity interest in another media
outlet in the same market, joint ventures, and common key employees among
competitors, if it determines that such relationships could have a significant
adverse effect upon economic competition and viewpoint diversity. The FCC has a
pending rulemaking proceeding that, among other things, seeks comment on whether
the FCC should modify its attribution rules by (i) raising the voting stock
attribution benchmark from 5% to 10%; (ii) raising the attribution benchmark for
passive investors from 10% to 20%; and (iii) attributing certain interests held
by limited liability corporations in certain circumstances. More recently, the
FCC has solicited comment on proposed rules that would (i) treat an otherwise
nonattributable equity or debt interest in a licensee as an attributable
interest where the interest holder is a program supplier or the owner of a
broadcast station in the same market and the equity and/or debt holding is
greater than a specified benchmark; (ii) treat a licensee of a television
station which, under a "local marketing agreement" or "LMA," brokers more than
15% of the time on another television station serving the same market, as having
an attributable interest in the brokered station; and (iii) in certain
circumstances, treat the licensee of a broadcast station that sells advertising
time on another station in the same market pursuant to a "joint sales
agreement," or "JSA," as having an attributable interest in the station whose
advertising is being sold. The FCC also has sought comment on, among other
things, (i) whether the cross-interest policy should be applied only in smaller
markets, and (ii) whether non-equity financial relationships such as debt, when
combined with multiple business interrelationships such as LMAs and JSAs, raise
concerns under the cross-interest policy.
The Communications Act prohibits the issuance of broadcast licenses to, or
the holding of a broadcast license by, 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 (collectively,
"Aliens"). The Communications Act also authorizes the FCC, if the FCC determines
that it would be in the public interest, to prohibit the issuance of a broadcast
license to, or the holding of a broadcast license by, any corporation directly
or indirectly 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 issued
interpretations of existing law under which these restrictions in modified form
apply to other forms of business organizations, including partnerships. The
Company and its subsidiaries are domestic corporations, and the Company's
ultimate controlling stockholder is a United States citizen. The Articles of
Incorporation of the Company contain limitations on Alien ownership and control
that are substantially similar to those contained in the Communications Act.
Pursuant to the Articles of Incorporation, the Company has the right to
repurchase Alien-owned shares at their fair market value to the extent
necessary, in the judgment of the Board of Directors, to comply with the Alien
ownership restrictions.
National Ownership Rule. Under the FCC's rules, an individual or entity may
own an unlimited number of television stations nationwide, subject to the
restriction that no individual or entity may have an attributable interest in
television stations reaching more than 35% of the national television viewing
audience. Historically, VHF stations have shared a larger portion of the market
than UHF stations. Therefore, only half of the households in the market area of
any UHF station are included when calculating whether an entity or individual
owns television stations reaching more than 35% of the national television
viewing audience. Of the Stations, three are VHF and one is UHF.
Duopoly Rule. Unless applicable waiver standards are met, the television
"duopoly" rule generally prohibits a single individual or entity from having an
attributable interest in two or more television stations with overlapping Grade
B service areas. The FCC has pending a rulemaking proceeding in which it has
proposed to modify the television duopoly rule to permit the common ownership of
television stations in different DMAs, so long as the Grade A signal contours of
the stations do not overlap. Pending resolution of its rulemaking proceeding,
the FCC has adopted an interim waiver policy that permits the common ownership
of television stations in different DMAs
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with no overlapping Grade A signal contours, conditioned on the final outcome of
the rulemaking proceeding. The FCC has also sought comment on whether common
ownership of two television stations in a market should be permitted (i) where
one or more of the commonly owned stations is UHF, (ii) where one of the
stations is in bankruptcy or has been off the air for a substantial period of
time or (iii) where the commonly owned stations have very small audience or
advertising shares, are located in a very large market, and/or a specified
number of independently owned media voices would remain after the acquisition.
See "Summary -- Management and Ownership" and "Risk Factors -- Potential
Conflicts of Interest."
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally prohibits a single
individual or entity from having an attributable interest in a television
station and a radio station serving the same market. However, in each of the 25
largest local markets in the United States, provided that there are at least 30
separately owned stations in the particular market, the FCC policy presumptively
allows waivers of the rule to permit the common ownership of one AM, one FM and
one TV station in a market. The Telecommunications Act directs the FCC to extend
this policy to each of the top 50 markets. The FCC has pending a rulemaking
proceeding in which it has solicited comment on whether the one to a market rule
should be modified or eliminated. See "Summary -- Management and Ownership" and
"Risk Factors -- Potential Conflicts of Interest."
The FCC does not apply its presumptive waiver policy in cases involving the
common ownership of one television station and two or more radio stations in the
same service (AM or FM), in the same market. Pending its rulemaking proceeding
to reexamine the one to a market rule, the FCC has stated that it will consider
waivers of the rule in such instances on a case-by-case basis. The FCC has
stated that it expects that any such waivers that are granted will be
conditioned on the outcome of the rulemaking proceeding.
As a result of the one to a market rule, the attributable radio interests
of persons with attributable interests in the Company limit the markets where
the Company may acquire or own television stations. Thomas O. Hicks, for
example, who is the Company's ultimate controlling stockholder, holds
attributable interests in Capstar, Chancellor and GulfStar Communications, Inc.,
which companies own radio stations in various markets throughout the United
States.
Local Television/Cable Cross-Ownership Rule. While the Telecommunications
Act eliminates a previous statutory prohibition against the common ownership of
a television broadcast station and a cable system that serves the same local
market, the Telecommunications Act leaves the current FCC rule in place. The
legislative history of the Act indicates that its repeal of the statutory ban
should not prejudge the outcome of any FCC review of the rule.
Television/Daily Newspaper Cross-Ownership Rule. The FCC's rules prohibit
the common ownership of a television broadcast station and a daily newspaper in
the same market.
Expansion of the Company's television operations on both a local and
national level will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Concomitantly, any further relaxation of
the FCC's ownership rules may increase the level of competition in one or more
of the markets in which the Company's stations are located, more specifically to
the extent that any of the Company's competitors may have greater resources and
thereby be in a superior position to take advantage of such changes.
Other Matters.
Must-Carry/Retransmission Consent. Pursuant to the Cable Act of 1992,
television broadcasters are required to make triennial elections to exercise
either certain "must-carry" or "retransmission consent" rights in connection
with their carriage by cable systems in each broadcaster's local market. By
electing must-carry rights, a broadcaster demands carriage on a specified
channel on cable systems within its Area of Dominant Influence ("ADI"), in
general as defined by the Arbitron
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1991-92 Television Market Guide. These must-carry rights are not absolute, and
their exercise is dependent on variables such as (i) the number of activated
channels on a cable system; (ii) the location and size of a cable system; and
(iii) 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. Alternatively, if a broadcaster chooses to exercise retransmission
consent rights, it can prohibit cable systems from carrying its signal or grant
the appropriate cable system the authority to retransmit the broadcast signal
for a fee or other consideration.
The most recent election date for must-carry or retransmission consent was
October 1, 1996, such election to be effective for the three-year period from
January 1, 1997 through December 31, 1999. For subsequent elections beginning
with the election to be made by October 1, 1999, the must-carry market will be
the station's DMA, in general as defined by the Nielsen DMA Market and
Demographic Rank Report of the prior year.
Digital Television. The FCC has taken a number of steps to implement
digital television service ("DTV") (including high-definition) in the United
States. In December 1996, the FCC adopted a DTV broadcast standard. On April 3,
1997, the FCC adopted a table of digital channel allotments and rules for the
implementation of DTV. The digital table of allotments provides each existing
television station licensee or permittee with a second broadcast channel to be
used during the transition to DTV, conditioned upon the surrender of one of the
channels at the end of the DTV transition period. Implementation of DTV will
improve the technical quality of television. Furthermore, the implementing rules
permit broadcasters to use their assigned digital spectrum flexibly to provide
either standard- or high-definition video signals and additional services,
including, for example, data transfer, subscription video, interactive
materials, and audio signals. However, the digital table of allotments was
devised on the basis of certain technical assumptions which have not been
subjected to extensive field testing and which, along with specific digital
channel assignments, are the subject of petitions for reconsideration of the
FCC's April 3, 1997 decision. Conversion to DTV may reduce the geographic reach
of the Company's stations or result in increased interference, with, in either
case, a corresponding loss of population coverage. DTV implementation will
impose additional costs on the Company, primarily due to the capital costs
associated with construction of DTV facilities and increased operating costs
both during and after the transition period. The FCC has set a target date of
2006 for expiration of the transition period, subject to biennial reviews to
evaluate the progress of DTV, including the rate of consumer acceptance.
Management of the Company believes that its conversion to DTV will commence in
1998 or 1999 for the Company's larger markets and in 2000 for the Company's
smaller markets. Future capital expenditures by the Company will be compatible
with the new technology whenever possible.
Programming and Operation.
General. The Communications Act requires broadcasters to serve the "public
interest." The FCC has relaxed or eliminated many of the more formalized
procedures it had developed in the past to promote the broadcast of certain
types of programming responsive to the needs of a station's community of
license. FCC licensees continue to be required, however, to present programming
that is responsive to community issues, and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming often will be considered by the FCC when it evaluates
renewal applications of a licensee, although such complaints may be filed at any
time and generally may be considered by the FCC at any time. Stations also must
pay regulatory and application fees, and follow various rules promulgated under
the Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisement of contests and lotteries,
obscene and indecent broadcasts, and technical operations, including limits on
radiofrequency radiation (the FCC has recently adopted more stringent guidelines
on radiofrequency radiation, which will apply to broadcasters beginning on
September 1, 1997). In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities,
and must submit reports to the FCC with respect to these matters on an
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annual basis and in connection with a renewal application. Failure to observe
these or other rules and policies can result in the imposition of various
sanctions, including monetary forfeitures, or the grant of a "short" (i.e., less
than the full) license renewal term or, for particularly egregious violations,
the denial of a license renewal application or the revocation of a license.
Children's Television Programming. Pursuant to legislation enacted in 1991,
all television stations have been required to broadcast some television
programming designed to meet the educational and informational needs of children
16 years of age and under. The legislation and FCC rules also limit the amount
of commercial matter that may be broadcast during children's programming. In
August 1996, the FCC adopted new rules setting forth more stringent children's
programming requirements. Specifically, as of September 1, 1997, television
stations will be required to broadcast a minimum of three hours per week of
"core" children's educational programming, which the FCC defines as programming
that (i) has serving the educational and informational needs of children 16
years of age and under as a significant purpose; (ii) is regularly scheduled,
weekly and at least 30 minutes in duration; and (iii) is aired between the hours
of 7:00 a.m. and 10:00 p.m. Furthermore, as of January 2, 1997, "core"
children's educational programs, in order to qualify as such, must be identified
as educational and informational programs over the air at the time they are
broadcast, and must be identified in the station's children's programming
reports required to be placed in stations' public inspection files.
Additionally, as of January 2, 1997, television stations must identify and
provide information concerning "core" children's programming to publishers of
program guides and listings. A television station found not to have complied
with the "core" programming requirements or the children's commercial
limitations could face sanctions, including monetary fines and the possible
non-renewal of its broadcasting license.
Television Violence. The Telecommunications Act directed the broadcast and
cable television industries to develop and transmit an encrypted rating in all
video programming that, when used in conjunction with so-called "V-Chip"
technology, would permit the blocking of programs with a common rating. On
January 17, 1997, an industry proposal was submitted to the FCC describing a
voluntary ratings system under which all video programming would be designated
in one of six categories. Pursuant to the Telecommunications Act, the FCC has
initiated a proceeding to determine whether to accept the industry proposal or
to establish and implement an alternative system for rating and blocking video
programming. The FCC has indicated that it will commence a separate proceeding
shortly addressing technical issues related to the "V-Chip." The Company cannot
predict whether the FCC will accept the industry proposal regarding the rating
and blocking of video programming, or how changes in this proposal could affect
the Company's business.
Closed Captioning. The Telecommunications Act directs the FCC to adopt
rules requiring closed captioning of all broadcast television programming,
except where captioning would be economically burdensome. The FCC is conducting
a rulemaking proceeding to implement such rules.
Proposed Changes. The Congress and the FCC have under consideration, and in
the future may consider and adopt, new laws, regulations and policies regarding
a wide variety of matters that could affect, directly or indirectly, the
operation, ownership and profitability of the Company's broadcast stations,
result in the loss of audience share and advertising revenues for the Stations,
and affect the ability of the Company to acquire additional broadcast stations
or finance such acquisitions. In addition to the changes and proposed changes
noted above, such matters include, for example, the license renewal process,
spectrum use fees, political advertising rates, potential restrictions on the
advertising of certain products (beer, wine and hard liquor, for example), and
the rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations. Other matters that could affect the Company's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry, such as direct radio
and television broadcast satellite service, the continued establishment of
wireless cable systems and low power television stations, digital television and
radio technologies, and the advent of telephone company participation in the
provision of video programming service.
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Other Considerations. The foregoing summary does not purport to be a
complete discussion of all provisions of the Communications Act or other
congressional acts or of the regulations and policies of the FCC. For further
information, reference should be made to the Communications Act, other
congressional acts, and regulations and public notices promulgated from time to
time by the FCC. There are additional regulations and policies of the FCC and
other federal agencies that govern political broadcasts, public affairs
programming, equal opportunity employment and other matters affecting the
Company's business and operations.
EMPLOYEES
As of June 30, 1997, the Stations had approximately 300 full-time and 30
part-time employees. WEYI has a contract with United Auto Workers that expires
on August 7, 1998 with respect to 48 employees. WROC has a contract with the
American Federation of Television and Radio Artists ("AFTRA") that expires on
March 2, 1999 with respect to 21 employees, and WROC has entered into a contract
with the National Association of Broadcast Employees and
Technicians/Communications Workers of America ("NABET") that expires on May 31,
2000 with respect to 35 employees. Four non-union employees of WROC have
recently applied to become members of NABET. WTOV has a contract with AFTRA that
expires January 28, 1999 and a contract with International Brotherhood of
Electrical Workers that expires on November 30, 1997 with respect to 24 and 19
employees, respectively. No significant labor problems have been experienced by
the Stations, and the Company considers its overall labor relations to be good.
However, there can be no assurance that the Company's collective bargaining
agreements will be renewed in the future or that the Company will not experience
a prolonged labor dispute, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Labor Relations."
PROPERTIES
Each Station's real properties generally include main offices, studios and
transmitter/antenna sites. The transmitter/antenna sites generally are located
so as to provide maximum signal strength and market coverage.
The Company owns all transmitter/antenna sites and studio and main office
space associated with each of the Stations. The Company generally considers its
facilities to be suitable and of adequate sizes for its current and intended
purposes. The Company does not anticipate any difficulties leasing or purchasing
additional space, if required. The Company owns all of its other equipment,
consisting principally of transmitting antennae, transmitters, studio equipment
and general office equipment. The towers, antennae and other transmission
equipment used by the Stations are generally in good condition, although
opportunities to upgrade facilities are continuously reviewed.
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The principal executive offices of the Company are located at 3839 4th
Street North, Suite 420, St. Petersburg, Florida 33703. The telephone number of
the Company at that address is (813) 821-7900. The following table generally
describes the Company's principal properties in each of its markets of
operations:
<TABLE>
<CAPTION>
OWNED APPROXIMATE
STATION AND PROPERTY TYPE OF OR SIZE EXPIRATION
LOCATION FACILITY AND USE LEASED (SQUARE FEET) OF LEASE
-------------------- ---------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
WEYI:
Clio, Michigan............... Main Office/Studio Owned 18,000 --
Tower/Antenna Site Owned (1) --
Saginaw, Michigan............ Satellite Sales Office Leased 1,200 2/14/99
WROC:
Rochester, New York.......... Main Office/Studio Owned 45,000 --
Brighton, New York........... Tower/Antenna Site Owned 2,400 --
KSBW:
Salinas, California.......... Main Office/Studio Owned 33,000 --
Santa Clara County,
California................. Tower/Antenna Site Owned 2,400 --
Monterey County, California... Back-up
Antenna/Microwave Site Owned 1,900 --
Gilroy, California........... Satellite News and Sales Office Leased 720 (2)
Santa Cruz, California....... Satellite News and Sales Office Leased 720 (2)
WTOV:
Steubenville Township,
Ohio....................... Main Office/Studio Owned 12,750 --
Tower/Antenna Site Owned (1) --
Pultney Township, Ohio....... Microwave/Relay Owned 450 --
Wheeling, West Virginia...... Satellite Sales Office Leased 973 8/31/98
</TABLE>
- ---------------
(1) Main Office/Studio and Tower/Antenna Site are at the same location.
(2) Lease is on a month-to-month basis. The Company does not anticipate any
difficulties leasing or acquiring alternative space, if required.
LEGAL PROCEEDINGS
The Stations from time to time are involved in litigation incidental to the
conduct of their business. The Stations are not a party to any lawsuit or
proceeding that, in the opinion of the Company, will have a material adverse
effect on the Company.
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MANAGEMENT AND DIRECTORS
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Holdings and the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Robert N. Smith............ 52 President of Holdings and Chief Executive Officer
and Director of Holdings and the Company
Sandy DiPasquale........... 49 President and Chief Operating Officer of the Company
and Executive Vice President and Chief Operating
Officer of Holdings
David A. Fitz.............. 52 Senior Vice President and Chief Financial Officer of
Holdings and the Company
John M. Purcell............ 54 Regional Vice President of Holdings and the Company
Eric C. Neuman............. 52 Vice President and Director of Holdings and the
Company
John R. Muse............... 46 Chairman of the Board of Directors of Holdings and
the Company
Michael J. Levitt.......... 38 Director of Holdings and the Company
John H. Massey............. 57 Director of Holdings and the Company
</TABLE>
Mr. Smith has served in the broadcast industry for 17 years and served as
President of Holdings and Chief Executive Officer and Director of Holdings and
the Company since their formation. Since 1985, Mr. Smith has served as President
and majority stockholder of SBG, which owns, operates and manages seven
television stations in addition to the Stations, and has served as Chief
Executive Officer of SBP, an affiliate of SBG. From 1983 to 1985, Mr. Smith
served as an officer, director and part owner of Heritage Broadcasting Company,
which was the licensee of WCTI-TV, New Bern, North Carolina. Mr. Smith first
became involved with the television broadcast industry as an attorney in the
Broadcast Bureau of the FCC from 1971 to 1974. Thereafter, Mr. Smith's career
included substantial government service, including serving on the White House
Staff in 1977 and as Assistant Director for Community Services Administration
from 1977 to 1979, prior to returning full time to the broadcast industry in
1983.
Mr. DiPasquale has served in the broadcast industry for 17 years and served
as President of the Company and Executive Vice President and Chief Operating
Officer of Holdings since their formation. Since 1996, Mr. DiPasquale has served
as Chief Operating Officer of SBP and has been responsible for the day-to-day
operations of the Stations. From November 1994 to the closing of the acquisition
of the Stations by Jupiter in January 1996, Mr. DiPasquale was associated with
SBG. From 1989 to 1994, Mr. DiPasquale served as President, Chief Executive
Officer and was a part owner of SD Communications, Inc., KBS Limited Partnership
and KBS, Inc., which were the owners of KWCH-TV, Wichita, Kansas, and its
affiliated stations in Hays, Goodland and Dodge City, Kansas. From 1986 to 1988,
Mr. DiPasquale served as President and General Manager and was a partner in
WGRZ-TV, Buffalo, New York. Prior to such time, Mr. DiPasquale served in sales
and management positions at various television broadcast stations in the Buffalo
area.
Mr. Fitz has served in the broadcast industry for 20 years and served as
Senior Vice President and Chief Financial Officer of Holdings and the Company
since their formation. Since 1996, Mr. Fitz has served as Chief Financial
Officer of SBP and as an officer and director of each of the SBG affiliated
companies. Mr. Fitz has held various positions with SBG affiliated companies
since 1986. Prior to joining SBG, Mr. Fitz served for nine years as Executive
Vice President and Chief Financial Officer of the Broadcast Division of Gulf
Broadcast Company, which at that time owned six
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television and eight radio broadcast stations. Prior to that time, Mr. Fitz was
a manager with KPMG Peat Marwick, which he joined in 1969.
Mr. Purcell has served in the broadcast industry for 35 years and served as
Regional Vice President of Holdings and the Company since their formation. Since
1996, Mr. Purcell has served as Senior Vice President of SBP and General Manager
of WROC-TV, Rochester, New York. From November 1994 to the closing of the
acquisition of the Stations by Jupiter in January 1996, Mr. Purcell was
associated with SBG. From 1986 to September 1994, Mr. Purcell served as Vice
President and General Manager of WHTM-TV, Harrisburg, Pennsylvania, an SBG-owned
station. Prior to such time, Mr. Purcell served as President and General Manager
of WGHP-TV, Greensboro, North Carolina, and as Vice President and Director of
Sales of WTSP-TV, Tampa/St. Petersburg, Florida.
Mr. Neuman has served as Vice President and as a director of the Company
and Holdings since its formation. Since May 1993, Mr. Neuman has been an officer
of Hicks Muse and is currently serving as Senior Vice President. Mr. Neuman has
served as a Vice President and director of Chancellor since April 1996 and as an
Executive Vice President and Director of Capstar since October 1996. From 1985
to 1993, Mr. Neuman was a Managing General Partner of Communications Partners,
Ltd., a private investment firm specializing in media and communications
businesses.
Mr. Muse has served as Chairman of the Board of Directors of the Company
and Holdings since its formation. Mr. Muse is Chief Operating Officer of Hicks
Muse. Prior to the formation of Hicks Muse in 1989, Mr. Muse headed the
merchant/investment banking operations of Prudential Securities in the
Southwestern region of the United States. Mr. Muse serves as Chairman of Atrium
Companies, Inc., Hedstrom Corporation and Hat Brands, Inc. and serves as
director of The Morningstar Group, Inc., Crain Holdings Corp., Ghirardelli
Chocolate Company, Olympus Real Estate Corporation, Mandeville S.A. and
Productos del Monte, S.A. de C.V.
Mr. Levitt has served as a director of the Company and Holdings since its
formation. Mr. Levitt is a Managing Director and Principal of Hicks Muse. Before
joining Hicks Muse, Mr. Levitt was a Managing Director and Deputy Head of
Investment Banking with Smith Barney Inc. from 1993 through 1995. From 1986
through 1993, Mr. Levitt was with Morgan Stanley & Co. Incorporated, most
recently as a Managing Director responsible for the New York-based Financial
Entrepreneurs Group. Mr. Levitt also serves as a director of Atrium Companies,
Inc., Ghirardelli Chocolate Company and International Home Foods, Inc.
Mr. Massey has served as a director of the Company and Holdings since its
formation. Until August 2, 1996, Mr. Massey served as the Chairman of the Board
and Chief Executive Officer of Life Partners Group, Inc., an insurance holding
company, having assumed those offices in October 1994. Prior to joining Life
Partners, he served, since 1992, as the Chairman of the Board of, and currently
serves as a director of, FSW Holdings, Inc., a regional investment banking firm.
Since 1986, Mr. Massey has served as a director of Gulf-California Broadcast
Company, a private holding company, that was sold in May 1996. From 1986 to
1992, he also was President of Gulf-California Broadcast Company. From 1976 to
1986, Mr. Massey was President of Gulf Broadcast Company, which owned and
operated 6 television stations and 11 radio stations in major markets in the
United States. Mr. Massey currently serves as a director of Chancellor, Central
Texas Bankshare Holdings, Inc., Hill Bank and Trust Co., Hill Bancshares
Holdings, Inc., Bank of The Southwest of Dallas, Texas, Columbus State Bank,
Columbine JDS Systems, Inc. and The Paragon Group, Inc.
All directors hold office for one year terms and until their successors are
duly elected and qualified. In May 1997, the Board of Directors of the Company
established an Executive Committee to which Messrs. Massey, Muse and Neuman have
been appointed, and an Audit Committee and Compensation Committee to which
Messrs. Levitt, Massey and Neuman have been appointed. Directors of the Company
are elected by Holdings, the sole stockholder of the Company.
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<PAGE> 69
DIRECTOR COMPENSATION
Directors of the Company who also are employees of the Company, Holdings or
Hicks Muse serve without additional compensation. Independent directors receive
an annual retainer of $12,000. These independent directors also receive $1,000
for each meeting of the Board of Directors attended and $1,000 for each
committee meeting attended. In addition, the independent directors are
reimbursed for any expenses incurred in connection with their attendance at such
meetings. Currently, John H. Massey is the Company's only independent director.
EXECUTIVE COMPENSATION
In connection with the Acquisition, each of Robert N. Smith, Sandy
DiPasquale, David A. Fitz and John M. Purcell has entered into five-year
employment agreements with the Company and Holdings. Each employment agreement
is subject to automatic successive one-year renewal terms that take effect
unless notice of non-renewal is given by either party to the agreement at least
120 days prior to the expiration of the initial term or annual extension, as the
case may be. The compensation provided to Messrs. Smith, DiPasquale, Fitz and
Purcell under their respective agreements includes an annual base salary of
$250,000 each, subject to adjustment at the sole discretion of the board of
directors of Holdings, and an annual bonus based upon criteria to be established
by the board of directors of Holdings at the beginning of each fiscal year.
These executives are also entitled to participate in certain benefit plans of
Holdings. If prior to the fourth anniversary of the consummation of the
Acquisition (the "Employment Date"), the executive officer terminates his
employment for good reason (as defined) or Holdings or the Company terminate his
employment for any reason other than for cause (as defined), then such executive
officer shall be paid his salary and shall continue to be covered by certain
employee benefit plans for 12 months or until the third anniversary of the
Employment Date, whichever period is longer; provided, however, that continued
coverage under any employee benefit plan of Holdings or the Company shall
terminate upon such executive officer becoming eligible for comparable benefits
pursuant to new employment. In the event of a change of control (as defined in
the agreements) prior to the fourth anniversary of the Employment Date, either
Holdings, the Company or the executive officer may terminate the employment
agreement concurrently with sale and receive the salary and benefits on the same
terms described in the preceding sentence.
Mr. Smith's employment agreement requires him to devote his best efforts
and such time, attention, knowledge and skill to the operation of the Stations
as is necessary to manage and supervise the Stations and the Company. Mr. Fitz's
employment agreement requires him to devote his best efforts and his working
time, attention, knowledge and skill solely to the operation of the Stations;
provided, however, that Mr. Fitz is permitted to devote reasonable time to
advisory services and oversight duties in connection with Mr. Smith's
investments in other business enterprises having an interest in or operating a
television station within certain excluded markets in which Mr. Smith currently
holds an interest in a television station (the "Excluded Markets") and any
acquisition or investment in up to three additional excluded stations (the
"Excluded Stations").
Each employment agreement also contains a noncompetition provision, which
provides that during the term of each agreement and for a period of two years
thereafter (or one year, if Hicks Muse or its affiliates cease to own any of the
Stations) and during any period in which the executive officer is receiving
severance payments pursuant to the employment agreement, such executive officer
will not engage in the television broadcast business within the DMA of any
Station. Mr. Smith's employment agreement permits him to invest in, become
employed by or otherwise render services to or for (i) another business
enterprise (other than the Company) having an interest in or operating a
television station within the Excluded Markets and (ii) after an opportunity to
acquire or invest shall have been presented to the Company and the Company shall
have declined in writing to make such acquisition or investment, the Excluded
Stations. Mr. Fitz's employment agreement permits him to invest in, become
employed by or otherwise render services to or for another business enterprise
(other than the Company) having an interest in or operating a television station
within the Excluded Markets.
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MANAGEMENT'S PARTICIPATION IN THE COMPANY
Robert N. Smith (through SBG), Sandy DiPasquale, David A. Fitz and John M.
Purcell and three other station general managers purchased an aggregate of 3.8%
of the Class A limited partnership interests of the Partnership for $1.9 million
and own 100% of the Class B limited partnership interests of the Partnership.
The return on such Class B ownership interests is based on the performance of
the Company. Neither the Class A nor the Class B limited partnership interests
entitle the holder to any right to participate in the management or control of
the Partnership or its business.
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CERTAIN TRANSACTIONS
In connection with the Acquisition, Holdings and the Company entered into a
ten-year agreement (the "Monitoring and Oversight Agreement") with an affiliate
of Hicks Muse ("Hicks Muse Partners") pursuant to which Holdings and the Company
have agreed to pay Hicks Muse Partners an annual fee payable quarterly for
oversight and monitoring services to the Company. The annual fee is adjustable
on January 1 of each calendar year to an amount equal to 0.2% of the budgeted
consolidated annual net sales of the Company and its subsidiaries for the
then-current fiscal year. Upon the acquisition by the Company and its
subsidiaries of another entity or business, the fee shall be adjusted
prospectively in the same manner using the pro forma consolidated annual net
sales of the Company and its subsidiaries. In no event shall the annual fee be
less than $75,000, regardless of the actual services provided by Hicks Muse
Partners. John R. Muse, Chairman of the Board of Directors of Holdings and the
Company, and Michael J. Levitt, director of Holdings and the Company, are each
principals of Hicks Muse Partners. Hicks Muse Partners is also entitled to
reimbursement for any expenses incurred by it in connection with rendering
services allocable to the Company under the Monitoring and Oversight Agreement,
which are estimated at $100,000 annually. In addition, Holdings and the Company,
jointly and severally, have agreed to indemnify Hicks Muse Partners, its
affiliates, and their respective directors, officers, controlling persons,
agents and employees from and against all claims, liabilities, losses, damages,
expenses and fees related to or arising out of or in connection with the
services rendered by Hicks Muse Partners under the Monitoring and Oversight
Agreement and not resulting primarily from the bad faith, gross negligence, or
willful misconduct of Hicks Muse Partners. The Monitoring and Oversight
Agreement makes available the resources of Hicks Muse Partners concerning a
variety of financial and operational matters. The Company does not believe that
the services that have been and will continue to be provided to the Company by
Hicks Muse Partners could otherwise be obtained by the Company without the
addition of personnel or the engagement of outside professional advisors. In the
Company's opinion, the fees provided for under the Monitoring and Oversight
Agreement reasonably reflect the benefits received and to be received by
Holdings and the Company.
In connection with the Acquisition, Holdings and the Company entered into a
ten-year agreement (the "Financial Advisory Agreement"), pursuant to which Hicks
Muse Partners received a financial advisory fee of $2.5 million at the closing
of the Acquisition as compensation for its services as financial advisor to the
Company in connection with the Acquisition. Hicks Muse Partners also is entitled
to receive a fee equal to 1.5% of the "transaction value" (as defined) for each
"add-on transaction" (as defined) in which the Company is involved. The term
"transaction value" means the total value of the add-on transaction including
without limitation, the aggregate amount of the funds required to complete the
add-on transaction (excluding any fees payable pursuant to the Financial
Advisory Agreement), including the amount of any indebtedness, preferred stock
or similar terms assumed (or remaining outstanding). The term "add-on
transaction" means any future proposal for a tender offer, acquisition, sale,
merger, exchange offer, recapitalization, restructuring or other similar
transaction directly involving the Company or any of its subsidiaries, and any
other person or entity. In addition, Holdings and the Company, jointly and
severally, have agreed to indemnify Hicks Muse Partners, its affiliates, and
their respective directors, officers, controlling persons, agents and employees
from and against all claims, liabilities, losses, damages, expenses and fees
related to or arising out of or in connection with the services rendered by
Hicks Muse Partners under the Financial Advisory Agreement and not resulting
primarily from the bad faith, gross negligence, or willful misconduct of Hicks
Muse Partners. The Financial Advisory Agreement makes available the resources of
Hicks Muse Partners concerning a variety of financial and operation matters. The
Company does not believe that the services that have been and will continue to
be provided by Hicks Muse Partners could otherwise be obtained by the Company
without the addition of personnel or the engagement of outside professional
advisors. In the Company's opinion, the fees provided for under the Financial
Advisory Agreement reasonably reflect the benefits received and to be received
by the Company.
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In connection with the Acquisition, affiliates of Hicks Muse purchased
$25.0 million of the Redeemable Preferred Stock for a purchase price of
approximately $24.1 million (or 96.5% of the initial liquidation preference of
such shares) and received in connection therewith warrants to purchase shares of
common stock of Holdings. The Hicks Muse affiliates, along with the other
purchaser of the Redeemable Preferred Stock and warrants, received certain
registration rights with respect to the shares of common stock of Holdings
issuable upon exercise of the warrants.
On February 28, 1997, the Company purchased substantially all the assets of
the Stations from Jupiter for approximately $157.0 million. SBP had an ownership
interest in and managed the Stations prior to the Acquisition. Robert N. Smith
(the President of Holdings and the Chief Executive Officer and Director of
Holdings and the Company), is the majority owner of SBG, which is a partner in
SBP. In addition, Sandy DiPasquale (the President and Chief Operating Officer of
the Company and Executive Vice President and Chief Operating Officer of
Holdings), David A. Fitz (Senior Vice President and Chief Financial Officer of
Holdings and the Company) and John M. Purcell (Regional Vice President of
Holdings and the Company) are partners in SBP. SBP, SBG and Messrs. DiPasquale,
Fitz and Purcell received approximately $10.0 million of the initial Acquisition
consideration. The Company believes that the terms of the Acquisition were
comparable to the terms that would be reached in an arm's-length transaction
with unrelated third parties. See "The Acquisition."
In 1996, the Stations paid SBP approximately $840,000 for certain
management services provided by SBP to the Stations.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company has 1,000 shares of common stock, $0.01 par value per share,
issued and outstanding, all of which are owned by Holdings. All of the capital
stock of Holdings is owned by the Partnership, which is controlled by Thomas O.
Hicks, the ultimate managing general partner of the Partnership. For a
description of the Company's management interest in the Partnership, see
"Management and Directors -- Management's Participation in the Company." For a
description of the relationship between Hicks Muse and the Company, see "Certain
Transactions".
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DESCRIPTION OF THE CREDIT AGREEMENT
The Credit Agreement, agented by The Chase Manhattan Bank ("Chase") and
NationsBank of Texas, N.A., provides for a seven year revolving credit facility
(the "Revolving Credit Facility") of $35.0 million expiring on February 27,
2004. Commitments under the Revolving Credit Facility will be automatically and
immediately reduced at the end of each fiscal quarter by the product of (x) one
quarter of the percentage set forth opposite each calendar year set forth below
(except with respect to 2004, during which there will be one reduction on
February 27, 2004 in the percentage set forth below opposite the year 2004) and
(y) the amount of the total Revolving Credit Facility commitments then in effect
as of December 31, 1999:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000............................................. 20%
2001............................................. 20%
2002............................................. 20%
2003............................................. 20%
2004............................................. 20%
</TABLE>
The Revolving Credit Facility bears interest at an annual rate, at the
Company's option, equal to the "ABR plus the Applicable Margin" ("ABR Loans") or
the "Eurodollar Rate plus the Applicable Margin" ("Eurodollar Loans"). As used
herein "ABR" means the highest of (i) the rate of interest publicly announced by
Chase as its prime rate in effect at its principal office in New York City, (ii)
the secondary market rate for three-month certificates of deposit (grossed up
for maximum statutory reserve requirements) plus 1% and (iii) the federal funds
effective rate from time to time plus 0.5%. "Eurodollar Rate" means the rate
(grossed up for maximum statutory reserve requirements for eurocurrency
liabilities) at which eurodollar deposits for one, two, three, six, or to the
extent available to all lenders under the Credit Agreement, nine or twelve
months as selected by the Company are offered to Chase in the interbank
eurodollar market in the approximate amount of Chase's share of the applicable
loan. "Applicable Margin" means (a) 1.50%, in the case of ABR Loans, and (b)
2.75%, in the case of Eurodollar Loans. Interest rates on the credit facilities
may be reduced quarterly in the event the Company meets certain financial tests
relating to consolidated leverage.
The Credit Agreement provides for first priority security interests in all
of the tangible and intangible assets of the Company and its direct and indirect
subsidiaries. In addition, the loans under the Credit Agreement will be
guaranteed by Holdings and the Company's current direct and indirect and any
future subsidiaries. Additionally, the Company will be required to apply 66 2/3%
of excess cash flow (as defined in the Credit Agreement), 100% of the net
proceeds of certain dispositions of material assets (other than inventory in the
ordinary course of business and subject to a capacity and basket for
reinvestment), 100% of the net proceeds of the issuance or sale of equity by the
Company or any of its Subsidiaries and 100% of the net proceeds of the
incurrence of certain indebtedness (including the Notes) to the repayment of the
Credit Agreement.
The Credit Agreement contains certain financial and operating maintenance
covenants including a maximum consolidated leverage ratio of (upon issuance of
the Notes) initially 7.0:1, a minimum consolidated fixed charge coverage ratio
of 1.05:1 and a consolidated interest coverage ratio of (upon issuance of the
Notes) initially 1.25:1. In addition, the Company will be limited in the amount
of annual payments that may be made for capital expenditures and corporate
overhead.
The operating covenants of the Credit Agreement include limitations on the
ability of the Company to (i) incur additional indebtedness (including film
debt), other than certain permitted indebtedness, (ii) permit additional liens
or encumbrances, other than certain permitted liens, (iii) make any investments
in other persons, other than certain permitted investments, (iv) become
obligated with respect to contingent obligations, other than certain permitted
contingent obligations and (v) make restricted payments (including dividends on
its common stock). The operating
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covenants will also include restrictions on certain specified fundamental
changes, such as mergers and asset sales, transactions with shareholders and
affiliates and business outside the ordinary course as currently conducted,
amendments or waivers of certain specified agreements and the issuance of
guarantees or other credit enhancements.
If for any reason the Company is unable to comply with the terms of the
Credit Agreement, including the covenants included therein, such noncompliance
would result in an event of default under the Credit Agreement and could result
in acceleration of the payment of the indebtedness outstanding under the Credit
Agreement.
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DESCRIPTION OF REDEEMABLE PREFERRED STOCK
In connection with the Acquisition, the Company issued 300,000 shares of
Redeemable Preferred Stock with an aggregate liquidation preference of $30.0
million, or $100 per share. The Redeemable Preferred Stock is entitled to
quarterly dividends that will accrue at a rate per annum of 14%. Prior to
February 28, 2002, dividends may be paid in either additional whole shares of
Redeemable Preferred Stock or cash, at the Company's option, and only in cash
following that date. The Indenture and the Credit Agreement prohibit the payment
of cash dividends until May 31, 2002. Pursuant to the terms of the securities
purchase agreement under which the Company sold the Redeemable Preferred Stock,
the Company has the right to repurchase the Redeemable Preferred Stock at any
time and from time to time prior to March 1, 1998, at $96.50 per share of
Redeemable Preferred Stock, plus an amount equal to accrued and unpaid dividends
through the repurchase date.
Optional Redemption. The Redeemable Preferred Stock is redeemable, in whole
or in part, at any time on and after February 28, 2002 at the option of the
Company, at the redemption prices (expressed as percentages of the liquidation
preference thereof) set forth below, if redeemed during the twelve-month period
commencing on February 28 of each of the years set forth below, plus accumulated
and unpaid dividends to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 106.20%
2003........................................................ 104.64
2004........................................................ 103.08
2005........................................................ 101.52
2006 and thereafter......................................... 100.00
</TABLE>
Notwithstanding the foregoing, on or prior to February 28, 2001, the
Company may, at its option, use the net cash proceeds of any Public Equity
Offering or Major Asset Sales (as defined in the Certificate of Designation for
the Redeemable Preferred Stock) to redeem the Redeemable Preferred Stock, in
part, at a redemption price equal to 114% of the then effective liquidation
preference, if redeemed during the twelve-month period commencing on February
28, 1997, 112% of the then effective liquidation preference if redeemed during
the twelve-month period commencing on February 28, 1998, 111% of the then
effective liquidation preference if redeemed during the twelve-month period
commencing on February 28, 1999, and 109% of the then effective liquidation
preference if redeemed during the twelve-month period commencing on February 28,
2000, plus, in each case, accumulated and unpaid dividends to the date of
redemption; provided, however, that after any such redemption the shares of
Redeemable Preferred Stock outstanding must equal at least 75% of the aggregate
number of shares of Redeemable Preferred Stock originally issued.
Mandatory Redemption. The Redeemable Preferred Stock is also be subject to
mandatory redemption (subject to contractual and other restrictions with respect
thereto and to the legal availability of funds therefor) in whole on February
28, 2008, at a price equal to the then effective liquidation preference thereof,
plus all accumulated and unpaid dividends to the date of redemption.
Exchange. The Company may, at its option, subject to certain conditions,
including its ability to incur additional indebtedness under the Indenture and
the Credit Agreement, on any scheduled dividend payment date occurring on or
after the Redeemable Preferred Stock issuance date, exchange the Redeemable
Preferred Stock, in whole but not in part, for Company's 14% Subordinated
Exchange Debentures due 2008 (the "Exchange Debentures"). Holders of the
Redeemable Preferred Stock are entitled to receive $1.00 principal amount of
Exchange Debentures for each $1.00 in liquidation preference of Redeemable
Preferred Stock including, to the extent necessary, Exchange Debentures in
principal amounts of less than $1,000.
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Voting Rights. Holders of the Redeemable Preferred Stock have no voting
rights, except as otherwise required by law, and, provided further, that the
holders of the Redeemable Preferred Stock, voting together as a single class,
shall have the right to elect the lesser of two directors or 25% of the total
number of directors constituting the Board of Directors of the Company upon the
occurrence of certain events including, but not limited to the failure by the
Company on or after February 28, 2002, to pay cash dividends in full on the
Redeemable Preferred Stock for six or more quarterly dividend periods, the
failure by the Company to discharge any mandatory redemption or repayment
obligation with respect to the Redeemable Preferred Stock, the breach or
violation of one or more of the covenants contained in the Certificate of
Designation or the failure by the Company to repay at final stated maturity, or
the acceleration of the final stated maturity of, certain indebtedness of the
Company.
Change of Control. The Certificate of Designation for the Redeemable
Preferred Stock provides that, upon the occurrence of a change of control (as
defined in the Certificate of Designation for the Redeemable Preferred Stock),
each holder will have the right to require that the Company repurchase all or a
portion of such holder's Redeemable Preferred Stock in cash at a purchase price
equal to 101% of the then current effective liquidation preference thereof, plus
an amount in cash equal to all accumulated and unpaid dividends per share to the
date of repurchase.
Certain Covenants. The Certificate of Designation for the Redeemable
Preferred Stock and the indenture for the Exchange Debentures contain covenants
customary for securities comparable to the Redeemable Preferred Stock and the
Exchange Debentures, including covenants that restrict the ability of the
Company and its subsidiaries to incur additional indebtedness, pay dividends and
make certain other restricted payments, and merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially of the assets of the Company. Such covenants are substantially
identical to those covenants contained in the Indenture.
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company on March 25, 1997, in the Original
Offering. In connection with that placement, the Company entered into the
Registration Rights Agreement, which requires that the Company file the
Registration Statement under the Securities Act with respect to the New Notes
and, upon the effectiveness of that Registration Statement, offer to the holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive legend
and which generally may be reoffered and resold by the holder without
registration under the Securities Act. The Registration Rights Agreement further
provides that the Company must use its best efforts to (i) cause the
Registration Statement with respect to the Exchange Offer to be declared
effective on or before September 21, 1997 and (ii) consummate the Exchange Offer
on or before November 5, 1997. Except as provided below, upon the completion of
the Exchange Offer, the Company's obligations with respect to the registration
of the Old Notes and the New Notes will terminate. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part and the summary herein of certain provisions
thereof does not purport to be complete and is qualified in its entirety by
reference thereto. As a result of the filing and the effectiveness of the
Registration Statement, certain liquidated damages provided for in the
Registration Rights Agreement will not become payable by the Company. Following
the completion of the Exchange Offer (except as set forth in the paragraph
immediately below), holders of Old Notes not tendered will not have any further
registration rights and those Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for the Old
Notes could be adversely affected upon completion of the Exchange Offer.
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<PAGE> 77
In order to participate in the Exchange Offer, a holder must represent to
the Company, among other things, that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving the New Notes, (ii) neither the holder nor any such other
person is engaging in or intends to engage in a distribution of the New Notes,
(iii) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of the New
Notes and (iv) neither the holder nor any such other person is an "affiliate,"
as defined under Rule 405 promulgated under the Securities Act, of the Company.
Pursuant to the Registration Rights Agreement, the Company is required to file a
"shelf" registration statement for a continuous offering pursuant to Rule 415
under the Securities Act in respect of the Old Notes if (i) because of any
change in law or applicable interpretations of the staff of the Commission, the
Company is not permitted to effect the Exchange Offer, (ii) the Exchange Offer
is not consummated within 225 days of the Original Offering, (iii) any holder of
Private Exchange Securities (as defined) requests within 60 days after the
Exchange Offer, (iv) any applicable law or interpretations do not permit any
holder of Old Notes to participate in the Exchange Offer, (v) any holder of Old
Notes participates in the Exchange Offer and does not receive freely
transferrable New Notes in exchange for Old Notes or (vi) the Company so elects.
In the event that the Company is obligated to file a "shelf" registration
statement, it will be required to keep such "shelf" registration statement
effective for at least three years. Other than as set forth in this paragraph,
no holder will have the right to participate in the "shelf" registration
statement nor otherwise to require that the Company register such holder's
shares of Old Notes under the Securities Act. See "-- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third-parties unrelated to the Company, the Company believes
that, with the exceptions set forth below, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any person receiving such New Notes, whether or not
such person is the registered holder (other than any such holder or such other
person which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the New
Notes are acquired in the ordinary course of business of the holder or such
other person and neither the holder nor such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Notes. Any holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes cannot rely on this
interpretation by the Commission's staff and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where the Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offer (except as set forth in the
second paragraph under "-- Purpose and Effect" above), holders of Old Notes not
tendered will not have any further registration rights and those Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for a holder's Old Notes could be adversely affected
upon completion of the Exchange Offer if the holder does not participate in the
Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes
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<PAGE> 78
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000 in principal amount.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the Indenture pursuant to which the Old
Notes were issued.
As of August 1, 1997, Old Notes representing $100,000,000 aggregate
principal amount were outstanding and there was one registered holder, a nominee
of DTC. This Prospectus, together with the Letter of Transmittal, is being sent
to such registered Holder and to others believed to have beneficial interests in
the Old Notes. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"The Exchange Offer -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 26, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will issue a notice of any extension by press
release or other public announcement prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. The
Company reserves the right, in its sole discretion, (i) to delay accepting any
Old Notes, to extend the Exchange Offer or, if any of the conditions set forth
under "The Exchange Offer -- Certain Conditions to Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender the Old Notes in the Exchange Offer.
Except as set forth under "The Exchange Offer -- Book Entry Transfer," to tender
in the Exchange Offer a holder must complete, sign, and date the Letter of
Transmittal, or a copy thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver the Letter
of Transmittal or copy to the Exchange Agent prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, prior to the Expiration
Date or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if that procedure is available, into the
Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to
the procedure for book-
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entry transfer described below, must be received by the Exchange Agent prior to
the Expiration Date, or (iii) the holder must comply with the guaranteed
delivery procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth under "The Exchange Offer -- Exchange Agent" prior to
the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the Letter of Transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration Instruction"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, the Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities, or conditions of tender
as to particular Old Notes. The Company's interpreta-
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<PAGE> 80
tion of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent, nor
any other person shall incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such defects or irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "The Exchange Offer -- Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the registered holder, (ii) neither the
holder nor any such other person is engaging in or intends to engage in a
distribution of such New Notes, (iii) neither the holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes, and (iv) neither the holder nor any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Company.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal), and all other required
documents. If any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the Exchange Offer or if Old Notes are submitted
for a greater principal amount than the holder desires to exchange, such
unaccepted or non-exchanged Old Notes will be returned without expense to the
tendering Holder thereof (or, in the case of Old Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where the Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such New Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures
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<PAGE> 81
for transfer. However, although delivery of Old Notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or copy thereof, with any required signature guarantees and any
other required documents, must, in any case other than as set forth in the
following paragraph, be transmitted to and received by the Exchange Agent at the
address set forth under "The Exchange Offer -- Exchange Agent" on or prior to
the Expiration Date or the guaranteed delivery procedures described below must
be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 pm., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth on the back cover page
of this Prospectus prior to 5:00 pm., New York City time, on the Expiration
Date. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee register the
transfer of such Old Notes into the name of the person withdrawing the tender,
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form,
and eligibility (including time of receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the
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Exchange Offer. Any Old Notes which have been tendered for exchange but which
are not exchanged for any reason will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal, rejection of
tender, or termination of the Exchange Offer. Properly withdrawn Old Notes may
be retendered by following one of the procedures under "The Exchange
Offer -- Procedures for Tendering" at any time on or prior to the Expiration
Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA"). In any such event the Company is required to use every reasonable
effort to obtain the withdrawal of any stop order at the earliest possible time.
EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. U.S. Trust Company of Texas, N.A. has been appointed as Exchange Agent
for the Exchange Offer. Questions, requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<C> <C>
By Registered or Certified Mail: By Hand:
U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A.
P.O. Box 841 111 Broadway
Attn: Corporate Trust Services Lower Level
Cooper Station Attn: Corporate Trust Services
New York, New York 10276-0841 New York, New York 10006-1906
By Overnight Courier: By Facsimile:
U.S. Trust Company of Texas, N.A. (212) 420-6504
770 Broadway, 13th Floor For Information or
Corporate Trust Operations Confirmation by Telephone:
New York, New York 10003 (800) 225-2398
</TABLE>
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
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FEES AND EXPENSES
The Company will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$210,304, which includes fees and expenses of the Exchange Agent, accounting,
legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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DESCRIPTION OF NEW NOTES
GENERAL
The New Notes are to be issued under the Indenture, dated as of March 25,
1997 (the "Indenture"), between the Company and U.S. Trust Company of Texas,
N.A., as trustee (the "Trustee"), a copy of which is available upon request to
the Company. The Old Notes were also issued pursuant to the Indenture. Upon the
effectiveness of the Exchange Offer, the Indenture will be subject to and
governed by the Trust Indenture Act. The following summary of certain provisions
of the Indenture and the Notes does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of the
Indenture (including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended) and the
Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee in New York, New York), except
that, at the option of the Company, payment of interest may be made by check
mailed to the address of the holders as such address appears in the note
registrar.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as paying agent and registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any paying agent and registrar without notice to holders of the Notes.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be unsecured, senior subordinated obligations of the Company
and will be limited to $100,000,000 aggregate principal amount at any one time
outstanding (including any New Notes that may be issued from time to time in
exchange for the Old Notes as described under "The Exchange Offer"), and will
mature on March 15, 2007. Interest on the Notes will accrue at a rate per annum
equal to 11% and will be payable in cash semiannually on March 15 and September
15 commencing on September 15, 1997 to holders of record on the immediately
preceding March 1 and September 1. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from March 25, 1997. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time on or after March 15, 2002, in whole
or in part, at the option of the Company, at the redemption prices (expressed as
a percentage of the principal amount thereof on the applicable redemption date)
set forth below, plus accrued and unpaid interest, if any, to the redemption
date, if redeemed during the 12-month period beginning on March 15 of each of
the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 105.500%
2003........................................................ 103.667%
2004........................................................ 101.833%
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, prior to March 15, 2000, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings to redeem up to 25%
of the principal amount of the Notes at a redemption price equal to 111.0% of
the principal amount thereof plus accrued and unpaid interest to the redemption
date; provided, however, that after any such redemption, at least 75% of the
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<PAGE> 85
aggregate principal amount of the Notes originally issued would remain
outstanding immediately after giving effect to such redemption. Any such
redemption will be required to occur on or prior to the date that is one year
after the receipt by the Company of the proceeds of a Public Equity Offering.
The Company shall effect such redemption on a pro rata basis.
In addition, prior to March 15, 2002, the Company may, at its option,
redeem the Notes upon a Change of Control. See "-- Change of Control."
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, in the absence of such requirements or if the Notes are not
so listed, on a pro rata basis, provided that no Notes of $1,000 or less shall
be redeemed in part. Notice of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original Note. On and after the
redemption date, interest ceases to accrue on the Notes or portions of them
called for redemption.
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control,
each holder will have the right to require that the Company purchase all or a
portion of such holder's Notes in cash pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following the date on which the Company
becomes aware that a Change of Control has occurred, if the purchase of the
Notes would violate or constitute a default under any other Indebtedness of the
Company, then the Company shall, to the extent needed to permit such purchase of
Notes, either (i) repay all such Indebtedness and terminate all commitments
outstanding thereunder or (ii) obtain the requisite consents, if any, under any
such Indebtedness required to permit the purchase of the Notes as provided
below. The Company will first comply with the covenant in the preceding sentence
before it will be required to make the Change of Control Offer or purchase the
Notes pursuant to the provisions described below.
Within 30 days following the date on which the Company becomes aware that a
Change of Control has occurred, the Company must send, by first-class mail
postage prepaid, a notice to each holder of Notes, which notice shall govern the
terms of the Change of Control Offer. Such notice shall state, among other
things, the purchase date, which must be no earlier than 30 days nor later than
45 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). Holders electing to have any Notes
purchased pursuant to a Change of Control Offer will be required to surrender
such Notes to the paying agent and registrar for the Notes at the address
specified in the notice prior to the close of business on the business day prior
to the Change of Control Payment Date.
In addition, the Indenture provides that, prior to March 15, 2002, upon the
occurrence of a Change of Control, the Company will have the option to redeem
the Notes in whole but not in part (a "Change of Control Redemption") at a
redemption price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date plus the Applicable Premium. In order to
effect a Change of Control Redemption, the Company must send a notice to each
holder of the Notes, which notice shall govern the terms of the Change of
Control Redemption. Such notice
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must be mailed to holders of the Notes within 30 days following the date the
Change of Control occurred (the "Change of Control Redemption Date") and state
that the Company is effecting a Change of Control Redemption in lieu of a Change
of Control Offer.
"Applicable Premium" means, with respect to a Note at any Change of Control
Redemption Date, the greater of (i) 1.0% of the principal amount of such Note
and (ii) the excess of (A) the present value at such time of (1) the redemption
price of such Note at March 15, 2002 (such redemption price being described
under "-- Optional Redemption") plus (2) all semi-annual payments of interest
through March 15, 2002 computed using a discount rate equal to the Treasury Rate
plus 100 basis points over (B) the principal amount of such Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) that
has become publicly available at least two business days prior to the Change of
Control Redemption Date (or, if such Statistical Release is no longer published,
any publicly available source or similar market data)) most nearly equal to the
period from the Change of Control Redemption Date to March 15, 2002; provided,
however, that if the period from the Change of Control Redemption Date to March
15, 2002 is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury securities for
which such yields are given except that if the period from the Change of Control
Redemption Date to March 15, 2002 is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent applicable in connection with the purchase of Notes
pursuant to a Change of Control Offer.
This "Change of Control" covenant will not apply in the event of (a)
changes in a majority of the board of directors of the Company or Holdings so
long as a majority of the board of directors continues to consist of Continuing
Directors and (b) certain transactions with Permitted Holders. In addition, this
covenant is not intended to afford holders of Notes protection in the event of
certain highly leveraged transactions, reorganizations, restructurings, mergers
and other similar transactions that might adversely affect the holders of Notes,
but would not constitute a Change of Control. The Company could, in the future,
enter into certain transactions including certain recapitalizations of the
Company, that would not constitute a Change of Control with respect to the
Change of Control purchase feature of the Notes, but would increase the amount
of indebtedness outstanding at such time. However, the Indenture contains
limitations on the ability of the Company and its Subsidiaries to incur
additional Indebtedness and the ability of the Company to engage in certain
mergers, consolidations and sales of assets, whether or not a Change of Control
is involved, subject, in each case, to limitations and qualifications. See
"-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Capital Stock" and "-- Certain Covenants -- Merger,
Consolidation and Sale of Assets" below.
With respect to the sale of "all or substantially all" the assets of the
Company, which would constitute a Change of Control for purposes of the
Indenture, the meaning of the phrase "all or substantially all" varies according
to the facts and circumstances of the subject transaction, has no clearly
established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company and,
therefore, it may be unclear whether a Change of Control has occurred and
whether the Notes should be subject to a Change of Control Offer.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Company and its Subsidiaries may also contain prohibitions
of certain events that would constitute a Change of
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Control or require such Senior Indebtedness to be repurchased upon a Change of
Control. Moreover, the exercise by the holders of their right to require the
Company to repurchase the Notes could cause a default under such Senior
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase of the Company. Finally, the Company's
ability to pay cash to the holders upon a repurchase may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. Even if sufficient funds were otherwise available, the terms of the
Credit Agreement may prohibit the Company's prepayment of the Notes prior to
their scheduled maturity. Consequently, if the Company is not able to prepay the
Indebtedness under the Credit Agreement and any other Senior Indebtedness
containing similar restrictions or obtain requisite consents, as described
above, the Company will be unable to fulfill its repurchase obligations if
holders of the Notes exercise their repurchase rights following a Change of
Control, thereby resulting in a default under the Indenture.
None of the provisions in the Indenture relating to a purchase of the Notes
upon a Change of Control is waivable by the board of directors of the Company.
Without the consent of each holder of the Notes affected thereby, after the
mailing of the notice of a Change of Control Offer, no amendment to the
Indenture may, directly or indirectly, affect the Company's obligation to
purchase the outstanding Notes or amend, modify or change the obligation of the
Company to consummate a Change of Control Offer or waive any default in the
performance thereof or modify any of the provisions of the definitions with
respect to any such offer.
RANKING AND SUBORDINATION
The payment of the principal of, premium (if any), and interest on the
Notes is subordinated in right of payment, to the extent set forth in the
Indenture, to the payment when due of all Senior Indebtedness of the Company.
However, payment from the money or the proceeds of U.S. Government Obligations
held in any defeasance trust described under "Defeasance" below is not
subordinate to any Senior Indebtedness or subject to the restrictions described
herein. As of December 31, 1996, on a pro forma basis after giving effect to the
Acquisition and the Original Offering, the Company would not have had any Senior
Indebtedness outstanding. Although the Indenture contains limitations on the
amount of additional Indebtedness that the Company and its Subsidiaries may
incur, under certain circumstances the amount of such additional Indebtedness
could be substantial and, in any case, all or a portion of such Indebtedness may
be Senior Indebtedness. See "Certain Covenants -- Limitation on Indebtedness"
below.
"Senior Indebtedness" is defined, whether outstanding on the Issue Date or
thereafter issued, as (x) all obligations under the Credit Agreement and (y) all
other Indebtedness of the Company, including interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or any Subsidiary whether or not a claim
for post-filing interest is allowed in such proceeding) and premium, if any,
thereon, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that the obligations in respect
of such Indebtedness are not superior in right of payment to the Notes;
provided, however, that Senior Indebtedness will not include (1) any obligation
of the Company to any Subsidiary, (2) any liability for federal, state, foreign.
local or other taxes owed or owing by the Company, (3) any accounts payable or
other liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities) or (4)
any Indebtedness, guarantee or obligation of the Company that is expressly
subordinate or junior in right of payment to any other Indebtedness, guarantee
or obligation of the Company, including any Senior Subordinated Indebtedness and
any Subordinated Obligations.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not incur, directly or indirectly, any Indebtedness that is subordinate or
junior in
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ranking in any respect to Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is contractually subordinated in right of payment
to Senior Subordinated Indebtedness. Unsecured Indebtedness is not deemed to be
subordinate or junior to Secured Indebtedness merely because it is unsecured.
Secured Indebtedness is not deemed to be Senior Indebtedness merely because it
is secured.
The Company may not pay principal of, premium (if any), or interest on the
Notes or make any deposit pursuant to the provisions described under
"Satisfaction and Discharge or Indenture; Defeasance" below and may not
otherwise purchase or retire any Notes (collectively, "pay the Notes") if (i)
any Senior Indebtedness is not paid when due or (ii) any other default on Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms unless, in either case, the default has been cured
or waived or is no longer continuing and/or any such acceleration has been
rescinded or such Senior Indebtedness has been paid in full; provided, however,
that the Company may pay the Notes without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of the Senior Indebtedness with respect to which either of the
events set forth in clause (i) or (ii) of this sentence has occurred and is
continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the preceding sentence) with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay the Notes (except (i) in Qualified Capital
Stock issued by the Company to pay interest on the Notes or issued in exchange
for the Notes, (ii) in securities substantially identical to the Notes issued by
the Company in payment of interest accrued thereon or (iii) in securities issued
by the Company which are subordinated to the Senior Indebtedness at least to the
same extent as the Notes and having a Weighted Average Life to Maturity at least
equal to the remaining Weighted Average Life to Maturity of the Notes) for a
period (a "Payment Blockage Period") commencing upon the receipt by the Trustee
(with a copy to the Company) of written notice (a "Blockage Notice") of such
default from the Representative of the holders of such Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the Person
or Persons who gave such Blockage Notice, (ii) because the default giving rise
to such Blockage Notice has been cured or waived or is no longer continuing or
(iii) because such Designated Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence,
but subject to the provisions of the first sentence of this paragraph and the
provisions of the immediately succeeding paragraph, the Company may resume
payments on the Notes after the end of such Payment Blockage Period. Not more
than one Blockage Notice may be given, and not more than one payment Blockage
Period may occur, in any consecutive 360-day period, irrespective of the number
of defaults with respect to Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization or bankruptcy of or
similar proceeding relating to the Company or its property, the holders of
Senior Indebtedness will be entitled to receive payment in full of the Senior
Indebtedness before the holders of the Notes are entitled to receive any
payment, and until the Senior Indebtedness is paid in full, any payment or
distribution to which holders of the Notes would be entitled but for the
subordination provisions of the Indenture will be made to holders of the Senior
Indebtedness as their interests may appear. If a distribution is made to holders
of the Notes that, due to the subordination provisions, should not have been
made to them, such holders are required to hold it in trust for the holders of
Senior Indebtedness and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the Representative (if any) of any
issue of Designated Senior Indebtedness which is then outstanding; provided,
however, that the Company and the Trustee shall
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be obligated to notify such a Representative only if such Representative has
delivered or caused to be delivered an address for the service of such a notice
to the Company and the Trustee (and the Company and the Trustee shall only be
obligated to deliver the notice to the address so specified). If a notice is
required pursuant to the immediately preceding sentence, the Company may not pay
the Notes (except payment (i) in Qualified Capital Stock issued by the Company
to pay interest on the Notes or issued in exchange for the Notes, (ii) in
securities substantially identical to the Notes issued by the Company in payment
of interest accrued thereon or (iii) securities issued by the Company which are
subordinated to the Senior Indebtedness at least to the same extent as the Notes
and have a Weighted Average Life to Maturity at lease equal to the remaining
Weighted Average Life to Maturity of the Notes), until five business days after
the respective Representative of the Designated Senior Indebtedness receives
notice (at the address specified in the preceding sentence) of such acceleration
and, thereafter, may pay the Notes only if the subordination provisions of the
Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the holders of the Notes, and
creditors of the Company who are not holders of Senior Indebtedness (including
holders of the Notes) may recover less, ratably, than holders of Senior
Indebtedness. In addition, the Indenture does not prohibit the transfer or
contribution of assets of the Company to its Wholly-Owned Subsidiaries. In the
event of any such transfer or contribution, holders of the Notes will be
effectively subordinated to the claims of creditors of such subsidiaries against
such assets.
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock. (a) The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
create, incur, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, "incur"), any
Indebtedness (other than Permitted Indebtedness) and the Company will not issue
any Disqualified Capital Stock and its Subsidiaries will not issue any Preferred
Stock; provided, however, that the Company and its Subsidiaries may incur
Indebtedness or issue shares of such Capital Stock if, in either case, the
Company's Leverage Ratio at the time of incurrence of such Indebtedness or the
issuance of such Capital Stock, as the case may be, after giving pro forma
effect to such incurrence or issuance as of such date and to the use of proceeds
therefrom is less than 7.0 to 1.
(b) In addition, the Indenture provides that the Company will not incur any
Secured Indebtedness (other than Senior Indebtedness) unless contemporaneously
therewith effective provision is made to secure the Notes equally and ratably
with such Secured Indebtedness for so long as such Secured Indebtedness is
secured by a Lien.
Limitation on Layering. The Indenture provides that the Company will not
incur any Indebtedness if such Indebtedness is subordinate or junior in ranking
in any respect to any Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is contractually subordinated in right of payment
to all Senior Subordinated Indebtedness (including the Notes).
Limitation on Restricted Payments. (a) The Indenture provides that neither
the Company nor any of its Subsidiaries will, directly or indirectly, make any
Restricted Payment if at the time of such Restricted Payment and immediately
after giving effect thereto:
(i) a Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Restricted
Payment; or
(ii) the Company is not able to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness and Issuance of Disqualified Capital
Stock" covenant; or
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(iii) the aggregate amount of Restricted Payments made subsequent to
the Issue Date (the amount expended for such purposes, if other than in
cash, being the fair market value of such property as determined by the
board of directors of the Company in good faith) exceeds the sum of (a) (x)
100% of the aggregate Consolidated Cash Flow of the Company (or, in the
event such Consolidated Cash Flow shall be a deficit, minus 100% of such
deficit) accrued subsequent to the Issue Date to the most recent date for
which financial information is available to the Company, taken as one
accounting period, less (y) 1.4 times Consolidated Interest Expense for the
same period, plus (b) 100% of the aggregate net proceeds, including the
fair market value of property other than cash as determined by the board of
directors of the Company in good faith, received subsequent to February 28,
1997 by the Company from any Person (other than a Subsidiary of the
Company) from the issuance and sale subsequent to February 28, 1997 of
Qualified Capital Stock of the Company (excluding (i) any net proceeds from
issuances and sales financed directly or indirectly using funds borrowed
from the Company or any Subsidiary of the Company, until and to the extent
such borrowing is repaid, but including the proceeds from the issuance and
sale of any securities convertible into or exchangeable for Qualified
Capital Stock to the extent such securities are so converted or exchanged
and including any additional proceeds received by the Company upon such
conversion or exchange and (ii) any net proceeds received from issuances
and sales that are used to consummate a transaction described in clauses
(2) and (3) of paragraph (b) below), plus (c) without duplication of any
amount included in clause (iii)(b) above, 100% of the aggregate net
proceeds, including the fair market value of property other than cash
(valued as provided in clause (iii)(b) above), received by the Company as a
capital contribution subsequent to February 28, 1997, plus (d) the amount
equal to the net reduction in Investments (other than Permitted
Investments) made by the Company or any of its Subsidiaries in any Person
resulting from (i) repurchases or redemptions of such Investments by such
Person, proceeds realized upon the sale of such Investment to an
unaffiliated purchaser and repayments of loans or advances or other
transfers of assets by such Person to the Company or any Subsidiary of the
Company or (ii) the redesignation of Unrestricted Subsidiaries as
Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Subsidiary, the amount of
Investments previously made by the Company or any Subsidiary in such
Unrestricted Subsidiary, which amount was included in the calculation of
Restricted Payments; provided, however, that no amount shall be included
under this clause (d) to the extent it is already included in Consolidated
Cash Flow, plus (e) the aggregate net cash proceeds received by a Person in
consideration for the issuance of such Person's Capital Stock (other than
Disqualified Capital Stock) that are held by such Person at the time such
Person is merged with and into the Company in accordance with the "Merger,
Consolidation and Sale of Assets" covenant subsequent to the Issue Date;
provided, however, that concurrently with or immediately following such
merger the Company uses an amount equal to such net cash proceeds to redeem
or repurchase the Company's Capital Stock, plus (f) $2,500,000.
(b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days
after the date of its declaration if such dividend or distribution would have
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,
options or other rights to acquire shares of any class of such Capital Stock
either (x) solely in exchange for shares of Qualified Capital Stock or other
rights to acquire Qualified Capital Stock or (y) through the application of the
net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock or warrants,
options or other rights to acquire Qualified Capital Stock or (z) in the case of
Disqualified Capital Stock, solely in exchange for, or through the application
of the net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of, Disqualified Capital Stock that has a redemption
date no earlier than, and requires the payment of current dividends or
distributions in cash no earlier than, in each case, the Disqualified Capital
Stock being purchased, redeemed or
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otherwise acquired or retired; (3) the acquisition of Indebtedness of the
Company that is subordinate or junior in right of payment to the Notes either
(x) solely in exchange for shares of Qualified Capital Stock (or warrants,
options or other rights to acquire Qualified Capital Stock), for shares of
Disqualified Capital Stock that have a redemption date no earlier than, and
require the payment of current dividends or distributions in cash no earlier
than, in each case, the maturity date and interest payments dates, respectively,
of the Indebtedness being acquired, or for Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes, at least to the extent
that the Indebtedness being acquired is subordinated to the Notes and has a
Weighted Average Life to Maturity no less than that of the Indebtedness being
acquired or (y) through the application of the net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of shares
of Qualified Capital Stock (or warrants, options or other rights to acquire
Qualified Capital Stock), shares of Disqualified Capital Stock that have a
redemption date no earlier than, and require the payment of current dividends or
distributions in cash no earlier than, in each case, the maturity date and
interest payments dates, respectively, of the Indebtedness being refinanced, or
Indebtedness of the Company that is subordinate or junior in right of payment to
the Notes at least to the extent that the Indebtedness being acquired is
subordinated to the Notes and has a Weighted Average Life to Maturity no less
than that of the Indebtedness being refinanced; (4) payments by the Company to
repurchase, or to enable Holdings to repurchase, Capital Stock or other
securities from employees of the Company or Holdings in an aggregate amount not
to exceed $2,000,000; (5) payments to enable Holdings to redeem or repurchase
stock purchase or similar rights granted by Holdings with respect to its Capital
Stock in an aggregate amount not to exceed $500,000; (6) payments, not to exceed
$100,000 in the aggregate, to enable Holdings to make cash payments to holders
of its Capital Stock in lieu of the issuance of fractional shares of its Capital
Stock; (7) payments made pursuant to any merger, consolidation or sale of assets
effected in accordance with the "Merger, Consolidation and Sale of Assets"
covenant; provided, however, that no such payment may be made pursuant to this
clause (7) unless, after giving effect to such transaction (and the incurrence
of any Indebtedness in connection therewith and the use of the proceeds
thereof), the Company would be able to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness and Issuance of Disqualified Capital
Stock" covenant such that after incurring that $1.00 of additional Indebtedness,
the Leverage Ratio would be less than 6.0 to 1; (8) payments to enable Holdings
or the Company to pay dividends on its Capital Stock (other than Disqualified
Capital Stock) after the first Public Equity Offering in an annual amount not to
exceed 6.0% of the gross proceeds (before deducting underwriting discounts and
commissions and other fees and expenses of the offering) received from shares of
Capital Stock (other than Disqualified Capital Stock) sold for the account of
the issuer thereof (and not for the account of any stockholder) in such initial
Public Equity Offering; (9) payments by the Company to fund the payment by any
direct or indirect holding company thereof of audit, accounting, legal or other
similar expenses, to pay franchise or other similar taxes and to pay other
corporate overhead expenses, so long as such dividends are paid as and when
needed by its respective direct or indirect holding company and so long as the
aggregate amount of payments pursuant to this clause (9) does not exceed
$500,000 in any calendar year; (10) payments by the Company to fund taxes of
Holdings for a given taxable year in an amount equal to the lesser of (x) the
Company's "separate return liability" and (y) the portion of the tax liability
of the "affiliated group" (within the meaning of Section 1504 (a) (I) of the
Code (as defined)) of which the Company is a member in accordance with the
method described in Treasury Regulations Section 1.1552-1 (a) (I) pursuant to
(x) or (y) of this clause (10) to the extent that the Company files a combined
or consolidated income tax return with Holdings under any state or local income
tax law for a taxable year, the payment by the Company to Holdings to fund such
tax liability for such taxable year shall be provided for in a manner as similar
as possible to that provided for United States federal income taxes (for
purposes of this clause (10) "separate return liability" for a given taxable
year shall mean the hypothetical United States tax liability of the Company
defined as if the Company had filed its own U.S. federal tax return for such
taxable year) and (11) on and after May 31, 2002, the payment of cash dividends
in respect of the Company's
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14% Redeemable Preferred Stock, par value $.01; provided, however, that in the
case of clauses (3), (4), (5), (6), (7), (8) and (11), no Event of Default shall
have occurred or be continuing at the time of such payment or as a result
thereof. In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date, amounts expended pursuant to clauses (1), (4),
(5), (6), (7), (8) and (11) shall be included in such calculation.
Merger, Consolidation and Sale of Assets. The Indenture provides that the
Company may not, in a single transaction or a series of related transactions,
consolidate with or merge with or into, or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its assets to, another
Person or adopt a plan of liquidation unless (i) either (1) the Company is the
surviving or continuing Person or (2) the Person (if other than the Company)
formed by such consolidation or into which the Company is merged or the Person
that acquires by conveyance, transfer or lease the properties and assets of the
Company substantially as an entirety or in the case of a plan of liquidation,
the Person to which assets of the Company have been transferred, shall be a
corporation, partnership or trust organized and existing under the laws of the
United States or any State thereof or the District of Columbia; (ii) such
surviving Person shall assume all of the obligations of the Company under the
Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after giving effect to
such transaction and the use of the proceeds therefrom (on a pro forma basis,
including giving effect to any Indebtedness incurred or anticipated to be
incurred in connection with such transaction), the Company (in the case of
clause (1) of the foregoing clause (i)) or such Person (in the case of clause
(2) of the foregoing clause (i)) shall be able to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant; (iv) immediately after giving effect to
such transactions, no Default or Event of Default shall have occurred or be
continuing; and (v) the Company has delivered to the Trustee prior to the
consummation of the proposed transaction an Officers' Certificate and an Opinion
of Counsel, each stating that such consolidation, merger or transfer complies
with the Indenture and that all conditions precedent in the Indenture relating
to such transaction have been satisfied. For purposes of the foregoing, the
transfer (by lease, assignment, sale or otherwise, in a single transaction or
series of related transactions) of all or substantially all of the properties
and assets of one or more Subsidiaries, the Capital Stock of which constitutes
all or substantially all of the properties or assets of the Company, will be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company. Notwithstanding the foregoing clauses (ii) and (iii), (1)
any Subsidiary of the Company may consolidate with, merge into or transfer all
or part of its properties and assets to the Company and (2) the Company may
merge with a corporate Affiliate thereof incorporated solely for the purpose of
reincorporating the Company in another jurisdiction in the U.S. to realize tax
or other benefits.
Limitation on Asset Sales. The Indenture provides that neither the Company
nor any of its Subsidiaries will consummate an Asset Sale unless (i) the Company
or the applicable Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
sold or otherwise disposed of (as determined in good faith by management of the
Company or, if such Asset Sale involves consideration in excess of $2,500,000,
by the board of directors of the Company, as evidenced by a board resolution),
(ii) at least 75% of the consideration received by the Company or such
Subsidiary, as the case may be, from such Asset Sale is in the form of cash or
Cash Equivalents (other than to the extent that the Company is exchanging all or
substantially all the assets of one or more broadcast businesses operated by the
Company (including by way of the transfer of capital stock) for all or
substantially all the assets (including by way of the transfer of capital stock)
constituting one or more broadcast businesses operated by another Person, in
which event, to such extent, the foregoing requirement with respect to the
receipt of cash or Cash Equivalents shall not apply) and is received at the time
of such disposition and (iii) upon the consummation of an Asset Sale, the
Company applies, or causes such Subsidiary to apply, such Net Cash Proceeds
within 180 days of receipt thereof either (A) to repay any Senior Indebtedness
of the Company or any Indebtedness of a Subsidiary of the Company
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(and, to the extent such Senior Indebtedness relates to principal under a
revolving credit or similar facility, to obtain a corresponding reduction in the
commitments thereunder), (B) to reinvest, or to be contractually committed to
reinvest pursuant to a binding agreement, in Productive Assets and, in the
latter case, to have so reinvested within 360 days of the date of receipt of
such Net Cash Proceeds or (C) to purchase Notes and other Senior Subordinated
Indebtedness, pro rata tendered to the Company for purchase at a price equal to
100% of the principal amount thereof (or the accreted value of such other Senior
Subordinated Indebtedness, if such other Senior Subordinated Indebtedness is
issued at a discount) plus accrued interest thereon, if any, to the date of
purchase pursuant to an offer to purchase made by the Company as set forth below
(a "Net Proceeds Offer"); provided, however, that the Company may defer making a
Net Proceeds Offer until the aggregate Net Cash Proceeds from Asset Sales not
otherwise applied in accordance with this covenant equal or exceed $5,000,000.
Subject to the deferral right set forth in the final proviso of the
preceding paragraph, each notice of a Net Proceeds Offer will be mailed, by
first-class mail, to holders of Notes not more than 180 days after the relevant
Asset Sale or, in the event the Company or a Subsidiary has entered into a
binding agreement as provided in (B) above, within 180 days following the
termination of such agreement but in no event later than 360 days after the
relevant Asset Sale. Such notice will specify, among other things, the purchase
date (which will be no earlier than 30 days nor later than 45 days from the date
such notice is mailed, except as otherwise required by law) and will otherwise
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Net Proceeds Offer, holders of Notes may elect to tender their Notes in
whole or in part in integral multiples of $1,000. To the extent holders properly
tender Notes in an amount which, together with all other Senior Subordinated
Indebtedness so tendered, exceeds the Net Proceeds Offer, Notes and other Senior
Subordinated Indebtedness of tendering holders will be repurchased on a pro rata
basis (based upon the aggregate principal amount tendered). To the extent that
the aggregate principal amount of Notes tendered pursuant to any Net Proceeds
Offer, which, together with the aggregate principal amount or aggregate accreted
value, as the case may be, of all other Senior Subordinated Indebtedness so
tendered, is less than the amount of Net Cash Proceeds subject to such Net
Proceeds Offer, the Company may use any remaining portion of such Net Cash
Proceeds not required to fund the repurchase of tendered Notes and other Senior
Subordinated Indebtedness for any purposes otherwise permitted by the Indenture.
Upon the consummation of any Net Proceeds Offer, the amount of Net Cash Proceeds
subject to any future Net Proceeds Offer from the Asset Sales giving rise to
such Net Cash Proceeds shall be deemed to be zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent applicable in connection with the repurchase of Notes
pursuant to a Net Proceeds Offer.
Limitation on Asset Swaps. The Indenture provides that the Company will
not, and will not permit any Subsidiary to, engage in any Asset Swaps, unless:
(i) at the time of entering into such Asset Swap, and immediately after giving
effect to such Asset Swap, no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof; (ii) in the event
such Asset Swap involves an aggregate amount in excess of $1.0 million, the
terms of such Asset Swap have been approved by a majority of the members of the
board of directors of the Company and (iii) in the event such Asset Swap
involves an aggregate amount in excess of $5.0 million, the Company has received
a written opinion from an independent investment banking firm of nationally
recognized standing that such Asset Swap is fair to the Company or such
Subsidiary, as the case may be, from a financial point of view.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, create or otherwise cause to permit
to exist or become effective, by operation of the charter of such Subsidiary or
by reason of any agreement, instrument, judgment, decree, rule, order, statute
or governmental regulation, any encumbrance or restriction on the ability of any
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock; (b) make loans or advances or pay
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any Indebtedness or other obligation owed to the Company or any of its
Subsidiaries; or (c) transfer any of its property or assets to the Company,
except for such encumbrances or restrictions existing under or by reason of: (1)
applicable law; (2) the Indenture; (3) customary non-assignment provisions of
any lease governing a leasehold interest of the Company or any Subsidiary; (4)
any instrument governing Acquired Indebtedness, which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired; (5)
agreements existing on the Issue Date (including the Credit Agreement) as such
agreements are from time to time in effect; provided, however, that any
amendments or modifications of such agreements that affect the encumbrances or
restrictions of the types subject to this covenant shall not result in such
encumbrances or restrictions being less favorable to the Company in any material
respect, as determined in good faith by the board of directors of the Company,
than the provisions as in effect before giving effect to the respective
amendment or modification; (6) any restriction with respect to such a Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Subsidiary pending the
closing of such sale or disposition; (7) an agreement effecting a refinancing,
replacement or substitution of Indebtedness issued, assumed or incurred pursuant
to an agreement referred to in clause (2), (4) or (5) above or any other
agreement evidencing Indebtedness permitted under the Indenture; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such refinancing, replacement or substitution agreement or any
such other agreement are no less favorable to the Company in any material
respect as determined in good faith by the board of directors of the Company
than the provisions relating to such encumbrance or restriction contained in
agreements referred to in such clause (2), (4) or (5); (8) restrictions on the
transfer of the assets subject to any Lien imposed by the holder of such Lien;
or (9) a licensing agreement to the extent such restrictions or encumbrances
limit the transfer of property subject to such licensing agreement.
Limitations on Transactions with Affiliates. The Indenture provides that
neither the Company nor any of its Subsidiaries will, directly or indirectly,
enter into or permit to exist any transaction (including, without limitation,
the purchase, sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any of its Affiliates (other than
transactions between the Company and a Wholly Owned Subsidiary of the Company or
among Wholly Owned Subsidiaries of the Company) (an "Affiliate Transaction"),
other than Affiliate Transactions on terms that are no less favorable than those
that might reasonably have been obtained in a comparable transaction on an
arm's-length basis from a person that is not an Affiliate; provided, however,
that for a transaction or series of related transactions involving value of
$1,000,000 or more, such determination will be made in good faith by a majority
of members of the board of directors of the Company and by a majority of the
disinterested members of the board of directors of the Company, if any;
provided, further, that for a transaction or series of related transactions
involving value of $5,000,000 or more, the board of directors of the Company has
received an opinion from a nationally recognized investment banking firm that
such Affiliate Transaction is fair, from a financial point of view, to the
Company or such Subsidiary. The foregoing restrictions will not apply to (1)
reasonable and customary directors' fees, indemnification and similar
arrangements and payments thereunder, (2) any obligations of the Company under
the Financial Monitoring and Oversight Agreements or any employment agreement,
noncompetition or confidentiality agreement with any officer of the Company
(provided that each amendment of any of the foregoing agreements shall be
subject to the limitations of this covenant), (3) reasonable and customary
investment banking, financial advisory, commercial banking and similar fees and
expenses paid to any of the Initial Purchasers and their Affiliates, (4) any
Restricted Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (5) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the board of directors of the Company, (6) loans or advances to
employees in the ordinary course of business of the Company or any of its
Subsidiaries consistent with past practices, (7) payments made in
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connection with the Acquisition, including fees to Hicks Muse, as described in
the Offering Memorandum and (8) the issuance of Capital Stock of the Company
(other than Disqualified Stock).
Reports. The Indenture provides that so long as any of the Notes are
outstanding, the Company will provide to the holders of Notes and file with the
Commission, to the extent such submissions are accepted for filing by the
Commission, copies of the annual reports and of the information, documents and
other reports that the Company would have been required to file with the
Commission pursuant to Sections 13 or 15(d) of the Exchange Act regardless of
whether the Company is then obligated to file such reports.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on the Notes when the same becomes due and
payable and the Default continues for a period of 30 days (whether or not such
payment is prohibited by the provisions described under "-- Ranking and
Subordination" above); (ii) the failure to pay principal of or premium, if any,
on any Notes when such principal or premium, if any, becomes due and payable, at
maturity, upon redemption or otherwise (whether or not such payment is
prohibited by the provisions described under "-- Ranking and Subordination"
above); (iii) a default in the observance or performance of any other covenant
or agreement contained in the Notes or the Indenture, which default continues
for a period of 30 days after the Company receives written notice thereof
specifying the default from the Trustee or holders of at least 25% in aggregate
principal amount of outstanding Notes; (iv) the failure to pay at the final
stated maturity (giving effect to any extensions thereof) the principal amount
of any Indebtedness of the Company or any Subsidiary of the Company, or the
acceleration of the final stated maturity of any such Indebtedness, if the
aggregate principal amount of such Indebtedness, together with the aggregate
principal amount of any other such Indebtedness in default for failure to pay
principal at the final stated maturity (giving effect to any extensions thereof)
or which has been accelerated, aggregates $5,000,000 or more at any time in each
case after a 10-day period during which such default shall not have been cured
or such acceleration rescinded; (v) one or more judgments in an aggregate amount
in excess of $5,000,000 (which are not covered by insurance as to which the
insurer has not disclaimed coverage) being rendered against the Company or any
of its Significant Subsidiaries and such judgment or judgments remain
undischarged or unstayed for a period of 60 days after such judgment or
judgments become final and nonappealable; and (vi) certain events of bankruptcy,
insolvency or reorganization affecting the Company or any of its Significant
Subsidiaries.
Upon the happening of any Event of Default specified in the Indenture, the
Trustee may, and the Trustee upon the request of holders of 25% in principal
amount of the outstanding Notes shall, or the holders of at least 25% in
principal amount of outstanding Notes may, declare the principal of all the
Notes, together with all accrued and unpaid interest and premium, if any, to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
will become due and payable upon the first to occur of an acceleration under the
Credit Agreement or five business days after receipt by the Company and the
agent under the Credit Agreement of such Acceleration Notice (unless all Events
of Default specified in such Acceleration Notice have been cured or waived). If
an Event of Default with respect to bankruptcy proceedings relating to the
Company or any Significant Subsidiaries occurs and is continuing, then such
amount will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of the Notes.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the holders of a majority in principal amount of the Notes then outstanding (by
notice to the Trustee) may rescind and cancel such declaration and its
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consequences if (i) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction, (ii) all existing Events of Default
have been cured or waived except nonpayment of principal of or interest on the
Notes that has become due solely by such declaration of acceleration, (iii) to
the extent the payment of such interest is lawful, interest (at the same rate
specified in the Notes) on overdue installments of interest and overdue payments
of principal, which has become due other than by such declaration of
acceleration, has been paid, (iv) the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of a
Default or Event of Default of the type described in clause (vi) of the
description of Events of Default in the first paragraph above, the Trustee has
received an Officers' Certificate and Opinion of Counsel that such Default or
Event of Default has been cured or waived. The holders of a majority in
principal amount of the Notes may waive any existing Default or Event of Default
under the Indenture, and its consequences, except a default in the payment of
the principal of or interest on any Notes.
The Company is required to deliver to the Trustee, within 120 days after
the end of the Company's fiscal year, a certificate indicating whether the
signing officers know of any Default or Event of Default that occurred during
the previous year and whether the Company has complied with its obligations
under the Indenture. In addition, the Company will be required to notify the
Trustee of the occurrence and continuation of any Default or Event of Default
promptly after the Company becomes aware of the same.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default thereunder should occur and be continuing,
the Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of the
Notes unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Subject to such provision for
security or indemnification and certain limitations contained in the Indenture,
the holders of a majority in principal amount of the outstanding Notes have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate its obligations under the Indenture at any time
by delivering all outstanding Notes to the Trustee for cancellation and paying
all sums payable by it thereunder. The Company, at its option, (i) will be
discharged from any and all obligations with respect to the Notes (except for
certain obligations of the Company to register the transfer or exchange of such
Notes, replace stolen, lost or mutilated Notes, maintain paying agencies and
hold moneys for payment in trust) or (ii) need not comply with certain of the
restrictive covenants with respect to the Indenture, if the Company deposits
with the Trustee, in trust, U.S. legal tender or U.S. Government Obligations or
a combination thereof that, through the payment of interest and premium thereon
and principal in respect thereof in accordance with their terms, will be
sufficient to pay all the principal of and interest and premium on the Notes on
the dates such payments are due in accordance with the terms of such Notes as
well as the Trustee's fees and expenses. To exercise either such option, the
Company is required to deliver to the Trustee (A) an opinion of counsel or a
private letter ruling issued to the Company by the Internal Revenue Service (the
"IRS") to the effect that the holders of the Notes will not recognize income,
gain or loss for federal income tax purposes as a result of the deposit and
related defeasance and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
option had not been exercised and, in the case of an opinion of counsel
furnished in connection with a discharge pursuant to clause (i) above,
accompanied by a private letter ruling issued to the Company by the IRS to such
effect, (B) subject to certain qualifications, an opinion of counsel to the
effect that funds so deposited will not be subject to avoidance under applicable
bankruptcy law and (C) an officers' certificate and an opinion of counsel to the
effect that the Company has complied with all conditions
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precedent to the defeasance. Notwithstanding the foregoing, the opinion of
counsel required by clause (A) above need not be delivered if all Notes not
theretofore delivered to the Trustee for cancellation (i) have become due and
payable, (ii) will become due and payable on the maturity date within one year
or (iii) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, together, without the
consent of the holders of the Notes, may amend or supplement the Indenture for
certain specified purposes, including curing ambiguities, defects or
inconsistencies. Other modifications and amendments of the Indenture may be made
with the consent of the holders of a majority in principal amount of the then
outstanding Notes, except that, without the consent of each holder of the Notes
affected thereby, no amendment may, directly or indirectly: (i) reduce the
amount of Notes whose holders must consent to an amendment; (ii) reduce the rate
of or change the time for payment of interest, including defaulted interest, on
any Notes; (iii) reduce the principal of or change the fixed maturity of any
Notes, or change the date on which any Notes may be subject to redemption or
repurchase, or reduce the redemption or repurchase price thereof; (iv) make any
Notes payable in money other than that stated in the Notes and the Indenture;
(v) make any change in provisions of the Indenture protecting the right of each
holder of a Note to receive payment of principal of, premium on and interest on
such Note on or after the due date thereof or to bring suit to enforce such
payment or permitting holders of a majority in principal amount of the Notes to
waive Default or Event of Default; or (vi) after the Company's obligation to
purchase the Notes arises under the Indenture, amend, modify or change the
obligation of the Company to make or consummate a Change of Control Offer or a
Net Proceeds Offer or waive any default in the performance thereof or modify any
of the provisions or definitions with respect to any such offers.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it requires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of Notes, unless such holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the laws of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of the
Company or at the time it merges or consolidates with the Company or any of its
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Subsidiary of the Company or such
acquisition, merger or consolidation.
"Affiliate" means a Person who, directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Company. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Asset Acquisition" means (i) an Investment by the Company or any
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company or shall be consolidated or merged with
the Company or any Subsidiary of the Company or (ii) the acquisition by the
Company or any Subsidiary of the Company of assets of any Person comprising a
division or line of business of such Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Subsidiaries (excluding any Sale and Leaseback Transaction or any pledge of
assets or stock by the Company or any of its Subsidiaries) to any Person other
than the Company or a Wholly Owned Subsidiary of the Company of (i) any Capital
Stock of any Subsidiary of the Company or (ii) any other property or assets of
the Company or any Subsidiary of the Company other than in the ordinary course
of business; provided, however, that for purposes of the "Limitation on Asset
Sales" covenant, Asset Sales shall not include (a) a transaction or series of
related transactions in which the Company or its Subsidiaries receive aggregate
consideration of less than $500,000, (b) transactions permitted under the
"Limitation on Asset Swaps" covenant or (c) transactions covered by the "Merger,
Consolidation and Sale of Assets" covenant.
"Asset Swap" means the execution of a definitive agreement, subject only to
FCC approval, if applicable, and other customary closing conditions, that the
Company in good faith believes will be satisfied, for a substantially concurrent
purchase and sale, or exchange, of Productive Assets between the Company or any
of its Subsidiaries and another Person or group of affiliated Persons; provided
that any amendment to or waiver of any closing condition that individually or in
the aggregate is material to the Asset Swap shall be deemed to be a new Asset
Swap.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of capital stock of such Person and (ii) with respect to any Person
that is not a corporation, any and all partnership or other equity interests of
such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a lease to which such Person is a
party that is required to be classified and accounted for as a capital lease
obligation under GAAP, and for purposes of this definition, the amount of such
obligation at any date shall be the capitalized amount of such obligation at
such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the
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full faith and credit of the United States, in each case maturing within one
year from the date of acquisition thereof; (ii) marketable direct obligations
issued by any state of the United States of America or any political subdivision
of any such state or any public instrumentality thereof maturing within one year
from the date of acquisition thereof and, at the time of acquisition, having one
of the two highest ratings obtainable from either Standard & Poor's Corporation
or Moody's Investors Service, Inc.; (iii) commercial paper maturing no more than
one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from Standard & Poor's Corporation or at least
P-1 from Moody's Investors Service, Inc.; (iv) certificates of deposit or
bankers' acceptances maturing within one year from the date of acquisition
thereof issued by any commercial bank organized under the laws of the United
States of America or any state thereof or the District of Columbia or any U.S.
branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $200,000,000; (v) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds that invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group") (whether or not otherwise in compliance with the
provisions of the Indenture), other than to Hicks Muse, any of its Affiliates,
officers and directors or Robert N. Smith or any of his Affiliates (the
"Permitted Holders"); or (ii) a majority of the board of directors of the
Company or Holdings shall consist of Persons who are not Continuing Directors;
or (iii) the acquisition by any Person or Group (other than the Permitted
Holders or any direct or indirect Subsidiary of any Permitted Holder, including
without limitation Holdings) of the power, directly or indirectly, to vote or
direct the voting of securities having more than 50% of the ordinary voting
power for the election of directors of the Company or Holdings.
"Commodity Agreement" means any commodity futures contract, commodity
option or other similar agreement or arrangement entered into by the Company or
any of its Subsidiaries designed to protect the Company or any of its
Subsidiaries against fluctuations in the price of commodities actually used in
the ordinary course of business of the Company and its Subsidiaries.
"Consolidated Cash Flow" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Subsidiaries paid or accrued in accordance with GAAP for
such period (other than income taxes attributable to extraordinary or
nonrecurring gains or losses), (B) Consolidated Interest Expense and (C)
Consolidated Non-Cash Charges, all as determined on a consolidated basis for
such Person and its Subsidiaries in conformity with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (i) the interest expense of such Person
and its Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Swap Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit, bankers' acceptance financing or similar
facilities, and (e) all accrued interest and (ii) the interest component of
Capitalized Lease Obligations paid or accrued by such Person and its
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or loss) of such Person and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP; provided,
however, that there shall be excluded therefrom, without duplica-
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tion, (a) gains and losses from Asset Sales (without regard to the $500,000
limitation set forth in the definition thereof) or abandonments or reserves
relating thereto and the related tax effects, (b) items classified as
extraordinary or nonrecurring gains and losses, and the related tax effects
according to GAAP, (c) the net income (or loss) of any Person acquired in a
pooling of interests transaction accrued prior to the date it becomes a
Subsidiary of such first referred to Person or is merged or consolidated with it
or any of its Subsidiaries, (d) the net income of any Subsidiary to the extent
that the declaration of dividends or similar distributions by that Subsidiary of
that income is restricted by contract, operation of law or otherwise, (e) the
net income of any Person, other than a Subsidiary, except to the extent of the
lesser of (x) dividends or distributions paid to such first referred to Person
or its Subsidiary by such Person and (y) the net income of such Person (but in
no event less than zero), and the net loss of such Person shall be included only
to the extent of the aggregate Investment of the first referred to Person or a
consolidated Subsidiary of such Person and any non-cash expenses attributable to
grants or exercises of employee stock options.
"Consolidated Non-Cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Subsidiaries (excluding any such charges constituting an
extraordinary or nonrecurring item) reducing Consolidated Net Income of such
Person and its Subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP.
"Continuing Director" means, as of the date of determination, any Person
who (i) was a member of the board of directors of the Company or Holdings on the
Issue Date, (ii) was nominated for election or elected to the board of directors
of the Company or Holdings, as the case may be, with the affirmative vote of a
majority of the Continuing Directors who were members of such board of directors
at the time of such nomination or election or (iii) is a representative of a
Permitted Holder.
"Credit Agreement" means the Credit Agreement, dated as of February 28,
1997, among the Company, The Chase Manhattan Bank, as agent, NationsBank of
Texas, N.A., as documentation agent, and any other financial institutions from
time to time party thereto, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including by way of adding Subsidiaries of
the Company as additional borrowers or guarantors thereunder) all or any portion
of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of lenders
(or other institutions).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all obligations under the Credit
Agreement and (ii) any other Senior Indebtedness of the Company which, at the
date of determination, has an aggregate principal amount outstanding of, or
under which, at the date of determination, the holders thereof are committed to
lend up to, at least $20,000,000 and is specifically designated by the Company
in the instrument evidencing or governing such Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Capital Stock" means any Capital Stock that, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is
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redeemable at the sole option of the holder thereof (except, in each case, upon
the occurrence of a Change of Control), in whole or in part, on or prior to the
final maturity date of the Notes.
"Financial Monitoring and Oversight Agreements" means, collectively, the
Monitoring and Oversight Agreement among the Company, Holdings and Hicks Muse
Partners, as in effect on the Issue Date, and the Financial Advisory Agreement
among the Company, Holding and Hicks Muse Partners, as in effect on the Issue
Date.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of the Issue Date.
"Indebtedness" means with respect to any Person, without duplication, any
liability of such Person (i) for borrowed money, (ii) evidenced by bonds,
debentures, notes or other similar instruments, (iii) constituting Capitalized
Lease Obligations, (iv) incurred or assumed as the deferred purchase price of
property, or pursuant to conditional sale obligations and title retention
agreements (but excluding trade accounts payable arising in the ordinary course
of business), (v) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (vi) for Indebtedness of
others guaranteed by such Person, (vii) for Interest Swap Obligations, Commodity
Agreements and Currency Agreements and (viii) for Indebtedness of any other
Person of the type referred to in clauses (i) through (vii) which is secured by
any Lien on any property or asset of such first referred to Person, the amount
of such Indebtedness being deemed to be the lesser of the value of such property
or asset or the amount of the Indebtedness so secured. The amount of
Indebtedness of any Person at any date shall be the outstanding principal amount
of all unconditional obligations described above, as such amount would be
reflected on a balance sheet prepared in accordance with GAAP, and the maximum
liability at such date of such Person for any contingent obligations described
above.
"Interest Swap Obligations" means the obligations of any Person under any
interest rate protection agreement, interest rate future, interest rate option,
interest rate swap, interest rate cap or other interest rate hedge or
arrangement.
"Investment" means (i) any transfer or delivery of cash, stock or other
property of value in exchange for Indebtedness, stock or other security or
ownership interest in any Person by way of loan, advance, capital contribution,
guarantee or otherwise and (ii) an investment deemed to have been made by the
Company at the time any entity which was a Subsidiary of the Company ceases to
be such a Subsidiary in an amount equal to the value of the loans and advances
made to, and any remaining ownership interest in, such entity immediately
following such entity ceasing to be a Subsidiary of the Company. The amount of
any non-cash Investment shall be the fair market value of such Investment, as
determined conclusively in good faith by management of the Company unless the
fair market value of such Investment exceeds $1,000,000, in which case the fair
market value shall be determined conclusively in good faith by the Board of
Directors of the Company at the time such Investment is made.
"Issue Date" means the date on which the Notes are originally issued.
"Leverage Ratio" shall mean, as to any Person, the ratio of (i) the
aggregate outstanding amount of Indebtedness of the Company and its Subsidiaries
as of the date of calculation on a consolidated basis in accordance with GAAP
plus the aggregate liquidation preference of all Disqualified Capital Stock of
the Company and of all outstanding Preferred Stock of Subsidiaries of the
Company to (ii) the Consolidated Cash Flow of the Company for the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
determination.
For purposes of this definition, the aggregate outstanding principal amount
of Indebtedness of the Person and its Subsidiaries for which such calculation is
made shall be determined on a pro forma basis as if the Indebtedness giving rise
to the need to perform such calculation had been incurred and the proceeds
therefrom had been applied, and all other transactions in respect of which such
Indebtedness is being incurred had occurred, on the last day of the Four Quarter
Period.
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In addition to the foregoing, for purposes of this definition, "Consolidated
Cash Flow" shall be calculated on a pro forma basis after giving effect to (i)
the incurrence of the Indebtedness of such Person and its Subsidiaries (and the
application of the proceeds therefrom) giving rise to the need to make such
calculation and any incurrence (and the application of the proceeds therefrom)
or repayment of other Indebtedness, other than the incurrence or repayment of
Indebtedness pursuant to working capital facilities, at any time subsequent to
the beginning of the Four Quarter Period and on or prior to the date of
determination, as if such incurrence (and the application of the proceeds
thereof), or the repayment, as the case may be, occurred on the first day of the
Four Quarter Period, (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including any
Person that becomes a Subsidiary as a result of such Asset Acquisition)
incurring, assuming or otherwise becoming liable for Indebtedness) at any time
on or subsequent to the first day of the Four Quarter Period and on or prior to
the date of determination, as if such Asset Sale or Asset Acquisition (including
the incurrence, assumption or liability for any such Indebtedness and also
including any Consolidated Cash Flow associated with such Asset Acquisition)
occurred on the first day of the Four Quarter Period and (iii) cost savings
resulting from employee terminations, facilities consolidations and closings,
standardization of employee benefits and compensation practices, consolidation
of property, casualty and other insurance coverage and policies, standardization
of sales representation commissions and other contract rates, and reductions in
taxes other than income taxes (collectively, "Cost Savings Measures"), which
cost savings the Company reasonably believes in good faith could have been
achieved during the Four Quarter Period as a result of such Asset Acquisition
(regardless of whether such cost savings could then be reflected in pro forma
financial statements under GAAP, Regulation S-X promulgated by the Commission or
any other regulation or policy of the Commission), less the amount of any
additional expenses that the Company reasonably estimates would result from
anticipated replacement of any items constituting Cost Savings Measures in
connection with such Asset Acquisitions; provided, however, that both (A) such
cost savings and Cost Savings Measures were identified and such cost savings
were quantified in an officer's certificate delivered to the Trustee at the time
of the consummation of the Asset Acquisition and (B) with respect to each Asset
Acquisition completed prior to the 90th day preceding such date of
determination, actions were commenced or initiated by the Company within 90 days
of such Asset Acquisition to effect the Cost Savings Measures identified in such
officer's certificate (regardless, however, of whether the corresponding cost
savings have been achieved). Furthermore, in calculating "Consolidated Interest
Expense" for purposes of the calculation of "Consolidated Cash Flow," (i)
interest on Indebtedness determined on a fluctuating basis as of the date of
determination (including Indebtedness actually incurred on the date of the
transaction giving rise to the need to calculate the Leverage Ratio) and which
will continue to be so determined thereafter shall be deemed to have accrued at
a fixed rate per annum equal to the rate of interest on such Indebtedness as in
effect on the date of determination and (ii) notwithstanding (i) above, interest
determined on a fluctuating basis, to the extent such interest is covered by
Interest Swap Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents)
received by the Company or any of its Subsidiaries from such Asset Sale net of
(i) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions, recording fees, title insurance premiums, appraisers,
fees and costs reasonably incurred in preparation of any asset or property for
sale), (ii) taxes paid or reasonably estimated to be payable (calculated based
on the combined state, federal and foreign statutory tax rates applicable to the
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Company or the Subsidiary engaged in such Asset Sale) and (iii) repayment of
Indebtedness secured by assets subject to such Asset Sale; provided, however,
that if the instrument or agreement governing such Asset Sale requires the
transferor to maintain a portion of the purchase price in escrow (whether as a
reserve for adjustment of the purchase price or otherwise) or to indemnify the
transferee for specified liabilities in a maximum specified amount, the portion
of the cash or Cash Equivalents that is actually placed in escrow or segregated
and set aside by the transferor for such indemnification obligation shall not be
deemed to be Net Cash Proceeds until the escrow terminates or the transferor
ceases to segregate and set aside such funds, in whole or in part, and then only
to the extent of the proceeds released from escrow to the transferor or that are
no longer segregated and set aside by the transferor.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing, or otherwise relating to, any
Indebtedness.
"Permitted Indebtedness" means, without duplication, (i) Indebtedness
outstanding on the Issue Date; (ii) Indebtedness of the Company or a Subsidiary
incurred under the Credit Agreement in an aggregate principal amount at any time
outstanding not to exceed the sum of the aggregate commitments pursuant to the
Credit Agreement as in effect on the Issue Date; (iii) Indebtedness evidenced by
or arising under the Notes and the Indenture; (iv) Interest Swap Obligations;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company from fluctuations in interest rates of its Indebtedness; (v)
additional Indebtedness of the Company or any of its Subsidiaries not to exceed
$10,000,000 in principal amount outstanding at any time (which amount may, but
need not, be incurred under the Credit Agreement); (vi) Refinancing
Indebtedness; (vii) Indebtedness owed by the Company to any Wholly Owned
Subsidiary of the Company or by any Subsidiary of the Company to the Company or
any Wholly Owned Subsidiary of the Company; (viii) guarantees by Subsidiaries of
any Indebtedness permitted to be incurred pursuant to the Indenture; (ix)
Indebtedness in respect of performance bonds, bankers' acceptances and surety or
appeal bonds provided by the Company or any of its Subsidiaries to their
customers in the ordinary course of their business; (x) Indebtedness arising
from agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Subsidiaries pursuant to such agreements, in each case incurred in connection
with the disposition of any business assets or Subsidiaries of the Company
(other than guarantees of Indebtedness or other obligations incurred by any
Person acquiring all or any portion of such business assets or Subsidiaries of
the Company for the purpose of financing such acquisition) in a principal amount
not to exceed the gross proceeds actually received by the Company or any of its
Subsidiaries in connection with such disposition; provided, however, that the
principal amount of any Indebtedness incurred pursuant to this clause (x), when
taken together with all Indebtedness incurred pursuant to this clause (x) and
then outstanding, shall not exceed $7,500,000; and (xi) Indebtedness represented
by Capitalized Lease Obligations, mortgage financings or purchase money
obligations, in each case incurred for the purpose of financing all or any part
of the purchase price or cost of construction or improvement of property used in
a related business or incurred to refinance any such purchase price or cost of
construction or improvement, in each case incurred no later than 365 days after
the date of such acquisition or the date of completion of such construction or
improvement; provided, however, that the principal amount of any Indebtedness
incurred pursuant to this clause (xi) shall not exceed $3,000,000 at any time
outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Subsidiary of the Company to acquire the stock or assets of any Person (or
Acquired Indebtedness acquired in connection with a transaction in which such
Person becomes a Subsidiary of the Company) engaged in the broadcast business or
businesses reasonably related thereto; provided, however, that if any such
Investment or series of related Investments involves an Investment by the
Company in excess of $5,000,000, the Company is able, at the time of such
investment and immediately after
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giving effect thereto, to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness and Issuance of Disqualified Capital Stock" covenant,
(ii) Investments received by the Company or its Subsidiaries as consideration
for a sale of assets, (iii) Investments by the Company or any Wholly Owned
Subsidiary of the Company in any Wholly Owned Subsidiary of the Company (whether
existing on the Issue Date or created thereafter) or any Person that after such
Investments, and as a result thereof, becomes a Wholly Owned Subsidiary of the
Company and Investments in the Company by any Wholly Owned Subsidiary of the
Company, (iv) Investments in cash and Cash Equivalents, (v) Investments in
securities of trade creditors, wholesalers or customers received pursuant to any
plan of reorganization or similar arrangement, (vi) loans or advances to
employees of the Company or any Subsidiary thereof for purposes of purchasing
the Company's Capital Stock and other loans and advances to employees made in
the ordinary course of business consistent with past practices of the Company or
such Subsidiary, and (vii) additional Investments in an aggregate amount not to
exceed $1,000,000 at any time outstanding.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Productive Assets" means assets of a kind used or usable by the Company
and its Subsidiaries in broadcast businesses or businesses reasonably related
thereto, and specifically includes assets acquired through Asset Acquisitions.
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Capital Stock) of the Company or Holdings (to the
extent, in the case of Holdings, that the net cash proceeds thereof are
contributed to the common or non-redeemable preferred equity capital of the
Company), pursuant to an effective registration statement filed with the
Commission in accordance with the Securities Act.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinancing Indebtedness" means any refinancing by the Company of
Indebtedness of the Company or any of its Subsidiaries incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant (other than pursuant to clause (iii) or
(iv) of the definition of Permitted Indebtedness) that does not (i) result in an
increase in the aggregate principal amount of Indebtedness (such principal
amount to include, for purposes of this definition, any premiums, penalties or
accrued interest paid with the proceeds of the Refinancing Indebtedness) of such
Person or (ii) create Indebtedness with (A) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being refinanced or (B) a final maturity earlier than the final maturity of the
Indebtedness being refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Senior Indebtedness; provided, however, that
if, and for so long as, any issue of Senior Indebtedness lacks such a
representative, then the Representative for such issue of Senior Indebtedness
shall at all times constitute the holders of a majority in outstanding principal
amount of such issue of Senior Indebtedness.
"Restricted Payment" means (i) the declaration or payment of any dividend
or the making of any other distribution (other than dividends or distributions
payable in Qualified Capital Stock or in options, rights or warrants to acquire
Qualified Capital Stock) on shares of the Company's Capital Stock, (ii) the
purchase, redemption, retirement or other acquisition for value of any Capital
Stock of the Company, or any warrants, rights or options to acquire shares of
Capital Stock of the Company, other than through the exchange of such Capital
Stock or any warrants, rights or options to acquire shares of any class of such
Capital Stock for Qualified Capital Stock or warrants, rights or
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options to acquire Qualified Capital Stock, (iii) the making of any principal
payment on, or the purchase, defeasance, redemption, prepayment, decrease or
other acquisition or retirement for value, prior to any scheduled final
maturity, scheduled repayment or scheduled sinking fund payment, of, any
Indebtedness of the Company or its Subsidiaries that is subordinated or junior
in right of payment to the Notes or (iv) the making of any Investment (other
than a Permitted Investment).
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Subsidiary transfers such
property to a Person and the Company or a Subsidiary leases it from such Person.
"Secured Indebtedness" means any Indebtedness of the Company or a
subsidiary secured by a Lien.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Notes in right of payment and is not subordinated by
its terms in right of payment to any Indebtedness or other obligation of the
Company which is not Senior Indebtedness.
"Significant Subsidiary" means for any Person each Subsidiary of such
Person which (i) for the most recent fiscal year of such Person accounted for
more than 5% of the consolidated net income of such Person or (ii) as at the end
of such fiscal year, was the owner of more than 5% of the consolidated assets of
such Person.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, through one or more
intermediaries, by such Person or (ii) any other Person of which at least a
majority of the voting interest under ordinary circumstances is at the time,
directly or indirectly, through one or more intermediaries, owned by such
Person; provided, however, that notwithstanding the foregoing, SAC shall be
deemed to be a "Subsidiary" of the Company. Notwithstanding anything in the
Indenture to the contrary, all references to the Company and its consolidated
Subsidiaries or to financial information prepared on a consolidated basis in
accordance with GAAP shall be deemed to include the Company and its Subsidiaries
as to which financial statements are prepared on a combined basis in accordance
with GAAP and to financial information prepared on such a combined basis.
Notwithstanding anything in the Indenture to the contrary, an Unrestricted
Subsidiary shall not be deemed to be a Subsidiary for purposes of the Indenture.
"Unrestricted Subsidiary" means a Subsidiary of the Company created after
the Issue Date and so designated by a resolution adopted by the board of
directors of the Company; provided, however, that (a) neither the Company nor
any of its other Subsidiaries (other than Unrestricted Subsidiaries) (1)
provides any credit support for any Indebtedness of such Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness) or (2) is
directly or indirectly liable for any Indebtedness of such Subsidiary and (b) at
the time of designation of such Subsidiary, such Subsidiary has no property or
assets (other than de minimis assets resulting from the initial capitalization
of such Subsidiary). The board of directors may designate any Unrestricted
Subsidiary to be a Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant and (y) no Default or Event of Default
shall have occurred or be continuing. Any designation pursuant to this
definition by the board of directors of the Company shall be evidenced to the
Trustee by the filing with the Trustee of a certified copy of the resolution of
the Company's board of directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or
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instrumentality thereof) for the payment of which the full faith and credit of
the United States of America is pledged and which are not callable or redeemable
at the issuer's option.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities (other than directors' qualifying
shares) which normally have the right to vote in the election of directors are
owned by such Person or any Wholly-Owned Subsidiary of such Person; provided,
however, that "Wholly Owned Subsidiary" shall also include SAC and any other
Restricted Subsidiary of which in excess of 95% of the common equity securities
are owned by the Company or another Wholly-Owned Subsidiary and which is
organized for the purpose of facilitating the acquisition of any broadcasting
business that, but for the formation of such Person, the Company and its
Restricted Subsidiaries could not acquire under applicable laws related to the
ownership of broadcast businesses.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the New Notes initially will be
represented by one or more permanent global certificates in definitive, duly
registered form (the "Global Notes"). The Global Notes will be deposited on the
Issue Date with, or on behalf of, The Depository Trust Company, New York, New
York ("DTC") and registered in the name of a nominee of DTC.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of New Notes
of the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. QIBs and institutional Accredited Investors
who are not QIB's may hold their interests in the Global Notes directly through
DTC if they are participants in such system, or indirectly through organizations
which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
New Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by such Global Notes for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures.
Payments of the principal of, premium (if any) and interest on, the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any and interest on the Global Notes, will credit
participants' accounts with payments in amount proportionate to their respective
beneficial interests in the principal amount of the Global
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Notes as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Notes held through such participants will be governed by standing instructions
and customary practice, as is now the case with securities held for the accounts
of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell New Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of New Notes as to
which such participant or participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Issuer within 90 days, Certificated Securities will be issued
in exchange for the Global Notes.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of Old Notes for New Notes, but does not
purport to be a complete analysis of all potential tax effects. The following
discussion is based upon the advice of Weil, Gotshal & Manges LLP. The
discussion is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, Internal Revenue Service rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the New Notes.
The description does not consider the effect of any applicable foreign, state,
local or other tax laws or estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not constitute an exchange for federal income tax purposes. Accordingly, such
exchange will have no federal income tax consequences to holders of Old Notes.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until November 24, 1997, all dealers effecting transactions in the New
Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a prospectus
meeting the requirements of the Securities Act, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any
broker-dealers and will indemnify holders of the Old Notes (including any
broker-dealers) against certain liabilities, including certain liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Weil, Gotshal & Manges LLP, Dallas, Texas and New York, New York.
INDEPENDENT AUDITORS
The consolidated balance sheet of the Company as of March 1, 1997, the
combined balance sheets of the Stations as of December 31, 1996 and January 17,
1996, the combined statements of operations, partners' equity and cash flows of
the Stations for the year ended December 31, 1996 and the combined statements of
operations and cash flows of the Stations for each of the two years ended
December 31, 1995 included in this Prospectus have been audited by Arthur
Andersen LLP, independent auditors, as stated in their reports, and are included
herein in reliance upon said firm as experts in giving said reports.
The consolidated balance sheets of WJAC as of December 31, 1996 and 1995
and the consolidated statements of earnings, stockholders' equity, and cash
flows for each of the two years ended December 31, 1996 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
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STC BROADCASTING, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STC Broadcasting, Inc. and Subsidiaries
Report of Independent Public Accountants.................. F-3
Consolidated Balance Sheet -- March 1, 1997............... F-4
Notes to Consolidated Balance Sheet....................... F-5
STC Broadcasting, Inc. and Subsidiaries
Unaudited Interim Consolidated Financial
Statements -- June 30, 1997
Consolidated Balance Sheets -- June 30, 1997 and March 1,
1997................................................... F-11
Consolidated Statements of Operations for the three month
period and the four month period ended June 30, 1997... F-12
Consolidated Statement of Stockholders' Equity for the
four month period ended June 30, 1997.................. F-13
Consolidated Statement of Cash Flows for the four month
period ended June 30, 1997............................. F-14
Notes to Consolidated Financial Statements................ F-15
Television Stations WEYI, WROC, WTOV and KSBW
Report of Independent Public Accountants.................. F-17
Combined Balance Sheets -- December 31, 1996 and January
17, 1996............................................... F-18
Combined Statement of Operations for the year ended
December 31, 1996...................................... F-19
Combined Statement of Partners' Equity for the year ended
December 31, 1996...................................... F-20
Combined Statement of Cash Flows for the year ended
December 31, 1996...................................... F-21
</TABLE>
Notes to Combined Financial Statements.................... F-22
Television Stations WEYI, WROC and WTOV
Report of Independent Public Accountants.................. F-29
Combined Statements of Operations for the years ended
December 31, 1995 and
1994................................................... F-30
Combined Statements of Cash Flows for the years ended
December 31, 1995 and
1994................................................... F-31
Notes to Combined Financial Statements.................... F-32
Television Station KSBW
Report of Independent Public Accountants.................. F-35
Statements of Operations for the years ended December 31,
1995 and 1994.......................................... F-36
Statements of Cash Flows for the years ended December 31,
1995 and 1994.......................................... F-37
Notes to Financial Statements............................. F-38
WJAC, Incorporated and Subsidiaries
Independent Auditors' Report.............................. F-41
Consolidated Balance Sheets -- December 31, 1996 and
1995................................................... F-42
Consolidated Statements of Earnings for the years ended
December 31, 1996 and 1995............................. F-43
F-1
<PAGE> 111
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995........... F-44
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995..................... F-45
Notes to Consolidated Financial Statements............................................................... F-46
WJAC, Incorporated and Subsidiaries
Unaudited Interim Consolidated Financial Statements -- June 30, 1997
Consolidated Balance Sheet -- June 30, 1997.............................................................. F-54
Consolidated Statement of Earnings for the six months ended June 30, 1997................................ F-55
Consolidated Statement of Stockholders' Equity for the six months ended
June 30, 1997......................................................................................... F-56
Consolidated Statement of Cash Flows for the six months ended June 30, 1997.............................. F-57
Notes to Unaudited Consolidated Financial Statements..................................................... F-58
</TABLE>
F-2
<PAGE> 112
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
STC Broadcasting, Inc.:
We have audited the accompanying consolidated balance sheet of STC
Broadcasting, Inc. and subsidiaries as of March 1, 1997. This balance sheet is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of STC Broadcasting,
Inc. and subsidiaries as of March 1, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 23, 1997
F-3
<PAGE> 113
STC BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET--MARCH 1, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 879,455
Accounts receivable, net of allowance for doubtful
accounts of $296,534................................... 6,967,985
Current portion of program rights......................... 3,623,712
Other current assets...................................... 508,812
------------
Total current assets.............................. 11,979,964
------------
PROPERTY AND EQUIPMENT...................................... 26,920,478
------------
INTANGIBLE ASSETS:
FCC licenses.............................................. 30,858,162
Network affiliation agreements............................ 97,717,514
Other..................................................... 1,889,276
------------
Total intangible assets........................... 130,464,952
------------
OTHER ASSETS:
Deferred acquisition and financing costs.................. 4,164,490
Program rights, net of current portion.................... 7,116,358
------------
Total other assets................................ 11,280,848
------------
Total assets...................................... $180,646,242
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 755,940
Accrued compensation...................................... 76,210
Accrued other............................................. 376,610
Credit Agreement indebtedness............................. 90,800,000
Current portion of program rights payable................. 3,623,441
------------
Total current liabilities......................... 95,632,201
PROGRAM RIGHTS PAYABLE, net of current portion.............. 7,502,059
REDEEMABLE PREFERRED STOCK.................................. 28,500,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, authorized, issued
and outstanding 1,000 shares........................... 10
Additional paid-in capital................................ 49,011,972
------------
Total stockholders' equity........................ 49,011,982
------------
Total liabilities and stockholders' equity........ $180,646,242
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-4
<PAGE> 114
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET
MARCH 1, 1997
1. ORGANIZATION AND NATURE OF OPERATIONS:
The accompanying balance sheet presents the consolidated financial position
as of March 1, 1997, of STC Broadcasting, Inc. and subsidiaries (the "Company").
The Company was incorporated on November 1, 1996, and is a wholly owned
subsidiary of Sunrise Television Corp. ("Sunrise"). The Company owns the
following commercial television stations (the "Stations"), which were acquired
on March 1, 1997:
<TABLE>
<CAPTION>
STATION DESIGNATED MARKET AREA NETWORK AFFILIATION
------- ---------------------- -------------------
<S> <C> <C>
WEYI-TV................. Flint, Saginaw-Bay City, NBC
Michigan
WROC-TV................. Rochester, New York CBS
KSBW-TV................. Salinas-Monterey, NBC
California
WTOV-TV................. Wheeling, West Virginia NBC
and Steubenville, Ohio
</TABLE>
On March 1, 1997, the Company acquired the Stations from Jupiter/Smith TV
Holdings, L.P. and Smith Broadcasting Partners, L.P. for approximately
$163,117,000, including working capital (the "Acquisition"). The accompanying
consolidated balance sheet reflects the Acquisition under the purchase method of
accounting. Accordingly, the acquired assets and assumed liabilities were
recorded at fair value as of the date of acquisition. The acquisition price was
allocated as follows:
<TABLE>
<S> <C>
Property and equipment...................................... $ 26,920,000
Intangible assets........................................... 130,086,000
Working capital............................................. 6,111,000
------------
$163,117,000
============
</TABLE>
The Acquisition was funded by $90,800,000 in borrowings under the Credit
Agreement (see Note 5) and the sale of preferred and common stock (see Notes 6
and 7) in the approximate amount of $77,500,000, net of expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying balance sheet includes the consolidated accounts of the
Company. All material intercompany items and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
Concentration of Risk and Accounts Receivable
The Company serves the markets shown in Note 1 above. Accordingly, the
revenue potential of the Company is dependent on the economy in these diverse
areas. The Company monitors their accounts receivable through continuing credit
evaluations. Historically, the Stations have not had significant uncollectible
accounts.
F-5
<PAGE> 115
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Program Rights
The Company has agreements with distributors for the rights to television
programming over contract periods which generally run from one to four years.
Each contract is recorded as an asset and liability when the license agreement
is signed. Program rights and the corresponding obligation are classified as
current or long-term based on the estimated usage and payment terms. The
capitalized cost of program rights is amortized on a straight-line basis over
the period of the program rights agreements, which approximates amortization
based on the estimated number of showings.
Property and Equipment
Property and equipment acquired in the Acquisition were recorded at the
estimate of fair value based upon independent appraisals and property and
equipment acquired subsequent thereto will be recorded at cost. Property and
equipment will be depreciated using the straight-line method over the estimated
useful lives of the assets, as follows:
<TABLE>
<S> <C>
Buildings................................................... 20-39 years
Broadcast equipment......................................... 5-15 years
Automobiles................................................. 3 years
Furniture and computers..................................... 5 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred, whereas expenditures for renewals and betterments are capitalized.
Intangible Assets
Intangible assets consist principally of values assigned to the Federal
Communications Commission (FCC) licenses and network affiliation agreements of
the Stations. Intangible assets are being amortized on the straight-line basis
over 15 years. Intangible assets are periodically evaluated for impairment using
a measurement of fair value.
Revenue Recognition
The Company's primary source of revenue is the sale of television time to
advertisers. Revenue is recorded when the advertisements are broadcast.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
should be addressed. The Company has determined, there has been no impairment in
the carrying value of long-lived assets of Stations, as of March 1, 1997.
Deferred Charges
Deferred financing costs will be amortized over the applicable loan period
(seven years) on a straight-line basis, and deferred acquisition and
organization costs will be amortized over a 60-month period on a straight-line
basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
F-6
<PAGE> 116
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
amounts of assets and liabilities. The preparation of financial statements in
conformity with generally accepted accounting principles also requires
management to make estimates and assumptions that affect the disclosures of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
The major classes of property and equipment are as follows at March 1,
1997:
<TABLE>
<S> <C>
Land and improvements....................................... $ 2,208,649
Buildings................................................... 5,691,714
Broadcast equipment......................................... 16,980,910
Automobiles................................................. 388,667
Furniture and computers..................................... 1,650,538
-----------
Total property and equipment...................... $26,920,478
===========
</TABLE>
4. OBLIGATIONS FOR PROGRAM RIGHTS:
The aggregate scheduled maturities of program rights obligations subsequent
to March 1, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 3,623,441
1999........................................................ 3,561,335
2000........................................................ 2,782,289
2001........................................................ 1,158,435
-----------
$11,125,500
===========
</TABLE>
5. CREDIT AGREEMENT:
To finance the Acquisition described in Note 1, the Company entered into a
Credit Agreement with Chase Manhattan Bank and NationsBank of Texas, N.A. (the
"Credit Agreement"), as agents for borrowings up to $95.0 million.
The Credit Agreement provides for (i) a seven-year term loan facility in
the amount of $60.0 million, maturing on February 27, 2004 (the "Term Loan") and
(ii) a seven-year revolving credit facility in the amount of $35.0 million,
expiring on February 27, 2004 (the "Revolving Credit Facility"). In connection
with the March 25, 1997, private placement of $100.0 million, 11% Senior
Subordinated Notes (the "11% Notes"), all amounts outstanding under the Term
Loan were repaid and the Term Loan was terminated (see Note 9). Commitments
under the Revolving Credit Facility will be reduced starting in the year 2000.
The Revolving Credit Facility will bear interest at an annual rate, at the
Company's option, equal to the "ABR, as defined in the Credit Agreement, plus
the Applicable Margin" (9.75% at March 1, 1997) or the "Eurodollar Rate, as
defined in the Credit Agreement, plus the Applicable Margin" (8.13% at March 1,
1997). Interest rates on the revolving facility may be reduced quarterly in the
event the Company meets certain financial tests relating to consolidated
leverage.
The Credit Agreement provides for first priority security interests in all
of the tangible and intangible assets of the Company and its direct and indirect
subsidiaries. In addition, the loans under the Credit Agreement are guaranteed
by Sunrise and the Company's current direct and indirect and any future
subsidiaries. The Credit Agreement contains certain financial and operating
maintenance covenants including a maximum consolidated leverage ratio of
initially 7.0:1, a minimum consoli-
F-7
<PAGE> 117
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
dated fixed charge coverage rate of 1.05:1 and a consolidated interest coverage
ratio of initially 1.25:1. In addition, the Company is limited in the amount of
annual payments that may be made for capital expenditures and corporate
overhead.
The operating covenants of the Credit Agreement include limitations on the
ability of the Company to (i) incur additional indebtedness (including film
debt), other than certain permitted indebtedness, (ii) permit additional liens
or encumbrances, other than certain permitted liens, (iii) make any investments
in other persons, other than certain permitted investments, (iv) become
obligated with respect to contingent obligations, other than certain permitted
contingent obligations, and (v) make restricted payments (including dividends on
its common stock). The operating covenants also include restrictions on certain
specified fundamental changes, such as mergers and asset sales, transactions
with shareholders and affiliates and business outside the ordinary course as
currently conducted, amendments or waivers of certain specified agreements and
the issuance of guarantees or other credit enhancements.
6. REDEEMABLE PREFERRED STOCK:
In connection with the Acquisition, the Company issued Redeemable Preferred
Stock with an aggregate liquidation preference of $30.0 million, or $100 per
share, which will be entitled to quarterly dividends that will accrue at a rate
per annum of 14%. Prior to February 28, 2002, dividends may be paid in either
additional whole shares of Redeemable Preferred Stock or cash, at the Company's
option, and only in cash following that date. The Indenture and the Credit
Agreement prohibit the payment of cash dividends until May 31, 2002. Pursuant to
the terms of the securities purchase agreement, the Company has the right to
repurchase the Redeemable Preferred Stock at any time and from time to time
prior to March 1, 1998, at $96.50 per share of Redeemable Preferred Stock, plus
an amount equal to accrued and unpaid dividends through the repurchase date.
The Redeemable Preferred Stock is subject to mandatory redemption (subject
to contractual and other restrictions with respect thereto and to the legal
availability of funds therefor) in whole on February 28, 2008, at a price equal
to the then effective liquidation preference thereof, plus all accumulated and
unpaid dividends to the date of redemption. Prior to February 28, 2008, the
Company has various options on redemption of the Redeemable Preferred Stock at
various redemption prices exceeding the liquidation preference.
The Company may, at its option, subject to certain conditions, including
its ability to incur additional indebtedness under the 11% Notes and the Credit
Agreement, on any scheduled dividend payment date occurring on or after the
Redeemable Preferred Stock issuance date, exchange the Redeemable Preferred
Stock, in whole but not in part, for the Company's 14% Subordinated Exchange
Debentures due 2008 (the "Exchange Debentures"). Holders of the Redeemable
Preferred Stock will be entitled to receive $1.00 principal amount of Exchange
Debentures for each $1.00 in liquidation preference of Redeemable Preferred
Stock.
Holders of the Redeemable Preferred Stock have no voting rights, except as
otherwise required by law; however, the holders of the Redeemable Preferred
Stock, voting together as a single class, shall have the right to elect the
lesser of two directors or 25% of the total number of directors constituting the
Board of Directors of the Company upon the occurrence of certain events,
including but not limited to, the failure by the Company on or after February
28, 2002, to pay cash dividends in full on the Redeemable Preferred Stock for
six or more quarterly dividend periods, the failure by the Company to discharge
any mandatory redemption or repayment obligation with respect to the Redeemable
Preferred Stock, the breach or violation of one or more of the covenants
contained in the Certificate of Designation, or the failure by the Company to
repay at final stated maturity, or the acceleration of the final stated maturity
of, certain indebtedness of the Company.
F-8
<PAGE> 118
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
The Certificate of Designation for the Redeemable Preferred Stock and the
indenture for the Exchange Debentures will contain covenants customary for
securities comparable to the Redeemable Preferred Stock and the Exchange
Debentures, including covenants that restrict the ability of the Company and its
subsidiaries to incur additional indebtedness, pay dividends and make certain
other restricted payments, to merge or consolidate with any other person or to
sell, assign, transfer, lease, convey, or otherwise dispose of all or
substantially all of the assets of the Company. Such covenants are substantially
identical to those covenants contained in the 11% Notes.
7. TRANSACTIONS WITH AFFILIATES:
In connection with the Acquisition, Sunrise and the Company entered into a
ten-year agreement (the "Monitoring and Oversight Agreement") with an affiliate
of Hicks Muse ("Hicks Muse Partners") pursuant to which Sunrise and the Company
have agreed to pay Hicks Muse Partners an annual fee payable quarterly for
oversight and monitoring services to the Company. The annual fee is adjustable
on January 1 of each calendar year to an amount equal to 0.2% of the budgeted
consolidated annual net sales of the Company and its subsidiaries for the
then-current fiscal year. The Monitoring and Oversight Agreement makes available
the resources of Hicks Muse Partners concerning a variety of financial and
operational matters. The Company does not believe that the services that have
been, and will continue to be provided to the Company by Hicks Muse Partners
could otherwise be obtained by the Company without the addition of personnel or
the engagement of outside professional advisors. In the Company's opinion, the
fees provided for under the Monitoring and Oversight Agreement reasonably
reflect the benefits received and to be received, by Sunrise and the Company.
In connection with the Acquisition, Sunrise and the Company entered into a
ten-year agreement (the "Financial Advisory Agreement") pursuant to which Hicks
Muse Partners received a financial advisory fee of $2.5 million at the closing
of the Acquisition as compensation for its services as financial advisor to the
Company in connection with the Acquisition. Hicks Muse Partners also is entitled
to receive a fee equal to 1.5% of the "transaction value" (as defined) for each
"add-on transaction" (as defined) in which the Company is involved. The term
"transaction value" means the total value of the add-on transaction including,
without limitation, the aggregate amount of the funds required to complete the
add-on transaction (excluding any fees payable pursuant to the Financial
Advisory Agreement), including the amount of any indebtedness, preferred stock
or similar terms assumed (or remaining outstanding). The term "add-on
transaction" means any future proposal for a tender offer, acquisition, sale,
merger, exchange offer, recapitalization, restructuring or other similar
transaction directly involving the Company or any of its subsidiaries, and any
other person or entity. The Financial Advisory Agreement makes available the
resources of Hicks Muse Partners concerning a variety of financial and
operational matters. The Company does not believe that the services that have
been, and will continue to be provided by Hicks Muse Partners could otherwise be
obtained by the Company without the addition of personnel or the engagement of
outside professional advisors. In the Company's opinion, the fees provided for
under the Financial Advisory Agreement reasonably reflect the benefits received
and to be received by the Company.
In connection with the Acquisition, affiliates of Hicks Muse purchased
$25.0 million of the Redeemable Preferred Stock for a purchase price of
approximately $24.1 million (or 96.5% of the initial liquidation preference of
such shares) and received in connection therewith warrants to purchase shares of
common stock of Sunrise. The Hicks Muse affiliates, along with the other
purchaser of the Redeemable Preferred Stock and warrants, received certain
registration rights with respect to the shares of common stock of Sunrise
issuable upon exercise of the warrants.
F-9
<PAGE> 119
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
The Company has elected to participate in a Hicks Muse affiliate insurance
program which covers automobiles, buildings, equipment, libel and slander,
liability and earthquake damage. The Company pays actual invoice costs and no
employee of Hicks Muse is compensated for these services other than through the
above Monitoring and Oversight Agreement. Management believes the amounts paid
are reasonable and representative of the services provided.
The Company has elected to participate in the Sunrise health, life, vision
and dental program, long and short-term disability, travel accident and
long-term care program. The Company is charged the same costs as any other
participating affiliate.
A defined contribution savings plan (401k) is provided to employees of the
Company by Sunrise. Employees of the Company who have been employed for six
months, who have attained the age of 21 years and who have completed 1,000 hours
of service are generally eligible to participate. Certain employees represented
by various unions have elected not to participate in the Plan or have
established their own plans.
Management believes that the costs it will incur in connection with the
above affiliate programs approximates the costs that would be required if the
Company procured such services on a stand-alone basis.
8. COMMITMENTS AND CONTINGENCIES:
The Company is subject to legal proceedings and claims in the ordinary
course of business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the financial
position or results of operations of the Company.
9. SUBSEQUENT EVENTS:
On March 25, 1997, the Company completed a private placement of
$100,000,000 principal amount of its 11% Senior Subordinated Notes due March 15,
2007. Proceeds from the sale of the 11% Notes were used to repay all outstanding
term loans and revolving credit borrowings under the Company's existing Credit
Agreement and for general working capital purposes.
On May 8, 1997, the Company entered into an agreement and plan of merger
with WJAC, Incorporated to acquire WJAC's issued and outstanding common stock.
WJAC, Incorporated owns and operates the NBC affiliate for the
Johnstown/Altoona, PA market. The approximate purchase will be $36,000,000,
including working capital, and the expected closing date will be in the fourth
quarter of 1997. The Company plans to finance this transaction with borrowing
under the revolving bank credit agreement, cash on hand and additional equity
financing. The WJAC Merger Agreement is subject to customary conditions and no
assurances can be given as to whether, or on what terms, such transaction or
such financing will be consummated by the Company.
On July 8, 1997, the Company entered into a stock purchase agreement (the
"ARTC Purchase Agreement") with Abilene Radio and Television Company, pursuant
to which the Company will acquire KRBC-TV ("KRBC") and KACB-TV ("KACB"). KRBC
and KACB are NBC-affiliated stations serving the Abilene and San Angelo, Texas
markets, respectively. The approximate purchase price will be $8.5 million plus
certain working capital, and the expected closing date will be the fourth
quarter of 1997. The Company intends to finance this transaction with borrowing
under the revolving bank credit agreement, cash on hand and additional equity
financing. The ARTC Purchase Agreement is subject to customary conditions and no
assurances can be given as to whether, or on what terms, such transaction or
such financings will be consummated by the Company.
F-10
<PAGE> 120
STC BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND MARCH 1, 1997
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 1,
1997 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,385,226 $ 879,455
Accounts receivable, net of allowance for doubtful
accounts of $331,000 and $297,000, respectively........ 7,930,481 6,967,985
Current portion of program rights......................... 3,555,894 3,623,712
Other current assets...................................... 1,085,888 508,812
------------ ------------
Total current assets.............................. 21,957,489 11,979,964
------------ ------------
PROPERTY & EQUIPMENT, net................................... 26,633,331 26,920,478
------------ ------------
INTANGIBLE ASSETS, net:
FCC licenses.............................................. 30,173,476 30,858,162
Network affiliation agreements............................ 95,549,342 97,717,514
Other..................................................... 1,864,416 1,889,276
------------ ------------
Net intangible assets............................. 127,587,234 130,464,952
------------ ------------
OTHER ASSETS:
Deferred acquisition and financing costs,net of
accumulated amortization of $436,000 at June 30........ 8,003,922 4,164,490
Program rights, net of current portion.................... 6,006,267 7,116,358
------------ ------------
Total other assets................................ 14,010,189 11,280,848
------------ ------------
Total assets...................................... $190,188,243 $180,646,242
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,375,477 $ 755,940
Accrued interest.......................................... 2,963,889 --
Accrued compensation...................................... 413,803 76,210
Accrued other............................................. 662,946 376,610
Revolving bank credit facility............................ -- 90,800,000
Current portion of program rights payable................. 3,539,029 3,623,441
------------ ------------
Total current liabilities......................... 8,955,144 95,632,201
SENIOR SUBORDINATED NOTES................................... 100,000,000 --
PROGRAM RIGHTS PAYABLE, net of current portion.............. 6,393,455 7,502,059
REDEEMABLE PREFERRED STOCK.................................. 29,945,455 28,500,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, authorized, issued
and outstanding 1,000 shares........................... 10 10
Additional paid-in capital................................ 49,011,972 49,011,972
Accumulated deficit....................................... (4,117,793) --
------------ ------------
Total stockholders' equity........................ 44,894,189 49,011,982
------------ ------------
Total liabilities & stockholders' equity.......... $190,188,243 $180,646,242
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-11
<PAGE> 121
STC BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD AND FOUR MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS FOUR MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Net revenues................................................ $10,242,026 $13,438,698
Operating expenses.......................................... 2,215,297 2,922,141
Amortization of program rights.............................. 908,487 1,212,608
Selling, general and administrative expenses................ 2,331,871 3,042,295
Trade and barter expense.................................... 328,447 439,698
Depreciation of property and equipment...................... 936,810 1,241,945
Amortization of intangibles................................. 2,435,164 3,334,847
Corporate overhead.......................................... 356,318 458,203
----------- -----------
Operating income............................................ 729,632 786,961
----------- -----------
Interest income............................................. 108,696 121,936
Interest expense............................................ (2,821,208) (3,557,123)
Other expense, net.......................................... (7,232) (112)
----------- -----------
Net loss before provision for income taxes.................. (1,990,112) (2,648,338)
Provision for income taxes.................................. 24,000 24,000
----------- -----------
Net loss.................................................... (2,014,112) (2,672,338)
Preferred dividends and accretion........................... (1,084,091) (1,445,455)
----------- -----------
Net loss applicable to common shareholders.................. $(3,098,203) $(4,117,793)
=========== ===========
Loss per common share....................................... $ (3,098.20) $ (4,117.79)
=========== ===========
Weighted average number of common shares outstanding........ 1,000 1,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 122
STC BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FOUR MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS'
STOCK PAID-IN CAPITAL DEFICIT EQUITY
------ --------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at February 28, 1997......... $-- $ -- $ -- $ --
Net loss applicable to common
shareholders....................... (4,117,793) (4,117,793)
Issuance of common stock............. 10 49,011,972 -- 49,011,982
--- ----------- ----------- -----------
Balance at June 30, 1997............. $10 $49,011,972 $(4,117,793) $44,894,189
=== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-13
<PAGE> 123
STC BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FOUR MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Net loss.................................................... $ (2,672,338)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation of property and equipment.................... 1,241,945
Amortization of intangibles............................... 3,334,847
Amortization of program rights............................ 1,212,608
Payments on program rights................................ (1,231,217)
Change in operating assets and liabilities net of effects
from acquisition of the Stations:
Increase in accounts receivable........................... (1,265,410)
Increase in prepaid and other assets...................... (742,271)
Increase in accounts payable and accrued expenses......... 4,518,068
-------------
Net cash provided by operating activities......... 4,396,232
-------------
Cash Flows From Investing Activities:
Acquisition of Jupiter/Smith stations....................... (163,128,291)
Capital expenditures........................................ (954,798)
-------------
Net cash used in investing activities............. (164,083,089)
-------------
Cash Flow from Financing Activities:
Proceeds from credit agreement............................ 90,800,000
Proceeds from senior subordinated debt.................... 100,000,000
Repayment of credit agreement............................. (90,800,000)
Proceeds from sale of preferred stock, net................ 28,500,000
Proceed from sale of common stock, net.................... 49,011,982
Deferred acquisition and debt refinancing costs
incurred............................................... (8,439,899)
-------------
Net cash provided by financing activities......... 169,072,083
-------------
Net increase in cash and cash equivalents................... 9,385,226
Cash and cash equivalents, beginning of period.............. --
-------------
Cash and cash equivalents, end of period.................... $ 9,385,226
=============
Supplemental disclosure of cash flow information:
Non cash items:
Preferred dividends and accretion......................... $ 1,445,455
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-14
<PAGE> 124
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include those of STC
Broadcasting, Inc. and its subsidiaries (the "Company"). Significant
intercompany transactions and accounts have been eliminated. The Company owns
and operates the following commercial television stations (the "Stations"),
which were acquired on March 1, 1997:
<TABLE>
<CAPTION>
NETWORK
STATION MARKET AFFILIATION
------- ------ -----------
<S> <C> <C>
WEYI-TV............... Flint, Saginaw-Bay City, Michigan NBC
WROC-TV............... Rochester, New York CBS
KSBW-TV............... Salinas-Monterey, California NBC
WTOV-TV............... Wheeling, West Virginia and Steubenville, Ohio NBC
</TABLE>
The accompanying consolidated financial statements are condensed interim
financial statements and do not include all disclosures required by general
accepted accounting principles. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim financial statements are
unaudited but include all adjustments, which are of a normal recurring nature,
that the Company considers necessary for a fair presentation of results for such
period. Operating results of interim periods are not necessarily indicative of
results for a full year. There have been no changes in accounting policies since
the March 1, 1997 balance sheet.
2. ACQUISITIONS
On March 1, 1997, the Company acquired the Stations from Jupiter/Smith TV
Holdings, L.P. and Smith Broadcasting Partners, L.P. for approximately
$163,128,000, including working capital. The accompanying financial statements
reflect the acquisition of the Stations under the purchase method of accounting.
Accordingly, the acquired assets and assumed liabilities were recorded at fair
value as of the date of acquisition based upon independent appraisals. The
acquisition price was allocated as follows:
<TABLE>
<S> <C>
Property and Equipment...................................... $ 26,920,000
Intangible Assets........................................... 130,486,000
Working Capital............................................. 5,722,000
------------
$163,128,000
============
</TABLE>
The acquisition was funded by $90,800,000 in borrowings under the Credit
Agreement (as defined below) and the sale of preferred and common stock in the
approximate amount of $77,500,000, which is net of approximately $1,000,000 in
expenses.
3. LONG TERM DEBT
On March 25, 1997, the Company completed a private placement of
$100,000,000 principal amount of its 11% Senior Subordinated Notes (the "11%
Notes") due March 15, 2007. Proceeds from the sale of the 11% Notes were used to
repay all outstanding term loan and revolving credit borrowings under the
Company's existing bank credit agreement (the "Credit Agreement"). The remaining
net proceeds from the sale of the 11% Notes will be used to fund future
acquisitions and general working capital purposes. The $60,000,000 term portion
of the Credit Agreement was cancelled upon repayment in accordance with the
original terms.
F-15
<PAGE> 125
STC BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's Credit Agreement currently provides for borrowings up to
$35,000,000 that can be used for acquisitions, working capital, and for general
corporate expenses. There were no outstanding balances under the Credit
Agreement as of March 31, 1997.
4. PENDING ACQUISITIONS
On May 8, 1997, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with WJAC, Incorporated ("WJAC"), pursuant to which
WJAC will become a wholly owned subsidiary of the Company. WJAC owns and
operates the NBC affiliate for the Johnstown/Altoona, Pennsylvania market. The
approximate purchase price will be $36,000,000 including working capital, and
the expected closing date will be in the fourth quarter of 1997. The Company
intends to finance this transaction with borrowings under the existing bank
credit agreement, cash on hand and additional equity financing. The Merger
Agreement is subject to customary conditions and no assurances can be given as
to whether, or on what terms, such transaction or such financings will be
consummated by the Company.
On July 8, 1997, the Company entered into a stock purchase agreement (the
"ARTC Purchase Agreement") with Abilene Radio and Television Company pursuant to
which the Company will acquire KRBC-TV ("KRBC") and KACB-TV ("KACB"). KRBC and
KACB are NBC-affiliated stations serving the Abilene and San Angelo, Texas
Markets, respectively. The approximate purchase price will be $8.5 million plus
certain working capital, and the expected closing date will be the fourth
quarter of 1997. The Company intends to finance this transaction with borrowings
under the existing bank credit agreement, cash on hand and additional equity
financing. The ARTC Purchase Agreement is subject to customary conditions and no
assurances can be given as to whether, or on what terms, such transaction or
such financings will be consummated by the Company.
F-16
<PAGE> 126
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jupiter/Smith TV Holdings, L.P.:
We have audited the accompanying combined balance sheets of Smith
Television of Michigan, L.P., Smith Television of Rochester, L.P., Smith
Television -- WTOV, L.P., and Smith Television of Salinas-Monterey, L.P., and
their respective licensed subsidiaries, (collectively, the "Partnerships") as of
December 31, 1996 and January 17, 1996, and the related combined statements of
operations, partners' equity, and cash flows for the year ended December 31,
1996. These financial statements are the responsibility of the Partnerships'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Partnerships as
of December 31, 1996 and January 17, 1996, and the results of their operations
and their cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 2, on February 28, 1997, Jupiter/Smith TV Holdings,
L.P. and Smith Broadcasting Partners, L.P. sold substantially all of the assets
of the Partnerships to STC Broadcasting, Inc. and Smith Acquisition Company.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 7, 1997 (except with respect
to the matter discussed in Note 2, as to
which the date is February 28, 1997)
F-17
<PAGE> 127
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND JANUARY 17, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 17,
1996 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,752,634 $ 1,765,431
Accounts receivable, net of allowance for doubtful
accounts of $222,706 and $328,983, respectively........ 7,981,853 6,689,358
Current portion of program rights......................... 2,570,373 2,536,989
Prepaid and other assets.................................. 570,694 171,903
------------ ------------
Total current assets.............................. 13,875,554 11,163,681
------------ ------------
PROPERTY AND EQUIPMENT, net................................. 26,228,333 27,515,997
PROGRAM RIGHTS, net of current portion...................... 541,443 618,932
INTANGIBLE ASSETS, net...................................... 59,437,889 63,990,904
DEFERRED FINANCING AND ORGANIZATIONAL COSTS, net............ 6,524,667 7,768,803
------------ ------------
TOTAL ASSETS...................................... $106,607,886 $111,058,317
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 2,192,240 $ 932,902
Current portion of program rights......................... 2,552,512 2,536,989
Credit Agreement Indebtedness, current portion............ 3,930,000 3,300,000
------------ ------------
Total current liabilities......................... 8,674,752 6,769,891
------------ ------------
PROGRAM RIGHTS PAYABLE, net of current portion.............. 549,838 618,932
CREDIT AGREEMENT INDEBTEDNESS, net of current portion....... 61,070,000 65,000,000
------------ ------------
TOTAL LIABILITIES................................. 70,294,590 72,388,823
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY............................................ 36,313,296 38,669,494
------------ ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $106,607,886 $111,058,317
============ ============
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-18
<PAGE> 128
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES:
Broadcasting revenues, net of agency and national
representative commissions of $6,605,677............... $34,063,438
Network compensation...................................... 2,752,359
Other revenue............................................. 742,995
-----------
Net revenues...................................... 37,558,792
-----------
EXPENSES:
Station operating expenses................................ 10,050,393
Amortization of program rights............................ 3,580,799
Selling, general and administrative expenses.............. 8,513,562
Depreciation.............................................. 4,285,734
Amortization.............................................. 5,860,048
Corporate Overhead........................................ 840,135
-----------
Total operating expenses.......................... 33,130,671
-----------
Operating income.................................. 4,428,121
INTEREST INCOME............................................. 92,882
INTEREST EXPENSE, CREDIT AGREEMENT.......................... 6,072,477
OTHER INCOME, net........................................... 1,459,770
-----------
NET LOSS.................................................... $ (91,704)
===========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-19
<PAGE> 129
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
COMBINED STATEMENT OF PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL
-----------
<S> <C>
PARTNERS' EQUITY, beginning of year......................... --
Partners' contributions during the year................... 36,405,000
Net loss, year ended December 31, 1996.................... (91,704)
-----------
PARTNERS' EQUITY, December 31, 1996......................... $36,313,296
===========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-20
<PAGE> 130
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (91,704)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 10,145,782
Amortization of program rights......................... 3,580,799
Payments on syndicated program and film obligations.... (3,590,265)
Increase in accounts receivable........................ (1,292,494)
Increase in other current assets....................... (398,791)
Increase in accounts payable and accrued expenses...... 1,259,338
Loss on disposal of property and equipment............. 33,118
------------
Net cash provided by operating activities......... 9,645,783
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of television stations....................... (105,353,237)
Capital expenditures...................................... (2,965,697)
Proceeds from disposal of property and equipment.......... 65,889
Other..................................................... (45,104)
------------
Net cash used in investing activities............. (108,298,149)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit agreement............................ 68,300,000
Principal payments on credit agreement.................... (3,300,000)
Partners' contributions................................... 36,405,000
------------
Net cash provided by financing activities......... 101,405,000
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,752,634
CASH AND CASH EQUIVALENTS, beginning of year................ --
------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,752,634
============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-21
<PAGE> 131
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JANUARY 17, 1996
1. ORGANIZATION AND NATURE OF OPERATIONS:
The accompanying financial statements present the combined financial
position as of December 31, 1996 and January 17, 1996 and the combined results
of operations and cash flows for the year ended December 31, 1996 of four
limited partnerships: Smith Television of Michigan, L.P., Smith Television of
Rochester, L.P., Smith-Television-WTOV, L.P., and Smith Television of Salinas-
Monterey, L.P., and their respective licensed subsidiaries, (collectively, the
"Partnerships"). The Partnerships own the following commercial television
stations: WEYI, Saginaw, Flint, and Bay City, Michigan; WROC, Rochester, New
York; WTOV, Wheeling, West Virginia and Steubenville, Ohio; and KSBW,
Monterey-Salinas, California (collectively, the "Stations"). Stations WEYI, WTOV
and KSBW are NBC affiliates and station WROC is a CBS affiliate. The
Partnerships are controlled by Jupiter/Smith TV Holdings, L.P. ("Jupiter/Smith")
and Smith Broadcasting Partners, L.P. ("SBP"). The Partnerships were formed on
December 13, 1995, and acquired the Stations in January 1996 for a total
purchase price of approximately $105,400,000, including transaction fees and
working capital.
The combined financial statements reflect the acquisitions of the Stations
under the purchase method of accounting. Accordingly, the acquired assets and
liabilities were recorded at fair value as of the date of acquisition. The
acquisition price of approximately $105,400,000 was allocated based upon
appraised values resulting in approximately $27,600,000, $71,800,000, and
$6,000,000 being assigned to property and equipment, intangibles (including
deferred financing and organizational costs), and working capital, respectively.
The transaction was funded by the Credit Agreement discussed in Note 8 and
partners' contributions. Management does not consider the results of operations
of the Stations from January 1, 1996, to the dates the Stations were acquired to
be significant.
2. SALE OF THE ASSETS OF THE PARTNERSHIPS:
On February 28, 1997, Jupiter/Smith and SBP completed the sale of
substantially all of the assets of the Partnerships to STC Broadcasting, Inc.
("STC") and Smith Acquisition Company ("SAC") for an aggregate sales price of
approximately $157,000,000. In connection with the sale, STC and SAC will assume
the Partnerships' television programming obligations, certain accounts payable
and accrued liabilities, and certain other obligations relating to the
operations of the Stations after the closing date. The Partnerships will retain
all other liabilities of the Partnerships, including the Credit Agreement with
Chase Manhattan Bank, as discussed in Note 8.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements include the combined accounts of the
Partnerships. The Partnerships are combined because of common ownership,
management and relationship of operations. All material items and transactions
between the Partnerships have been eliminated.
Cash and Cash Equivalents
The Partnerships consider all highly liquid investments with a maturity of
three months or less to be cash equivalents.
F-22
<PAGE> 132
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Risk and Accounts Receivable
The Partnerships serve the Saginaw, Flint, and Bay City, Michigan;
Rochester, New York; Wheeling, West Virginia and Steubenville, Ohio; and
Monterey and Salinas, California, demographic areas. Accordingly, the revenue
potential of the Partnerships is dependent on the economy in these diverse
areas. The Partnerships monitor their accounts receivable through continuing
credit evaluations. Historically, the Partnerships have not had significant
uncollectible accounts.
Program Rights
The Partnerships have agreements with distributors for the rights to
television programming over contract periods which generally run from one to
four years. Each contract is recorded as an asset and liability when the license
period begins and the program is available for its first showing. Program rights
and the corresponding obligation are classified as current or long-term based on
the estimated usage and payment terms. The capitalized cost of program rights is
amortized on a straight-line basis over the period of the program rights
agreements, which approximates amortization based on the estimated number of
showings.
Property and Equipment
Property and equipment acquired in purchase transactions are recorded at
the estimate of fair value based upon independent appraisals and property and
equipment acquired subsequent thereto are recorded at cost. Property and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets, as follows:
<TABLE>
<S> <C>
Buildings................................................... 39 years
Broadcast equipment......................................... 5-15 years
Automobiles................................................. 3 years
Furniture and computers..................................... 5 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred, whereas expenditures for renewals and betterments are capitalized.
Intangible Assets
Intangible assets consist principally of values assigned to the Federal
Communications Commission (FCC) licenses and network affiliation agreements of
the Stations. Intangible assets are being amortized on the straight-line basis
primarily over 15 years. Intangible assets are periodically evaluated for
impairment using a measurement of fair value.
Revenue Recognition
The Company's primary source of revenue is the sale of television time to
advertisers. Revenue is recorded when the advertisements are broadcast.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
should be addressed. The Partnerships
F-23
<PAGE> 133
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
have determined there has been no impairment in the carrying value of long-lived
assets of Stations as of December 31, 1996.
Deferred Charges
Deferred charges include net financing costs of $4,555,479 and $5,314,728
at December 31, 1996 and January 17, 1996, respectively, which are being
amortized over the applicable loan period (7 years) on a straight-line basis,
and net organization costs of $1,969,188 and $2,415,196 at December 31, 1996 and
January 17, 1996, respectively, which are being amortized over a 60-month period
on a straight-line basis. Deferred charges are net of accumulated amortization
of $1,244,132 and $38,879 at December 31, 1996 and January 17, 1996,
respectively.
Trade/Barter Transactions
Trade/barter transactions involve the exchange of advertising time for
products and/or services. Trade/barter transactions are recorded based on the
fair market value of the products and/or services received. Revenue is recorded
when advertising schedules air and expense is recognized when products and/or
services are used or received.
Income Taxes
No income tax provision has been included in the financial statements since
income or loss of the Partnerships is required to be reported by the partners on
their respective income tax returns.
Allocation of Partnerships' Income
The Partnerships' income for the year ended December 31, 1996 is allocated
as described by the Partnership Agreement.
Supplemental Cash Flow Disclosures
Cash paid for interest during 1996 was $5,974,847. In addition, the
Partnerships acquired new contracts for television program obligations in the
amount of $698,861 during 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. The
preparation of financial statements in conformity with generally accepted
accounting principles also requires management to make estimates and assumptions
that affect the disclosures of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
F-24
<PAGE> 134
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
The major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 17,
1996 1996
------------ -----------
<S> <C> <C>
Land and improvements.................................. $ 2,432,561 $ 2,355,418
Buildings.............................................. 5,761,872 5,564,896
Broadcast equipment.................................... 19,624,542 17,447,894
Automobiles............................................ 907,765 626,343
Furniture and computers................................ 1,705,735 1,652,825
----------- -----------
30,432,475 27,647,376
Less -- Accumulated depreciation....................... (4,204,142) (131,379)
----------- -----------
$26,228,333 $27,515,997
=========== ===========
</TABLE>
5. INTANGIBLE ASSETS:
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 17,
1996 1996
------------ -----------
<S> <C> <C>
FCC licenses........................................... $13,483,025 $13,483,025
Network affiliation agreements......................... 42,696,479 42,696,479
Other intangibles...................................... 7,874,301 7,955,647
----------- -----------
64,053,805 64,135,151
Less -- Accumulated amortization....................... (4,615,916) (144,247)
----------- -----------
$59,437,889 $63,990,904
=========== ===========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 17,
1996 1996
------------ -----------
<S> <C> <C>
Accounts payable........................................... $ 821,215 $246,080
Accrued interest........................................... 97,630 --
Accrued payroll, commissions, and bonuses.................. 402,256 559,981
Payable to former owner.................................... 149,376 --
Other...................................................... 721,763 126,841
---------- --------
$2,192,240 $932,902
========== ========
</TABLE>
7. OBLIGATIONS FOR PROGRAM RIGHTS:
Current and noncurrent obligations for program rights recorded on the
accompanying December 31, 1996 combined balance sheet are $2,552,512 and
$549,838 (all related to 1998), respectively. In addition, the Partnerships have
entered into noncancelable commitments for future program rights aggregating
$7,640,019 at December 31, 1996. Program contract obligations and the assets
related to these commitments have not been recognized in the accompanying
combined
F-25
<PAGE> 135
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements as all of the conditions specified in Statement of
Financial Accounting Standards No. 63, "Financial Reporting by Broadcasters,"
have not been met.
See Note 2 regarding the sale of the Partnerships' assets which will
include the assignment and assumption of all outstanding program obligations,
including future contracts.
8. LONG-TERM DEBT:
Outstanding bank debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 17,
1996 1996
------------ -----------
<S> <C> <C>
Initial term loan...................................... $37,000,000 $38,000,000
Revolving credit loan.................................. 12,500,000 14,300,000
Standby term loan...................................... 15,500,000 16,000,000
----------- -----------
$65,000,000 $68,300,000
=========== ===========
</TABLE>
To finance the acquisitions described in Note 1 and to provide for future
operating capital, the Partnerships entered into a Credit Agreement with Chase
Manhattan Bank, N.A. (the "Credit Agreement"), as administrative agent, for
borrowings of up to $72,000,000, bearing interest at a blended effective rate of
7.63% at December 31, 1996. The borrowings are collateralized by all of the
assets and outstanding Partnership interests.
The aggregate scheduled maturities of long-term debt subsequent to December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997.................................................. $ 3,000,000
1998.................................................. 6,500,000
1999.................................................. 8,000,000
2000.................................................. 11,500,000
2001.................................................. 11,500,000
2002.................................................. 24,500,000
-----------
$65,000,000
===========
</TABLE>
In addition to the scheduled debt repayments discussed above, the
Partnerships are required to make prepayments of 66.7% of Excess Cash Flow (as
defined in the Credit Agreement). The required payment due at March 31, 1997
amounts to approximately $2,730,000, of which $1,800,000 has been prepaid at
December 31, 1996. The remaining $930,000 is included in the current portion of
Credit Agreement.
Under the Credit Agreement, the Partnerships have the option to maintain
domestic and Eurodollar loans. Interest on borrowings under this agreement are
at varying rates based, at the Partnerships' option, on the banks' prime rate or
the London Interbank Offering Rate (LIBOR), plus a fixed percent, and are
adjusted based upon the ratio of total debt to earnings before interest, taxes,
depreciation, and amortization. The weighted average interest rate during 1996
was 9.08%. Additionally, commitment fees of 0.5% are payable quarterly.
F-26
<PAGE> 136
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Partnerships enter into interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate debt. The Partnerships
had one outstanding interest rate swap agreement with the commercial bank in the
Credit Agreement in the amount of $58,000,000, declining in amount to its
expiration date of September 30, 1998. The floating interest rates are based
upon the three month LIBOR rate and the measurement and settlement is performed
quarterly. Settlements of these agreements are recorded as adjustments to
interest expense in the relevant period. The counterparties to these agreements
are major national financial institutions.
Under the existing Credit Agreement, the Partnerships agree to abide by
restrictive covenants which place limitations upon payments of cash
distributions, issuance of Partnership interests, investment transactions and
the incurrence of additional obligations. In addition, the Partnerships must
maintain specified levels of operating cash flow and comply with other financial
covenants.
9. AFFILIATE TRANSACTIONS:
The Partnerships pay SBP, the general partner of the Partnerships, to
provide certain management services. Payments amounted to $690,135 in 1996 and a
$150,000 bonus is included in accounts payable as of December 31, 1996.
Management believes these amounts are reasonable and representative of the
services provided. The agreement terminates upon the sale of the Stations'
assets.
The Partnerships have elected to participate in an affiliate insurance
program which covers automobiles, buildings, equipment, libel and slander,
liability and earthquake damage. The Partnerships pay actual invoice costs and
no employee of the affiliate or SBP is compensated for these services other than
through the above management fee. Management believes the amounts paid are
reasonable and representative of the services provided.
The Partnerships have elected to participate in an affiliate health, life,
vision and dental program, long and short term disability, travel accident and
long-term care program. The Partnerships are charged the same costs as any other
participating affiliate. No employee of the affiliate or SBP is compensated for
these services other than through the above management fee. Management believes
the amounts paid are reasonable and representative of the services provided.
A defined contribution savings plan (401k) is provided to employees of the
Partnerships by an affiliate. Employees of the Partnerships who have been
employed for six months, who have attained the age of 21 years and who have
completed 1,000 hours of service are generally eligible to participate. Certain
employees represented by various unions have elected not to participate in the
Plan or have established their own plans. Amounts contributed to the plan by the
Partnerships amounted to $131,429 in 1996.
Management believes the costs incurred in connection with the above
affiliate programs approximate the costs that would be incurred if the
Partnerships procured such services on a stand-alone basis.
F-27
<PAGE> 137
SMITH TELEVISION OF MICHIGAN, L.P.,
SMITH TELEVISION OF ROCHESTER, L.P.,
SMITH TELEVISION -- WTOV, L.P., AND
SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER INCOME:
Other income for the year ended December 31, 1996 consisted of the
following:
<TABLE>
<S> <C>
Payment received from an unaffiliated network, net.......... $1,500,000
Loss on disposal of equipment............................... (33,118)
Other....................................................... (7,112)
----------
$1,459,770
==========
</TABLE>
During 1996, the Partnerships agreed to provide certain services to an
unaffiliated national television network and agreed to potentially swap one of
its Stations for one of the unaffiliated network's stations. The Partnerships
have provided all services required by the network. The Partnerships received
$1,500,000 for these services.
11. COMMITMENTS AND CONTINGENCIES:
The Partnerships lease sales offices and minor transmission sites. Rent
expense for the year ended December 31, 1996 was $53,845.
The Partnerships are subject to legal proceedings and claims in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Partnerships.
F-28
<PAGE> 138
TELEVISION STATIONS WEYI, WROC, AND WTOV
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To STC Broadcasting, Inc.:
We have audited the accompanying combined statements of operations and cash
flows of television stations WEYI, WROC and WTOV, stations owned by Television
Station Partners, L.P., for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of the management of STC
Broadcasting, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
television stations WEYI, WROC and WTOV for the years ended December 31, 1995
and 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 7, 1997
F-29
<PAGE> 139
TELEVISION STATIONS WEYI, WROC, AND WTOV
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
REVENUES:
Broadcasting revenues, net of agency and national
representative commissions of $3,793,321 and
$3,640,676, respectively............................... $21,267,176 $20,051,728
Network compensation...................................... 1,893,670 1,253,917
Other revenue............................................. 306,600 351,563
----------- -----------
Net revenues...................................... 23,467,446 21,657,208
----------- -----------
EXPENSES:
Station operating expenses................................ 14,957,246 13,995,579
Amortization of program rights............................ 2,189,842 1,923,842
Depreciation and amortization............................. 1,341,200 1,384,532
----------- -----------
Total operating expenses.......................... 18,488,288 17,303,953
----------- -----------
Operating income.................................. 4,979,158 4,353,255
----------- -----------
OTHER EXPENSES.............................................. (623,082) (322,265)
----------- -----------
NET INCOME.................................................. $ 4,356,076 $ 4,030,990
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE> 140
TELEVISION STATIONS WEYI, WROC, AND WTOV
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,356,076 $ 4,030,990
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 1,341,200 1,384,532
Amortization of program rights......................... 2,189,842 1,923,842
Payments on program rights............................. (2,565,029) (2,345,845)
Increase in accounts receivable........................ (558,277) (452,568)
Decrease in other assets............................... 198,125 296,351
Decrease in accounts payable and accrued liabilities... (489,685) (208,645)
Other.................................................. (81,338) (64,467)
----------- -----------
Net cash provided by operating activities......... 4,390,914 4,564,190
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (323,571) (774,657)
----------- -----------
Net cash used in investing activities............. (323,571) (774,657)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transfers to Television Station Partners, L.P......... (3,889,426) (3,427,199)
----------- -----------
Net cash used in financing activities............. (3,889,426) (3,427,199)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 177,917 362,334
CASH AND CASH EQUIVALENTS, beginning of year................ 531,993 169,659
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 709,910 $ 531,993
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-31
<PAGE> 141
TELEVISION STATIONS WEYI, WROC, AND WTOV
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND NATURE OF OPERATIONS:
The accompanying financial statements present the combined results of
operations and cash flows for the years ended December 31, 1995 and 1994, of
three commercial television stations: WEYI, Saginaw, Flint and Bay City,
Michigan; WROC, Rochester, New York; and WTOV, Wheeling, West Virginia and
Steubenville, Ohio (collectively, the "Stations"). Stations WEYI and WTOV are
NBC affiliates and station WROC is a CBS affiliate. The Stations are owned by
Television Station Partners, L.P. (the "Partnership"), a Delaware limited
partnership which was organized on May 24, 1989. The Stations, along with
another television station, were acquired by the Partnership on July 7, 1989.
2. AGREEMENT TO SELL THE STATIONS:
On April 13, 1995, the Partnership entered into an agreement to sell the
Stations to Jupiter/Smith Television Holdings, L.P. (the "Buyer") for
approximately $63,200,000 plus an amount equal to the excess of the current
assets over the current liabilities assumed by the Buyer, as defined in the
Asset Purchase Agreement, to be paid in cash at the closing of the sale. On
January 3, 1996, the sale of the Stations was finalized for a total sales price
of $73,150,000, including transaction fees and working capital.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the combined
accounts of the Stations. The Stations are combined because of common ownership,
management and relationship of operations. All material items and transactions
between the Stations have been eliminated.
Cash and Cash Equivalents
The Stations consider all highly liquid investments with a maturity of
three months or less to be cash equivalents.
Concentration of Risk and Accounts Receivable
The Stations serve the Saginaw, Flint, and Bay City, Michigan; Rochester,
New York; Steubenville, Ohio, and Wheeling, West Virginia, demographic areas.
Accordingly, the revenue potential of the Stations is dependent on the economy
in these areas. The Stations monitor their accounts receivable through
continuing credit evaluations. Historically, the Stations have not had
significant uncollectible accounts that had not previously been provided for in
the allowance for doubtful accounts.
Program Rights
Program rights and the corresponding contractual obligations are recorded
at gross cost when purchased and when the programs are available for their first
showing. The capitalized cost of program rights is amortized on a straight-line
basis over the period of the program rights agreements, or usage, whichever
yields the greater accumulated amortization.
F-32
<PAGE> 142
TELEVISION STATIONS WEYI, WROC, AND WTOV
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Buildings and tower......................................... 20-30 years
Automobiles................................................. 3 years
Furniture and fixtures...................................... 5-8 years
Machinery and equipment..................................... 5-20 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred.
Intangible Assets
Intangible assets are comprised principally of values assigned to the
Federal Communications Commission licenses and network affiliation agreements
arising from the acquisition of the Stations. Intangible assets are being
amortized on the straight-line basis primarily over 40 years. Intangible assets
are periodically evaluated for impairment using a measurement of fair value.
Revenue Recognition
The Company's primary source of revenue is the sale of television time to
advertisers. Revenue is recorded when the advertisements are broadcast.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount should be addressed. The Partnership has determined
that as of December 31, 1995, there has been no impairment in the carrying value
of the long-lived assets of the Stations.
Trade/Barter Transactions
Trade/barter transactions involve the exchange of advertising time for
products and/or services. Trade/barter transactions are recorded based on the
fair market value of the products and/or services received. Revenue is recorded
when advertising schedules air and expense is recognized when products and/or
services are used.
Income Taxes
No income tax provision has been included in the financial statements since
income or loss of the Stations is required to be reported by the partners of the
Partnership on their respective income tax returns.
Supplemental Cash Flow Disclosures
Property and equipment totaling $115,097 and $98,730 was acquired in 1995
and 1994, respectively, in exchange for advertising time. In addition, the
Stations acquired new contracts for television program obligations in the amount
of $310,044 and $8,983,788 in 1995 and 1994, respectively.
F-33
<PAGE> 143
TELEVISION STATIONS WEYI, WROC, AND WTOV
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. AFFILIATE TRANSACTIONS:
The Partnership's general partner is entitled to a management fee pursuant
to a management agreement. These management fees are for services rendered on
behalf of the Partnership's four stations and are not allocated to or accounted
for on the individual stations' financial statements. Management fees due to the
general partner were approximately $919,000 and $1,377,000 for the years ended
December 1995 and 1994, respectively.
5. COMMITMENTS AND CONTINGENCIES:
The Stations are subject to legal proceedings and claims in the ordinary
course of business. In the opinion of the management of STC Broadcasting, Inc.,
the amount of ultimate liability with respect to these actions will not
materially affect the results of operations of the Stations.
F-34
<PAGE> 144
TELEVISION STATION KSBW
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To STC Broadcasting, Inc.:
We have audited the accompanying statements of operations and cash flows of
television station KSBW, a station owned by E.P. Communications, Inc., for the
years ended December 31, 1995 and 1994. These financial statements are the
responsibility of the management of STC Broadcasting, Inc. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of television
station KSBW for the years ended December 31, 1995 and 1994, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 7, 1997
F-35
<PAGE> 145
TELEVISION STATION KSBW
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
REVENUES:
Broadcasting revenues, net of agency and national
representative commissions of $1,658,863 and
$1,903,886, respectively............................... $8,505,825 $8,739,544
Network compensation...................................... 650,581 444,698
Other revenue............................................. 281,149 201,227
---------- ----------
Net revenues...................................... 9,437,555 9,385,469
---------- ----------
EXPENSES:
Station operating expenses................................ 5,771,698 5,826,363
Amortization of program rights............................ 990,709 1,198,996
Depreciation and amortization............................. 2,777,619 2,310,676
---------- ----------
Total operating expenses.......................... 9,540,026 9,336,035
---------- ----------
Station operating (loss) income................... (102,471) 49,434
Management fees paid to affiliate......................... -- 276,000
---------- ----------
Operating loss.................................... (102,471) (226,566)
OTHER EXPENSES.............................................. (11,309) (141,303)
---------- ----------
NET LOSS.................................................... $ (113,780) $ (367,869)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 146
TELEVISION STATION KSBW
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (113,780) $ (367,869)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 2,777,619 2,310,676
Amortization of program rights......................... 990,709 1,198,996
Payments on program rights............................. (986,955) (1,053,534)
(Increase) decrease in accounts receivable............. (241,804) 366,358
(Increase) decrease in other assets.................... (16,764) 386,217
Increase (decrease) in accounts payable and accrued
liabilities.......................................... 69,938 (246,861)
Other.................................................. 27,812 56,836
----------- -----------
Net cash provided by operating activities......... 2,506,775 2,650,819
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (426,025) (512,138)
----------- -----------
Net cash used in investing activities............. (426,025) (512,138)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from GHTV, Inc.............................. -- 477,544
Net transfers to GHTV, Inc. and E.P. Communications,
Inc.................................................... (2,089,240) (2,730,301)
----------- -----------
Net cash used in financing activities............. (2,089,240) (2,252,757)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (8,490) (114,076)
CASH AND CASH EQUIVALENTS, beginning of year................ 174,888 288,964
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 166,398 $ 174,888
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 147
TELEVISION STATION KSBW
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND NATURE OF OPERATIONS:
The accompanying financial statements present the results of operations and
cash flows for the years ended December 31, 1995 and 1994, of television station
KSBW (the "Station"). The Station is an NBC affiliate that serves the Salinas
and Monterey, California, demographic markets. The Station, along with another
television station, is owned by E.P. Communications, Inc. ("EPC"), an S
corporation incorporated in the state of California on March 3, 1994. The
Station was acquired by E.P. Communications, Inc. on September 21, 1994 from
GHTV, Inc. for approximately $22,727,965.
The financial statements reflect the acquisition of the Station by EPC
under the purchase method of accounting. Accordingly, the acquired assets and
liabilities were recorded at fair value as of the date of EPC's acquisition of
the Station.
2. AGREEMENT TO SELL THE TELEVISION STATION:
On August 31, 1995, EPC signed a letter of intent to sell the Station to
Jupiter/Smith Television Holdings, L.P. (the "Buyer") for approximately
$28,000,000 plus an amount equal to the excess of the current assets over the
current liabilities assumed by the Buyer, as defined in the Asset Purchase
Agreement, to be paid in cash at the closing of the sale. On January 17, 1996,
the sale of the Station was finalized for a total sales price of $32,250,000,
including transaction fees and working capital.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Station considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
Concentration of Risk and Accounts Receivable
The Station serves the Salinas and Monterey, California, demographic areas.
Accordingly, the revenue potential of the Station is dependent on the economy in
this area. The Station monitors its accounts receivable through continuing
credit evaluations. Historically, the Station has not had significant
uncollectible accounts that had not previously been provided for in the
allowance for doubtful accounts.
Program Rights
Program rights and the corresponding contractual obligations are recorded
at gross cost when the license period begins and the programs are available for
their first showing. The capitalized cost of program and film rights is
amortized on a straight-line basis over the period of the program and film
rights agreements, which approximates amortization based on the estimated number
of showings.
F-38
<PAGE> 148
TELEVISION STATION KSBW
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment acquired in purchase transactions are recorded at
the estimate of fair value based upon independent appraisals and property and
equipment acquired subsequent thereto are recorded at cost. Property and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets, as follows:
<TABLE>
<S> <C>
Buildings and tower......................................... 25-30 years
Automobiles................................................. 3-5 years
Furniture and fixtures...................................... 5-10 years
Machinery and equipment..................................... 5-20 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred.
Intangible Assets
Intangible assets are comprised principally of values assigned to the
Federal Communications Commission license and network affiliation agreement
arising from the acquisition of the Station. Intangible assets are being
amortized on the straight-line basis primarily over 40 years. Intangible assets
are periodically evaluated for impairment using a measurement of fair value.
Revenue Recognition
The Company's primary source of revenue is the sale of television time to
advertisers. Revenue is recorded when the advertisements are broadcast.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount should be addressed. Management has determined that as
of December 31, 1995, there has been no impairment in the carrying value of the
long-lived assets of the Station.
Trade/Barter Transactions
Trade/barter transactions involve the exchange of advertising time for
products and/or services. Trade/barter transactions are recorded based on the
fair market value of the products and/or services received. Revenue is recorded
when advertising schedules air and expense is recognized when products and/or
services are used.
Income Taxes
EPC is incorporated as an S corporation. Accordingly, for federal income
tax purposes, EPC is not subject to an income tax at the corporate level since
EPC's net income or loss is required to be reported by its shareholders on their
respective income tax returns.
During the first nine months of 1994, when the Station was owned by GHTV,
Inc., income taxes were not computed and allocated to the Station on a
stand-alone basis. Accordingly, no tax provision or benefit has been reflected
in the 1994 statement of operations.
F-39
<PAGE> 149
TELEVISION STATION KSBW
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental Cash Flow Disclosures
Property and equipment totaling $15,000 was acquired in 1994 in exchange
for advertising time. In addition, the Station acquired new contracts for
television program obligations in the amounts of $859,560 and $677,840 in 1995
and 1994, respectively.
Use of Estimates
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. AFFILIATE TRANSACTIONS:
Corporate expenses, debt and related interest expense of EPC are not
allocated to its stations. Accordingly, such items are not reflected on the
accompanying statement of operations.
For the first nine months of 1994, the Station paid its former owner, GHTV,
Inc., for certain direct general and administrative services. Payments amounted
to approximately $276,000 in 1994.
5. COMMITMENTS AND CONTINGENCIES:
The Station is subject to legal proceedings and claims in the ordinary
course of its business. In the opinion of the management of STC Broadcasting,
Inc., the amount of ultimate liability with respect to these actions will not
materially affect the results of operations of the Station.
F-40
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
WJAC, Incorporated and Subsidiaries:
We have audited the accompanying consolidated balance sheets of WJAC,
Incorporated and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
As described in Note 6 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for postretirement
benefits other than pensions.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 28, 1997
(May 8, 1997 as to Note 11)
F-41
<PAGE> 151
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,727,632 $ 1,472,653
Short-term investments.................................... 3,857,852 3,516,394
Accounts receivable -- trade (net of allowance of $20,000
in 1996 and 1995)...................................... 2,142,031 1,655,964
Program rights -- current portion......................... 188,718 125,400
Prepaid expenses.......................................... 107,562 97,759
Deferred income taxes..................................... 25,156 28,879
Accrued interest receivable............................... 15,319 22,331
Other current assets...................................... 22,926 14,815
----------- -----------
Total current assets.............................. 8,087,196 6,934,195
----------- -----------
PROPERTY, PLANT AND EQUIPMENT -- At cost:
Land and land improvements................................ 103,792 102,892
Buildings................................................. 2,320,253 2,300,598
Equipment and fixtures.................................... 7,220,845 6,886,064
----------- -----------
9,644,890 9,289,554
Less accumulated depreciation............................. (7,159,439) (6,700,122)
----------- -----------
2,485,451 2,589,432
----------- -----------
DEFERRED INCOME TAXES....................................... 650,322 685,865
----------- -----------
OTHER ASSETS................................................ 1,410,464 1,284,428
----------- -----------
$12,633,433 $11,493,920
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 101,612 $ 54,788
Dividends payable......................................... 213,052 213,052
Accrued salaries and wages................................ 70,200 64,105
Payroll taxes and withholdings............................ 42,465 43,553
Accrued vacation pay...................................... 169,503 157,319
Deferred compensation -- current portion.................. 12,780 12,780
Program rights payable -- current portion................. 94,220 97,677
Accrued income taxes...................................... 163,162 170,045
Deferred revenue.......................................... 343,897 215,452
----------- -----------
Total current liabilities......................... 1,210,891 1,028,771
----------- -----------
PROGRAM RIGHTS PAYABLE -- Less current portion.............. 107,289 7,042
----------- -----------
DEFERRED COMPENSATION....................................... 400,250 341,154
----------- -----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 2,206,759 2,061,262
COMMITMENTS (See Note 10)................................... -- --
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, 37,750 shares;
issued, 30,436 shares.................................. 50,000 50,000
Additional paid-in capital 9,435 9,435
Retained earnings......................................... 8,938,528 8,280,603
Less unrealized losses on investments..................... (71,669) (66,297)
Less treasury stock -- at cost, 7,314 shares.............. (218,050) (218,050)
----------- -----------
8,708,244 8,055,691
----------- -----------
$12,633,433 $11,493,920
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE> 152
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
REVENUE:
Broadcasting.............................................. $ 9,842,395 $ 8,795,276
Hockey team............................................... 904,894 460,968
Production and recording.................................. 59,432 82,875
Other operating........................................... 74,793 1,005
----------- -----------
Total revenue..................................... 10,881,514 9,340,124
----------- -----------
EXPENSES:
General and administrative................................ 2,017,239 1,748,105
News...................................................... 1,408,476 1,297,644
Selling................................................... 1,316,999 1,107,481
Technical and production.................................. 839,236 809,160
Program and promotion..................................... 421,280 327,637
Amortization of program rights............................ 865,065 428,438
Depreciation and amortization............................. 566,105 558,964
Direct costs of hockey operations......................... 745,449 364,979
Maintenance -- buildings and transmitters................. 289,794 290,344
Other operating........................................... 111,118 54,356
----------- -----------
Total expenses.................................... 8,580,761 6,987,108
----------- -----------
OPERATING INCOME............................................ 2,300,753 2,353,016
OTHER INCOME AND EXPENSES................................... 280,380 287,708
----------- -----------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE................................... 2,581,133 2,640,724
INCOME TAXES................................................ (1,071,000) (1,064,000)
----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. 1,510,133 1,576,724
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (net of
deferred income tax benefit of $763,288................... -- (1,144,934)
----------- -----------
NET EARNINGS................................................ $ 1,510,133 $ 431,790
=========== ===========
EARNINGS PER SHARE AMOUNTS:.................................
Earnings before cumulative effect of change in
accounting principle................................... $ 49.62 $ 51.80
Cumulative effect of change in accounting principle....... -- (37.62)
----------- -----------
Net earnings.............................................. $ 49.62 $ 14.18
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 153
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED LOSSES ON TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INVESTMENTS STOCK EQUITY
------- ---------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... $50,000 $9,435 $8,701,021 $(227,458) $(218,050) $8,314,948
Net earnings........... -- -- 431,790 -- -- 431,790
Unrealized gain on
investments -- net
of deferred tax
expense of
$111,994............ -- -- -- 161,161 -- 161,161
Cash dividends --
$28.00 per share.... -- -- (852,208) -- -- (852,208)
------- ------ ---------- --------- --------- ----------
BALANCE, DECEMBER 31,
1995................... 50,000 9,435 8,280,603 (66,297) (218,050) 8,055,691
Net earnings........... -- -- 1,510,133 -- -- 1,510,133
Unrealized loss on
investments -- net
of deferred tax
benefit of $3,734... -- -- -- (5,372) -- (5,372)
Cash dividends --
$28.00 per share.... -- -- (852,208) -- -- (852,208)
------- ------ ---------- --------- --------- ----------
BALANCE, DECEMBER 31,
1996................... $50,000 $9,435 $8,938,528 $ (71,669) $(218,050) $8,708,244
======= ====== ========== ========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE> 154
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $1,510,133 $ 431,790
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Cumulative effect of change in accounting principle.... -- 1,144,934
Depreciation and amortization.......................... 566,105 558,964
Deferred compensation expense.......................... 59,096 24,653
Deferred income taxes.................................. 43,000 (87,000)
Amortization of program rights......................... 865,065 428,438
Payments for program rights............................ (875,307) (495,952)
Accounts receivable -- trade........................... (486,067) (97,398)
Accounts payable -- trade.............................. 46,824 3,624
Deferred revenue....................................... 128,445 136,602
Prepaid pension cost................................... (110,688) (53,793)
Increase in cash surrender value -- life insurance..... (33,237) (33,794)
Postretirement benefits other than pensions............ 145,497 153,040
Accrued income taxes................................... (6,883) (59,013)
Other.................................................. (2,817) 119,167
---------- ----------
Net cash provided by operating activities......... 1,849,166 2,174,262
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (398,936) (426,941)
Purchases of short-term investments....................... (924,436) (685,494)
Net proceeds from sale of short-term investments.......... 582,978 1,019,359
Payment for purchase of Webworks, Inc., net of $29,586
cash acquired.......................................... -- (45,414)
Payment for purchase of Johnstown Chiefs, Inc., net of
$1,500 cash acquired................................... -- (598,500)
Other..................................................... (1,585) (9,678)
---------- ----------
Net cash used in investing activities............. (741,979) (746,668)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES -- Dividends paid...... (852,208) (905,471)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 254,979 522,123
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 1,472,653 950,530
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $1,727,632 $1,472,653
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Income
taxes paid................................................ $1,005,138 $1,210,013
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-45
<PAGE> 155
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization -- WJAC, Incorporated (the "Parent") is an NBC affiliate
broadcast television station located in Johnstown, PA and is the parent holding
company of the Johnstown Chiefs, Inc. and Webworks, Inc. (collectively, the
"Company"). The Johnstown Chiefs, Inc. are a minor league hockey team which was
purchased in May 1995. Webworks, Inc. maintains a page on the Internet used by
advertisers for which it receives a fee and began operations in November 1995.
The consolidated financial statements include the results of operations of the
Johnstown Chiefs, Inc. since the date of acquisition and Webworks, Inc. since
the start of operations. All significant transactions between the Parent and
subsidiaries are eliminated.
b. Short-Term Investments -- Short-term investments consist principally of
tax-exempt bonds, mutual funds and corporate equity securities. The Company
accounts for investments under Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires certain investments to be categorized as
either trading, available-for-sale, or held-to-maturity. At December 31, 1996
and 1995, all of the Company's investments were categorized as
available-for-sale and are carried at fair value with unrealized gains and
losses recorded as a separate component of stockholders' equity.
c. Property, Plant and Equipment -- Depreciation is provided over the
estimated useful lives (three to ten years) of the related assets on the
straight-line method except that depreciation of broadcasting equipment is
provided by accelerated methods. Depreciation expense for the years ended
December 31, 1996 and 1995 approximated $501,000 and $521,000, respectively.
d. Program Rights and Program Rights Payable -- The asset and liability for
program rights are recorded at cost when the license period begins. The
capitalized costs are being expensed based on the number of future showings and
the related revenue forecasted for those showings.
e. Other Assets Amortization -- Goodwill is amortized over ten years and
the non-compete agreement is amortized over the life of the agreement.
f. Program Barter Transactions -- The Company purchases certain programming
which provides advertising time to the syndicator during the airing of the
programs. The estimated fair value of advertising revenue received in program
barter transactions is recognized as revenue and a corresponding program cost
when the air time is used by the advertiser. Program barter revenue and expense
of approximately $337,000 is included as an increase to broadcasting revenue and
amortization of program rights for the year ended December 31, 1996. No amounts
were recorded for the year ended December 31, 1995.
g. Income Taxes -- The Company accounts for deferred taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires
the use of the liability method of accounting for deferred income taxes.
Deferred income tax liabilities and assets reflect temporary differences between
financial statement reporting and income tax reporting. The Company's temporary
differences primarily relate to unrealized losses on investments, vacation pay
expense, depreciation, pension costs, postretirement benefits other than
pensions and deferred compensation expense.
h. Earnings Per Share Amounts -- The earnings per share amounts for the
years ended December 31, 1996 and 1995 are calculated using the issued and
outstanding common shares (30,436 in 1996 and 1995).
F-46
<PAGE> 156
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
i. Statements of Cash Flows -- For purposes of the consolidated statements
of cash flows, the Company considers ready asset deposits and short-term money
market funds held by a broker purchased with an original maturity of three
months or less to be cash equivalents.
j. Use of Estimates in Preparation of the Consolidated Financial
Statements -- The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities as of the date of the consolidated financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The significant estimates used by
management are those used in determining depreciation of property, plant and
equipment, program rights costs, amortization of goodwill, deferred tax assets
and program barter transactions.
k. New Accounting Pronouncement -- In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires the long-lived assets and identifiable intangibles, including goodwill,
that an entity expects to hold and use be evaluated based on the fair value of
the asset whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Management considers the
undiscounted cash flow expected to be generated by the use of the asset and its
eventual disposition to determine when, and if, an impairment has occurred. SFAS
No. 121 was implemented by the Company on January 1, 1996. The effect of
implementation of SFAS No. 121 did not have a material impact on the
consolidated financial statements.
l. Reclassifications -- Certain reclassifications have been made to the
1995 consolidated financial statements in order to conform to the 1996
presentation.
2. ACQUISITIONS
The Parent acquired the Johnstown Chiefs, Inc. in May 1995 for $600,000 and
Webworks, Inc. in November 1995 for $75,000. The purchase price of these
acquisitions were recorded as follows:
<TABLE>
<S> <C>
Goodwill.................................................... $531,866
Cash........................................................ 31,086
Non-compete agreement....................................... 50,000
Equipment and fixtures...................................... 41,860
Advanced ticket sales....................................... 77,350
Other....................................................... 21,688
Deferred revenue............................................ (78,850)
--------
$675,000
========
</TABLE>
These acquisitions were accounted for under the purchase method of
accounting.
The following unaudited financial information for the Company assumes that
the aforementioned acquisitions had occurred at the beginning of the year ended
December 31, 1995;
<TABLE>
<S> <C>
Total revenue............................................... $9,797,980
Earnings before cumulative effect of change in accounting
principle................................................. 1,545,705
Net earnings................................................ 400,771
Earnings per share.......................................... 13.17
</TABLE>
F-47
<PAGE> 157
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SHORT-TERM INVESTMENTS
Debt and equity securities in the available-for-sale category included in
short-term investments and their respective unrealized holding gains and losses
at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
UNREALIZED HOLDING
FAIR VALUE GAINS (LOSSES)
----------------------- ---------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Debt securities..................... $1,812,310 $1,808,742 $ (13,323) $ 6,387
Equity securities................... 2,045,542 1,707,652 (114,210) (124,814)
---------- ---------- --------- ---------
$3,857,852 $3,516,394 $(127,533) $(118,427)
========== ========== ========= =========
</TABLE>
The net change in the unrealized holding loss account was a loss of $9,106
for 1996 and a gain of $273,156 for 1995. Gross realized gains from the sale of
securities classified as available-for-sale for the year ended December 31, 1996
and 1995 were approximately $1,700 and $13,000, respectively. For the purpose of
determining gross realized gains and losses, the cost of securities sold is
based upon specific identification. The total cost of short-term investments was
$3,985,385 and $3,634,821 at December 31, 1996 and 1995, respectively.
The estimated fair value of debt securities in the available-for-sale
category by contractual maturity at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
FAIR VALUE
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Due within one year....................................... $ 404,103 $ 452,047
Due after one year through five years..................... 706,262 411,517
Due after five years through ten years.................... 167,177 382,150
Due after ten years....................................... 534,768 563,028
---------- ----------
$1,812,310 $1,808,742
========== ==========
</TABLE>
4. OTHER ASSETS
Other assets as of December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Goodwill (net of accumulated amortization of $84,217 in
1996 and $31,029 in 1995)............................... $ 447,649 $ 500,837
Prepaid pension cost...................................... 494,061 383,373
Cash surrender value -- life insurance.................... 305,210 271,973
Program rights -- less current portion.................... 118,112 74,398
Non-compete agreement (net of accumulated amortization of
$15,831 in 1996 and $5,831 in 1995)..................... 34,169 44,169
Other..................................................... 11,263 9,678
---------- ----------
$1,410,464 $1,284,428
========== ==========
</TABLE>
5. PENSION PLAN
The Company has two noncontributory, defined benefit pension plans covering
principally all full-time salaried and hourly employees and certain part-time
employees. Pension expense allocable
F-48
<PAGE> 158
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the Company for the years ended December 31, 1996 and 1995 was approximately
$5,000 and $17,000, respectively.
The Company's pension benefits are based on a formula which takes into
consideration an employee's compensation and years of service. The Company's
funding policy is to make annual contributions to the plans based upon the
funding standards developed by the plans' actuary. The actuary uses the
Projected Unit Credit actuarial cost method. The Company's contributions for
1996 and 1995 at least equaled the minimum funding requirements of ERISA.
The Company's actuarial present value of accumulated benefit obligation was
$1,426,077 and $1,100,186, and included vested benefits of $1,224,399 and
$883,789, for 1996 and 1995, respectively.
The following table sets forth the plans' funded status and the amounts
recognized in the Company's consolidated balance sheets as of December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Plan assets at fair value consisting principally of
marketable securities................................... $2,143,962 $1,852,309
Actuarial present value of projected benefit obligation
for service rendered to date............................ 1,696,211 1,315,607
---------- ----------
Plan assets in excess of projected benefit obligation..... 447,751 536,702
Unrecognized net loss (gain).............................. 140,364 (45,840)
Unrecognized net asset at October 1, 1989, being
recognized over 15 years................................ (94,054) (107,489)
---------- ----------
$ 494,061 $ 383,373
========== ==========
</TABLE>
Pension expense for the years ended December 31, 1996 and 1995 included the
following components:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Service cost -- benefits earned during the period.......... $ 61,693 $ 56,736
Interest cost on projected benefit obligation.............. 103,225 92,330
Actual return on plan assets............................... (194,485) (248,621)
Net amortization and deferral:
Actual versus expected return on plan assets............. 47,556 129,701
Unrecognized net asset................................... (13,435) (13,435)
--------- ---------
Pension expense............................................ $ 4,554 $ 16,711
========= =========
</TABLE>
The principal actuarial assumptions for the plans were as follows for 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
----- ------
<S> <C> <C>
Weighted average discount rate used in determining the
actuarial present value of the benefit obligations........ 7.00% 8.00%
Expected weighted average long-term rate of return on plan
assets.................................................... 7.50% 7.50%
Compensation increases...................................... 4.50% 4.50%
</TABLE>
6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors health and life insurance plans covering certain
full-time employees and retirees. The plans are funded only as benefit payments
are required. Effective January 1, 1995,
F-49
<PAGE> 159
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company adopted SFAS No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions," whereby the cost of the health and life insurance
postretirement benefits is accrued during the employees active service period.
The Company elected to immediately recognize the accumulated benefit obligation
rather than amortize it over future periods. The cumulative effect of this
accounting change as of January 1, 1995 was to decrease net earnings by
$1,144,934, net of a deferred income tax benefit of $763,288. The effect of the
accounting change was to increase benefit expense by approximately $148,000 for
the year ended December 31, 1995.
The plans also include cost sharing coverage provisions, such as
co-insurance and deductibles. The health insurance plan coordinates benefits
with Medicare coverage for participants that are 65 years and older.
The components of the net postretirement benefit cost for the years ended
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Service cost -- benefits earned during the year............. $ 65,666 $ 64,930
Interest cost on the projected benefit obligation........... 141,291 146,873
Amortization of net gain.................................... (4,180) --
-------- --------
Net postretirement benefit cost............................. $202,777 $211,803
======== ========
</TABLE>
The status of the Company's unfunded postretirement benefit obligation at
December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Retirees................................................ $ 296,580 $ 821,559
Fully eligible active plan participants................. 80,385 75,108
Other active plan participants.......................... 335,524 922,136
---------- ----------
Accumulated postretirement benefit obligations............ 712,489 1,818,803
Unrecognized net gain..................................... 1,494,270 242,459
---------- ----------
Accrued postretirement benefit cost....................... $2,206,759 $2,061,262
========== ==========
</TABLE>
The principal actuarial assumptions for the plan were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Weighted average discount rate used in determining the
actuarial present value of the projected postretirement
benefit obligation........................................ 7.50% 8.00%
Assumed health care cost trend rates:
First four years (five years for 1995):................... 8.00% 8.00%
Next five years:.......................................... 7.00% 7.00%
Thereafter:............................................... 6.00% 6.00%
</TABLE>
The 1996 actuarial valuation includes as an experience gain that, beginning
in 1997, certain existing Medicare eligible retirees and all new Medicare
retirees will be receiving coverage under a managed care program.
A 1% increase in the assumed health care cost trend rates would increase
the service and interest components of the net postretirement benefit cost for
the year ended December 31, 1996 by approximately $13,000, as well as increase
the December 31, 1996 accumulated postretirement benefit obligation by
approximately $87,000.
F-50
<PAGE> 160
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. AGREEMENTS WITH EMPLOYEES
Under the terms of salary continuation agreements with four employees, the
Company is to provide monthly postretirement compensation for a maximum period
of 15 years, or until death, whichever occurs first. The present value of the
future payments required under each of the agreements is being charged to
operations over the remaining service periods of the employee. The total amount
charged to operations related to these agreements approximated $59,000 and
$37,000 during 1996 and 1995, respectively.
The Company has a long-term employment contract with the president of the
Company which expires in April 2001. The contract provides for, among other
things, salary continuation in the event of disability or termination for other
than just cause (see Note 11).
Certain employees are covered under a collective bargaining agreement.
8. OTHER INCOME AND EXPENSES
Other income and expenses for the years ended December 31, 1996 and 1995
consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Interest income............................................. $224,748 $230,073
Dividends................................................... 56,260 41,342
Miscellaneous -- net........................................ (628) 16,293
-------- --------
$280,380 $287,708
======== ========
</TABLE>
9. INCOME TAXES
The income tax provision for the years ended December 31, 1996 and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current:
Federal................................................. $ 756,000 $ 825,000
State................................................... 272,000 326,000
---------- ----------
1,028,000 1,151,000
---------- ----------
Deferred:
Federal................................................. (3,500) (81,000)
State................................................... 46,500 (6,000)
---------- ----------
43,000 (87,000)
---------- ----------
$1,071,000 $1,064,000
========== ==========
</TABLE>
F-51
<PAGE> 161
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations between the statutory federal income tax rate and the
Company's effective income tax rate as a percentage of earnings before income
taxes and cumulative effect of change in accounting principle are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Statutory federal income tax rate........................... 34% 34%
State taxes, net of federal tax benefit..................... 8 8
Other....................................................... (1) (2)
-- --
Effective income tax rate................................... 41% 40%
== ==
</TABLE>
The tax effects of significant items comprising the Company's total
deferred tax assets and total deferred tax liabilities as of December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions............. $ 895,944 $ 865,730
Deferred compensation................................... 162,502 154,019
Operating loss carryforwards............................ 132,728 106,284
Valuation allowance on operating loss carryforwards..... (132,728) (106,284)
Other................................................... 76,846 73,585
---------- ----------
Total deferred tax assets................................. $1,135,292 $1,093,334
---------- ----------
Deferred tax liabilities:
Prepaid pension cost.................................... $ 220,728 $ 152,297
Differences between book and tax basis of property,
plant and equipment.................................. 187,396 181,587
Other................................................... 51,690 44,706
---------- ----------
Total deferred tax liabilities............................ $ 459,814 $ 378,590
---------- ----------
</TABLE>
At December 31, 1996 and 1995, the Johnstown Chiefs, Inc. has remaining
preacquisition net operating loss carryforwards for federal tax purposes of
approximately $312,600. Also, the Johnstown Chiefs, Inc. has approximately
$265,000 of loss carryforward for state income tax purposes at December 31,
1996. The carryforwards expire in varying amounts through 2011 for federal tax
purposes and through 1999 for state tax purposes. The ability of the Company to
utilize these carryforwards is dependent on the ability of the Johnstown Chiefs,
Inc. to generate income during the carryforward period. As a result, the
potential tax benefit of these net operating loss carryforwards and deferred
taxes from purchase date basis differences have been fully reserved with a
valuation allowance at December 31, 1996 and 1995. Unamortized purchase date
basis differences were approximately $90,000 and $150,000 at December 31, 1996
and 1995, respectively.
No additional deferred tax valuation allowance is deemed necessary as a
result of management's evaluation of the likelihood that all of the deferred tax
assets will be realized.
10. COMMITMENTS
In addition to program rights payable as reflected in the consolidated
financial statements, the Company has contracted the right to broadcast certain
programs in the future. The total commitment to be paid under these contracts to
broadcast future programs was approximately $1,268,000 at December 31, 1996, and
payments will begin primarily at the time of initial broadcast.
F-52
<PAGE> 162
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
On April 7, 1997, the Company signed a Separation Agreement with the
president of the Company which provided severance of approximately $1,250,000
and the payment of $200,000 for a one year noncompetition agreement. As a result
of the Separation Agreement, the provisions of the long-term employment contract
described in Note 7 were fulfilled. At December 31, 1996, there was
approximately $225,000 included in the Company's deferred compensation liability
related to this employee.
On May 5, 1997 the Board of Directors of the Parent approved the sale of
the stock of the Johnstown Chiefs, Inc. (the "Chiefs") to a major shareholder of
the Parent for $50,000 plus additional amounts if that company is later sold for
the purpose of moving the team out of the Johnstown, Pennsylvania area before
the 2000-2001 hockey season. The proposed sales price for the stock is less than
the carrying amount of the net assets. The sale of the stock of the Chiefs is
subject to the approval of the shareholders.
On May 8, 1997, the Parent entered into an Agreement and Plan of Merger
(the "Agreement") whereby, upon the closing (expected before December 31, 1997),
the Parent becomes a wholly owned subsidiary of STC Broadcasting, Inc. and the
stockholders of the Parent will receive approximately $36,000,000, plus or minus
a calculated net current asset adjustment. The Agreement provides for the
proceeds from a sale of the stock of the Chiefs to be distributed to the current
shareholders of the Parent.
F-53
<PAGE> 163
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,309,102
Short-term investments.................................... 3,199,322
Accounts receivable -- trade (net of allowance of
$20,000)............................................... 1,767,006
Program rights -- current portion......................... 141,802
Prepaid expenses.......................................... 108,617
Deferred income taxes..................................... 104,057
Accrued interest receivable............................... 9,866
Other current assets...................................... 438,409
-----------
Total current assets.............................. 7,078,181
-----------
PROPERTY, PLANT AND EQUIPMENT -- At cost:
Land and land improvements............................. 103,792
Buildings.............................................. 2,319,619
Equipment and fixtures................................. 6,491,415
-----------
8,914,826
Less accumulated depreciation............................. (6,580,449)
-----------
2,334,377
-----------
DEFERRED INCOME TAXES....................................... 556,456
-----------
OTHER ASSETS................................................ 1,007,094
-----------
$10,976,108
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 84,657
Accrued salaries and wages................................ 69,843
Payroll taxes and withholdings............................ 54,991
Accrued vacation pay...................................... 161,882
Deferred compensation -- current portion.................. 12,780
Program rights payable -- current portion................. 97,212
Deferred revenues......................................... 198,595
-----------
Total current liabilities......................... 679,960
-----------
PROGRAM RIGHTS PAYABLE -- Less current portion.............. 37,678
-----------
DEFERRED COMPENSATION....................................... 176,668
-----------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 2,206,759
-----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, 37,750 shares;
issued, 30,436 shares.................................. 50,000
Additional paid-in capital................................ 9,435
Retained earnings......................................... 8,074,110
Less unrealized losses on investments..................... (40,452)
Less treasury stock -- at cost, 7,314 shares.............. (218,050)
-----------
7,875,043
-----------
$10,976,108
===========
</TABLE>
See notes to unaudited consolidated financial statements.
F-54
<PAGE> 164
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
SIX MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
REVENUE:
Broadcasting.............................................. $ 4,647,739
Hockey team............................................... 552,925
Production and recording.................................. 30,279
Other operating........................................... 54,939
-----------
Total revenue..................................... 5,285,882
-----------
EXPENSES:
General and administrative................................ 953,494
News...................................................... 752,081
Selling................................................... 603,153
Technical and production.................................. 416,981
Program and promotion..................................... 247,167
Amortization of program rights............................ 531,275
Depreciation and amortization............................. 343,653
Direct costs of hockey operations......................... 382,174
Maintenance -- buildings and transmitters................. 158,306
Settlement of employment contract......................... 1,032,649
Impairment in carrying value of investment in hockey
team................................................... 481,908
Other operating........................................... 80,180
-----------
Total expenses.................................... 5,983,021
-----------
OPERATING LOSS.............................................. (697,139)
OTHER INCOME AND EXPENSES................................... 101,191
-----------
LOSS BEFORE INCOME TAXES.................................... (595,948)
INCOME TAXES................................................ 157,634
-----------
NET LOSS.................................................... $ (438,314)
===========
Loss per share.............................................. $ (14.40)
===========
</TABLE>
See notes to unaudited consolidated financial statements.
F-55
<PAGE> 165
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED LOSSES ON
STOCK CAPITAL EARNINGS INVESTMENTS
------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. $50,000 $9,435 $8,938,528 $(71,669)
Net loss................................ -- -- (438,314) --
Decrease in unrealized loss on
investments........................... -- -- -- 31,217
Cash Dividends -- $14.00 per share...... -- -- (426,104) --
------- ------ ---------- --------
BALANCE, JUNE 30, 1997.................. $50,000 $9,435 $8,074,110 $(40,452)
======= ====== ========== ========
<CAPTION>
TREASURY STOCKHOLDERS'
STOCK EQUITY
--------- -------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996.............. $(218,050) $8,708,244
Net loss................................ -- (438,314)
Decrease in unrealized loss on
investments........................... 31,217
Cash Dividends -- $14.00 per share...... -- (426,104)
--------- ----------
BALANCE, JUNE 30, 1997.................. $(218,050) $7,875,043
========= ==========
</TABLE>
See notes to unaudited consolidated financial statements.
F-56
<PAGE> 166
WJAC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (438,314)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 343,653
Impairment in carrying value of investment in Hockey
team.................................................. 481,908
Deferred compensation expense.......................... (223,582)
Deferred income taxes.................................. 14,965
Accounts receivable -- trade........................... 375,025
Program rights......................................... 110,395
Accounts payable -- trade.............................. (16,955)
Deferred revenue....................................... (145,302)
Program rights payable................................. (66,619)
Prepaid pension cost................................... (66,290)
Decrease in cash surrender value -- life insurance..... 63,100
Accrued vacation....................................... (7,621)
Prepaid income taxes................................... (507,765)
Prepaid expense and other current assets............... (66,482)
Accrued salaries & payroll taxes....................... 12,169
----------
Net cash used in operating activities............. (137,715)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment................ (131,406)
Payment on noncompete agreement........................... (200,000)
Net proceeds from sale of short-term investments.......... 689,747
----------
Net cash provided by investing activities......... 358,341
----------
CASH FLOWS FROM FINANCING ACTIVITIES -- Dividends paid...... (639,156)
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (418,530)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,727,632
----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $1,309,102
==========
</TABLE>
See notes to unaudited consolidated financial statements.
F-57
<PAGE> 167
WJAC, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997
BASIS OF PRESENTATION
The accompanying consolidated financial statements, which include WJAC,
Incorporated and its subsidiaries (the "Company"), as of June 30, 1997 and for
the six months then ended are unaudited. Significant intercompany transactions
and accounts have been eliminated. In the opinion of management, all adjustments
necessary for the fair presentation of such financial information have been
included. These adjustments are of a normal recurring nature. There have been no
changes in accounting policies since the year ended December 31, 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements, footnotes, and discussions should
be read in conjunction with the December 31, 1996 and 1995 financial statements
and related footnotes contained elsewhere in the Prospectus.
SUBSEQUENT EVENTS
SALE OF HOCKEY TEAM
On May 5, 1997, the Board of Directors of the Parent approved the sale of
the stock of the Johnstown Chiefs, Inc. (the "Chiefs") to a major shareholder of
the Parent for $50,000 plus additional amounts if that company is later sold for
the purpose of moving the team out of the Johnstown, PA area before the
2000-2001 hockey season. The proposed sales price for the stock is less than the
carrying amount of the net assets and accordingly the Company has recorded an
impairment write down in the amount of $481,908.
SALE OF THE COMPANY
On May 8, 1997, the Company entered into an agreements and plan of merger
(the "Merger Agreement") with STC Broadcasting, Inc. ("STC"), pursuant to which
the Company will become a wholly owned subsidiary of STC. The approximate
purchase price will be $36,000,000 plus or minus a calculated net current asset
adjustment, and the expected closing date will be in the fourth quarter of 1997.
The Chiefs will not be part of the sale to STC. The Agreement provides for the
proceeds from a sale of the stock of the Chiefs to be distributed to the current
shareholders of the Parent.
SETTLEMENT OF EMPLOYMENT CONTRACT
On April 7, 1997, the Company signed a Separation Agreement with the
president of the Company which provided severance of approximately $1,257,000
and the payment of $200,000 for a one year noncompetition agreement. As a result
of the Separation Agreement, the provisions of the employee's long-term
employment contract described in Note 7 of the December 31, 1996 financial
statements were fulfilled. At December 31, 1996, there was approximately
$225,000 included in the Company's deferred compensation liability related to
this employee.
F-58
<PAGE> 168
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NEW NOTES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF THE NEW NOTES
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS NOT
BEEN A CHANGE IN FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
- ------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information........................ i
Certain Definitions and Market and Industry
Data....................................... ii
Summary...................................... 1
Risk Factors................................. 13
The Acquisition.............................. 20
Recent Development........................... 20
Use of Proceeds.............................. 21
Capitalization............................... 22
Selected Historical Financial Information.... 23
Unaudited Pro Forma Financial Information.... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 32
Business..................................... 40
Management and Directors..................... 64
Certain Transactions......................... 68
Securities Ownership of Certain Beneficial
Owners..................................... 69
Description of the Credit Agreement.......... 70
Description of Redeemable Preferred Stock.... 72
The Exchange Offer........................... 73
Description of New Notes..................... 81
Certain Federal Income Tax Considerations.... 105
Plan of Distribution......................... 106
Legal Matters................................ 106
Independent Auditors......................... 106
Index to Financial Statements................ F-1
</TABLE>
- ------------------------------------------------------------
UNTIL NOVEMBER 24, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
OFFER TO EXCHANGE
ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES
DUE 2007
FOR
11% SENIOR SUBORDINATED NOTES
DUE 2007
STC BROADCASTING, INC.
---------------------
PROSPECTUS
---------------------
AUGUST 26, 1997
