<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NOS. 333-06241
333-13121
PROSPECTUS
6,401,216 SHARES
YOUNG BROADCASTING INC. LOGO
CLASS A COMMON STOCK
---------------
Of the 6,401,216 shares of Class A Common Stock offered hereby, 5,250,000
shares are being sold by Young Broadcasting Inc. (the "Company") and 1,151,216
shares are being sold by selling stockholders of the Company (collectively,
the "Selling Stockholders"). See "Principal and Selling Stockholders." Of the
6,401,216 shares of Class A Common Stock offered hereby, 5,201,216 shares are
being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 1,200,000 shares are being offered in a
concurrent offering outside the United States and Canada by the International
Underwriters (the "International Offering", and together with the U.S.
Offering, the "Offerings"). The initial public offering price and the
underwriting discount per share are identical for both Offerings. See
"Underwriting." The Company will not receive any of the proceeds from the sale
of the shares by the Selling Stockholders.
The Company's outstanding capital stock is comprised of Class A Common
Stock, Class B Common Stock and Class C Common Stock (collectively, the
"Common Stock"). The rights of holders of Common Stock are identical, except
that each share of Class B Common Stock generally entitles its holder to ten
votes, whereas each share of Class A Common Stock entitles its holder to one
vote, and holders of shares of Class C Common Stock are not entitled to vote
except as provided by law. Immediately after the Offerings, the holders of all
of the Company's Class B Common Stock will have approximately 68% of the
combined voting power with respect to substantially all matters submitted for
the vote of all stockholders. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "YBTVA." On September 30, 1996, the last reported sales price of the
Class A Common Stock, as reported by the Nasdaq National Market, was $33 per
share. See "Price Range of Class A Common Stock and Dividend Policy."
SEE "RISK FACTORS" ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $32.50 $1.47 $31.03 $31.03
- --------------------------------------------------------------------------------
Total(3)................... $208,039,520 $9,409,788 $162,907,500 $35,722,232
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several U.S. Underwriters and International Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses, estimated at $1,000,000, payable by the
Company.
(3) The Selling Stockholders have granted the U.S. Underwriters and the
International Underwriters options, exercisable within 30 days after the
date hereof, to purchase up to an aggregate of 780,182 and 180,000 shares
of Class A Common Stock, respectively, at the initial price to public per
share, less the underwriting discount, solely to cover over-allotments, if
any. If such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Stockholders will be
$239,245,435, $10,821,255 and $65,516,680, respectively. See
"Underwriting."
---------------
The Class A Common Stock is being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, and
subject to approval of certain legal matters by counsel for the Underwriters
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of certificates for the shares of Class A Common Stock
will be made in New York, New York on or about October 4, 1996.
---------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
---------------
The date of this Prospectus is September 30, 1996.
<PAGE>
This page shows a map of the United States and shows the geographic location of
each of the Company's stations with the respective station logos, as well as the
Company's logo appearing below the map.
[MAP APPEARS HERE]
IN CONNECTION WITH THE OFFERINGS, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS, CONCERNING,
AMONG OTHER THINGS, INCREASES IN NET REVENUES AND BROADCAST CASH FLOW (AS
DEFINED) AND REDUCTIONS IN OPERATING EXPENSES, INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS,
INCLUDING THE IMPACT OF CHANGES IN NATIONAL AND REGIONAL ECONOMIES, SUCCESSFUL
INTEGRATION OF ACQUIRED TELEVISION STATIONS (INCLUDING ACHIEVEMENT OF
SYNERGIES AND COST REDUCTIONS), PRICING FLUCTUATIONS IN LOCAL AND NATIONAL
ADVERTISING AND VOLATILITY IN PROGRAMMING COSTS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "SEC"). Such reports and other information filed by the
Company can be inspected and copied at the public reference facilities of the
SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, as well as at the following SEC regional offices: Seven World Trade
Center, 13th Floor, New York, New York 10048; and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports
and other information can also be reviewed through the SEC's Electronic Data
Gathering, Analysis, and Retrieval System which is publicly available through
the SEC's Web site (http://www.sec.gov).
The Company has filed a Registration Statement with the SEC under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Class A Common Stock being offered. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the shares of Class
A Common Stock being offered, reference is made hereby to such Registration
Statement and exhibits, which may be obtained from the SEC's principal office
in Washington, D.C. upon payment of the fees prescribed by the SEC.
INFORMATION INCORPORATED BY REFERENCE
The following documents which have been filed with the SEC pursuant to the
Exchange Act are incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995; (ii) the
Company's current report on Form 8-K dated January 16, 1996; (iii) the
Company's current report on Form 8-K dated February 13, 1996; (iv) the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1996; (v) the Company's current report on Form 8-K dated May 15, 1996; (vi)
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1996; and (vii) the description of the Common Stock included in its
Registration Statement under Section 12 of the Exchange Act relating to the
Common Stock, including any amendment or report filed for the purpose of
updating that description. In addition, the Company hereby incorporates by
reference into this Prospectus all documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of the Offerings, which documents
shall be deemed to be a part hereof from the date of filing such documents.
The Company will provide without charge to each person to whom a Prospectus is
delivered, upon written or oral request of such person, a copy of any and all
of the documents that have been incorporated herein by reference (not
including exhibits to such documents unless such exhibits are specifically
incorporated by reference in such documents). Any such request should be
directed to: Secretary, Young Broadcasting Inc., 599 Lexington Avenue, New
York, New York (telephone: (212) 754-7070).
Any statements contained in a document all or a portion of which is
incorporated by reference in this Prospectus will be deemed to be modified or
superseded for the purposes of this Prospectus to the extent that a statement
contained in this Prospectus or in any other subsequently filed document that
also is incorporated by reference in this Prospectus modifies or supersedes
such statement. Any statement so modified will not be deemed a part of this
Prospectus, except as so modified, and any statement so superseded will not be
deemed part of this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information (including financial information and the notes thereto) appearing
elsewhere in this Prospectus. All share and per share information in this
Prospectus has been adjusted to reflect a 71-for-1 stock split of the Common
Stock which occurred on October 17, 1994, and, except as otherwise indicated,
assumes no exercise of the Underwriters' over-allotment option. All market
rank, rank in market, station audience rating and share, and television
household data in this Prospectus are from the Nielsen Station Index Viewers
and Profile dated May 1996, as prepared by A.C. Nielsen Company ("Nielsen").
Nielsen data provided herein refers solely to the United States television
markets. As used herein, the "Company" means Young Broadcasting Inc. and, where
the context requires, its subsidiaries (the "Subsidiaries"). Reference should
be made to "Selected Consolidated Financial Data" for the definition of certain
financial terms appearing throughout this Prospectus.
THE COMPANY
The Company owns and operates eleven network-affiliated television stations
in geographically diverse markets. Six of the stations are affiliated with
Capital Cities/ABC, Inc. ("ABC"), four are affiliated with CBS Inc. ("CBS") and
one is affiliated with National Broadcasting Company, Inc. ("NBC"). The Company
is presently the seventh largest ABC network affiliate group in terms of
households reached and owns more ABC stations than any single operator other
than ABC. The Company has agreed to acquire KCAL (the "KCAL Acquisition"), the
only independent VHF television station operating in the Los Angeles market,
which is ranked as the second-largest television market in terms of population
and the largest in terms of estimated television revenue. For the twelve months
ended June 30, 1996, after giving pro forma effect to the KCAL Acquisition and
to the Quad Cities and KELO Acquisitions (as defined), including annualized net
expense reductions, and the New WTVO Affiliation Agreement (as defined) as if
such transactions had occurred on July 1, 1995, the Company would have had net
revenues and broadcast cash flow of $268.8 million and $126.4 million,
respectively.
The Company was founded in 1986 by Vincent Young and his father, Adam Young.
Vincent Young, the Company's Chairman, has over 25 years of experience in the
television broadcast industry, and Adam Young has over 50 years of experience
in the industry. Ronald Kwasnick, the Company's President, has over 25 years of
experience in the industry. The following table sets forth certain information
for each of the Company's stations, after giving pro forma effect to the KCAL,
Quad Cities and KELO Acquisitions and the New WTVO Affiliation Agreement.
<TABLE>
<CAPTION>
PRO FORMA
NET REVENUES FOR TWELVE MONTHS
JUNE 30, 1996
-----------------------------------
YEAR NETWORK MARKET PERCENTAGE OF
STATION ACQUIRED AFFILIATION MARKET RANK AMOUNT TOTAL
- ------- -------- ----------- ------------------------------- ------ --------------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
KCAL (1) IND Los Angeles, California 2 $120.0 44.6%
WKRN 1989 ABC Nashville, Tennessee 33 23.5 8.9
WTEN 1989 ABC Albany, New York 52 15.9 5.9
WRIC 1994 ABC Richmond, Virginia 54 16.8 6.3
WATE 1994 ABC Knoxville, Tennessee 62 14.7 5.4
WBAY 1994 ABC Green Bay, Wisconsin 71 14.2 5.3
KWQC 1996 NBC Quad Cities 88 13.5 5.0
KELO(2) 1996 CBS Sioux Falls, South Dakota 105 12.1 4.5
WLNS 1986 CBS Lansing, Michigan 106 13.2 4.9
KLFY 1988 CBS Lafayette, Louisiana 121 13.7 5.1
WKBT 1986 CBS La Crosse-Eau Claire, Wisconsin 135 4.7 1.7
WTVO 1988 ABC Rockford, Illinois 136 6.5 2.4
------ -----
$268.8 100%
====== =====
</TABLE>
- --------
(1) To be acquired pursuant to the KCAL Acquisition.
(2) Except as otherwise indicated, all references in this Prospectus to KELO
include KCLO, the CBS network affiliate in Rapid City, South Dakota (market
rank 173), which the Company acquired together with the assets of KELO.
4
<PAGE>
The Company continually seeks to increase its revenues and broadcast cash
flow. In each of the past four fiscal years, the Company has achieved broadcast
cash flow margins of approximately 45% or more. Net revenues increased by 55.5%
and broadcast cash flow increased by 57.2% for the year ended December 31,
1995, compared to the year ended December 31, 1994 (with the 1994 results
including the performance of the stations acquired in 1994 pursuant to the
Nationwide Acquisition (as defined) for only the last 47 days of the period).
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of "broadcast cash flow."
Although operating results have continued to improve (as reflected by the
increases in net revenues and broadcast cash flow), the Company has incurred
net losses in each of the past five fiscal years. The Company's net losses have
resulted principally from the substantial interest expense associated with the
debt incurred to finance the Company's acquisitions, depreciation and
amortization charges, and from the extraordinary loss resulting from the early
extinguishment of debt. See "Risk Factors" for a discussion of certain risks
associated with an investment in the Class A Common Stock offered hereby,
including such history of net losses and the Company's highly leveraged
position. See also "Business--1992 Restructuring" for a discussion of the
agreement reached between the Company and its creditors in 1992 with respect to
the restructuring of its debt and equity.
BUSINESS STRATEGY
The Company's business strategy includes the following key elements:
.Targeted Marketing. The Company seeks to increase its revenues and
broadcast cash flow by expanding existing relationships with local and
national advertisers and attracting new advertisers through targeted
marketing techniques and carefully tailored programming. The Company works
closely with advertisers to develop campaigns that match specifically
targeted audience segments with the advertisers' overall marketing
strategies. With this information, the Company regularly refines its
programming mix among network, syndicated and locally-produced shows in a
focused effort to attract audiences with demographic characteristics
desirable to advertisers.
.Strong Local Presence. Each station seeks to achieve a distinct local
identity principally through the quality of its local news programming and
by targeting specific audience groups with special programs and marketing
events. Each station's local news franchise is the foundation of the
Company's strategy to strengthen audience loyalty and increase revenues and
broadcast cash flow for each station. Strong local news generates high
viewership and results in higher ratings both for programs preceding and
following the news. Each station also utilizes special programming and
marketing events to strengthen community relations and increase advertising
revenues. The Company places a special emphasis on developing and training
its local sales staff to promote involvement in community affairs and
stimulate the growth of local advertising sales.
.Cost Controls. Each station emphasizes strict control of its programming
and operating costs as an essential factor in increasing broadcast cash
flow. The Company follows a programming strategy of continually reviewing
its existing programming inventory and selecting additional programming by
balancing cost against the potential for increasing advertising revenues.
The Company continually seeks to identify and implement cost savings
opportunities at each of its stations, and the Company's size benefits each
station in reducing corporate overhead costs and in negotiating favorable
terms with programming suppliers and other vendors.
.Selective Acquisitions. The Company believes that its ability to manage
costs effectively while enhancing the quality provided to station viewers
gives the Company an important advantage in acquiring and operating new
stations. In assessing acquisitions, the Company targets stations for which
it has
5
<PAGE>
identified line item expense reductions that can be implemented upon
acquisition. The Company also develops specific proposals for revenue
enhancement utilizing management's significant experience in local and
national advertising. The Company believes that the results of the stations
acquired pursuant to the Nationwide Acquisition represent a prime example
of the success of the Company's acquisition strategy. The Company is
regularly presented with opportunities to acquire television stations which
it evaluates on the basis of its acquisition strategy. Other than the KCAL
Acquisition, the Company does not presently have any agreements to acquire
any television stations. Pursuant to the Amendment (as defined), the
Company will have the ability, subject to certain limitations, to borrow up
to approximately $185.0 million under the Senior Credit Facility (as
defined) for the purpose of financing acquisitions. If the Company is
unable to consummate the KCAL Acquisition, the Company would use the net
proceeds of the Offerings intended therefor to finance future acquisitions
of television stations and for general working capital purposes.
THE KCAL ACQUISITION
The Company has entered into an agreement to acquire from KCAL Broadcasting,
Inc., a subsidiary of The Walt Disney Company ("Disney"), the assets of
television station KCAL, Los Angeles, California ("KCAL"). KCAL, transmitting
on Channel 9, is the only independent VHF television station in Los Angeles.
Los Angeles is ranked as the second-largest television market in terms of
population and the largest in terms of estimated television revenue. The
purchase price that the Company has agreed to pay for the KCAL assets and for
the stock of a Disney subsidiary which holds the Federal Communications
Commission ("FCC") licenses issued for KCAL is $368.0 million payable in cash,
plus an estimated $17.0 million for net working capital included as part of the
purchased assets.
For the twelve months ended June 30, 1996, KCAL generated aggregate net
revenues of approximately $121.4 million and broadcast cash flow of
approximately $17.0 million, resulting in a broadcast cash flow margin of
approximately 14.0%. Based upon its review of current operating budgets and
expenses and 1995 operating results of KCAL, the Company has identified, on a
line item basis for the twelve months ended June 30, 1996, annualized expense
reductions of approximately $20.9 million for personnel and other costs and
$10.6 million of net programming cost savings associated with seven sitcom
programs, the liabilities for which are not being assumed by the Company in
connection with the KCAL Acquisition. The Company has also identified other
areas for improvements consistent with its operating strategy which are
expected to enhance the operating performance of KCAL and result in further
increases in broadcast cash flow margins. See "Forward-Looking Statements."
Based upon the performance of KCAL for the twelve months ended June 30, 1996,
after giving pro forma effect to the KCAL Acquisition (including annualized net
expense reductions), the purchase price therefor represents a multiple of
approximately 7.6 times broadcast cash flow for KCAL for such period.
On September 20, 1996, the FCC granted the application for consent to the
transfer of control of the Disney subsidiary which holds the KCAL FCC licenses
to a wholly-owned subsidiary of the Company.
OTHER RECENT DEVELOPMENTS
KELO Acquisition. On May 31, 1996, the Company acquired (the "KELO
Acquisition") from a subsidiary of Midcontinent Media, Inc. ("Midcontinent")
for $50.0 million all of the assets of television station KELO ("KELO"). KELO
is the CBS affiliate in Sioux Falls, South Dakota (market rank 105) and Rapid
City, South Dakota (market rank 173). The Company also purchased approximately
$2.0 million of accounts receivable at a 3% discount.
For the twelve months ended June 30, 1996, KELO generated aggregate net
revenues of approximately $11.7 million and broadcast cash flow of
approximately $5.0 million, resulting in a broadcast cash flow margin of 42.7%.
Based upon its review of current operating budgets and 1995 operating results
for KELO, the Company has identified, on a line item basis, approximately $1.3
million of annualized expense reductions that the Company intends to implement
at KELO. See "Forward-Looking Statements." Such reductions are in the area of
personnel and benefits savings, programming costs and purchased services.
6
<PAGE>
Quad Cities Acquisition. On April 15, 1996, the Company acquired (the "Quad
Cities Acquisition") from Broad Street Television, L.P. for $55.0 million all
of the assets of television station KWQC (Quad Cities), an NBC network
affiliate (the "Quad Cities Station"). The acquired assets included
approximately $2.1 million of accounts receivable, which were purchased at a 5%
discount. Upon consummation of the Quad Cities Acquisition, the seller
deposited approximately $2.0 million in escrow for the purpose of securing the
Company's rights to indemnification from the seller.
For the twelve months ended June 30, 1996, the Quad Cities Station generated
aggregate net revenues and broadcast cash flow of approximately $13.5 million
and $5.4 million, respectively, resulting in a broadcast cash flow margin of
40.0%. Based upon its review of current operating budgets and 1995 operating
results for the Quad Cities Station, the Company has identified, on a line item
basis, approximately $1.4 million of annualized expense reductions that the
Company is implementing at the Quad Cities Station. See "Forward-Looking
Statements." Such reductions are in the area of personnel and benefit savings,
programming costs and purchased services.
As part of the FCC's approval of the assignment of the FCC licenses for the
Quad Cities Station, the Company has been granted a temporary waiver of the
FCC's duopoly rule which was requested because of overlapping service contours
between the Company's presently owned Rockford, Illinois station (WTVO) and the
Quad Cities Station. The Company is required, as a condition to such waiver, to
have an application on file with the FCC by October 15, 1996 proposing to sell
its Rockford, Illinois station. On September 16, 1996, the Company filed a
petition with the FCC requesting (i) a permanent waiver of the duopoly rule to
allow it to maintain ownership of WTVO and the Quad Cities Station; and (ii) to
the extent necessary, an extension of its temporary waiver to maintain common
ownership during the FCC's consideration of the petition. The Company also
filed simultaneously with the petition for permanent waiver an application
seeking to modify the technical facilities of the Quad Cities Station (a change
that would not only reduce the amount of overlap between WTVO and the Quad
Cities Station but substantially expand the WTVO coverage area). See
"Business--Federal Regulation of Television Broadcasting--Multiple Ownership
Restrictions."
BACKGROUND
On November 14, 1994, the Company implemented a financing plan (the
"Financing Plan") to enable it to acquire three television stations (the
"Nationwide Acquisition") from Nationwide Communications Inc. ("Nationwide"),
increase liquidity and improve operating and financial flexibility. Under the
Financing Plan, the Company effected an initial public offering of its Class A
Common Stock, generating gross proceeds to the Company of approximately $69.8
million, and issued $120.0 million principal amount of its 11 3/4% Senior
Subordinated Notes due 2004 (the "November 1994 Notes"). Concurrently with the
consummation of the Nationwide Acquisition, ABC invested $25.0 million in the
Company and received 1,500,000 shares of the Company's non-voting Class C
Common Stock (the "ABC Stock") and warrants (the "ABC Warrants") to purchase an
additional 750,000 shares of such Common Stock (the "ABC Investment"). On June
12, 1995, the Company completed an offering (the "June 1995 Notes Offering") of
$125.0 million principal amount of its 10 1/8% Senior Subordinated Notes due
2005 (the "June 1995 Notes"). The Company used the net proceeds of the June
1995 Notes Offering (approximately $120.8 million) to repay certain of its then
outstanding indebtedness under the Senior Credit Facility. On May 19, 1995, the
Company entered into an agreement (the "New WTVO Affiliation Agreement") with
ABC whereby the Company switched the affiliation of its Rockford, Illinois
station, WTVO, from NBC to ABC, effective as of August 14, 1995. On January 16,
1996, the Company completed an offering (the "January 1996 Notes Offering") of
$125.0 million principal amount of its 9% Senior Subordinated Notes due 2006
(the "January 1996 Notes"; together with the June 1995 Notes and the November
1994 Notes, the "Notes"). The Company used approximately $50.0 million of the
net proceeds of the January 1996 Notes Offering (approximately $121.9 million)
to repay all of its then outstanding indebtedness, including accrued interest,
under the Senior Credit Facility. Of the remaining approximately $71.9 million
of net proceeds, the Company used approximately $56.0 million to finance the
Quad Cities Acquisition, and used the remaining net proceeds and borrowings
under the Senior Credit Facility to finance the KELO Acquisition. The Company
and Disney, the parent of ABC, have entered into an agreement pursuant to which
the Company will repurchase (the "ABC Repurchase") the ABC Stock and the ABC
Warrants concurrently with the closing of the Offerings. See "Certain
Transactions."
7
<PAGE>
THE OFFERINGS
Class A Common Stock
Offered.................
5,250,000 shares by the Company
1,151,216 shares by the Selling Stockholders
---------
6,401,216 Shares
U.S. Offering........... 5,201,216 shares
International Offering.. 1,200,000 shares
Shares of Common Stock
to be outstanding
after the Offerings....
11,262,350 shares of Class A Common Stock (1)
2,029,620 shares of Class B Common Stock (2)
938,387 shares of Class C Common Stock
----------
14,230,357 Shares (1)(2)
Voting rights........... Each class of Common Stock has identical rights,
except with respect to voting. The Class A Common
Stock entitles its holders to one vote per share on
all matters submitted to a vote of the holders of the
Common Stock. The Class B Common Stock entitles its
holders to ten votes per share, except in connection
with certain significant transactions. Holders of
Class C Common Stock are not entitled to vote, except
in connection with any change to the Company's
certificate of incorporation which would adversely
affect their rights as holders of such Common Stock.
Holders of Class C Common Stock may at any time
convert their shares into the same number of shares
of Class A Common Stock if the holding of such Class
A shares would not violate any law. All classes of
Common Stock entitled to vote on any matter vote
together as a single class except as otherwise
provided by law. See "Principal and Selling
Stockholders" and "Description of Capital Stock."
Use of Proceeds......... The proceeds of the Offerings to be received by the
Company, together with the proceeds of borrowings
under the Senior Credit Facility, will be used to
finance the KCAL Acquisition and the ABC Repurchase
and to pay related fees and expenses. If the Company
is unable to consummate the KCAL Acquisition, the
Company would use the net proceeds of the Offerings
intended therefor to finance future acquisitions of
television stations and for general working capital
purposes. See "Use of Proceeds."
Nasdaq National Market YBTVA
symbol..................
- --------
(1) Does not include 8,800 shares of Class A Common Stock issuable upon
exercise of options granted to independent directors of the Company. See
"Management--1995 Stock Option Plan."
(2) Does not include 637,188 shares of Class B Common Stock issuable upon
exercise of options granted to Company management, 246,751 of which are not
exercisable within 60 days. See "Management--1995 Stock Option Plan."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Class A Common Stock offered
hereby.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents summary historical consolidated financial data
of the Company for the three years ended December 31, 1995, which have been
derived from the Company's audited consolidated financial statements, and
condensed and unaudited historical and pro forma financial data. The historical
consolidated financial data of the Company for the six months ended June 30,
1995 and 1996 have been derived from the Company's unaudited consolidated
financial statements which, in the opinion of management of the Company, have
been prepared on the same basis as the audited consolidated financial
statements and include all normal and recurring adjustments and accruals
necessary for a fair presentation of such information. The pro forma statement
of operations data and other financial data have been presented as if the
Offerings, the January 1996 Notes Offering, the June 1995 Notes Offering, the
KCAL, Quad Cities and KELO Acquisitions (including actual and anticipated
related borrowings and annualized net expense reductions), the New WTVO
Affiliation Agreement and the ABC Repurchase had occurred on the first day of
the respective periods. The pro forma balance sheet data have been presented as
if the Offerings, the KCAL Acquisition (including anticipated related
borrowings and annualized net expense reductions) and the ABC Repurchase had
been effected on June 30, 1996. The summary pro forma financial data does not
purport to represent what the Company's results of operations would have been
if such transactions had been effected at the date indicated and do not purport
to project results of operations of the Company in any future period.
The information in this table should be read in conjunction with "Pro Forma
Consolidated Financial Data," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------------- TWELVE MONTHS
(UNAUDITED) ENDED
PRO PRO JUNE 30,
FORMA FORMA 1996
1993 1994 1995 1995(1) 1995 1996 1996(1) PRO FORMA(1)
--------- --------- ---------- -------- ---------- ---------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues(2)........ $ 61,792 $ 78,788 $ 122,530 $258,328 $ 59,344 $ 63,759 $135,292 $268,791
Operating expenses,
including selling,
general and
administrative
expenses.............. 28,460 33,800 51,614 115,636 25,588 27,426 56,794 114,735
Amortization of program
license rights........ 3,969 4,400 6,418 30,007 3,072 3,635 18,151 32,655
Depreciation and
amortization(3)....... 13,859 15,280 24,572 50,914 12,450 13,073 26,132 49,946
Corporate overhead..... 1,350 2,052 3,348 3,648 1,566 2,171 2,321 4,253
Non-cash compensation
paid in Common
Stock(4).............. -- 6,497 1,167 1,167 438 15 15 744
--------- --------- ---------- -------- ---------- ---------- -------- --------
Operating income....... 14,154 16,759 35,411 56,956 16,230 17,439 31,879 66,458
Interest expense, net.. 17,778 19,105 32,644 64,404 16,070 19,742 32,201 64,404
Other expenses
(income)(5)........... 141 3 233 31 (124) (842) 355 569
--------- --------- ---------- -------- ---------- ---------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. (3,765) (2,349) 2,534 $ (7,479) 284 (1,461) $ (677) $ 1,485
======== ======== ========
Extraordinary loss on
extinguishment of
debt(6)............... -- (6,027) (9,125) (9,125) --
Cumulative effect of
change in accounting
principle(7).......... (1,520) -- -- -- --
--------- --------- ---------- ---------- ----------
Net loss............... $ (5,285) $ (8,376) $ (6,591) $ (8,841) $ (1,461)
========= ========= ========== ========== ==========
Net loss per common
share(8).............. $ (4.50) $ (5.42) $ (0.61) $ (0.82) $ (0.14)
Weighted average shares
outstanding(8)........ 2,234,370 3,339,794 11,071,154 10,899,255 10,469,933
OTHER FINANCIAL DATA:
Cash flow provided by
operating
activities(9)......... $ 13,562 $ 23,597 $ 32,416 -- $ 7,595 $ 18,186 -- --
Payments for program
license liabilities... 4,003 4,170 6,747 $ 28,665 3,222 3,724 $ 13,913 $ 27,692
Broadcast cash
flow(10).............. 29,329 40,818 64,169 114,027 30,534 32,609 64,585 126,364
Broadcast cash flow
margin................ 47.5% 51.8% 52.4% 44.1% 51.5% 51.1% 47.7% 47.0%
Operating cash
flow(11).............. $ 27,979 $ 38,766 $ 60,821 $110,379 $ 28,968 $ 30,438 $ 62,264 $122,111
Capital expenditures... 686 1,206 4,484 10,019 2,939 1,635 5,068 6,675
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
HISTORICAL PRO FORMA
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 7,934 $ 4,137
Total assets........................................ 400,284 838,487
Long-term debt (including current portion).......... 401,787 687,826
Stockholders' equity (deficit)...................... (28,872) 78,292
</TABLE>
(Footnotes begin on next page)
9
<PAGE>
(1) Pro forma adjustments include expense reductions relating to the KCAL, Quad
Cities and KELO Acquisitions of approximately $19.4 million, $1.8 million
and $1.4 million, respectively, for the year ended December 31, 1995,
approximately $11.0 million, $517,000 and $581,000, respectively, for the
six months ended June 30, 1996 and $21.2 million, $1.4 million and $1.3
million, respectively, for the twelve months ended June 30, 1996.
(2) Net revenues are total revenues net of agency and national representation
commissions. Pro forma adjustments include additional network compensation
payable to the Company under the New WTVO Affiliation Agreement of
approximately $225,000 and $45,000, respectively, for the year ended
December 31, 1995 and the twelve months ended June 30, 1996. The New WTVO
Affiliation Agreement provides for additional annual compensation of
approximately $360,000 for the first full year, and for additional
increases of $33,000 in each of the second, third, and fourth years. Pro
forma adjustments also include a decrease in net revenues of $3.2 million,
$589,000 and $1.4 million, respectively, for the year ended December 31,
1995 and the six and twelve months ended June 30, 1996, relating to seven
sitcoms not being purchased in connection with the KCAL Acquisition.
(3) Pro forma adjustments represent the additional amortization resulting from
the January 1996 Notes Offering, the June 1995 Notes Offering and the
Amendment. In addition, reflects the elimination of deferred financing
costs in connection with the Senior Credit Facility as amended and restated
pursuant to the Amendment. Furthermore, pro forma adjustments reflect the
amortization of intangibles associated with the KCAL, Quad Cities and KELO
Acquisitions for periods ranging from 2 to 40 years and a net increase in
annual depreciation resulting from the allocation of the KCAL, Quad Cities
and KELO Acquisitions purchase prices to the acquired property and
equipment depreciated over a new estimated useful life.
(4) Represents non-cash charges for the issuance to key employees in 1994 of
shares of Common Stock and in 1995 of shares of Common Stock and below-
market options to purchase shares of Common Stock.
(5) Includes approximately $1.2 million of interest income for the six months
ended June 30, 1996.
(6) Extraordinary loss for the years ended December 31, 1994 and 1995 resulted
from the early extinguishment of debt.
(7) Cumulative effect of change in accounting principle for the year ended
December 31, 1993 resulted from a change in accounting principle for
amortization of program license rights.
(8) The computation of earnings per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the
period plus (in periods in which they have a dilutive effect) the net
effect of common shares contingently issuable, primarily from stock options
and exercise of warrants.
(9) For pro forma purposes, information is not determinable.
(10) "Broadcast cash flow" is defined as operating income before income taxes
and interest expense, plus depreciation and amortization (including
amortization of program license rights), non-cash compensation and
corporate overhead, less payments for program license liabilities. The
Company has included broadcast cash flow data because such data are
commonly used as a measure of performance for broadcast companies and are
also 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 income or cash flow as reflected in
the Consolidated 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 for measures of performance prepared in accordance with
generally accepted accounting principles.
(11) "Operating cash flow" is defined as operating income before income taxes
and interest expense, plus depreciation and amortization (including
amortization of program license rights) and non-cash compensation, less
payments for program license liabilities. The Company has included
operating cash flow data because such data are commonly used by investors
to measure a company's ability to service debt and will be used in
calculating the amount of additional indebtedness that the Company may
incur in the future under the Indentures. Operating cash flow does not
purport to represent cash provided by operating activities as reflected in
the Consolidated Financial Statements, is not a measure of financial
performance under generally accepted accounting principles and should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
10
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Class A Common Stock offered hereby.
SUBSTANTIAL LEVERAGE
The Company has, and after giving effect to the Offerings and anticipated
borrowings related to the KCAL Acquisition will continue to have, consolidated
indebtedness that is substantial in relation to its total stockholders'
equity. At June 30, 1996, the Company had outstanding long-term indebtedness
(including current installments) of approximately $401.8 million, with a total
stockholders' deficit of approximately $28.9 million. As of June 30, 1996,
after giving pro forma effect to the Offerings and the application of the net
proceeds therefrom, and to the anticipated borrowings related to the KCAL
Acquisition as if such transaction had occurred on such date, the total long-
term indebtedness (including current installments) of the Company outstanding
would have been approximately $687.8 million, with a total stockholders'
equity of approximately $78.3 million.
The Company has significant cash interest expense relating to its
indebtedness under the Notes and the Senior Credit Facility, and a significant
amount of the Company's cash flow will be required for debt service. After
giving pro forma effect to the January 1996 Notes Offering, the June 1995
Notes Offering, the Offerings and the application of the net proceeds
therefrom and to the actual and anticipated borrowings related to the Quad
Cities, KCAL and KELO Acquisitions as if such transactions had occurred on the
first day of the respective periods, the interest expense of the Company would
have been $64.4 million and $32.2 million for the year ended December 31, 1995
and for the six month period ended June 30, 1996, respectively. The average
interest rate accrued on the Company's long-term indebtedness during the year
ended December 31, 1995 was 11.4%.
The degree to which the Company is leveraged could have important
consequences to holders of the Class A Common Stock including, but not limited
to, the following: (i) 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; (ii) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of the
principal of, and interest on, its debt; (iii) the agreements governing the
Company's long-term debt will contain certain restrictive financial and
operating covenants which could limit the Company's ability to compete as well
as its ability to expand; and (iv) the Company's substantial leverage may make
it more vulnerable to economic downturns, limit its ability to withstand
competitive pressures and reduce its flexibility in responding to changing
business and economic conditions. The ability of the Company to satisfy its
debt obligations will be dependent on the future operating performance of the
Company, which could be affected by changes in economic conditions and other
factors, including factors beyond the control of the Company. A failure to
comply with the covenants and other provisions of its debt instruments could
result in events of default under such instruments, which could permit
acceleration of the debt under such instruments and in some cases acceleration
of debt under other instruments that contain cross-default or cross-
acceleration provisions.
If the Company is unable to generate sufficient cash flow to meet its debt
obligations, the Company may be required to renegotiate the terms of the
instruments relating to its long-term debt or to refinance all or a portion of
its long-term debt. However, there can be no assurance that the Company will
be able to successfully renegotiate such terms or refinance its indebtedness,
or, if the Company were able to do so, that the terms available would be
favorable to it. In the event that the Company were unable to refinance its
indebtedness or obtain new financing under these circumstances, the Company
likely would have to consider various other options such as the sale of
certain assets to meet its required debt service, negotiation with its lenders
to restructure applicable indebtedness or other options available to it under
law. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
NET LOSSES
The Company on a consolidated basis reported a net loss of $5.3 million for
the year ended December 31, 1993, a net loss of $8.4 million for the year
ended December 31, 1994 and a net loss of $6.6 million for the year
11
<PAGE>
ended December 31, 1995. For the year ended December 31, 1995 and the six
months ended June 30, 1996, after giving pro forma effect to the KCAL, Quad
Cities and KELO Acquisitions (including actual and anticipated related
borrowings), the New WTVO Affiliation Agreement, the January 1996 Notes
Offering, the June 1995 Notes Offering, the ABC Repurchase and the Offerings
as if such transactions had occurred on the first day of the respective
periods, the Company would have reported a loss after provision for income
taxes and before extraordinary item of approximately $7.5 million and
$677,000, respectively. The losses were primarily caused by the substantial
interest expense on debt incurred by the Company to finance the acquisition of
its stations, depreciation and amortization charges and the extraordinary
losses relating to the early extinguishment of debt. Future utilization of a
significant portion of the Company's net operating losses for federal income
tax purposes will likely be subject to an annual limitation. See Note 11 to
Notes to the Company's Consolidated Financial Statements.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indentures relating to the Notes (the "Indentures") restrict, among
other things, the Company's and its subsidiaries' ability to incur additional
indebtedness, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with
affiliates, incur indebtedness that is subordinate in right of payment to any
Senior Debt and senior in right of payment to the Notes, incur liens, 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. In addition, the Senior Credit Facility
contains other and more restrictive covenants and limits the Company's ability
to prepay its indebtedness and make future acquisitions of additional
television stations without the prior consent of the lenders. The Senior
Credit Facility also requires the Company to maintain specified financial
ratios and satisfy certain financial condition tests. The Company's ability to
meet those financial ratios and financial condition tests can be affected 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 Senior Credit Facility and/or the Indentures. In the event of an
event of default under the Senior Credit Facility, the lenders could elect to
declare all amounts outstanding under the Senior Credit Facility, together
with accrued interest, to be immediately due and payable. If the Company were
unable to repay those amounts, the lenders could proceed against the
collateral granted to them to secure that indebtedness. If the Senior Credit
Facility indebtedness 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. Substantially all the
assets of the Company and its subsidiaries have been pledged as security under
the Senior Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RISKS OF ACQUISITIONS AND THE FAILURE TO INTEGRATE TELEVISION STATIONS
As part of its business strategy, the Company will continue to evaluate
opportunities to acquire new television stations. There can be no assurance
that the Company will find attractive acquisition candidates or effectively
manage the integration of acquired stations into its existing business. If the
expected operating efficiencies from acquisitions do not materialize, if the
Company fails to integrate new stations or recently acquired stations into its
existing business, or if the costs of such integration exceed expectations,
the Company's operating results and financial condition could be adversely
affected. Future acquisitions by the Company could result in the incurrence of
debt, the potentially dilutive issuance of equity securities and the
incurrence of contingent liabilities and amortization expenses related to
goodwill and other intangible assets, any of which could adversely affect the
Company's operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The loss of the services of any of Vincent J. Young, the Company's Chairman,
Ronald Kwasnick, the Company's President, and James A. Morgan, the Company's
Executive Vice President, could have an adverse impact on the Company. The
Company has an employment agreement with Mr. Morgan. Although Vincent Young
and Adam Young together own substantially all of the shares of capital stock
of Adam Young Inc., a
12
<PAGE>
national representation firm, Vincent Young devotes substantially all of his
time and Adam Young devotes approximately 60% of his time to the business of
the Company. There can be no assurance that the services of such personnel
will continue to be made available to the Company. The Company does not carry
key man life insurance on any such personnel. Each of Vincent Young, Adam
Young and Ronald Kwasnick was a director and/or executive officer of the
Company at the time of the June 1992 filing of an involuntary petition under
Chapter 11 of the U.S. Bankruptcy Code against the Company. See "Business--
1992 Restructuring."
NETWORK AFFILIATION; RELIANCE ON NETWORK PROGRAMMING; RELIANCE ON PROGRAMMING
Six of the Company's eleven stations are affiliated with the ABC television
network, four are affiliated with the CBS television network and one is
affiliated with the NBC television network. The television viewership levels
for the Company's stations other than KCAL are materially dependent upon
programming provided by these major networks and are particularly dependent
upon programming provided by the ABC network. There can be no assurance that
such programming will achieve or maintain satisfactory viewership levels in
the future.
Each of the Company's existing stations is a party to an affiliation
agreement with one of the networks giving the station the right to rebroadcast
programs transmitted by the network. The networks pay each affiliated station
a fee for each hour of network programming broadcast by the stations in
exchange for the networks' right to sell the majority of the commercial
announcement time during such programming.
In October 1994, the Company and ABC entered into new affiliation agreements
for five of the Company's ABC-affiliated stations. Effective August 14, 1995,
the Company switched the affiliation of its then sole NBC affiliate to ABC. In
addition, in October 1994 CBS entered into new affiliation agreements with
three of the Company's CBS-affiliated stations. Such ABC and CBS affiliation
agreements provide for contract terms of ten years. The NBC affiliation
agreement for the Quad Cities Station has a ten year term which expires
November 1, 2004. On April 3, 1996, the Company and CBS entered into new
affiliation agreements for KELO and each of its satellite stations which
expire on October 2, 2006. Affiliation agreements are automatically renewed
for successive terms. Under the affiliation agreements, the networks also
possess, under certain circumstances, the right to terminate the agreement on
prior written notice ranging between 15 and 45 days depending on the
agreement. Although the Company expects that it will continue to be able to
renew its network affiliation agreements, no assurance can be given that such
renewals will be obtained. The non-renewal or termination of one or more of
the network affiliation agreements could have a material adverse effect on the
Company's operations. See "Business--Network Affiliation Agreements."
As an independent station, KCAL purchases all of its programming, resulting
in proportionally higher programming costs for the station. At the same time,
KCAL retains its entire inventory of advertising and all of the revenue
obtained therefrom. Furthermore, KCAL enters into barter arrangements whereby
program distributors may receive advertising time in exchange for the
programming they provide. There can be no assurance that the Company will not
be exposed in the future to volatile or increased programming costs which may
adversely affect the Company's operating results. Further, programs are
usually purchased for broadcasting for two to three year periods, making it
difficult to accurately predict how a program will perform. In some instances,
programs must be replaced before their cost has been fully amortized,
resulting in write-offs that increase station operating costs.
GOVERNMENT REGULATION
The Company's television operations are subject to significant regulation by
the FCC under the Communications Act of 1934, as amended (the "Communications
Act"). A television station may not operate without the authorization of the
FCC. Approval of the FCC is required for the issuance, renewal and transfer of
station operating licenses. In particular, the Company's business will be
dependent upon its continuing to hold television broadcasting licenses from
the FCC. Although FCC licenses generally have been issued for terms of five
years, new legislation has recently been enacted which lengthens the normal
term to eight years. More information concerning the renewal term and process,
including the expiration dates for the FCC licenses for each of the Company's
stations and KCAL, is set forth under the caption "Business--Federal
Regulation of Television Broadcasting--License Grant and Renewal." While in
the vast majority of cases such licenses are
13
<PAGE>
renewed by the FCC, there can be no assurance that the Company's licenses will
be renewed at their expiration dates or, if renewed, that the renewal terms
will be for the maximum permitted period. The non-renewal or revocation of one
or more of the Company's primary FCC licenses could have a material adverse
effect on the Company's operations.
Congress and the FCC currently have under consideration and may in the
future adopt new laws, regulations and policies regarding a wide variety of
matters which could, directly or indirectly, affect the operation and
ownership of the Company's broadcast properties. The Company is unable to
predict the impact which any such laws or regulations may have on its
operations. See "Business--Federal Regulation of Television Broadcasting."
COMPETITION IN THE TELEVISION INDUSTRY; IMPROVEMENTS AND INNOVATIONS IN
TECHNOLOGY; RISK OF NEW COMPETING NETWORKS
The television broadcasting industry has become increasingly competitive in
recent years with the growth of cable television, the Fox television network,
satellite dishes, multichannel multipoint distribution systems, pay-per-view
programs and the proliferation of VCRs and VCR movie rentals. These changes
have fractionalized television viewing audiences, and this trend is likely to
continue in the future. In addition, technological developments such as
"direct broadcast satellite," "high definition" and "interactive" television
may impose additional costs and competitive pressures on the Company. Each of
Time Warner, Inc. and Paramount Communications, Inc. (now merged into Viacom
Inc.) has recently launched a new television network. The Company is unable to
predict the effect, if any, that such networks will have on the future results
of the Company's operations.
In addition to competing with other media outlets for audience share, the
Company's stations also compete for advertising revenues, which comprise the
primary source of revenues for the Company's operating subsidiaries. The
Company's stations compete for such advertising revenues with other television
stations in their respective markets, as well as with other advertising media,
such as newspapers, radio stations, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail and local cable systems.
The Company's television stations are located in highly competitive markets.
Accordingly, the Company's results of operations will be dependent upon the
ability of each station to compete successfully in its market, and there can
be no assurance that any one of the Company's stations will be able to
maintain or increase its current audience share or revenue share. To the
extent that certain of its competitors have or may, in the future, obtain
greater resources than the Company, the Company's ability to compete
successfully in its broadcasting markets may be impeded. See "Business--
Competition."
EFFECT OF NATIONAL AND LOCAL ECONOMIC CONDITIONS
The television industry is cyclical in nature. Because the Company relies
upon sales of advertising time at its stations for substantially all of its
revenues, the Company's operating results are particularly susceptible to
being affected by prevailing economic conditions at both the national and
regional levels. Upon consummation of the KCAL Acquisition, KCAL will
represent, on a pro forma basis, a significant portion of the Company's
revenues; the Company's operating results, therefore, will be particularly
susceptible to economic conditions in the Los Angeles market. The Company's
revenues could be adversely affected by a future national recessionary
environment like that of the past several years and, due to the substantial
portion of revenues derived from local advertisers, the Company's operating
results in individual markets could be adversely affected by local or regional
economic downturns.
VOTING RIGHTS; CONTROL BY CERTAIN STOCKHOLDERS; POSSIBLE ANTI-TAKEOVER EFFECT
The Company's Common Stock has been divided into three classes with
different voting rights which allow for the maintenance of control by
management. Each share of Class A Common Stock is entitled to one vote, each
share of Class B Common Stock is entitled to ten votes except for certain
significant transactions for which such shares are entitled to one vote per
share, and shares of Class C Common Stock are not entitled to vote except in
connection with any change to the Company's certificate of incorporation which
would adversely affect the rights of holders of such Common Stock. Holders of
Class C Common Stock may at any time convert their shares into the same number
of shares of Class A Common Stock if the holding of such Class A shares would
not violate any law.
14
<PAGE>
After giving effect to the Offerings, Adam Young and Vincent Young together
will beneficially own shares of Class B Common Stock representing
approximately 58% of the total voting power of the Company's Common Stock and,
as a result, maintain control over the election of a majority of the Company's
directors and, thus, over the operations and business of the Company as a
whole. In addition, such stockholders will have the ability to prevent certain
types of material transactions, including a change of control of the Company.
See "Description of Capital Stock."
The disproportionate voting rights of the Class A Common Stock relative to
the Class B Common Stock may make the Company a less attractive target for a
takeover than it otherwise might be, or render more difficult or discourage a
merger proposal or a tender offer.
DILUTION
Persons purchasing shares of Class A Common Stock in the Offerings will
sustain an immediate dilution in net tangible book value per share of Common
Stock of $69.83. See "Dilution."
NO DIVIDENDS
The Company does not anticipate paying any dividends on shares of its Common
Stock in the foreseeable future. In addition, under the Senior Credit Facility
and the Indentures the Company is restricted in its ability to pay cash
dividends on its Common Stock. See "Price Range of Common Stock and Dividend
Policy" and "Description of Capital Stock--Common Stock."
POTENTIAL EFFECTS ON MARKET PRICE RESULTING FROM SHARES ELIGIBLE FOR FUTURE
SALE; REGISTRATION AND SALE OF ADDITIONAL SHARES
After giving effect to the Offerings, including the ABC Repurchase, the
Company, as of August 30, 1996, would have had outstanding 14,230,357 shares
of Common Stock. Of the 10,480,357 shares outstanding at August 30, 1996,
other than the 1,500,000 shares to be repurchased pursuant to the ABC
Repurchase and 2,111,398 shares to be sold by the Selling Stockholders
(assuming exercise of the Underwriters' over-allotment option), (i) 4,858,007
previously registered shares will be freely tradable without restriction or
further registration under the Securities Act, (ii) 1,575,180 shares are
eligible for sale subject to the volume and other restrictions of Rule 144
under the Securities Act, and (iii) 435,772 shares have or will become
eligible for sale into the open market under Rule 144(k) from time to time,
free of such volume and other restrictions under Rule 144. In addition, as of
August 30, 1996 options for 399,237 shares were exercisable and, upon
exercise, such shares will be freely tradable without restriction or further
registration. As of August 30, 1996, the Company also had reserved an
additional 346,938 shares for issuance from time to time pursuant to options
under its 1995 Stock Option Plan which have been registered under the
Securities Act, and such shares may be sold into the open market when issued.
The Company, the Selling Stockholders (other than the Estate of Henry
Kramer, which has advised Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") it does not intend to sell its Common Stock other than in
the Offerings for 30 days after the date of this Prospectus) and certain
officers and directors of the Company have each agreed not to sell or grant
any option for the sale of, or otherwise dispose of, any Common Stock, or any
securities convertible into or exchangeable or exercisable for shares of
Common Stock, other than the shares of Common Stock that may be offered by the
Company and the Selling Stockholders in the Offerings, and not to file or
request to be filed, as the case may be, any registration statement with
respect to Common Stock for a period of 90 days after the date of this
Prospectus without the prior written consent of Merrill Lynch.
The Company can make no prediction as to the effect, if any, that sales of
additional shares of Class A Common Stock or the availability of shares for
future sale will have on the market price of the Class A Common Stock or the
availability of shares for future sale will have on the market price of the
Class A Common Stock. Sales in the public market of substantial amounts of the
Common Stock, or the perception that such sales could occur, could depress the
prevailing market price for the Class A Common Stock. See "Shares Eligible for
Future Sale."
15
<PAGE>
THE COMPANY
The Company owns and operates eleven network-affiliated television stations
in geographically diverse markets. Six of the stations are affiliated with
ABC, four are affiliated with CBS and one is affiliated with NBC. The Company
has agreed to acquire KCAL, the only independent VHF television station
operating in the Los Angeles market.
BACKGROUND
The Company was founded in 1986 by Vincent Young and his father, Adam Young.
Vincent Young, the Company's Chairman, has over 25 years of experience in the
television broadcast industry, and Adam Young has over 50 years of experience
in the industry. Ronald Kwasnick, the Company's President, has over 25 years
of experience in the industry. The Company is a Delaware corporation having
its principal offices located at 599 Lexington Avenue, New York, New York
10022, and its telephone number is (212) 754-7070.
Effective as of October 1, 1994, the Company and ABC entered into new
network affiliation agreements for five of the Company's ABC-affiliated
stations. Effective as of the same date, the Company also entered into new
network affiliation agreements with CBS for three of its CBS stations. The new
affiliation agreements provide for contract terms of ten years and for
additional annual compensation of approximately $4.4 million in the aggregate
to the Company's stations.
On November 14, 1994, the Company acquired from Nationwide for $150.0
million all of the assets of television stations WRIC (Richmond, Virginia),
WATE (Knoxville, Tennessee) and WBAY (Green Bay, Wisconsin), each of which is
an ABC network affiliate. The acquired assets included approximately $8.3
million of accounts receivable. A $5.0 million portion of the purchase price
has been deferred (having a net present value as of the Nationwide Acquisition
date, discounted at 11.9%, of $3.6 million) and is payable over the remaining
four-year period, without interest, in equal annual installments, with the
first such installment having been paid on November 14, 1995. The Company has
to date implemented approximately $4.7 million of annualized expense
reductions at the three stations acquired from Nationwide, an increase of
$800,000 from the $3.9 million of cost savings identified on a line item basis
by management of the Company prior to the Nationwide Acquisition. Such
reductions are in the area of personnel and benefit savings, programming costs
and purchased services. The Nationwide Acquisition purchase price, as adjusted
for the acquired accounts receivable and the deferred purchase price discount,
amounts to approximately $140.3 million. Based upon the performance of the
acquired stations for the year ended December 31, 1994, after giving pro forma
effect to the Nationwide Acquisition (including annualized net expense
reductions) and the new network affiliation agreements described below, such
adjusted purchase price represents a multiple of 6.5 times broadcast cash flow
for the acquired stations for such period. Based upon such performance for the
year ended December 31, 1995, such adjusted purchase price represents a
multiple of 6.1 times broadcast cash flow for the acquired stations for such
period.
Concurrently with the consummation of the Nationwide Acquisition, ABC
invested $25.0 million in the Company and received 1,500,000 shares of the
Company's non-voting Class C Common Stock and warrants to purchase an
additional 750,000 shares of such Common Stock. The Company and Disney, the
parent of ABC, have entered into an agreement pursuant to which the Company
will repurchase the ABC Stock and the ABC Warrants concurrently with the
closing of the Offerings. See "Certain Transactions."
On November 14, 1994, in order to enable the Company to acquire the three
stations from Nationwide, increase liquidity and improve operating and
financial flexibility, the Company implemented the Financing Plan. Under the
Financing Plan, which was consummated concurrently with the Nationwide
Acquisition and the ABC Investment, the Company effected an initial public
offering of its Class A Common Stock, generating gross proceeds to the Company
of approximately $69.8 million, and issued $120.0 million principal amount of
its 11 3/4% Senior Subordinated Notes due 2004. The Company utilized the net
proceeds of such offerings, the ABC Investment and borrowings under the Senior
Credit Facility principally to consummate the Nationwide
16
<PAGE>
Acquisition and to repay all of its debt obligations, including its
obligations under its then existing senior credit facility (the "Old Credit
Facility"). Under the Financing Plan, the Company also repurchased shares of
its outstanding preferred stock and related warrants, and all of the remaining
holders of preferred stock and warrants converted their shares or exercised
their warrants into Class A Common Stock.
On May 19, 1995, the Company entered into the New WTVO Affiliation Agreement
with ABC whereby the Company has switched the affiliation of its Rockford,
Illinois station, WTVO, from NBC to ABC, effective as of August 14, 1995. The
New WTVO Affiliation Agreement also provides for a contract term of ten years,
and increases the annual compensation of the station by approximately $360,000
for a total of $600,000 for the first full year and will increase the annual
compensation by $33,000 in each of the second, third and fourth years for a
total of approximately $700,000 of annual compensation for the remainder of
the contract term. In addition, ABC has agreed to provide the Company with
certain promotional and equipment purchase incentives in connection with the
affiliation change. As a result of the Nationwide Acquisition and the
affiliation switch, the Company presently owns more ABC stations than any
single operator other than ABC.
As a result of the affiliation change, the Company is now able to utilize
its own programming in the half-hour time period following the late evening
news. As an NBC affiliate, the Company was required to present The Tonight
Show with Jay Leno in this time period and did not have the ability to sell
any commercial time during the first half-hour of the program. The Company now
utilizes its own inventory of syndicated programs for this time period.
Management of the Company estimates that such time period will generate
approximately $250,000 of additional annual net advertising sales with minimal
additional related expenses.
On June 12, 1995, the Company completed the June 1995 Notes Offering of
$125.0 million principal amount of its 10 1/8% Senior Subordinated Notes due
2005. The Company used the net proceeds of the June 1995 Notes Offering
(approximately $120.8 million) to repay certain of its then outstanding
indebtedness under the Senior Credit Facility.
On December 15, 1995, the Company agreed to repurchase 423,259 shares of the
Company's Common Stock from J.P. Morgan Capital Corp., an affiliate of J.P.
Morgan Securities Inc., for approximately $11.1 million. The Company
repurchased 26,625 of such shares in December 1995 and repurchased the balance
in January 1996.
On January 16, 1996, the Company completed the January 1996 Notes Offering
of $125.0 million principal amount of its 9% Senior Subordinated Notes due
2006. The Company used approximately $50.0 million of the net proceeds of the
January 1996 Notes Offering (approximately $121.9 million) to repay all of its
then outstanding indebtedness, including accrued interest, under the Senior
Credit Facility. Of the remaining approximately $71.9 million of net proceeds,
the Company used approximately $56.0 million to finance the Quad Cities
Acquisition, and used the remaining net proceeds and borrowings under the
Senior Credit Facility to finance the KELO Acquisition.
17
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of the shares of Class A Common
Stock offered hereby by the Company are estimated to be approximately $162.0
million (net of underwriting discounts and commissions and the estimated
expenses of the Offerings). The Company will use the net proceeds of the
Offerings, approximately $286.0 million of borrowings under the Senior Credit
Facility and $3.8 million of its existing cash balances to finance the KCAL
Acquisition (having an expected purchase price of approximately $368.0
million, plus an estimated $17.0 million of working capital) and the ABC
Repurchase (having an estimated purchase price of $54.8 million) and to pay
approximately $12.0 million of related fees and expenses.
Until the net proceeds from the sale of the Class A Common Stock offered
hereby remaining after the ABC Repurchase are applied toward the financing of
the KCAL Acquisition, the Company expects to use approximately $20.0 million
of such net proceeds to repay in full the outstanding principal indebtedness
and accrued interest, determined as of September 30, 1996, under the Senior
Credit Facility. Such principal amount bore interest, determined as of
September 30, 1996, at the rate of approximately 7.4375%, and has a final
maturity in December 2000. Pending its use, the remaining net proceeds of
approximately $87.2 million will be placed in an interest-bearing bank account
or invested in United States government securities or other interest-bearing
investment grade securities.
If the Company is unable to consummate the KCAL Acquisition, the Company
would use the net proceeds of the Offerings intended therefor to finance
future acquisitions of television stations and for general working capital
purposes.
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY
The Company's Class A Common Stock began trading on the Nasdaq National
Market ("Nasdaq") under the symbol "YBTVA" on November 7, 1994. The following
table sets forth, on a per share basis and for the respective periods
indicated, the range of high and low closing sales prices of the Class A
Common Stock as reported on Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1994:
November 7-
December 31............................................ $22 $13 3/4
1995:
First Quarter.......................................... $22 1/2 $17 1/2
Second Quarter......................................... 27 3/4 20 3/4
Third Quarter.......................................... 35 3/4 25
Fourth Quarter......................................... 31 1/2 24
1996:
First Quarter.......................................... $31 1/4 $25
Second Quarter......................................... 38 1/4 28
Third Quarter (to September 30, 1996).................. 40 5/8 30 1/4
</TABLE>
On September 30, 1996, the last reported sale price of the Class A Common
Stock on Nasdaq was $33 per share.
At August 30, 1996, there were approximately 40, 18 and 2 stockholders of
record of the Company's Class A, Class B and Class C Common Stock,
respectively. Such number does not include beneficial owners holding shares
through nominee names. There is no public trading market for the Class B and
Class C Common Stock.
The Company has never paid a dividend on its Common Stock and does not
expect to pay dividends on its Common Stock in the foreseeable future. The
terms of the Senior Credit Facility and the Indentures restrict the Company's
ability to pay cash dividends on its Common Stock. Under the Senior Credit
Facility, the Company is not permitted to pay any dividends on its Common
Stock. Under the Indentures, the Company is not permitted to pay any dividends
on its Common Stock unless at the time of, and immediately after giving effect
to, the dividend no default would result under the Indentures and the Company
would continue to have the ability to incur indebtedness. In addition, under
the Indentures, the dividend may not exceed an amount equal to the Company's
cash flow less a multiple of the Company's interest expense, plus the net
proceeds of the sale by the Company of additional capital stock. See
"Description of Capital Stock."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 and as adjusted to give effect to the Offerings and the application
of the net proceeds therefrom, to the KCAL Acquisition (and anticipated
related borrowings) and to the Amendment to the Senior Credit Facility. This
table should be read in conjunction with the Consolidated Financial Statements
and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of Senior Credit Facility............. $ -- $ --
Current portion of capital lease obligations.......... 40 40
Acquisition purchase price obligation................. 962 962
--------- ---------
Total short-term debt............................... 1,002 1,002
Long-term debt, less current maturities:
Senior Credit Facility(1)............................. 25,400 311,439
9% Senior Subordinated Notes due 2006................. 125,000 125,000
10 1/8% Senior Subordinated Notes due 2005............ 125,000 125,000
11 3/4% Senior Subordinated Notes due 2004............ 120,000 120,000
Capital lease obligations............................. 71 71
Acquisition purchase price obligation................. 5,314 5,314
--------- ---------
Total long-term debt................................ 400,785 686,824
Total debt.............................................. 401,787 687,826
Stockholders' equity:
Class A Common Stock, $.001 par value; 20,000,000
shares authorized; 4,887,264 shares issued and
outstanding (as adjusted, 11,262,350 shares issued
and outstanding)(2).................................. 5 11
Class B Common Stock, $.001 par value; 20,000,000
shares authorized; 2,029,620 shares issued and
outstanding(3)....................................... 2 2
Class C Common Stock, $.001 par value; 20,000,000
shares authorized; 3,563,473 shares issued and
outstanding (as adjusted, 938,387 shares issued and
outstanding)(2)...................................... 3 1
Additional paid-in capital............................ 126,185 233,345
Accumulated deficit................................... (155,067) (155,067)
--------- ---------
Total stockholders' (deficit) equity ................. (28,872) 78,292
--------- ---------
Total capitalization.................................... $ 372,915 $ 766,118
========= =========
</TABLE>
- --------
(1) The Company will have the ability, subject to certain limitations, to
borrow an additional aggregate amount of up to approximately $200.0
million under the Senior Credit Facility (as amended pursuant to the
Amendment) for general corporate purposes, $185.0 million of which will be
available for the financing of acquisitions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources."
(2) As adjusted, includes 5,250,000 shares of Class A Common Stock to be sold
by the Company in connection with the Offerings and 1,125,086 shares of
Class A Common Stock to be converted from Class C Common Stock by certain
Selling Stockholders in connection with the Offerings. Does not include
8,800 shares of Class A Common Stock issuable upon exercise of options
granted to independent directors, 4,800 of which were granted pursuant to
the Company's 1995 Stock Option Plan. See "Management."
(3) Does not include 637,188 shares of Class B Common Stock issuable upon
exercise of options granted to key employees under the Company's 1995
Stock Option Plan. Also does not include 346,938 shares of Common Stock
that are available for future grants under the 1995 Stock Option Plan. See
"Management."
19
<PAGE>
DILUTION
As of June 30, 1996, the historical deficit in net tangible book value of
the Company's Common Stock was $289.1 million, or approximately $27.59 per
share outstanding. As of June 30, 1996, the pro forma deficit in net tangible
book value of the Company's Common Stock after giving effect to the KCAL
Acquisition (including anticipated related borrowings) and the Amendment was
$638.4 million, or approximately $60.91 per share. As of June 30, 1996, the
pro forma deficit in net tangible book value of the Company's Common Stock
after giving effect to the Offerings, the application of the net proceeds
including the ABC Repurchase therefrom and the transactions described in the
preceding sentence was $531.2 million, or approximately $37.33 per share. The
deficit in net tangible book value per share of Common Stock represents the
amount of the Company's tangible assets less its liabilities divided by the
number of shares of Common Stock outstanding. When broadcasting properties are
acquired, it is not unusual for a significant portion of the purchase price to
be allocated to intangible assets, because the purchase price of broadcasting
properties is typically determined by factors such as strength of market area,
cash flow and the potential for profit improvement.
The following table illustrates this pro forma dilution in net tangible book
value per share to new investors at June 30, 1996:
<TABLE>
<S> <C> <C> <C>
Public offering price................................ $32.50
Historical deficit in net tangible book value per
share at June 30, 1996............................ $(27.59)
Increase in deficit in net tangible book value per
share as a result of the following transactions,
specifically excluding the Offerings:
KCAL Acquisition ................................ (32.17)
Amendment........................................ (1.15)
------
(33.32)
-------
(60.91)
Increase in net tangible book value per share at-
tributable to
new investors..................................... 24.16
ABC Warrant Repurchase............................. (.58)
-------
Pro forma deficit in net tangible book value per
share after all elements included in the "Unaudited
Pro Forma Consolidated Balance Sheet" appearing un-
der the caption "Pro Forma Consolidated Financial
Data"............................................... (37.33)
------
Dilution per share to new investors.................. $69.83
======
</TABLE>
20
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated balance sheet of the Company
as of June 30, 1996 is based on the historical consolidated balance sheet of
the Company, and is presented as if the Offerings, the ABC Repurchase and the
KCAL Acquisition (and anticipated related borrowings and annualized net
expense reductions) had occurred on June 30, 1996. The unaudited pro forma
consolidated balance sheet gives effect to the KCAL Acquisition under the
purchase method of accounting and is based upon a preliminary allocation of
the purchase price and the assumptions and adjustments described in the
accompanying notes. The unaudited pro forma consolidated balance sheet should
be read in conjunction with the Company's Consolidated Financial Statements
and the financial statements of KCAL appearing elsewhere in this Prospectus.
The pro forma information is not necessarily indicative of the consolidated
financial position that would have been reported had such events actually
occurred on the date specified, nor is it indicative of the Company's future
consolidated financial position.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1995 and the six months ended June 30, 1995 and 1996 are
based on the historical consolidated financial statements of the Company and
the financial statements of each of KCAL, the Quad Cities Station and KELO,
and are presented as if the Offerings, the ABC Repurchase, the KCAL, Quad
Cities and KELO Acquisitions (and actual and anticipated related borrowings
and annualized net expense reductions), the January 1996 Notes Offering, the
June 1995 Notes Offering and the New WTVO Affiliation Agreement had occurred
on the first day of the respective periods. The unaudited pro forma
consolidated statements of operations give effect to the KCAL, Quad Cities and
KELO Acquisitions under the purchase method of accounting and are based upon a
preliminary allocation of the purchase price and the assumptions and
adjustments described in the accompanying notes. The unaudited pro forma
consolidated statements of operations should be read in conjunction with the
Company's consolidated financial statements and the financial statements of
each of KCAL, the Quad Cities Station and KELO appearing elsewhere in this
Prospectus. The pro forma information is not necessarily indicative of the
results of consolidated operations that would have been reported had such
events actually occurred on the date specified, nor is it indicative of the
Company's consolidated future results.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
YOUNG PRO FORMA
BROADCASTING KCAL AT
AT JUNE 30, AT JUNE 30, JUNE 30,
1996(1) 1996 ADJUSTMENTS(1) 1996
------------ ----------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................. $ 7,934 $ 23,763 $(27,560) $ 4,137
Trade accounts
receivable less
allowance for doubtful
accounts.............. 31,163 25,458 (8,458) 48,163
Program license rights,
current............... 3,775 11,218 125 15,118
Prepaid expenses....... 1,775 306 (306) 1,775
Deferred income taxes.. 6,003 (6,003)
--------- -------- -------- ---------
Total current as-
sets............... 44,647 66,748 (42,202) 69,193
Net property and
equipment.............. 91,162 13,047 47,753 151,962
Program license rights,
noncurrent............. 2,352 3,657 6,009
Other noncurrent assets. 1,862 1,862
Intangible assets, net
of accumulated
amortization........... 246,625 216,403 120,797 583,825
Deferred financing
costs, net of
accumulated
amortization........... 13,636 12,000 (2) 25,636
--------- -------- -------- ---------
Total assets........ $ 400,284 $299,855 $138,348 $ 838,487
========= ======== ======== =========
LIABILITIES AND STOCK-
HOLDERS' EQUITY (DEFI-
CIT)
Current liabilities:
Trade accounts payable. $ 5,125 $ 4,094 $ (4,094) $ 5,125
Accrued expenses and
other liabilities..... 4,023 4,023
Accrued interest....... 12,168 12,168
Program license liabil-
ities, current........ 3,809 20,988 (12,460) 12,337
Long-term debt, cur-
rent.................. 962 962
Capital lease obliga-
tions, current........ 40 40
--------- -------- -------- ---------
Total current lia-
bilities........... 26,127 25,082 (16,554) 34,655
Program license liabili-
ties, noncurrent....... 2,244 6,472 8,716
Long-term debt,
noncurrent............. 27,714 286,039 (2) 313,753
Midcontinent seller
note................... 3,000 3,000
9% Senior Subordinated
Notes due 2006......... 125,000 125,000
10 1/8% Senior Subordi-
nated Notes due 2005... 125,000 125,000
11 3/4% Senior Subordi-
nated Notes due 2004... 120,000 120,000
Capital lease obliga-
tions, noncurrent...... 71 71
Deferred income taxes... 6,362 23,638(3) 30,000
--------- -------- -------- ---------
Total liabilities... $ 429,156 $ 37,916 $293,123 $ 760,195
--------- -------- -------- ---------
Stockholders' equity
(deficit):
Common stock............ 10 4 (2)(4) 14
Additional paid-in capi-
tal.................... 126,185 107,160 (2)(4) 233,345
Accumulated deficit..... (155,067) (155,067)
KCAL net equity......... 261,939 (261,939)
--------- -------- -------- ---------
Total stockholders'
equity (deficit)... (28,872) 261,939 (154,775) 78,292
--------- -------- -------- ---------
Total liabilities
and stockholders'
equity (deficit)... $400,284 $299,855 $138,348 $ 838,487
========= ======== ======== =========
</TABLE>
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(1) To record the purchase of KCAL, the Company has preliminarily allocated
the purchase price to the tangible assets and liabilities based upon
estimates of fair market value at June 30, 1996. The KCAL Acquisition
purchase price of $385.0 million (exclusive of financing costs) includes
approximately $337.2 million of intangible assets. The excess of the
purchase price over amounts allocated to the tangible assets and
liabilities will be amortized on a straight-line basis over periods
ranging from 2 to 40 years. Final allocations are not expected to be
materially different from the preliminary allocations.
(2) To record the Offerings, the borrowing under the Senior Credit Facility,
and the deferred financing costs.
(3) To record the deferred tax liability in connection with the difference
between amounts recorded for financial reporting and tax purposes.
(4) To record the ABC Repurchase.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YOUNG QUAD CITIES KCAL
BROADCASTING STATION MIDCONTINENT YEAR PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, COMBINING SEPTEMBER 30, KCAL DECEMBER 31,
1995 1995 1995 ADJUSTMENTS SUBTOTAL 1995 ADJUSTMENTS 1995
------------- ------------ ------------ ----------- -------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Gross revenues.. $ 143,555 $15,037 $12,607 $ 665(1) $171,864 $130,916 $(3,815)(7) $ 298,965
Less commis-
sions........... 21,025 1,792 1,466 24,283 16,926 (572)(7) 40,637
----------- ------- ------- ------- -------- -------- ------- -----------
Net revenues..... 122,530 13,245 11,141 665 147,581 113,990 (3,243) 258,328
----------- ------- ------- ------- -------- -------- ------- -----------
Operating ex-
penses........... 28,034 3,310 4,203 (1,581)(2) 33,966 41,903 (12,104)(8) 63,765
Amortization of
program license
rights........... 6,418 1,326 301 (547)(2) 7,498 35,771 (13,262)(7)(8) 30,007
Selling, general
and
administrative
expenses......... 23,580 3,893 2,474 (1,039)(2) 28,908 23,828 (865)(8) 51,871
Depreciation and
amortization..... 24,572 3,172 1,006 1,793 (3) 30,543 10,862 9,509 (9) 50,914
Corporate over-
head............. 3,348 374 (374)(4) 3,348 1,201 (901)(10) 3,648
Non-cash
compensation..... 1,167 1,167 1,167
----------- ------- ------- ------- -------- -------- ------- -----------
Total operating
expenses......... 87,119 12,075 7,984 (1,748) 105,430 113,565 (17,623) 201,372
----------- ------- ------- ------- -------- -------- ------- -----------
Operating income. 35,411 1,170 3,157 2,413 42,151 425 14,380 56,956
Interest ex-
pense........... 32,644 9,592(5) 42,236 22,168 (11) 64,404
Other expenses
(income)........ 233 (15) (187) 31 31
----------- ------- ------- ------- -------- -------- ------- -----------
(Loss) income
before provision
for income taxes
and before
extraordinary
item............. 2,534 1,185 3,344 (7,179) (116) 425 (7,788) (7,479)
Provision for in-
come taxes....... 1,108 (1,108)(6)
----------- ------- ------- ------- -------- -------- ------- -----------
(Loss) income
after provision
for income taxes
and before
extraordinary
item............. $ 2,534 $ 1,185 $ 2,236 $(6,071) $ (116) $ 425 $(7,788) $ (7,479)
=========== ======= ======= ======= ======== ======== ======= ===========
(Loss) income
after provision
for income taxes
and before
extraordinary
item, per common
share(12)........ $ .23 $ (.50)
=========== ===========
Weighted average
shares
outstanding...... 11,071,154 14,821,154
=========== ===========
</TABLE>
(Footnotes begin on next page)
See Notes to Unaudited Pro Forma Consolidated Statement of Operations
24
<PAGE>
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(1) Reflects increased network compensation resulting from the new WTVO, KWQC
and KELO affiliation agreements.
(2) Reflects $1.8 million and $1.4 million of anticipated cost savings
related to the excess personnel, programming and other costs to be
eliminated prospectively in connection with the Quad Cities and KELO
Acquisitions, respectively.
(3) Reflects the amortization of intangibles associated with the Quad Cities
and KELO Acquisitions over a 40 year period and net increased annual
depreciation resulting from the newly acquired property and equipment
depreciated over a new estimated useful life. In addition, reflects the
amortization expense of the new debt financing costs related to the
January 1996 Notes Offering, the June 1995 Notes Offering and the Senior
Credit Facility as amended and restated pursuant to the Amendment.
Furthermore, reflects the elimination of amortization of deferred
financing costs in connection with the Senior Credit Facility as amended
and restated pursuant to the Amendment.
(4) Eliminates the Quad Cities Station management fee.
(5) Reflects interest expense on a portion of the January 1996 Notes Offering
and a portion of the Senior Credit Facility related to the Quad Cities and
KELO Acquisitions.
(6) Eliminates the KELO tax provision due to the Company's pro forma loss for
the year.
(7) Reflects the net revenue adjustment of $3.2 million and program
amortization adjustment of $6.9 million for seven sitcom programs the
liabilities for which are not being assumed by the Company in connection
with the KCAL Acquisition. Replacement programs are assumed to be revenue
neutral (revenue equals program costs).
(8) Reflects $19.4 million of anticipated cost savings related to excess
personnel, programming and other costs to be eliminated prospectively in
connection with the purchase of KCAL.
(9) Reflects the amortization of intangibles associated with the KCAL
Acquisition over periods ranging from 2 to 40 years and increased annual
depreciation resulting from the newly acquired property and equipment
depreciated over new estimated useful lives. In addition, reflects the
amortization expense of the new debt financing costs related to the
Offerings.
(10) Eliminates the KCAL management fee of $1.2 million. Reflects additional
corporate overhead of $300,000 in connection with the purchase of KCAL.
(11) Represents the drawdown of approximately $286.0 million from the Senior
Credit Facility at the assumed rate of 7.75%.
(12) The computation of earnings per common and common equivalent share is
based on the weighted average number of common shares outstanding during
the period plus (in periods in which they have a dilutive effect) the net
effect of common shares contingently issuable, primarily from stock
options and exercise of warrants.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
QUAD
YOUNG CITIES
BROADCASTING STATION MID- KCAL PRO FORMA
SIX SIX CONTINENT SIX SIX
MONTHS MONTHS SIX MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 25, JUNE 30, COMBINING JUNE 30, KCAL JUNE 30,
1995 1995 1995 ADJUSTMENTS SUBTOTAL 1995 ADJUSTMENTS 1995
------------ -------- ---------- ----------- -------- -------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Gross revenues......... $ 69,468 $7,411 $6,166 $ 400 (1) $83,445 $63,540 $(1,093)(7) $ 145,892
Less commissions....... 10,124 887 740 11,751 8,182 (164)(7) 19,769
----------- ------ ------ ------- ------- ------- ------- -----------
Net revenues............ 59,344 6,524 5,426 400 71,694 55,358 (929) 126,123
----------- ------ ------ ------- ------- ------- ------- -----------
Operating expenses...... 13,790 1,605 2,321 (791)(2) 16,925 22,673 (6,052)(8) 33,546
Amortization of program
license rights.......... 3,072 644 156 (274)(2) 3,598 17,218 (4,812)(7)(8) 16,004
Selling, general and
administrative expenses. 11,798 1,961 1,028 (519)(2) 14,268 9,844 (433)(7) 23,679
Depreciation and amorti-
zation.................. 12,450 1,757 531 832 (3) 15,570 5,410 5,347 (9) 26,327
Corporate overhead...... 1,566 186 (186)(4) 1,566 511 (361)(10) 1,716
Non-cash compensation... 438 438 438
----------- ------ ------ ------- ------- ------- ------- -----------
Total operating ex-
penses.................. 43,114 6,153 4,036 (938) 52,365 55,656 (6,311) 101,710
----------- ------ ------ ------- ------- ------- ------- -----------
Operating income........ 16,230 371 1,390 1,338 19,329 (298) 5,382 24,413
Interest expense....... 16,070 5,047 (5) 21,117 11,084 (11) 32,201
Other expenses
(income)............... (124) (6) (53) (183) (183)
----------- ------ ------ ------- ------- ------- ------- -----------
(Loss) income after
provision for income
taxes and before
extraordinary item...... $ 284 $ 377 $1,443 $(3,709) $(1,605) $ (298) $(5,702) $ (7,605)
=========== ====== ====== ======= ======= ======= ======= ===========
(Loss) income after
provision for income
taxes and before
extraordinary item, per
common share(12)........ $ (0.03) $ (0.52)
=========== ===========
Shares used in earnings
per share calculation:.. 10,899,255 14,649,255
=========== ===========
</TABLE>
(Footnotes begin on next page)
See Notes to Unaudited Pro Forma Consolidated Statement of Operations
26
<PAGE>
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(1) Reflects increased network compensation resulting from the new WTVO, KWQC
and KELO affiliation agreements.
(2) Reflects $887,000 and $697,000 of anticipated cost savings related to
excess personnel, programming and other costs to be eliminated
prospectively in connection with the Quad Cities and KELO Acquisitions,
respectively.
(3) Reflects the amortization of intangibles associated with the Quad Cities
and KELO Acquisitions over a 40 year period and net increased annual
depreciation resulting from the newly acquired property and equipment
depreciated over a new estimated useful life. In addition, reflects the
amortization expense of the new debt financing costs related to the
January 1996 Notes Offering, the June 1995 Notes Offering and the Senior
Credit Facility as amended and restated pursuant to the Amendment.
Furthermore, reflects the elimination of deferred financing costs in
connection with the Senior Credit Facility as amended and restated
pursuant to the Amendment.
(4) Eliminates the Quad Cities Station management fee.
(5) Reflects interest expense on a portion of the January 1996 Notes and a
portion of the Senior Credit Facility related to the Quad Cities and KELO
Acquisitions.
(6) Eliminates the KELO tax provision due to the Company's pro forma loss for
the period.
(7) Reflects the net revenue adjustment of $929,000 and program amortization
adjustment of $1.6 million for seven sitcom programs the liabilities for
which are not being assumed by the Company in connection with the KCAL
Acquisition. Replacement programs are assumed to be revenue neutral
(revenue equals program costs).
(8) Reflects $9.7 million of anticipated cost savings related to excess
personnel, programming and other costs to be eliminated prospectively in
connection with the purchase of KCAL.
(9) Reflects the amortization of intangibles associated with the KCAL
Acquisition over periods ranging from 2 to 40 years and increased annual
depreciation resulting from the newly acquired property and equipment
depreciated over new estimated useful lives. In addition, reflects the
amortization expense of the new debt financing costs related to the
Offerings.
(10) Eliminates the KCAL management fee of $511,000. Reflects additional
corporate overhead of $150,000 in connection with the purchase of KCAL.
(11) Represents the drawdown of approximately $286.0 million from the Senior
Credit Facility at the assumed rate of 7.75%.
(12) The computation of earnings per common and common equivalent share is
based on the weighted average number of common shares outstanding during
the period plus (in periods in which they have a dilutive effect) the net
effect of common shares contingently issuable, primarily from stock
options and exercise of warrants.
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30,1996
<TABLE>
<CAPTION>
QUAD
YOUNG CITIES MID-
BROADCASTING STATION CONTINENT KCAL PRO FORMA
SIX 3.5 FIVE SIX SIX
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 30, APRIL 15, MAY 31, COMBINING JUNE 30, KCAL JUNE 30,
1996 1996 1996 ADJUSTMENTS SUBTOTAL 1996 ADJUSTMENTS 1996
------------ --------- --------- ----------- -------- -------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Gross revenues......... $ 74,604 $4,606 $5,670 $ 179 (1) $ 85,059 $72,563 $ (698)(8) $ 156,924
Less commissions....... 10,845 598 670 12,113 9,628 (109)(8) 21,632
----------- ------ ------ ------- -------- ------- ------- -----------
Net revenues............ 63,759 4,008 5,000 179 72,946 62,935 (589) 135,292
----------- ------ ------ ------- -------- ------- ------- -----------
Operating expenses...... 14,544 936 1,923 (565)(2) 16,838 22,836 (6,809)(9) 32,865
Amortization of program
rights.................. 3,635 367 98 (173)(2) 3,927 18,444 (4,220)(8)(9) 18,151
Selling, general and
administrative expenses. 12,882 1,129 819 (360)(2) 14,470 10,101 (642)(9) 23,929
Depreciation and amorti-
zation.................. 13,073 879 350 1,074 (3) 15,376 5,058 5,698 (10) 26,132
Corporate overhead...... 2,171 101 (101)(4) 2,171 831 (681)(11) 2,321
Non-cash compensation
paid in Common Stock.... 15 15 15
----------- ------ ------ ------- -------- ------- ------- -----------
Total operating ex-
penses.................. 46,320 3,412 3,190 (125) 52,797 57,270 (6,654) 103,413
----------- ------ ------ ------- -------- ------- ------- -----------
Operating income........ 17,439 596 1,810 304 20,149 5,665 6,065 31,879
Interest expense....... 19,742 1,375 (5) 21,117 11,084 (12) 32,201
Other expenses
(income)............... (842) (6) (23) 1,226 (6) 355 355
----------- ------ ------ ------- -------- ------- ------- -----------
(Loss) income before
provision for income
taxes and before
extraordinary item...... (1,461) 602 1,833 (2,297) (1,323) 5,665 (5,019) (677)
Provision for income
taxes................... 359 (359)(7)
----------- ------ ------ ------- -------- ------- ------- -----------
(Loss) income after
provision for income
taxes and extraordinary
item.................... $ (1,461) $ 602 $1,833 $(2,297) $(1,323) $ 5,306 $(4,660) $ (677)
=========== ====== ====== ======= ======== ======= ======= ===========
(Loss) income after
provision for income
taxes and before
extraordinary item, per
common share (13)....... $ (0.14) $ (0.05)
=========== ===========
Shares used in earnings
per share calculation... 10,480,357 14,230,357
=========== ===========
</TABLE>
(Footnotes begin on next page)
See Notes to Unaudited Pro Forma Consolidated Statement of Operations
28
<PAGE>
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(1) Reflects increased network compensation resulting from the new KWQC and
KELO affiliation agreements.
(2) Reflects $517,000 and $581,000 of anticipated cost savings related to
excess personnel, programming and other costs to be eliminated
prospectively in connection with the Quad Cities and KELO Acquisitions,
respectively.
(3) Reflects the amortization of intangibles associated with the Quad Cities
and KELO Acquisitions over a 40 year period and net increased annual
depreciation resulting from the newly acquired property and equipment
depreciated over a new estimated useful life. In addition, reflects the
amortization expense of the new debt financing costs related to the
January 1996 Notes Offering, the June 1995 Notes Offering and the Senior
Credit Facility as amended and restated pursuant to the Amendment.
Furthermore, reflects the elimination of deferred financing costs in
connection with the Senior Credit Facility as amended and restated
pursuant to the Amendment.
(4) Eliminates the Quad Cities Station management fee.
(5) Reflects interest expense on a portion of the January 1996 Notes and a
portion of the Senior Credit Facility related to the Quad Cities and KELO
Acquisitions.
(6) Eliminates interest income related to the Company's January 1996 Notes
Offering.
(7) Eliminates the KCAL tax provision due to the Company's pro forma loss for
the period.
(8) Reflects the net revenue adjustment of $589,000 and program amortization
adjustment of $721,000 for seven sitcom programs the liabilities for which
are not being assumed by the Company in connection with the KCAL
Acquisition. Replacement programs are assumed to be revenue neutral
(revenue equals program costs).
(9) Reflects $11.0 million of anticipated cost savings related to excess
personnel, programming and other costs to be eliminated prospectively in
connection with the purchase of KCAL.
(10) Reflects the amortization of intangibles associated with the KCAL
Acquisition over periods ranging from 2 to 40 years and increased annual
depreciation resulting from the KCAL Acquisition purchase price to the
newly acquired property and equipment depreciated over new estimated
useful lives. Also reflects the amortization expense of the new debt
financing costs related to the Offerings.
(11) Eliminates the KCAL management fee of $831,000. Reflects additional
corporate overhead of $150,000 in connection with the purchase of KCAL.
(12) Represents the drawdown of approximately $286.0 million from the Senior
Credit Facility at the assumed rate of 7.75%.
(13) The computation of earnings per common and common equivalent share is
based on the weighted average number of common shares outstanding during
the period plus (in periods in which they have a dilutive effect) the net
effect of common shares contingently issuable, primarily from stock
options and exercise of warrants.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company for the five years ended December 31, 1995 and the six months ended
June 30, 1995 and 1996, which have been derived from the Company's audited and
unaudited consolidated financial statements. The historical consolidated
financial data of the Company for the six months ended June 30, 1995 and 1996
have been derived from the Company's unaudited consolidated financial
statements which, in the opinion of management of the Company, have been
prepared on the same basis as the audited consolidated financial statements
and include all normal and recurring adjustments and accruals necessary for a
fair presentation of such information.
The information in this table should be read in conjunction with the
Consolidated Financial Statements and the notes thereto, "Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
Company has not paid dividends on its capital stock during any of the periods
presented below.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ----------------------
(UNAUDITED)
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues (1)....... $ 56,015 $ 59,799 $ 61,792 $ 78,788 $ 122,530 $ 59,344 $ 63,759
Operating expenses,
including selling,
general and
administrative
expenses.............. 26,734 28,066 28,460 33,800 51,614 25,588 27,426
Amortization of program
license rights........ 4,197 3,516 3,969 4,400 6,418 3,072 3,635
Depreciation and
amortization.......... 22,709 18,790 13,859 15,280 24,572 12,450 13,073
Corporate overhead..... 1,327 1,325 1,350 2,052 3,348 1,566 2,171
Non-cash compensation
paid in Common Stock
(2)................... -- -- -- 6,497 1,167 438 15
--------- --------- --------- --------- ---------- ---------- ----------
Operating income....... 1,048 8,102 14,154 16,759 35,411 16,230 17,439
Interest expense, net.. 27,597 29,476 17,778 19,105 32,644 16,070 19,742
Other expenses (income)
(3)................... 350 75 141 3 233 (124) (842)
--------- --------- --------- --------- ---------- ---------- ----------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. (26,899) (21,449) (3,765) (2,349) 2,534 284 (1,461)
Extraordinary loss on
extinguishment of debt
(4)................... -- (7,452) -- (6,027) (9,125) (9,125) --
Cumulative effect of
change in accounting
principle (5)......... -- -- (1,520) -- -- -- --
--------- --------- --------- --------- ---------- ---------- ----------
Net loss............... $ (26,899) $ (28,901) $ (5,285) $ (8,376) $ (6,591) $ (8,841) $ (1,461)
========= ========= ========= ========= ========== ========== ==========
Income (loss) per
common share before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ (12.04) $ (9.60) $ (3.82) $ (3.62) $ 0.23 $ 0.03 $ (0.14)
Net loss per common
share (6)............. (12.04) (12.93) (4.50) (5.42) (0.61) (0.84) (0.14)
Weighted average shares
outstanding........... 2,234,370 2,234,370 2,234,370 3,339,794 11,071,154 10,899,255 10,469,933
OTHER FINANCIAL DATA:
Cash flow provided by
operating activities.. $ 5,228 $ 13,449 $ 13,562 $ 23,597 $ 32,416 $ 7,595 $ 18,186
Payments for program
license liabilities... 5,429 4,710 4,003 4,170 6,747 3,222 3,724
Broadcast cash flow
(7)................... 23,852 27,023 29,329 40,818 64,169 30,534 32,609
Broadcast cash flow
margin................ 42.6% 45.2% 47.5% 51.8% 52.4% 51.5% 51.1%
Operating cash flow
(8)................... $ 22,525 $ 25,698 $ 27,979 $ 38,766 $ 60,821 $ 28,968 $ 30,438
Capital expenditures... 563 572 686 1,206 4,484 2,939 1,635
BALANCE SHEET DATA (AS
OF END OF PERIOD):
Cash and cash
equivalents........... $ 1,031 $ 793 $ 4,493 $ 6,304 $ 3,426 $ 4,079 $ 7,934
Total assets........... 183,491 167,327 158,231 316,827 296,098 299,401 400,284
Long-term debt
(including current
portion).............. 218,975 200,397 196,156 305,050 297,993 303,718 401,787
Stockholders' deficit.. (50,824) (46,401) (51,686) (11,654) (25,544) (19,607) (28,872)
</TABLE>
(Footnotes begin on next page)
30
<PAGE>
(1) Net revenues are total revenues net of agency and national representation
commissions.
(2) Represents non-cash charges for the issuance to key employees in 1994 of
shares of Common Stock and in 1995 of shares of Common Stock and below-
market options to purchase shares of Common Stock. See "Management."
(3) Includes approximately $1.2 million of interest income for the six months
ended June 30, 1996.
(4) Extraordinary loss for the years ended December 31, 1992, 1994 and 1995
resulted from the early extinguishment of debt. See Note 6 to Notes to the
Company's Consolidated Financial Statements.
(5) Cumulative effect of change in accounting principle for the year ended
December 31, 1993 resulted from a change in accounting principle for
amortization of program license rights. See Notes 2 and 4 to Notes to the
Company's Consolidated Financial Statements.
(6) The computation of earnings per common and common equivalent share is
based upon the weighted average number of common shares outstanding during
the period plus (in periods in which they have a dilutive effect) the net
effect of common shares contingently issuable, primarily from stock
options and exercise of warrants.
(7) "Broadcast cash flow" is defined as operating income before income taxes
and interest expense, plus depreciation and amortization (including
amortization of program license rights), non-cash compensation and
corporate overhead, less payments for program license liabilities. The
Company has included broadcast cash flow data because such data are
commonly used as a measure of performance for broadcast companies and are
also 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 income or cash flow as reflected in
the Consolidated 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 for measures of performance prepared in accordance with
generally accepted accounting principles.
(8) "Operating cash flow" is defined as operating income before income taxes
and interest expense, plus depreciation and amortization (including
amortization of program license rights), and non-cash compensation, less
payments for program license liabilities. The Company has included
operating cash flow data because such data are commonly used by investors
to measure a company's ability to service debt and will be used in
calculating the amount of additional indebtedness that the Company may
incur in the future under the Indentures. Operating cash flow does not
purport to represent cash provided by operating activities as reflected in
the Consolidated Financial Statements, is not a measure of financial
performance under generally accepted accounting principles and should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The operating revenues of the Company's stations are derived primarily from
advertising revenues and, to a much lesser extent, from compensation paid by
the networks to the stations for broadcasting network programming. The
stations' primary operating expenses are for employee compensation, news
gathering, production, programming and promotion costs. A high proportion of
the operating expenses of the stations are fixed.
Advertising is sold for placement within and adjoining a station's network
and locally originated programming. Advertising is sold in time increments and
is priced primarily on the basis of a program's popularity among the specific
audience an advertiser desires to reach, as measured principally by periodic
audience surveys. In addition, advertising rates are affected by the number of
advertisers competing for the available time, the size and demographic makeup
of the market served by the station and the availability of alternative
advertising media in the market area. Rates are highest during the most
desirable viewing hours, with corresponding reductions during other hours. The
ratings of a local station affiliated with a national television network can
be affected by ratings of network programming.
Most advertising contracts are short-term, and generally run only for a few
weeks. The Company estimates that approximately 54% of the annual gross
revenue of the Company's stations is currently generated from local
advertising, which is sold by a station's sales staff directly to local
accounts, and the remainder of the advertising revenue primarily represents
national advertising, which is sold by a national advertising sales
representative. See "Certain Transactions." The stations generally pay
commissions to advertising agencies on local, regional and national
advertising, and, on national advertising, the stations also pay commissions
to the national sales representative.
The advertising revenues of the Company's 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. In addition, advertising
revenues are generally higher during even numbered election years due to
spending by political candidates, which spending typically is heaviest during
the fourth quarter.
"Broadcast cash flow" is defined as operating income before income taxes and
interest expense, plus depreciation and amortization (including amortization
of program license rights), non-cash compensation and corporate overhead, less
payments for program license liabilities. The Company has included broadcast
cash flow data because such data are commonly used as a measure of performance
for broadcast companies and are also 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 income or cash flow
as reflected in the Consolidated 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 for measures of performance prepared in accordance with generally
accepted accounting principles.
32
<PAGE>
The following table sets forth certain operating data for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Income.................. $14,154 $16,759 $35,411 $16,230 $17,439
Add:
Amortization of program license
rights.......................... 3,969 4,400 6,418 3,072 3,635
Depreciation and amortization.... 13,859 15,280 24,572 12,450 13,073
Corporate overhead............... 1,350 2,052 3,348 1,566 2,171
Non-cash compensation paid in
Common Stock.................... -- 6,497 1,167 438 15
Less:
Payments for program license
liabilities..................... (4,003) (4,170) (6,747) (3,222) (3,724)
------- ------- ------- ------- -------
Broadcast cash flow............... $29,329 $40,818 $64,169 $30,534 $32,609
======= ======= ======= ======= =======
</TABLE>
TELEVISION REVENUES
Set forth below are the principal types of television revenues received by
the Company's stations for the periods indicated and the percentage
contribution of each to the Company's total revenues, as well as agency and
national sales representative commissions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Local.................. $ 41,333 57.3% $ 50,063 54.1% $ 77,980 54.3% $ 37,373 53.8% $ 40,437 54.2%
National............... 26,142 36.2 32,327 35.0 51,546 35.9 25,307 36.4 25,523 34.2
Network compensation... 3,321 4.6 4,564 4.9 9,873 6.9 5,048 7.3 5,529 7.4
Political.............. 379 0.5 4,546 4.9 1,835 1.3 295 0.4 1,461 2.0
Production and other... 971 1.4 981 1.1 2,321 1.6 1,445 2.1 1,654 2.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total................. 72,146 100.0 92,481 100.0 143,555 100.0 69,468 100.0 74,604 100.0
Agency and sales
representative
commissions............ (10,354) (14.4) (13,693) (14.8) (21,025) (14.6) (10,124) (14.6) (10,845) (14.5)
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net revenues............ $ 61,792 85.6% $ 78,788 85.2% $122,530 85.4% $ 59,344 85.4% $ 63,759 85.5%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net revenues for the six months ended June 30, 1996 were $63.8 million, an
increase of $4.5 million, or 7.6%, compared to $59.3 million for the six
months ended June 30, 1995, with the Quad Cities Station and KELO accounting
for $3.7 million of such increase. Gross local revenue was up 1.3% and
national revenue was down 3.7%, as compared to the same period in 1995 for the
stations owned prior to the Quad Cities and KELO Acquisitions. Network
compensation increased $481,000 for the six months ended June 30, 1996, of
which $228,000 is attributable to the acquired stations and $212,000 is
attributable to the New WTVO Affiliation Agreement.
Operating expenses, including selling and general administrative expenses,
were $27.4 million for the six months ended June 30, 1996, compared to $25.6
million for the six months ended June 30, 1995, an increase of $1.8 million,
or 7.0%, with the Quad Cities Station and KELO accounting for all of such
increase.
33
<PAGE>
Amortization of program license rights for the six months ended June 30,
1996 was $3.6 million, compared to $3.1 million for the six months ended June
30, 1995, an increase of $563,000, or 18.3%. Amortization of program license
rights at the Quad Cities Station and KELO was $154,000.
Depreciation of property and equipment and amortization of intangible assets
was $13.1 million for the six months ended June 30, 1996, compared to $12.4
million for the six months ended June 30, 1995, an increase of $623,000, or
5.0%. This increase principally resulted from the depreciation and
amortization at the Quad Cities Station and KELO, which amounted to $647,000.
The Company made payments for program license liabilities of $3.7 million
during the six months ended June 30, 1996, compared with payments of $3.2
million during the six months ended June 30, 1995, an increase of $502,000.
Program license payments related to the Quad Cities Station and KELO were
$216,000.
Corporate overhead was $2.2 million for the six months ended June 30, 1996,
compared to $1.6 million for the period ended June 30, 1995, an increase of
$605,000. This increase is due to additional personnel expense as a result of
the new acquisitions.
Interest income for the six months ended June 30, 1996 was $1.3 million,
compared to $216,000 for the same period in 1995, an increase of $1.1 million.
This increase is primarily attributable to the higher cash levels resulting
from the January 1996 Notes. Approximately $71.9 million of the net proceeds
thereof remained after the repayment of approximately $50.0 million under the
Senior Credit Facility, which was invested in low risk commercial paper until
it was used to finance, in part, the Quad Cities and KELO Acquisitions.
Interest expense was $19.7 million for the six months ended June 30, 1996,
compared to $16.1 million for the same period in the prior year, an increase
of $3.6 million, or 22.4%. The increase in interest expense is due to the
Company's higher debt level following the January 1996 Notes Offering.
The Company had a $25.0 million interest rate swap agreement which expired
on April 18, 1996. The net interest expense resulting from this swap agreement
amounted to $315,000 for the six months ended June 30, 1996, compared to
$459,000 for the six months ended June 30, 1995. At June 30, 1996, fixed rate
debt was $373 million, or 92.9%, of the Company's total debt.
In June 1995, the Company incurred a $9.1 million extraordinary loss on the
extinguishment of debt. This loss was related to the partial repayment and the
amendment of the Senior Credit Facility in connection with the June 1995 Notes
Offering.
As a result of the factors discussed above, the net loss to the Company was
$1.5 million for the six months ended June 30, 1996, compared with a net loss
of $8.8 million for the same period in 1995. Loss before the extraordinary
item referred to above was $284,000 for the six months ended June 30, 1995.
Broadcast cash flow was $32.6 million for the six months ended June 30,
1996, compared to $30.5 million for the same period in 1995, an increase of
$2.1 million, or 6.9%, of which approximately $1.9 million was generated by
the Quad Cities Station and KELO. As a result, the broadcast cash flow margin
(broadcast cash flow divided by net revenues) was 51.1% for the six months
ended June 30, 1996, compared to 51.5% for the same period in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The following historical financial information include the results of the
stations acquired from Nationwide for the last 47 days of 1994, the period of
1994 following the Nationwide Acquisition, and for the entire year of 1995.
Net revenues for the year ended December 31, 1995 were $122.5 million, an
increase of $43.7 million, or 55.5%, compared to $78.8 million for the year
ended December 31, 1994, with the acquired stations accounting for $39.1
million of such increase. Improvement in both the national and various local
market economies led to an increase in the Company's national and local
revenue of 7.2% and 7.5%, respectively, for the stations owned prior to the
Nationwide Acquisition. Political revenue for the year ended December 31, 1995
was $1.8 million, compared to $4.5 million for the year ended December 31,
1994, a decrease of $2.7 million. The decrease was
34
<PAGE>
due to the fact that 1995 was not a congressional election year and in 1994
the stations benefited from several governor and local legislative elections.
Network compensation in 1995 increased $5.3 million, or 116.3%, with $3.0
million attributable to the acquired stations and $2.3 million due to the new
network compensation arrangements (including the New WTVO Affiliation
Agreement), at the stations owned prior to the Nationwide Acquisition.
Operating expenses, including selling, general and administrative expenses,
for the year ended December 31, 1995 were $51.6 million, compared to $33.8
million for the year ended December 31, 1994, an increase of $17.8 million, or
52.7%. Operating expenses at the acquired stations were $16.8 million, and the
remaining increase was primarily attributable to higher local sales
commissions resulting from higher sales volume.
Amortization of program license rights for the year ended December 31, 1995
was $6.4 million, compared to $4.4 million for the year ended December 31,
1994, an increase of $2.0 million, or 45.5%, with the acquired stations
accounting for principally all of such increase.
Depreciation of property and equipment and amortization of intangible assets
was $24.6 million for the year ended December 31, 1995, compared with $15.3
million for the comparable period in 1994, an increase of $9.3 million, or
60.8%. The increase results from depreciation and amortization at the acquired
stations of $8.5 million, and the remaining increase was primarily
attributable to increased capital expenditures in 1995.
The Company made payments for program license liabilities of $6.7 million
during the year ended December 31, 1995, compared to $4.2 million for the year
ended December 31, 1994, an increase of $2.5 million, or 59.5%. Payments
associated with the acquired stations were $2.6 million.
Corporate overhead for the year ended December 31, 1995 was $3.3 million,
compared to $2.1 million for the comparable period in 1994, an increase of
$1.2 million, or 57.1%. This was the result of additional personnel and
administrative costs associated with being a public company.
Non-cash compensation paid in Common Stock for the year ended December 31,
1995 was $1.2 million consisting of below-market options and a contribution to
the 401(k) plan, compared to $6.5 million for the year ended December 31, 1994
consisting of stock grants and a contribution to the 401(k) plan.
Net interest expense for the year ended December 31, 1995 was $32.6 million,
compared with $19.1 million for the comparable period in 1994, an increase of
$13.5 million, or 70.7%. The increase is primarily attributable to the
Company's higher debt level following the Financing Plan and the June 1995
Notes Offering.
At December 31, 1995, the Company held a $25.0 million interest rate swap
agreement which expired on April 18, 1996. The interest expense resulting from
this swap agreement amounted to $952,000 in 1995, and the interest expense
resulting from this and other swap agreements amounted to $1.4 million in
1994. This interest rate swap agreement was the only derivative instrument
held by the Company at December 31, 1995. The Senior Credit Facility no longer
requires the Company to enter into interest rate swap agreements for the
purpose of interest rate protection. At December 31, 1995, fixed rate debt and
interest rate swap agreements comprised $270.0 million, or 90.6%, of the
Company's total debt.
In June 1995, the Company incurred an approximately $9.1 million
extraordinary loss on the extinguishment of debt. This loss was related to the
partial repayment and the amendment of the Senior Credit Facility in
connection with the June 1995 Notes Offering.
As a result of the factors discussed above, including the non-recurring
extraordinary loss referred to above, the net loss for the Company was $6.6
million for the year ended December 31, 1995, compared with a net loss of $8.4
million for the year ended December 31, 1994, a decrease of $1.8 million.
Broadcast cash flow was $64.2 million for the year ended December 31, 1995,
compared to $40.8 million for the year ended December 31, 1994, an increase of
$23.4 million, or 57.4%. Broadcast cash flow margins (broadcast cash flow
divided by net revenues) improved to 52.4% for the year ended December 31,
1995,
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<PAGE>
compared to 51.8% for the same period in 1994. The increase in broadcast cash
flow was a direct result of revenue growth and continued expense controls.
Approximately $20.1 million of the increase is attributable to the acquired
stations.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The following historical financial information include the results of the
stations acquired from Nationwide for the last 47 days of 1994, the period of
1994 following the Nationwide Acquisition.
Net revenues for the year ended December 31, 1994 were $78.8 million, an
increase of $17.0 million, or 27.5%, compared to $61.8 million for the year
ended December 31, 1993, with the acquired stations accounting for $5.6
million of such revenues. Improvement in both the national and various local
market economies led to an increase in the Company's national and local
revenue of 12.1% and 14.2%, respectively, for the stations owned prior to the
Nationwide Acquisition. Political revenue for the year ended December 31, 1994
was $4.5 million, compared to $379,000 for the year ended December 31, 1993.
Political revenues were particularly strong during the fourth quarter,
accounting for approximately 54% of total political revenues, because of the
elections taking place during the quarter. Total political revenues for the
Company's stations including the stations acquired from Nationwide, on a
combined basis, was $6.6 million in 1994, compared to $1.0 million in 1993, an
increase of $5.6 million. Network compensation in 1994 increased $1.2 million,
or 37.5%, with $393,000 of such increase attributable to the acquired stations
and $832,000 due to the new network compensation arrangements and other
adjustments at the stations owned prior to the Nationwide Acquisition.
Operating expenses, including selling, general and administrative expenses,
for the year ended December 31, 1994 were $33.8 million, compared to $28.5
million for the year ended December 31, 1993, an increase of $5.3 million, or
18.6%. Operating expenses at the acquired stations were $2.5 million, and the
remaining increase was primarily attributable to higher local sales
commissions resulting from higher sales volume and the addition of an early
morning news show at one of the Company's stations.
Amortization of program license rights for the year ended December 31, 1994
was $4.4 million, compared to $4.0 million for the year ended December 31,
1993, an increase of $400,000, or 10%. Amortization of program license rights
at the acquired stations was $285,000.
Depreciation of property and equipment and amortization of intangible assets
was $15.3 million for the year ended December 31, 1994, compared with $13.9
million for the comparable period in 1993, an increase of $1.4 million, or
10.1%. The increase results from depreciation and amortization at the acquired
stations of $1.2 million, partially offset by the completion of the
depreciation and amortization of certain items arising from the acquisition of
two stations in 1988.
The Company made payments for program license liabilities of $4.2 million
during the year ended December 31, 1994, compared to $4.0 million for the year
ended December 31, 1993, an increase of $200,000, or 5%. Payments associated
with the acquired stations were $205,000.
Corporate overhead for the year ended December 31, 1994 was $2.1 million,
compared to $1.4 million for the comparable period in 1993, an increase of
$702,000, or 50%. This increase was the result of additional personnel costs
in 1994.
Non-cash compensation paid in Common Stock for the year ended December 31,
1994 was $6.5 million, compared to zero for the year ended December 31, 1993.
This amount represents non-cash charges for the issuance in 1994 of shares of
Common Stock to key employees.
Net interest expense for the year ended December 31, 1994 was $19.1 million,
compared with $17.8 million for the comparable period in 1993, an increase of
$1.3 million, or 7.3%. The increase is primarily attributable to the Company's
higher debt level following the Financing Plan. Partially offsetting this
increase was a decrease
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<PAGE>
arising from the expiration in April 1994 of an unfavorable $25.0 million
interest rate swap agreement required under the Old Credit Facility. Interest
expense recognized in relation to this agreement was $1.6 million in 1993 and
$500,000 in 1994.
At December 31, 1994, the Company held a $25.0 million interest rate swap
agreement which expired on April 18, 1996. The interest expense resulting from
this swap agreement amounted to $1.6 million in 1993 and $1.4 million in 1994.
This interest rate swap agreement was the only derivative instrument held by
the Company at December 31, 1994. At December 31, 1994, fixed rate debt and
interest rate swap agreements comprised $145 million, or 47.5%, of the
Company's total debt.
Under the Financing Plan, in November 1994 the Company repaid all of its
then existing outstanding debt. Deferred charges of $2.7 million relating to
the Old Credit Facility were written off as part of an extraordinary loss on
early extinguishment of debt. In addition, $3.3 million of call premiums paid
to the holders of the Company's subordinated debt, which was repaid in
connection with the Financing Plan, were also included in this extraordinary
item.
As a result of the factors discussed above, the net loss for the Company was
$8.4 million for the year ended December 31, 1994, compared with $5.3 million
for the same period in 1993, an increase of $3.1 million. The 1994 net loss
includes the extraordinary non-recurring losses of $6.0 million, as described
above.
Broadcast cash flow for the year ended December 31, 1994 was $40.8 million,
compared with $29.3 million for the year ended December 31, 1993, an increase
of $11.5 million, or 39.2%. As a result, broadcast cash flow margins
(broadcast cash flow divided by net revenues) for the year ended December 31,
1994 increased to 51.8% from 47.5% for the same period in 1993. The increase
in broadcast cash flow was a direct result of revenue growth and continued
expense controls. Furthermore, approximately $2.8 million of broadcast cash
flow in 1994 was generated by the stations acquired from Nationwide.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operations and
funds available under the Senior Credit Facility.
The Company's senior credit facility (the "Senior Credit Facility")
currently provides for borrowings of up to an aggregate of $80.0 million in
the form of a revolving facility which matures on December 31, 2000. The
Company is permitted to borrow at any time up to $65.0 million of such $80.0
million for acquisitions meeting certain criteria which are approved by a
majority of the lenders under the Senior Credit Facility. Undrawn amounts
under such facility are available to the Company for working capital
requirements and general corporate purposes. As of June 30, 1996, there was
$25.4 million outstanding under the Senior Credit Facility.
The Company has entered into a commitment letter with certain of its
existing lenders pursuant to which the Senior Credit Facility will be amended
and restated (the "Amendment") to provide the Company with the ability to
borrow up to $500.0 million in the form of (i) a seven year reducing revolving
credit facility in the amount of $200.0 million (the "Revolver Facility") and
(ii) a seven year amortizing term loan facility in the amount of $300.0
million (the "Term Facility").
The Company will use $286.0 million of availability under the Term Facility,
the net proceeds of the Offerings ($162.0 million) and $3.8 million of its
existing cash balances to finance the KCAL Acquisition (having an expected
purchase price of approximately $368.0 million, plus an estimated $17.0
million for working capital) and the ABC Repurchase (having an estimated
purchase price of $54.8 million) and to pay approximately $12.0 million of
related fees and expenses. Until the net proceeds from the sale of the Class A
Common Stock offered hereby remaining after the ABC Repurchase are applied
toward the financing of the KCAL Acquisition, the Company expects to use
approximately $20.0 million of such net proceeds to repay in full the
outstanding principal indebtedness and accrued interest, determined as of
September 30, 1996, under the Senior Credit Facility. Pending its use, the
remaining net proceeds of approximately $87.2 million will be placed in an
interest-bearing bank account or invested in United States government
securities or other interest-bearing investment grade securities.
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<PAGE>
The Revolver Facility will have a $185.0 million sublimit (the "Sublimit")
for borrowings in connection with the acquisition of additional television
stations (and businesses, if any, incidental thereto) pursuant to transactions
which meet the following criteria: (i) each of the acquired stations will
become a wholly-owned subsidiary of the Company and will become a part of the
lenders' security package under the Senior Credit Facility, and (ii) the
Company can demonstrate that after giving pro forma effect to each such
acquisition (based upon assumptions, including identified cost savings, that
the agents for the lenders find reasonable), the Company will be in compliance
with all of the terms and conditions of the Senior Credit Facility and have a
total debt/operating cash flow ratio of less than 6.0x.
Pursuant to the Amendment, the Company will be prohibited from making
investments or advances to third parties exceeding $7.5 million in the
aggregate unless the third party becomes a guarantor of the Company's
obligations. However, the Company may utilize up to $20.0 million of its
borrowing availability under the Sublimit for the purpose of repurchasing
shares of Common Stock and for paying dividends, subject to the limitations
set forth in the Indentures, provided that the total debt/operating cash flow
ratio is less than 5.5x. In addition, the Company may utilize the undrawn
amounts under the Sublimit to retire or prepay subordinated debt, subject to
the limitations set forth in the Indentures, provided that the total
debt/operating cash flow ratio is less than 5.0x, or 4.5x after June 30, 2000;
if the ratio exceeds such amounts, the Company will be permitted to utilize
only up to $20.0 million of availability under the Sublimit. Undrawn amounts
under the Revolver Facility are available to the Company for working capital
requirements and general corporate purposes.
Pursuant to the Amendment, interest under the Senior Credit Facility will be
payable at the LIBOR rate, "CD Rate" or "Base Rate." In addition to the index
rates, the Company will pay a floating percentage tied to the Company's ratio
of total debt to operating cash flow; ranging, in the case of LIBOR rate
loans, from 1.25% based upon a ratio under 4:1 to 2.625% based upon a 6:5 or
greater ratio.
Each of the Subsidiaries has guaranteed the Company's obligations under the
Senior Credit Facility. The Senior Credit Facility is secured by the pledge of
all the stock of the Subsidiaries and a first priority lien on all of the
assets of the Company and its Subsidiaries.
The Senior Credit Facility imposes restrictions on the Company's ability to
incur additional indebtedness. Pursuant to the Amendment, the Company will be
permitted to incur, subject to the terms of the Indentures and satisfaction of
the financial covenants of the Senior Credit Facility, unsecured subordinated
debt, provided that the subordination and mandatory redemption provisions and
the maturity of such indebtedness are comparable to the Notes and that the
proceeds are used to repay the outstanding balance of the Term Facility until
the Company's debt to operating cash flow ratio is less than 4.5x. The Company
is also restricted as to the amount of its capital lease obligations and
guarantees. The Senior Credit Facility also restricts the ability of the
Company to amend material terms of the Indentures.
The Senior Credit Facility requires the Company to maintain certain
financial ratios. Pursuant to the Amendment, the Company's required total
debt/ and senior debt/operating cash flow ratios have been lowered. The
Company will be required to maintain a total debt/operating cash flow ratio
ranging from 6.75x upon the entering into of the Amendment to 4.50x during the
year 2000 and thereafter. The Company will also be required to maintain a
senior debt/operating cash flow ratio ranging from 3.75x commencing upon the
entering into of the Amendment to 2.25x during the year 2000 and thereafter.
Additionally, the Company will be required to maintain an operating cash
flow/total interest expense ratio ranging from 1.50x commencing upon the
entering into of the Amendment to 2.25x during the year 2000 and thereafter.
The Company will also be required to maintain an operating cash flow minus
capital expenditures to pro forma debt service ratio of no less than 1.10x at
any time. Such ratios must be maintained as of the last day of the quarter for
each of the periods.
The Senior Credit Facility requires the Company to apply on April 30 of each
year 50% or 75% (depending upon the level of the Company's total debt to
operating cash flow ratio at the end of such year) of its "Excess Cash Flow"
for the preceding completed fiscal year to reduce outstanding debt under the
Term Facility. In addition, the Company is required to apply from the proceeds
of any permitted equity issuance and certain subordinated debt issuances an
amount sufficient to reduce the Company's debt ratio to specified levels. The
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Senior Credit Facility also contains a number of customary covenants
including, among others, limitations on investments and advances, mergers and
sales of assets, liens on assets, affiliate transactions and changes in
business. The Company may, subject to the financial covenants of the Senior
Credit Facility, sell assets constituting less than 15% of its operating cash
flow.
The Company from time to time investigates alternatives for replacing or
refinancing its existing Senior Credit Facility. Any such replacement or
refinancing may or may not have terms and conditions, including restrictive
covenants and maintenance tests, similar to those in the Senior Credit
Facility.
Interest on the January 1996 Notes is payable semi-annually on January 15
and July 15, interest on the June 1995 Notes is payable semi-annually on
February 15 and August 15, and interest on the November 1994 Notes is payable
semi-annually on May 15 and November 15. The Indentures impose certain
limitations on the ability of the Company and certain of its Subsidiaries to,
among other things, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with
affiliates, incur indebtedness that is subordinate in right of payment to any
Senior Debt and senior in right of payment to the Notes, incur liens, 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.
A $5.0 million portion of the purchase price in connection with the
Nationwide Acquisition has been deferred (having a net present value as of
June 30, 1996, discounted at 11.9%, of $3.3 million) and is payable over the
remaining four-year period, without interest, in equal annual installments,
with the first such installment having been paid on November 14, 1995. The
Company paid a $3.0 million portion of the purchase price in connection with
the KELO Acquisition by delivery of a promissory note, the principal amount of
which will be payable in full on May 31, 1998, and which requires quarterly
payments of interest accruing at the prime rate.
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. At December 31,
1995, payments on program license liabilities due in 1996, which will be paid
with cash from operations, amounted to $5.8 million.
The Company anticipates that its operating cash flow, together with the
amounts available under the Senior Credit Facility, will be sufficient to
finance the operating requirements of its stations, debt service requirements
and anticipated capital expenditures.
The Company is regularly presented with opportunities to acquire television
stations which it evaluates on the basis of its acquisition strategy. Other
than the KCAL Acquisition, the Company does not presently have any agreements
to acquire any television stations. The KCAL Acquisition will be accounted for
as a purchase. If the Company were unable to consummate the KCAL Acquisition,
the Company would use the net proceeds of the Offerings intended therefor to
finance future acquisitions of television stations and for general working
capital purposes. It is anticipated that a substantial portion of the purchase
price will be allocated to intangible assets. Such intangible assets will be
amortized over their estimated lives which will not exceed 40 years. See
"Business--Acquisition Strategy."
INCOME TAXES
The Company and its Subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. The Company
anticipates making use of its net operating loss carry forward to the maximum
extent possible to reduce its future tax liabilities. Future utilization of a
significant portion of the Company's net operating losses for federal income
tax purposes will be subject to an annual limitation. See Note 11 to Notes to
the Company's Consolidated Financial Statements.
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<PAGE>
BUSINESS
The Company owns and operates eleven network-affiliated television stations
in geographically diverse markets. Six of the stations are affiliated with
ABC, four are affiliated with CBS and one is affiliated with NBC. The Company
is presently the seventh largest ABC network affiliate group in terms of
households reached and owns more ABC stations than any single operator other
than ABC. The Company has agreed to acquire KCAL, the only independent VHF
television station operating in the Los Angeles market, which is ranked as the
second-largest television market in terms of population and the largest in
terms of estimated television revenue. For the twelve months ended June 30,
1996, after giving pro forma effect to the KCAL, Quad Cities and KELO
Acquisitions (including annualized net expense reductions) and the New WTVO
Affiliation Agreement as if such transactions had occurred on July 1, 1995,
the Company would have had net revenues and broadcast cash flow of $268.8
million and $126.4 million, respectively.
The Company was founded in 1986 by Vincent Young and his father, Adam Young.
Vincent Young, the Company's Chairman, has over 25 years of experience in the
television broadcast industry, and Adam Young has over 50 years of experience
in the industry. Ronald Kwasnick, the Company's President, has over 25 years
of experience in the industry. The following table sets forth certain
information for each of the Company's stations, after giving pro forma effect
to the KCAL, Quad Cities and KELO Acquisitions and the New WTVO Affiliation
Agreement.
<TABLE>
<CAPTION>
PRO FORMA
NET REVENUES FOR
TWELVE MONTHS ENDED
JUNE 30, 1996
-------------------------
YEAR NETWORK MARKET PERCENTAGE OF
STATION ACQUIRED AFFILIATION MARKET RANK AMOUNT TOTAL
------- -------- ----------- ------------------------------- ------ ----------- -------------
(DOLLARS IN
MILLIONS)
<C> <C> <S> <C> <C> <C> <C>
KCAL (1) IND Los Angeles, California 2 $120.0 44.6%
WKRN 1989 ABC Nashville, Tennessee 33 23.5 8.9
WTEN 1989 ABC Albany, New York 52 15.9 5.9
WRIC 1994 ABC Richmond, Virginia 54 16.8 6.3
WATE 1994 ABC Knoxville, Tennessee 62 14.7 5.4
WBAY 1994 ABC Green Bay, Wisconsin 71 14.2 5.3
KWQC 1996 NBC Quad Cities 88 13.5 5.0
KELO 1996 CBS Sioux Falls, South Dakota 105 12.1 4.5
WLNS 1986 CBS Lansing, Michigan 106 13.2 4.9
KLFY 1988 CBS Lafayette, Louisiana 121 13.7 5.1
WKBT 1986 CBS La Crosse-Eau Claire, Wisconsin 135 4.7 1.7
WTVO 1988 ABC Rockford, Illinois 136 6.5 2.4
------ ----
$268.8 100%
====== ====
</TABLE>
- --------
(1) To be acquired pursuant to the KCAL Acquisition.
The Company continually seeks to increase its revenues and broadcast cash
flow. In each of the past four fiscal years, the Company has achieved
broadcast cash flow margins of approximately 45% or more. Net revenues
increased by 55.5% and broadcast cash flow increased by 57.2% for the year
ended December 31, 1995, compared to the year ended December 31, 1994 (with
the 1994 results including the performance of the stations acquired in 1994
pursuant to the Nationwide Acquisition for only the last 47 days of the
period).
OPERATING STRATEGY
The Company's operating strategy focuses on increasing the cash flow of its
stations through advertising revenue growth and strict control of programming
and operating costs. The components of this strategy include the following:
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Targeted Marketing. The Company seeks to increase its revenues and broadcast
cash flow by expanding existing relationships with local and national
advertisers and attracting new advertisers through targeted marketing
techniques and carefully tailored programming. The Company works closely with
advertisers to develop campaigns that match specifically targeted audience
segments with the advertisers' overall marketing strategies. With this
information, the Company regularly refines its programming mix among network,
syndicated and locally-produced shows in a focused effort to attract audiences
with demographic characteristics desirable to advertisers. The Company's
success in increasing local advertising revenues is also attributable, in
part, to the upgrading of its local sales staff, performance-based
compensation arrangements and the implementation of systems of performance
accountability. Each station also benefits from the ongoing exchange of ideas
and experiences with the other stations. As a result of this marketing effort,
during the year ended December 31, 1995, the Company's stations recorded
approximately $11.0 million from new accounts.
The Company's stations utilize a variety of marketing techniques to increase
advertising revenues, including the following:
. Vendor Marketing. The Company's "vendor marketing" program has
experienced a great deal of success in the Company's markets. Under this
program, a station will contact the vendors of a particular store chain
and arrange for the vendors to purchase advertising for the store chain
in exchange for the store's commitment to purchase additional products
from the vendors. The result is that both the vendors' products and the
store chain are advertised, with the vendors collectively bearing the
cost of the advertisement.
. Live Remotes. Stations obtain premium advertising dollars by utilizing
live remotes on location at the offices or facilities of an advertiser.
The station will use its own staff and broadcasting equipment and, as a
result, the expense to the station is relatively low. Live
advertisements are broadcast continually over the course of a period of
the day and tend to show immediate results with viewers being attracted
to the live television event taking place within their community.
. Research. Each station designates personnel to research the amount of
advertising dollars expended in other media (such as radio, newspapers
and magazines) by advertisers within its market. The station will then
target individual advertisers seeking the same demographic groups sought
by the station for particular dayparts and will illustrate to the
advertisers the advantages of television advertising over other media
which do not target specific demographic groups.
An important element in determining advertising rates is the station's
rating and share among a particular demographic group which the advertiser may
be targeting. The Company believes that its success is attributable to its
ability to reach desirable demographic groups with the programs it broadcasts.
Strong Local Presence. Each station seeks to achieve a distinct local
identity principally through the quality of its local news programming and by
targeting specific audience groups with special programs and marketing events.
Each station's local news franchise is the foundation of the Company's
strategy to strengthen audience loyalty and increase revenues and broadcast
cash flow for each station. Strong local news generates high viewership and
results in higher ratings both for programs preceding and following the news.
Strong local news product helps differentiate local broadcast stations from
cable system competitors, which generally do not provide this service. The
cost of producing local news programming generally is lower than other sources
of programming and the amount of local news programming can be increased for
very modest incremental increases in cost. Moreover, such programming can be
increased or decreased on very short notice, providing the Company with
greater programming flexibility.
In each of its markets, the Company develops additional information-oriented
programming designed to expand the Company's hours of commercially valuable
local news and other news programming with relatively small increases in
operating expenses. In addition to local news, each station utilizes special
programming and marketing events, such as prime time programming of local
interest or sponsored community events, to strengthen community relations and
increase advertising revenues. The Company places a special emphasis on
41
<PAGE>
developing and training its local sales staff to promote involvement in
community affairs and stimulate the growth of local advertising sales.
Programming. The Company continually reviews its existing programming
inventory and seeks to purchase the most profitable and cost-effective
syndicated programs available for each time period. In developing its
selection of syndicated programming, management balances the cost of available
syndicated programs, their potential to increase advertising revenue and the
risk of reduced popularity during the term of the program contract. The
Company seeks to purchase only those programs with contractual periods that
permit programming flexibility and which complement a station's overall
programming strategy and counter competitive programming. Programs that can
perform successfully in more than one time period are more attractive due to
the long lead time and multi-year commitments inherent in program purchasing.
Cost Controls. Each station emphasizes strict control of its programming and
operating costs as an essential factor in increasing broadcast cash flow.
The Company relies primarily on its in-house production capabilities and
seeks to minimize its use of outside firms and consultants. The Company's size
benefits each station in negotiating favorable terms with programming
suppliers and other vendors. In addition, each station reduces its corporate
overhead costs by utilizing the group benefits provided by the Company for all
of the stations, such as insurance and other employee group benefit plans.
Through its strategic planning and annual budget processes, the Company
continually seeks to identify and implement cost savings opportunities at each
of its stations. The Company closely monitors the expenses incurred by each of
the stations and continually reviews the performance and productivity of
station personnel. The Company has been successful in controlling its costs
without sacrificing revenues through efficient use of its available resources.
ACQUISITION STRATEGY
The Company believes that its ability to manage costs effectively while
enhancing the quality provided to station viewers gives the Company an
important advantage in acquiring and operating new stations. In assessing
acquisitions, the Company targets stations for which it has identified line
item expense reductions that can be implemented upon acquisition. The Company
emphasizes strict controls over operating expenses as it expands a station's
revenue base with the goal of improving a station's broadcast cash flow.
Typical cost savings arise from reducing staffing levels, substituting more
cost-effective employee benefit programs, reducing dependence on outside
consultants and research firms and reducing travel and other non-essential
expenses. The Company also develops specific proposals for revenue enhancement
utilizing management's significant experience in local and national
advertising. The Company believes that the results of the stations acquired
pursuant to the Nationwide Acquisition represent a prime example of the
success of the Company's acquisition strategy. See "The Company."
The Company plans to pursue favorable acquisition opportunities as they
become available. The Company is regularly presented with opportunities to
acquire television stations which it evaluates on the basis of its acquisition
strategy. Other than the KCAL Acquisition, the Company does not presently have
any agreements to acquire any television stations. As of June 30, 1996, on a
pro forma basis giving effect to the Offerings, the KCAL Acquisition (and
anticipated related borrowings) and the Amendment as if such transactions had
occurred on such date, the Company would have had the ability, subject to
certain limitations, to borrow up to approximately $185.0 million under the
Senior Credit Facility for the purpose of financing acquisitions. If the
Company is unable to consummate the KCAL Acquisition, the Company would use
the net proceeds of the Offerings to finance future acquisitions of television
stations and for general working capital purposes.
THE KCAL ACQUISITION
On May 10, 1996, the Company entered into an agreement to acquire from KCAL
Broadcasting, Inc., a subsidiary of Disney, the assets of television station
KCAL, Los Angeles, California. KCAL, transmitting on Channel 9, is the only
independent VHF television station in Los Angeles. Los Angeles is ranked as
the second-largest television market in terms of population and the largest in
terms of estimated television revenue. The
42
<PAGE>
purchase price that the Company has agreed to pay for the KCAL assets and for
the stock of a Disney subsidiary which holds the FCC licenses issued for KCAL
is $368.0 million payable in cash, plus an estimated $17.0 million for net
working capital included as part of the purchased assets. The purchase price
will be adjusted to the extent that such working capital is greater or less
than $17.0 million on the closing date.
The Company intends to finance the KCAL Acquisition with the net proceeds of
the Offerings, borrowings under the Senior Credit Facility and its existing
cash balances. See "Use of Proceeds." Prior to or concurrently with the
closing of the KCAL Acquisition, the Company will assign all of its rights to
acquire KCAL and the stock of the Disney subsidiary holding its FCC licenses
to a newly formed wholly-owned subsidiary of the Company.
For the twelve months ended June 30, 1996, KCAL generated aggregate net
revenues of approximately $121.4 million and broadcast cash flow of
approximately $17.0 million, resulting in a broadcast cash flow margin of
approximately 14.0%. Based upon its review of current operating budgets and
expenses and 1995 operating results of KCAL, the Company has identified, on a
line item basis for the twelve months ended June 30, 1996, annualized expense
reductions of approximately $20.9 million for personnel and other costs and
$10.6 million of net programming cost savings associated with seven sitcom
programs, the liabilities for which are not being assumed by the Company in
connection with the KCAL Acquisition. See "Forward-Looking Statements." Such
reductions are in the area of advertising and promotion, programming costs
under contracts which the seller will be retaining, purchased services and
personnel. The Company has also identified other means for improvement
consistent with its operating strategy which are expected to enhance the
operating performance of KCAL and result in further increases in broadcast
cash flow margins. See "Forward-Looking Statements." Based upon the
performance of KCAL for the twelve months ended June 30, 1996, after giving
pro forma effect to the KCAL Acquisition (including annualized net expense
reductions), the purchase price therefor represents a multiple of
approximately 7.6 times broadcast cash flow for KCAL for such period.
On June 26, 1996, the FCC released a public notice announcing its acceptance
for filing of the application for transfer of control of the KCAL FCC licenses
to the Company's newly formed subsidiary. The application did not contain any
request for waivers of FCC rules. The application, however, did include an
analysis by the Company of why certain non-voting equity interests currently
held by ABC in the Company do not implicate the FCC's cross-interest policy.
Under its cross-interest policy, the FCC examines, on an ad hoc basis, whether
certain relationships not expressly covered by the multiple ownership rules,
such as holding an attributable interest in one media property while also
holding a nonattributable interest in another media property in the same
geographic area, still raise any regulatory concerns. The policy is addressed
in the Company's KCAL application because ABC, now owned by Disney, is the
licensee of a television station and 3 radio stations in Los Angeles,
California. On July 26, 1996, the National Hispanic Media Coalition ("NHMC")
filed with the FCC a petition to deny the KCAL transfer application in large
part because of ABC's interest in Young. On that same date, NBC Subsidiary
(KNBC-TV), Inc. filed a letter with the FCC requesting that the Commission
impose specific safeguards to ensure that Disney's relationship with the
Company does not adversely affect competition in the Los Angeles market. The
Company filed oppositions to both filings. On September 20, 1996, the FCC
granted the application for consent to the transfer of control of the Disney
subsidiary which holds the KCAL FCC licenses to a wholly-owned subsidiary of
the Company. The FCC denied NHMC's petition and determined that it did not
need to impose the safeguards requested by KNBC-TV.
THE STATIONS
The Company's stations are geographically diverse, which minimizes the
impact of regional economic downturns. Six stations are located in the midwest
region (WBAY-Green Bay, Wisconsin, KWQC-Quad Cities, KELO-Sioux Falls, South
Dakota, WLNS-Lansing, Michigan, WKBT-La Crosse-Eau Claire, Wisconsin, and
WTVO-Rockford, Illinois), four stations are in the southeast region (WKRN-
Nashville, Tennessee, WRIC-Richmond, Virginia, WATE-Knoxville, Tennessee, and
KLFY-Lafayette, Louisiana), and one station is in the northeast region (WTEN-
Albany, New York). KCAL is located in the west region.
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Six of the Company's eleven stations are affiliated with ABC, four are
affiliated with CBS and one is affiliated with NBC. The Company believes that
this network diversity reduces the potential impact of a ratings decline
experienced by a particular network. KCAL is the only independent VHF
television station operating in the Los Angeles market.
The following table sets forth general information for each of the Company's
stations and the station to be acquired pursuant to the KCAL Acquisition:
<TABLE>
<CAPTION>
STATION
COMMERCIAL RANK
MARKET TELEVISION NETWORK STATIONS IN IN-MARKET YEAR
STATION MARKET RANK(1) HOUSEHOLDS(2) CHANNEL AFFILIATION IN DMA(3) MARKET(4) SHARE(5) ACQUIRED
------- ------------------------ ------- ------------- ------- ----------- ---------- --------- --------- --------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
KCAL Los Angeles, CA 2 4,917,550 9 IND 12 7 9 (6)
WKRN Nashville, TN 33 765,870 2 ABC 5 3 21 1989
WTEN Albany, NY 52 507,120 10(7) ABC 4 3 25 1989
WRIC Richmond, VA 54 500,720 8 ABC 5 3 26 1994
WATE Knoxville, TN 62 429,250 6 ABC 4 2 25 1994
WBAY Green Bay, WI 71 372,100 2 ABC 5 2 29 1994
KWQC Quad Cities 88 299,400 6 NBC 4 1 45 1996
KELO Sioux Falls, SD 105 228,730 11(8) CBS 4 1 49 1996
WLNS Lansing, MI 106 228,540 6 CBS 4 1 42 1986
KLFY Lafayette, LA 121 201,050 10 CBS 3 1 57 1988
WKBT La Crosse-Eau Claire, WI 135 165,200 8 CBS 4 2 28 1986
WTVO Rockford, IL 136 163,880 17 ABC 4 3 25 1988
</TABLE>
- --------
(1) Refers to the size of the television market or Designated Market Area
("DMA") as used by Nielsen.
(2) Refers to the number of television households in the DMA as estimated by
Nielsen.
(3) Represents the number of television stations ("reportable stations")
designated by Nielsen as "local" to the DMA, excluding public television
stations and stations which do not meet minimum Nielsen reporting
standards (weekly cumulative audience of less than 2.5%) for reporting in
the Sunday through Saturday, 7:00 a.m. to 1:00 a.m. period ("sign-on to
sign-off"). Does not include national cable channels. The number of
reportable stations may change for each reporting period. "Weekly
cumulative audience" measures the total number of different households
tuned to a station at a particular time during the week. "Share"
references used elsewhere herein measure the total daily households tuned
to a station at a particular time during the week.
(4) Station's rank relative to other reportable stations, based upon the DMA
rating as reported by Nielsen sign-on to sign-off during May 1996.
(5) Represents an estimate of the percentage share of DMA households viewing
television received by a local commercial station in comparison to other
local commercial stations in the market ("in-market share"), as measured
sign-on to sign-off.
(6) To be acquired pursuant to the KCAL Acquisition.
(7) WTEN has a satellite station, WCDC (Adams, Massachusetts), Channel 19,
operating under a separate license from the FCC.
(8) KELO has two satellite stations, KDLO (Florence, South Dakota), Channel 3,
and KPLO (Reliance, South Dakota), Channel 6, each of which operates under
a separate license from the FCC. KCLO (Rapid City, South Dakota), Channel
15, was acquired by the Company together with the assets of KELO and
operates in a separate DMA (rank 173) from that of KELO and its two
satellites.
The following is a description of each of the Company's stations and the
station to be acquired pursuant to the KCAL Acquisition:
KCAL, Los Angeles, California. The Company has agreed to acquire KCAL from a
subsidiary of Disney. KCAL has the distinction of being one of the first
commercial stations in the country. KCAL's first broadcast was on December 23,
1931. It is now the only independent VHF station in the Los Angeles market.
Los Angeles is the second largest DMA with an estimated 4,917,550 television
households and the country's largest television market in terms of estimated
advertising dollars spent on the medium. There are twelve reportable stations
in the DMA. For the May 1996 ratings period, KCAL was rated seventh after the
local ABC, NBC, CBS, WB and Fox affiliates and an independently programmed
Spanish language station, with an overall sign-on to sign-off in-market share
of 9%. KCAL ranked fifth in in-market revenue share in each of the last
quarter of 1995 and the first quarter of 1996.
KCAL is a prominent news provider in the market, presenting 27 hours of such
programming each week and up to 15 special one hour reports each year. In
1995, the station won the prestigious Edward R. Murrow Award as the "Best
Local Newscast in the Country." During the same year, KCAL was honored with
nine Golden Mikes, ten Emmys, six Radio Television News Directors awards
(three each for national and regional categories), seven New York Film
Festival Awards and 22 Associated Press Awards. Since 1991, KCAL has been the
most honored local station in Los Angeles for news.
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KCAL is also the broadcast station of choice for premier local sports
franchises with over 130 major televised sporting events each year. KCAL
currently has long term agreements with the Los Angeles Lakers (4 years
remaining), California Angels (5 years remaining) and Mighty Ducks of Anaheim
(2 years remaining). The station also has agreements to broadcast PAC 10
Football and certain boxing events. These contracts enable KCAL to offer
advertisers year-round sports packages aimed at very attractive audience
categories.
As the largest market in the country's largest state, Los Angeles enjoys a
diverse industry makeup ranging from entertainment and manufacturing to
international trade and financial services. In addition to Los Angeles County,
KCAL reaches Orange, Santa Barbara and other counties in Southern California.
Orange County alone has ranked fifth, nationally, in both population and
population growth over the last five years. According to Investing in
Television Market Report '96 (2nd Edition), published by BIA Publications,
Inc. (the "BIA Guide"), the average household income in the Los Angeles market
in 1994 was $52,378, with an effective buying income projected to grow at an
annual rate of 2.5% through 1999. Historically, there has been a close
correlation between retail sales and expenditures on broadcast television
advertising in a given market. According to the BIA Guide, retail sales growth
for the Los Angeles market is projected to average 0.5% annually through 1999.
WKRN, Nashville, Tennessee. WKRN, acquired by the Company from Knight-Ridder
Broadcasting, Inc. in June 1989, began operations in 1953 and is affiliated
with ABC. The Nashville market is the 33rd largest DMA, with an estimated
765,870 television households. There are five reportable stations in the DMA.
For the May 1996 ratings period, WKRN was rated third after the NBC and CBS
affiliates, with an overall sign-on to sign-off in-market share of 21%. The
station's syndicated programs include The Cosby Show, Roseanne, Coach, Full
House, M*A*S*H, The Maury Povich Show, Entertainment Tonight, Live With Regis
and Kathie Lee, Family Matters, Step by Step, Extra and Rosie.
The quality of the station's newscasts has been regularly recognized by its
broadcasting peers, highlighted by its winning of the prestigious Peabody
Award for investigative journalism. During the last three years, the station
won a combined 28 regional Emmy Awards. The Tennessee Associated Press awarded
the station first place for Investigative, Feature and Spot News reporting.
The station also has won a number of regional awards from the Radio and
Television News Directors Association, including 1994 awards for Best Feature,
Best News Operation and Best Investigative Reporting.
Nashville is the capital of Tennessee and the center of local, state and
federal government with three of its five largest employers being government
related. Prominent corporations located in the area include Bridgestone-
Firestone, Nissan, Saturn, Columbia/HCA, Shoney's, Service Merchandise, First
American National Bank, Northern Telecom, Aladdin Industries and Willis
Corroon plc. Nashville is the home of several universities, including
Vanderbilt and Tennessee State. According to the BIA Guide, the average
household income in the Nashville market in 1994 was $41,613, with effective
buying income projected to grow at an annual rate of 5.6% through 1999.
Historically, there has been a close correlation between retail sales and
expenditures on broadcast television advertising in a given market. According
to the BIA Guide, retail sales growth for the Nashville market is projected to
average 5.8% annually through 1999.
WKRN is a prime example of the Company's strategy to achieve a strong local
presence. Its community activities range from raising food for the hungry of
Middle Tennessee to focusing on the issues and concerns of children through
its "Kids 2 Kids" campaign and "Schools Now" half million dollar fund raising
effort.
ABC affiliates in Bowling Green, Kentucky and Jackson, Tennessee have
overlapping signals with WKRN on the north and west edges of the DMA,
resulting in some loss of viewers in those areas. The Company believes this
overlap is responsible for the lower station share compared to the NBC and CBS
affiliates.
WTEN, Albany, New York. WTEN, acquired by the Company from Knight-Ridder
Broadcasting, Inc. in October 1989, began operations in 1953 and is affiliated
with ABC. WTEN added a satellite station, WCDC-TV Channel 19, in Adams,
Massachusetts in 1963 to serve more adequately the eastern edge of the market.
WCDC-TV was acquired concurrently with WTEN. (All references to WTEN include
WCDC-TV.)
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The Albany market (which includes Schenectady and Troy) is the 52nd largest
DMA, with an estimated 507,120 television households. There are four
reportable stations in the DMA, three of which broadcast in the VHF spectrum.
During the May 1996 ratings period, WTEN was third in the ratings, with a
sign-on to sign- off in-market share of 25%, compared to 35% for WNYT, the NBC
affiliate, and 32% for WRGB, the CBS affiliate. The station's syndicated
programs include Wheel of Fortune, Jeopardy, Day & Date, Coach and Full House
and Rosie. WTEN has won numerous awards in recent years for both local news
and public affairs programming.
Albany is the capital of New York. The largest employers are the New York
State government, the State University of New York and the General Electric
Company. Other prominent corporations located in the area include Lockheed
Martin, Fleet Financial Group, State Farm Insurance, Metropolitan Life
Insurance and Quad Graphics. These employers, which are dependent upon a well-
educated and skilled labor force to remain competitive in their industries,
are able to draw upon the nation's largest concentration per capita of
professionals with doctoral and post-doctoral degrees. According to the BIA
Guide, the average household income in the Albany market in 1994 was $45,705,
with effective buying income projected to grow at an annual rate of 3.5%
through 1999. Retail sales growth in this market is also projected by the BIA
Guide to average 3.6% annually during the same period.
The station has focused on its local newscasts in achieving continued
revenue growth. Since its acquisition by the Company in 1989, the station has
increased local news programming by 100%. The morning newscast was increased
to an hour in September 1994, which has doubled the amount of saleable
advertising time spots. The early evening newscast continues to be the top
rated program for its time period.
WRIC, Richmond, Virginia. WRIC, acquired by the Company in November 1994
from Nationwide, began operations in 1955 and is affiliated with ABC. The
Richmond market (which also includes Petersburg, Virginia) is the 54th largest
DMA, with an estimated 500,720 television households. There are five
reportable commercial television stations in the DMA, three of which are VHF
stations. For the May 1996 ratings period, WRIC was in third place in the
ratings, eight points behind WTVR and five behind WWBT, the CBS and NBC
affiliates. In actual audience share, WRIC was slightly behind WTVR and WWBT,
with a sign-on to sign-off in-market share of 26%, compared to 34% for WTVR
and 31% for WWBT. The station's syndicated programming includes Wheel of
Fortune, Jeopardy, Montel Williams, Ricki Lake and EXTRA. WRIC has won
numerous awards in recent years from state journalism organizations for its
news operations.
Richmond is the capital of Virginia and home to numerous colleges and
universities, including the University of Richmond, Virginia Commonwealth
University (VCU) and the VCU Medical College of Virginia. Philip Morris is the
largest employer in the market, employing approximately 11,000 area residents.
According to the BIA Guide, the average household income in the Richmond
market in 1994 was $43,317, with effective buying income projected to grow at
an annual rate of 3.7% through 1999. Retail sales growth is also projected by
the BIA Guide to average 5.6% annually during the same period.
WATE, Knoxville, Tennessee. WATE, also acquired by the Company in November
1994 from Nationwide, began operations in 1953 and is also affiliated with
ABC. The Knoxville, Tennessee market is the 62nd largest DMA, with an
estimated 429,250 television households. There are four reportable stations in
the DMA, three of which are VHF stations. During the May 1996 ratings period,
WATE ranked second, with a sign-on to sign-off in-market share of 25%. The
station's syndicated programming includes Roseanne, Home Improvement, Jenny
Jones, Coach, Matlock and A Current Affair. WATE has won numerous awards in
recent years from state journalism organizations for its news operations.
According to the BIA Guide, the average household income in the Knoxville
market in 1994 was $37,005 with effective buying income projected to grow at
an annual rate of 5.2% through 1999. Retail sales growth is also projected by
the BIA Guide to average 5.2% annually during the same period.
WBAY, Green Bay, Wisconsin. WBAY, the third station acquired by the Company
in November 1994 from Nationwide, began operations in 1953 and is also
affiliated with ABC. The Green Bay market (which also includes Appleton,
Wisconsin) is the 71st largest DMA, with an estimated 372,100 television
households. There
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<PAGE>
are five reportable stations in the DMA, three of which are VHF stations. For
the May 1996 ratings period, WBAY was second in the ratings behind WFRV, the
CBS affiliate. In audience share, WFRV led WBAY in the May 1996 ratings
period, with a sign-on to sign-off in-market share of 35%, compared to 29% for
WBAY. The station's syndicated programming includes Home Improvement,
Seinfeld, Roseanne, Inside Edition, Ricki Lake, A Current Affair and Jenny
Jones. WBAY has won numerous awards in recent years from state journalism
organizations for its news operations.
According to the BIA Guide, the average household income in the Green Bay
market in 1994 was $42,159, with effective buying income projected to grow at
an annual rate of 4.6% through 1999. Retail sales growth is also projected by
the BIA Guide to average 5.6% annually during the same period.
KWQC, Quad Cities. The Company acquired KWQC from Broad Street Television,
L.P. on April 15, 1996. The station began operations in 1949 and is affiliated
with NBC. The Davenport market, referred to as the Quad Cities Market, is the
88th largest DMA serving an estimated 299,400 television households in eastern
Iowa and western Illinois. There are four reportable stations in the DMA,
three of which are VHF. During the May 1996 ratings period, KWQC retained its
number one position in the market with a sign-on to sign-off in-market share
of 45%. The station has retained the number one position for over twelve years
and continues to expand news programming and increase market share. The
station's syndicated programming includes Oprah, Jeopardy, Wheel of Fortune,
Sally Jesse Raphael, American Journal and Cheers.
KWQC places a strong emphasis on local news and community related events and
broadcasts. The station annually produces several news specials in addition to
providing 21 hours of local news and information programming per week. KWQC is
involved in a variety of community events including Race For The Cure, Toys
For Tots, Festival of Trees, The Student Hunger Drive, the United Way Drive,
Bix 7 Race and Women's Lifestyle Fair.
John Deere Corporation and Eagle Country Markets are both headquartered in
the Quad Cities. Other major employers include the Rock Island Arsenal, Alcoa,
Trinity Medical Center, Oscar Mayer, J.I. Case and Modern Woodman. Riverboat
gambling has brought three boats to the market that have increased the tourism
business. The market has also experienced an increase in convention business.
According to the BIA Guide, the average household income in the Quad Cities
market in 1994 was $40,086, with effective buying income projected to grow at
an annual rate of 3.0% through 1999. Retail sales growth is also projected by
the BIA Guide to average 4.8% annually during the same period.
KELO, Sioux Falls, South Dakota. On May 31, 1996, the Company acquired KELO
from a subsidiary of Midcontinent Media, Inc. The station began operations in
1953 and is affiliated with CBS. KELO added satellite station KDLO, Channel 3,
in Florence, South Dakota in 1955 to serve the northern South Dakota area, and
added satellite station KPLO, Channel 6, in Reliance, South Dakota in 1957 to
serve the central South Dakota area. In 1988, KCLO, Channel 15, then operating
as a translator facility, was added as a satellite station of KELO in Rapid
City, South Dakota. KELO fully serves two DMAs, as Rapid City is a separate
contiguous DMA. (All references to KELO include KDLO and KPLO. The following
information pertains only to the Sioux Falls DMA.)
The Sioux Falls market is the 105th largest DMA serving an estimated 228,730
television households encompassing counties in Minnesota, Iowa and Nebraska,
as well as 52 counties within South Dakota. There are four reportable stations
in the DMA, three of which are VHF. During the May 1996 ratings period, KELO
was first in the market with a sign-on to sign-off in-market share of 49%,
significantly ahead of the ABC, NBC and FOX affiliates, who had 29%, 18% and
7%, respectively. KELO's newscast finished ahead of each of the competing
stations for every weekday newscast time period. Recognizing the importance of
local news, the station presents live newscasts five times daily, with notable
ratings and sales success. The station's syndicated programming includes
Entertainment Tonight, The Maury Povich Show, Day and Date, M*A*S*H, Rescue
911 and Lonesome Dove.
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The largest employers in the market are Citibank and John Morrell. Sioux
Falls is the largest city in South Dakota, with a population of 112,000.
Taxable sales have grown at an average rate of 9% annually since 1990, and
unemployment is at a relatively low 2.4%.
According to the BIA Guide, the average household income in the Sioux Falls
market in 1994 was $42,726, with effective buying income projected to grow at
an annual rate of 4.9% through 1999. Retail sales growth is also projected by
the BIA Guide to average 6.9% annually during the same period.
WLNS, Lansing, Michigan. WLNS, acquired by the Company from Backe
Communications, Inc. in September 1986, began operations in 1950 and is
affiliated with CBS. The Lansing market is the 106th largest DMA, with an
estimated 228,540 television households. WLNS is one of only two VHF network
affiliates in the DMA. During the May 1996 ratings period, WLNS was the
highest-rated station out of four reportable stations in its DMA, with a sign-
on to sign-off in-market share of 42%. The station has consistently held the
highest rating for several ratings periods. The station's syndicated
programming includes Entertainment Tonight, Hard Copy, The Maury Povich Show,
A Current Affair, The Cosby Show and Murphy Brown. The ratings of the
station's late night programming and late evening newscast have received a
boost from CBS's addition of Late Show With David Letterman, which outpaces
NBC's The Tonight Show With Jay Leno by a 2 to 1 margin in the station's
market.
The station attributes its success to the experience of its local sales
staff, which focuses on developing strong relationships with local
advertisers. WLNS is also recognized as the dominant news station in the
Lansing market. The station consistently wins by wide margins against
competitors in its noon and 6:00 p.m. newscasts. For the February 1996 ratings
period, WLNS's newscasts finished ahead of its closest competitor by 20 share
points at noon and 19 share points at 6:00 p.m. The station also won at 11:00
p.m. WLNS launched the market's first 5:30 p.m. newscast in 1989, which has
since developed a solid audience share and has consistently held the greatest
share in its time period. The station's recently added 6:00 a.m. newscast has
surpassed its competition by wide margins. The station recognizes local news
programming as the key to its success and produces 18 to 20 special news
programs each year, including live town hall meetings in prime time on
community topics such as youth violence and political debates in major
election years. The quality of the news broadcasts at WLNS has resulted in
numerous state journalism and public service awards.
The economy of Lansing is dominated by three employers, the State of
Michigan, General Motor's Buick-Oldsmobile-Cadillac Division ("B.O.C.") and
Michigan State University, giving Lansing an advantage over other Michigan
cities whose economies rely more heavily on, and are more prone to the
cyclical nature of, the domestic automobile industry. Lansing is the capital
of Michigan and its various government agencies employ an aggregate of
approximately 15,500 people. B.O.C. has approximately 17,000 employees.
Michigan State University has over 12,000 employees with a student enrollment
of over 42,000. Other significant industry sectors in the area are plastics,
non-electrical machinery, fabricated metal products, food processing and
printing. Companies represented in these groups include Owens-Brockway, John
Henry Co. and Dart Container. According to the BIA Guide, the average
household income in the Lansing market in 1994 was $46,143, with effective
buying income projected to grow at an annual rate of 3.8% through 1999. Retail
sales growth in this market is also projected by the BIA Guide to average 5.6%
annually during the same period.
KLFY, Lafayette, Louisiana. KLFY, acquired by the Company from Texoma
Broadcasters, Inc. in May 1988, began operations in 1955 as the market's first
television station and is affiliated with CBS. KLFY is one of only two
network-affiliated VHF stations serving the Lafayette market. The third
commercial station in the market is a Fox affiliate operating on a UHF channel
and a fourth Station, KLAF, is a lower power station affiliated with the
Warner Brothers Network. The market is dominated by KLFY and the local ABC
affiliate. The signals from the NBC affiliates in Lake Charles, Baton Rouge
and Alexandria, Louisiana are available to households in the DMA. Currently
the NBC affiliate in Lake Charles is selling advertising in the Lafayette
market with minimal success.
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The Lafayette market is the 121st largest DMA, with an estimated 201,050
television households. KLFY ranks first in the May 1996 ratings period with an
overall sign-on to sign-off in-market share of 57%, and has ranked first in
those viewership measurements consistently for prior ratings periods. KLFY
leads its competition in audience share in 26 of 30 major Nielsen dayparts.
KLFY is ranked number one during prime-time (7:00 p.m.-10:00 p.m., Monday-
Saturday and 6:00 p.m.-10:00 p.m., Sunday), the most sought after advertiser
demographic time period, with a sign-on to in-market share of 53%. The
station's syndicated programs include The Maury Povich Show, Home Improvement,
Day & Date, Cosby, Coach and Rosie. KLFY has also benefitted from the addition
of Late Show With David Letterman.
Historically, KLFY has placed a strong emphasis on local news and community-
related broadcasts. Each weekday begins with a 90-minute live production of
"Passe Partout," a family-oriented program offering early morning news,
weather, sports and interviews on subjects relevant to local residents. For
the February 1996 ratings period, this program received a sign-on to sign-off
in-market share of 64%. The first 30 minutes of "Passe Partout" are broadcast
in French for the large French-speaking Cajun population in the area; the
balance is in English. KLFY also has won numerous awards in recent years from
state journalism organizations, including the 1995 "Station of the Year" award
from the Louisiana Broadcasters Association.
KLFY has made community involvement an important part of its operations. The
12:00 noon news show is called "Meet Your Neighbor" and, in addition to an
emphasis on local news reporting, is a platform for community service
segments. In addition to ongoing commitments to blood drives, food and
clothing drives, a big brother/big sister program and animal adoptions, the
station has been the motivating force behind some unusual projects.
"Wednesday's Child" is a nationally recognized weekly segment featuring a
child in need of adoption, and the effort has had a significant success rate
in placing children. The station has over the past seven years raised over a
thousand tons of food for the hungry with its annual "Food for Families" all-
day live remote from 17 locations in the DMA. It has an annual "Coats for
Kids" campaign to clothe needy children and has raised over $7.5 million for
the Muscular Dystrophy Association's ("MDA") annual telethon. For its efforts,
the station has received awards from state and national service organizations,
including the MDA's special recognition award and Media of the Year awards
from the Louisiana Special Olympics and the Black Advisory Adoption Committee.
According to the BIA Guide, the average household income in the Lafayette
market in 1994 was $35,050, with effective buying income projected to grow at
an annual rate of 4.8% through 1999. Retail sales growth in this market is
also projected by the BIA Guide to average 6.9% annually during the same
period.
WKBT, La Crosse, Wisconsin. WKBT, acquired (together with WLNS) by the
Company from Backe Communications Inc. in September 1986, began operations in
1954 and is affiliated with CBS. Although 90 miles apart, the cities of La
Crosse and Eau Claire are considered a single market by Nielsen, and WKBT's
signal covers both cities, reaching an eleven-county area that includes two
Minnesota counties and most of western Wisconsin. There are four reportable
stations in the DMA, but WKBT is one of only two local VHF stations.
The La Crosse-Eau Claire market is the 135th largest DMA, with an estimated
165,200 television households. The highest-rated local stations in the DMA are
WKBT and WEAU, the NBC affiliate. For the May 1996 ratings period, WKBT had a
sign-on to sign-off in-market share of 28%, which places WKBT second to WEAU,
which had a 43% share. The station's syndicated programming includes
Entertainment Tonight, Roseanne, Married with Children, The Cosby Show, Murphy
Brown, Baywatch, The Simpsons and Fresh Prince of Bel-Air. WKBT's late night
programming has benefitted from the addition of Late Show With David
Letterman.
In recent years, the station hired an award-winning local anchor team to
host the station's news programs. The station's newscasts, collectively
broadcast as NewsChannel 8, focuses on local coverage of news, weather and
sports events.
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Over the past several years, WKBT has won awards for news coverage from
state journalism organizations. Currently, WKBT is the only station in its
market to provide closed-captioning of its local newscasts for its hearing
impaired viewers. The station is also an active sponsor of many other local
community events and programs, including Toys for Tots, Crimestoppers,
Salvation Army Operation Food Basket, Red Cross Disaster Relief,
Weatherschool, Friday's Child and Today's Breakthroughs--Tomorrow Cures. WKBT
regularly contributes public service announcements and hundreds of hours of
volunteer labor to the community throughout the year.
The economy in the La Crosse-Eau Claire region is centered on skilled
industry, medical services, agriculture and education. Prominent corporations
located in the area include The Trane Company, the area's largest employer
with approximately 2,600 employees, Fleming Foods, G. Heileman Brewing Company
and La Crosse Footwear. Lutheran Hospital, Franciscan Health Systems and
Gunderson Clinic have made La Crosse a health care hub for the entire western
Wisconsin region and, combined, employ approximately 4,400 area residents.
Local educational institutions draw a large student base to the market and
include branches of the University of Wisconsin in La Crosse and Eau Claire,
as well as Viterbo College and Western Wisconsin Technical College. According
to the BIA Guide, the average household income in the La Crosse-Eau Claire
market in 1994 was $37,934, with effective buying income projected to grow at
an annual rate of 4.2% through 1999. Retail sales growth in this market is
also projected by the BIA Guide to average 5.4% annually during the same
period.
WTVO, Rockford, Illinois. WTVO, the ABC affiliate in Rockford, Illinois
began operations in 1953 under the ownership of Winnebago Television
Corporation. The Company purchased Winnebago Television Corporation in
September 1988. WTVO switched its affiliation from NBC to ABC, effective as of
August 14, 1995.
The Rockford market is the 136th largest DMA, with an estimated 163,880
television households. There are four reportable stations in the DMA, of which
one is a VHF station and the others, including WTVO, are UHF stations. In the
May 1996 ratings period, WTVO was number three in the market, with a sign-on
to sign-off in-market share of 25%, compared to 28% and 33% for the CBS and
NBC affiliates, respectively. The stations's syndicated programs include Sally
Jessy Raphael, Jenny Jones, Murphy Brown, Hard Copy, Entertainment Tonight and
The Simpsons. The station produces local interest programs such as Spectrum 17
and Page 17.
Each year, the Northern Illinois Council of Advertising recognizes the
production creativity of local advertising agencies and television stations by
awarding "Raddys." Since 1990, WTVO has been the recipient of 18 Raddy awards
which span the categories of broadcast division, original footage, and
promotional (news) campaign. WTVO has won more Raddys than any other station
in the Rockford market.
WTVO's DMA encompasses a five-county area of northern Illinois, northwest of
Chicago. Rockford is the second largest city in Illinois. Over 1,000
manufacturing firms employ a total of over 50,000 persons in the Rockford
area, specializing in machine tool, automotive, aerospace, and consumer
product industries. Prominent manufacturers in the area include Sundstrand
Corporation, the area's largest employer, Ingersoll Milling Machine Company
and Chrysler Corporation's new Neon subcompact facility. UPS has constructed a
new $60.0 million midwestern freight hub at Rockford, and Motorola has begun
construction on a cellular phone plant in nearby Harvard, Illinois. According
to the BIA Guide, the average household income in the Rockford market in 1994
was $45,671, with effective buying income projected to grow at an annual rate
of 4.1% through 1999. Retail sales growth in this market is also projected by
the BIA Guide to average 3.4% annually during the same period.
INDUSTRY BACKGROUND
General. Commercial television broadcasting began in the United States on a
regular basis in the 1940s. Currently there are a limited number of channels
available for broadcasting in any one geographic area. Television stations can
be distinguished by the frequency on which they broadcast. Television stations
which
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broadcast over the very high frequency ("VHF") band (channels 2-13) of the
spectrum generally have some competitive advantage over television stations
which broadcast over the ultra-high frequency ("UHF") band (channels above 13)
of the spectrum because the former usually have better signal coverage and
operate at a lower transmission cost. However, the improvement of UHF
transmitters and receivers, the complete elimination from the marketplace of
VHF-only receivers and the expansion of cable television systems have reduced
the VHF signal advantage.
The Market for Television Programming. Television station revenues are
primarily derived from local, regional and national advertising and, to a
lesser extent, from network compensation and revenues from studio rental and
commercial production activities. Advertising rates are based upon a variety
of factors, including a program's popularity among the viewers an advertiser
wishes to attract, the number of advertisers competing for the available time,
the size and demographic makeup of the market served by the station, and the
availability of alternative advertising media in the market area. Rates are
also determined by a station's overall ratings and share in its market, as
well as the station's ratings and share among particular demographic groups
which an advertiser may be targeting. Because broadcast television 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.
All television stations in the country are grouped by Nielsen, a national
audience measuring service, into approximately 210 generally recognized
television markets that are ranked in size according to various formulae based
upon actual or potential audience. Each DMA is determined as an exclusive
geographic area consisting of all counties in which the home-market commercial
stations receive the greatest percentage of total viewing hours. Nielsen
periodically publishes data on estimated audiences for the television stations
in the various television markets throughout the country. The estimates are
expressed in terms of the percentage of the total potential audience in the
market viewing a station (the station's "rating") and of the percentage of the
audience actually watching television (the station's "share"). Nielsen
provides such data on the basis of total television households and selected
demographic groupings in the market. Nielsen uses two methods of determining a
station's ability to attract viewers. In larger geographic markets, ratings
are determined by a combination of meters connected directly to selected
television sets and weekly diaries of television viewing, while in smaller
markets only weekly diaries are completed. None of the Company's markets are
metered.
Whether or not a station is affiliated with one of the three major networks
(NBC, ABC or CBS) has a significant impact on the composition of the station's
revenues, expenses and operations. A typical network affiliate receives the
majority of its programming each day from the network. This programming, along
with cash payments ("network compensation"), is provided to the affiliate by
the network in exchange for a substantial majority of the advertising time
during network programs. The network then sells this advertising time and
retains the revenues. The affiliate retains the revenues from time sold during
breaks in and between network programs and programs the affiliate produces or
purchases from non-network sources. The Fox Broadcasting Company ("Fox") has
established a network of independent stations whose operating characteristics
are similar to the major network affiliate stations although the number of
hours of network programming for Fox affiliates is less than that of the three
major networks. In recent years, Fox has effectively evolved into the fourth
network.
A fully independent station such as KCAL purchases or produces all of the
programming which it broadcasts, resulting in generally higher programming
costs than those of major-network affiliates in the same market. However,
under increasingly popular barter arrangements, a national program distributor
may receive advertising time in exchange for programming it supplies, with the
station paying a reduced fee or no cash fee at all for such programming.
Because the major networks regularly provide first-run programming during
prime time viewing hours, their affiliates generally (but do not always)
achieve higher audience shares, but have substantially less inventory of
advertising time to sell during those hours than independent stations, since
the major networks use almost all of their affiliates' prime time inventory
for network shows. The independent station is, in theory, able to retain its
entire inventory of advertising and all of the revenue obtained therefrom. The
independent stations' smaller audiences and greater inventory during prime
time hours generally result in lower advertising rates charged and more
advertising time sold during those hours, as compared with major
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affiliates' larger audiences and limited inventory, which generally allow the
major-network affiliates to charge higher advertising rates for prime time
programming. By selling more advertising time, the independent station
typically achieves a share of advertising revenues in its market greater than
its audience ratings.
Broadcast television stations compete for advertising revenues primarily
with other broadcast television stations, and to a lesser extent, with radio
stations and cable system operators serving the same market. Traditional
network programming, and recently Fox programming, generally achieve higher
audience levels than syndicated programs aired by independent stations.
However, since greater amounts of advertising time are available for sale by
independent stations and Fox affiliates, they typically achieve a share of the
television market advertising revenues greater than their share of the
market's audience. Public broadcasting outlets in most communities compete
with commercial broadcasters for viewers.
Developments in the Television Market. Through the 1970s, network television
broadcasting enjoyed virtual dominance in viewership and television
advertising revenue, because network-affiliated stations competed only with
each other in most local markets. Beginning in the 1980s, however, this level
of dominance began to change as more local stations were authorized by the FCC
and marketplace choices expanded with the growth of independent stations and
cable television services. See "--Federal Regulation of Television
Broadcasting" below.
Cable television systems, which grew at a rapid rate beginning in the early
1970s, were initially used to retransmit broadcast television programming to
paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant
competitor for viewers of broadcast television programming, although no single
cable programming network regularly attains audience levels amounting to more
than a small fraction of any single major broadcast network. With the increase
in cable penetration in the 1980s, the advertising share of cable networks has
increased. Notwithstanding such increases in cable viewership and advertising,
over-the-air broadcasting remains the dominant distribution system for mass
market television advertising. Basic cable penetration (the percentage of
television households which are connected to a cable system) in the Company's
television markets ranges from 54% to 67%.
In acquiring programming to supplement network programming, network
affiliates compete with independent stations and Fox affiliates in their
markets. 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, such programs would not likely have been acquired by such stations
in any event. In the past, the cost of programming increased dramatically,
primarily because of an increase in the number of new independent stations and
a shortage of desirable programming. Recently, however, program prices have
stabilized as a result of increases in the supply of programming.
COMPETITION
Competition in the television industry takes place on several levels:
competition for audience, competition for programming (including news) and
competition for advertisers. Additional factors that are material to a
television station's competitive position include signal coverage and assigned
frequency. The broadcasting industry is continually 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 have a material effect on the Company's
operations.
Audience. Stations compete for audience on the basis of program popularity,
which has a direct effect on advertising rates. A majority of the daily
programming on the Company's stations is supplied by the network with which
each station is affiliated. In those periods, the stations are totally
dependent upon the performance of the network programs in attracting viewers.
There can be no assurance that such programming will achieve or maintain
satisfactory viewership levels in the future. Non-network time periods are
programmed by the station
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with a combination of self-produced news, public affairs and other
entertainment programming, including news and syndicated programs purchased
for cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the past
decade, have also emerged as viable competitors for television viewership
share. Each of Time Warner, Inc. and Paramount Communications, Inc. has
recently launched a new television network and have entered into affiliation
agreements with certain independent commercial television stations. The
programming made available by these new networks is presently limited. The
Company is unable to predict the effect, if any, that such networks will have
on the future results of the Company's operations.
In addition, the development of methods of television transmission of video
programming other than over-the-air broadcasting, and in particular the growth
of cable television, has significantly altered competition for audience in the
television industry. These other transmission methods can increase competition
for a broadcasting 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 non-broadcast programming originated on the cable
system. Through the 1970s, network television broadcasting enjoyed virtual
dominance in viewership and television advertising revenues because network-
affiliated 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 cable television penetration occurred
throughout the 1970s and 1980s in areas that did not have 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 have not sought
to compete with broadcast stations for a share of the local news audience.
Recently, however, certain cable operators have elected to compete for such
audiences, and the increased competition could have an adverse effect on the
Company's advertising revenues.
Other sources of competition include home entertainment systems (including
video cassette recorder and playback systems, videodiscs and television game
devices), "wireless cable" service, satellite master antenna television
systems, low power television stations, television translator stations and,
most recently, direct broadcast satellite video distribution services which
transmit programming directly to homes equipped with special receiving
antennas.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now under development
for use with current cable channels or direct broadcast satellites, are
expected to reduce the bandwidth required for television signal transmission.
These compression techniques, as well as other technological developments, are
applicable to all video delivery systems, including over-the-air broadcasting,
and have the potential to provide vastly expanded programming to highly
targeted audiences. Reduction in the cost of creating additional channel
capacity could lower entry barriers for new channels and encourage the
development of increasingly specialized "niche" programming. This ability to
reach very narrowly defined audiences is expected to alter the competitive
dynamics for advertising expenditures. The Company is unable to predict the
effect that these or other technological changes will have on the broadcast
television industry or the future results of the Company's operations.
Programming. Competition for programming involves negotiating with national
program distributors or syndicators which sell first-run and rerun packages of
programming. The stations compete against in-market broadcast station
competitors for exclusive access to off-network reruns (such as Roseanne) and
first-run product (such as Entertainment Tonight) in their respective markets.
Cable systems generally do not compete with local stations for programming,
although various national cable networks from time to time have acquired
programs that would have otherwise been offered to local television stations.
Competition for exclusive news stories and features is also endemic in the
television industry.
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Time Warner, Inc. and Paramount Communications, Inc., each of which has
recently launched a new television network, also own or control a major
production studio. Outside production studios are the primary source of
programming for the networks. It is uncertain whether in the future such
programming, which is generally subject to short-term agreements between the
studios and the networks, will be moved to the new networks.
Advertising. Advertising rates are based upon the size of the market 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 market served by the station,
the availability of alternative advertising media in the market area,
aggressive and knowledgeable sales forces, and development of projects,
features and programs that tie advertiser messages to programming. In addition
to competing with other media outlets for audience share, the Company's
stations also compete for advertising revenues, which comprise the primary
source of revenues for the Subsidiaries. The Company's stations compete for
such advertising revenues with other television stations in their respective
markets, as well as with other advertising media, such as newspapers, radio
stations, magazines, outdoor advertising, transit advertising, yellow page
directories, direct mail and local cable systems. Competition for advertising
dollars in the broadcasting industry occurs primarily within individual
markets. Generally, a television broadcasting station in the market does not
compete with stations in other market areas. The Company's television stations
are located in highly competitive markets.
NETWORK AFFILIATION AGREEMENTS
Each of the Company's existing stations is affiliated with a network
pursuant to an affiliation agreement (an "Affiliation Agreement"). WKRN, WTEN,
WRIC, WATE, WBAY and WTVO are affiliated with ABC. KELO, WLNS, KLFY and WKBT
are affiliated with CBS. The Quad Cities Station (KWQC) is affiliated with
NBC.
In October 1994, the Company and ABC entered into new Affiliation Agreements
for five of the Company's ABC-affiliated stations. Effective August 14, 1995,
the Company switched the affiliation of its then sole NBC affiliate to ABC. In
addition, in October 1994, the Company and CBS entered into new Affiliation
Agreements for three of the Company's CBS-affiliated stations. Such
Affiliation Agreements with ABC and CBS provide for contract terms of ten
years. The Affiliation Agreement for the Quad Cities Station provides for a
ten-year term, with an expiration date of November 1, 2004. On April 3, 1996,
the Company and CBS entered into new affiliation agreements for KELO and each
of its satellite stations which expire on October 2, 2000. Each Affiliation
Agreement is automatically renewed for successive terms subject to either
party's right to terminate at the end of any term after giving proper notice
thereof (such notice to be given at least six months in advance). Under the
Affiliation Agreements, the networks also possess, under certain circumstances
(such as a transfer of control or adverse changes in signal, operating hours
or other mode of operation), the right to terminate the Affiliation Agreement
on prior written notice ranging between 15 and 45 days depending on the
Affiliation Agreement. In addition, ABC has the right upon 60 days prior
notice to terminate the Affiliation Agreement with respect to an ABC-
affiliated station in a particular market if it acquires a different station
within such market.
Each Affiliation Agreement provides the affiliated station with the right to
broadcast all programs transmitted by the network with which it is affiliated.
In exchange, the network has the right to sell a substantial majority of the
advertising time during such broadcasts. In addition, for each hour that the
station elects to broadcast network programming, the network pays the station
a fee, specified in each Affiliation Agreement, which varies with the time of
day. Typically, "prime-time" programming (Monday through Saturday from
8:00 p.m.-11:00 p.m., Eastern time, and Sunday from 7:00 p.m.-11:00 p.m.,
Eastern time) generates the highest hourly rates. Management believes that
programming costs are generally lower for network affiliates than for
independent television stations and prime-time network programs generally
achieve higher ratings than non-network programs. Management believes that the
Company's relationship with the networks is excellent and that all of its
stations are highly valued affiliates.
As an independent station, KCAL purchases all of its programming, resulting
in proportionally higher programming costs for the station. In this regard,
KCAL retains its entire inventory of advertising and all of the revenue
obtained therefrom. Furthermore, KCAL enters into barter arrangements whereby
program distributors may receive advertising time in exchange for the
programming they provide.
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FEDERAL REGULATION OF TELEVISION BROADCASTING
Existing Regulation. Television broadcasting is subject to the jurisdiction
of the FCC under the Communications Act of 1934, as amended (the
"Communications Act"). The Communications Act prohibits the operation of
television broadcasting stations except under a license issued by the FCC and
empowers the FCC, among other things, to issue, revoke and modify broadcasting
licenses, determine the locations of stations, regulate the equipment used by
stations, adopt regulations to carry out the provisions of the Communications
Act and impose penalties for violation of such regulations. The Communications
Act also prohibits the assignment of a license or the transfer of control of a
licensee without prior approval of the FCC. On February 1, 1996, the U.S.
Senate and House of Representatives voted to approve the Telecommunications
Act of 1996 (the "1996 Act") and the measure was signed into law by President
Clinton on February 8, 1996. Provisions of the new law which affect
broadcasting are highlighted in the following descriptions.
License Grant and Renewal. In recent years, television broadcasting licenses
have generally been granted or renewed for a maximum period of five years
although the FCC has authority to renew for a shorter period upon a finding
that the "public interest, convenience and necessity" would be served thereby.
The 1996 Act lengthens the normal term for television broadcast licenses from
five to eight years. The FCC has initiated a proceeding to implement the new
statutory broadcast license term provisions. The 1996 Act also streamlines the
license renewal process by prohibiting the FCC, upon expiration of an
incumbent station's license, from considering competing applications for such
licenses unless the FCC first decides that the incumbent licensee does not
meet the following statutory requirements for renewal: (1) the station has
served the public interest, convenience and necessity; (2) there have been no
serious violations of either the Communications Act or the FCC's rules and
regulations by the licensee; and (3) there have been no other violations of
either the Communications Act or FCC Rules by the licensee which taken
together would constitute a pattern of abuse. In making this determination,
the FCC cannot consider whether the public interest would be better served by
a person other than the renewal applicant. The FCC on April 12, 1996 issued an
order eliminating comparative renewal hearings for broadcast applications
filed after May 1, 1995 and implementing a new renewal procedure in accordance
with these statutory renewal standards. At the time application is made for
renewal of a television license, parties in interest may file petitions to
deny, and such parties as well as members of the public may comment upon the
service the station has provided during the preceding license term and urge
denial of the application. In a vast majority of cases, broadcast licenses are
renewed by the FCC even when petitions to deny are filed against broadcast
license renewal applications. The main station licenses for the Company's
stations expire on the following dates: WRIC, October 1, 1996 (an application
for renewal of the WRIC license is now pending before the FCC; pursuant to
Section 307(c)(3) of the Communications Act, the station's license shall
continue in effect pending final action on the renewal application by the
FCC); KLFY, June 1, 1997; WKRN, August 1, 1997; WATE, August 1, 1997; WLNS,
October 1, 1997; WBAY, December 1, 1997; WKBT, December 1, 1997; WTVO,
December 1, 1997; KWQC, February 1, 1998; KCLO, April 1, 1998; KELO, April 1,
1998; KDLO and KPLO (satellites of KELO), April 1, 1998; WTEN, June 1, 1999;
and WCDC, WTEN's satellite station, April 1, 1999. The Company is not aware of
any facts or circumstances that would prevent the renewal of the licenses for
the stations at the end of the respective license terms. On June 6, 1996, the
FCC released a decision granting the license renewal application of KCAL and
imposing certain reporting conditions regarding the station's equal employment
opportunity (EEO) records. On July 5, 1996, the National Hispanic Media
Coalition ("NHMC") appealed the FCC's decision to renew the license for KCAL
to the United States Court of Appeals for the District of Columbia Circuit.
NHMC separately requested that the FCC delay action on the application for the
transfer of control of Fidelity Television, Inc., the Disney subsidiary to
which the FCC license for KCAL is issued, to the Company pending the outcome
of this appeal. In granting the application for consent to the transfer of
control of KCAL-TV, the FCC also denied NHMC's request that action on the
transfer application be delayed pending resolution of the judicial appeal.
KCAL's main station license now expires on December 1, 1998, along with all
other California television stations.
Multiple Ownership Restrictions. FCC regulations and the 1996 Act govern the
multiple ownership of radio and television broadcast stations and certain
other media. These rules or statutory standards include limits on the number
of radio and television stations that may be owned both on a national and
local basis. The 1996 Act eliminates the FCC's national ownership limits in
the form of caps on the number of television and radio
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broadcast stations that may be commonly owned. Additionally, it raises the
national audience coverage restriction on television station ownership from
25% to 35% of the national audience. On March 8, 1996, the FCC released an
order modifying its national ownership rules to conform to the 1996 Act in
these respects.
On a local basis, FCC rules currently allow an entity to have an
attributable interest (as defined below) in only one television station in a
market (the so-called TV "duopoly" rule). In addition, FCC rules generally
prohibit an individual or entity from having an attributable interest in a
television station and a radio station, daily newspaper or cable television
system that is located in the same local market area served by the television
station. The 1996 Act leaves the television duopoly ban in place but directs
the FCC to conduct a rulemaking to determine whether the restriction should be
retained, modified, or eliminated. Accompanying legislative report language
suggests that the FCC should permit VHF-VHF station combinations only in the
most compelling circumstances. The 1996 Act also directed the FCC to modify
its waiver policy with respect to the TV/radio cross-ownership restriction
(the so-called "one-to-a-market" rule) by extending it to radio-television
combinations in the top 50 markets. Among the other multiple ownership issues
addressed by the 1996 Act are the following:
1. It directs the FCC to revise the dual network rule to permit broadcast
stations to affiliate with an entity that maintains two or more networks,
unless the combination is composed of (a) two of the four existing networks
(ABC, CBS, NBC, Fox) or (b) any of the four existing networks and one of
the two emerging networks (WBTN, UPN). The accompanying explanatory
language clarifies that Congress does not intend these limits to apply if
such networks are not operated simultaneously or if there is no substantial
overlap of the territory served by the group of stations comprising each
network.
2. It eliminates the network/cable cross-ownership restriction contained
in FCC rules, but allows the Commission to adopt further regulations if
necessary to ensure carriage, channel positioning, and nondiscriminatory
treatment of nonaffiliated television stations.
3. It grandfathers certain television Local Marketing Agreements ("LMAs")
which were in existence upon enactment and are in compliance with FCC
regulations. It is anticipated that the overall status of television LMAs
will be further clarified in future FCC ownership proceedings.
4. It removes the statutory prohibition on broadcast/cable cross-
ownership, but leaves the FCC regulatory restriction in place. The
explanatory language indicates, however, that repeal of the statutory ban
should not be considered by the FCC in any future review of the rule.
5. It requires the FCC to review its ownership rules biennially as part
of its regulatory reform obligations to determine if such rules are
necessary in the public interest as a result of competition.
As noted, the FCC must issue administrative orders or conduct new or
additional rulemaking proceedings to implement and/or carry out the foregoing
directives of Congress in the 1996 Act. The Company is unable to predict the
nature or the timing of any such changes.
Expansion of the Company's broadcast operations in particular areas and
nationwide will continue to be subject to the FCC's ownership rules and any
changes the agency or Congress may adopt. At the same time, 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,
particularly to the extent that the Company's competitors may have greater
resources and thereby be in a better position to capitalize on any such
changes.
Under the FCC's ownership rules, if a purchaser of the Company's Common
Stock acquires an "attributable" interest in the Company and has an
attributable interest in other broadcast stations, a cable television system
or a daily newspaper, a violation of the Communications Act or FCC regulations
could result depending on the number and location of the other broadcast
stations, cable television operations, or daily newspaper attributable to such
purchaser. In the case of corporations, ownership of television stations
generally is "attributable" to all officers and directors of a licensee, as
well as shareholders who own 5% or more of the outstanding voting stock of a
licensee, except that certain institutional investors who exert no control or
influence over a licensee may own up to 10% of such outstanding voting stock
before attribution results. Under current
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FCC regulations, debt instruments, non-voting stock and certain limited
partnership interests (provided the licensee certifies that the limited
partners are not "materially involved" in the management or operation of the
subject media property) and voting stock held by minority shareholders in
cases where there is a single majority shareholder are not generally subject
to attribution. In addition, the FCC's cross-interest policy, which precludes
an individual or entity from having an attributable interest in one media
property and a "meaningful" (but not attributable) interest in a broadcast,
cable or newspaper property in the same area, may be invoked in certain
circumstances to reach interests not expressly covered by the multiple
ownership rules. On January 12, 1995, the FCC released a "Notice of Proposed
Rulemaking" designed to permit a "thorough review of [its] broadcast media
attribution rules." Among other things, the FCC solicited comment on whether
it should raise its percentage benchmarks for attribution, tighten its
policies as to nonvoting stock and adopt rules for limited liability companies
and other new forms of business. The FCC also solicited comment on whether, in
given circumstances, multiple "cross interests" or other significant business
relationships (such as time brokerage agreements, debt relationships or
holdings of nonattributable interests) raise any issues or concerns with
respect to diversity and competition. As noted, at present, all nonvoting
stock interests and all minority stock interests where a corporation has a
single majority stockholder are treated as nonattributable. In this
proceeding, the FCC questions whether it should amend its rules to make such
interests attributable, at least in certain circumstances.
Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licenses. Foreign
governments, representatives of foreign governments, non-citizens,
representatives of non-citizens, and corporations or partnerships organized
under the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, collectively, may directly or indirectly own up to 20% of the
capital stock of a licensee. The 1996 Act, however, eliminates the former
complete ban on non-citizens serving as officers or directors of such
licensee. In addition, a broadcast license may not be granted to or held by
any corporation that is controlled, directly or indirectly, by any other
corporation if more than one-fourth of the capital stock of that other
corporation is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or
revocation of such license. The 1996 Act also eliminates the former
restrictions in the Communications Act on non-citizens serving as officers or
on the board of such holding or parent companies. The Company, which serves as
a holding company for the Subsidiaries, therefore, may be restricted from
having more than one-fourth of its capital stock owned directly or indirectly
by non-citizens, foreign governments or foreign corporations. Recently,
proposals have been initiated by the FCC and advanced by certain members of
Congress that would relax the foreign ownership restrictions in certain
additional respects. In a Report and Order released on November 28, 1995, the
FCC modified its public interest standard for considering applications of
foreign common carriers to enter the U.S. market to provide international
services, but took no similar action with respect to easing the restrictions
on alien ownership of broadcast licenses.
Recent Developments, Proposed Legislation and Regulation. The FCC, in an
order adopted July 28, 1995, decided to eliminate the prime time access rule
("PTAR"), effective August 30, 1996. PTAR limited a television station's
ability to broadcast network programming (including syndicated programming
previously broadcast over a network) during prime time hours. The elimination
of PTAR could increase the amount of network programming broadcast over a
station affiliated with ABC, NBC or CBS. Such elimination also could result in
(i) an increase in the compensation paid by the network to a station (due to
the additional prime time during which network programming could be aired by a
network-affiliated station) and (ii) increased competition for syndicated
network programming that previously was unavailable for broadcast by network
affiliates during prime time.
The FCC announced by order adopted August 29, 1995 that it was rescinding
its remaining financial interest and syndication ("fin-syn") rules. The fin-
syn rules restricted the ability of ABC, CBS and NBC to obtain financial
interests in, or participate in syndication of, prime-time entertainment
programming created by independent producers for airing during the networks'
evening schedules. (The FCC previously had lifted the financial interest rules
and restraints on foreign syndication).
In an order adopted August 8, 1996, the FCC established new regulations for
television broadcasters under the Children's Television Act of 1990 ("CTA").
The Children's Programming Order sets a new benchmark for
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TV licensees as to both the amount and the type of "educational and
informational" programming that stations must broadcast for children aged 16
and younger. Beginning September 1, 1997, the FCC will institute a new
"processing guideline" for considering license renewals which will have the
effect of requiring television broadcasters to air at least three hours of
qualifying children's programming each week. Programs will qualify only if (i)
education is a "significant purpose" of the material and (ii) the educational
objective and target audience age range is identified in writing. The FCC also
will require commercial TV broadcasters to satisfy more detailed record-
keeping requirements and provide greater information to the public regarding a
station's qualifying programming.
Congress and the FCC currently have under consideration, and may in the
future adopt, new laws, regulations and policies regarding a wide variety of
matters which could, directly or indirectly, affect the operation and
ownership of the Company's broadcast properties. In addition to the matters
noted above, such pending or potential subject areas include, for example, the
license renewal process, particularly the criteria to be applied in
implementing the new renewal standard and procedure adopted in the 1996 Act,
spectrum use fees, political advertising rates, potential restrictions on
certain products (such as beer and wine), the rules and policies to be applied
in enforcing the FCC's equal employment opportunity regulations, possible
changes in the deductibility of advertising expenses, and violent and indecent
programming. With respect to the latter, the 1996 Act requires the FCC to
prescribe (1) on the basis of recommendations by a nonpartisan advisory
committee comprised of parents, programmers, broadcasters and cable operators,
guidelines and procedures for the identification and rating of video
programming that contains "sexual, violent, or other indecent material"
(excluding content of a political or religious nature); and (2) rules
requiring distributors of rated programming to transmit such rating to permit
parents to block the display of inappropriate programming. The advisory
committee would be required to submit a report of its recommendation within
one year after appointment. Significantly, these requirements shall take
effect one year after enactment of the 1996 Act (or February 1, 1997) only if
the FCC determines, in consultation with appropriate public interest groups
and interested individuals, that distributors of video programming have not by
such date (1) established voluntary rating rules and (2) agreed voluntarily to
broadcast such ratings (see below).
Related to the foregoing program ratings or identification scheme, the 1996
Act requires that any TV set that is either shipped in interstate commerce or
manufactured domestically, and has a picture screen of 13 inches or greater,
be equipped with a feature designed to enable viewers to block all programs
with a common rating or label (the so-called "v-chip"). The FCC, after
consulting with the TV manufacturing industry, is required to specify the
effective date when the v-chip must be included, which may not be less than
two years after enactment.
Although the 1996 Act provides for expedited judicial review to challenge
the constitutionality of these provisions, the broadcast industry has not yet
undertaken any court appeal. Indeed, on February 29, 1996, the major networks
and other leaders of the television and video distribution industries
announced a commitment to attempt to develop a voluntary, industry-initiated
and implemented program ratings or labeling scheme that could be used with the
v-chip technology. Separately, in response to a further mandate in the 1996
Act, the FCC will require all applicants for renewal of a TV station license
to submit an exhibit summarizing all written comments and suggestions received
from the public and maintained by the licensee that comment on the licensee's
programming characterized as violent. The Company is unable to predict the
outcome of these developments or the impact they might eventually have, if
any, on the operation of its stations.
In addition, on June 15, 1995, the FCC initiated a review and update of
certain long-standing rules governing the programming practices of broadcast
television networks and their affiliates. Specifically, the FCC will consider
whether to modify, repeal or retain the following programming-related rules:
(1) the right to reject rule which ensures that a network affiliate retains
the right to reject network programming; (2) the time option rule that
currently prohibits a network from holding an option to use specified amounts
of an affiliate's broadcast time; (3) the exclusive affiliation rule that
forbids a network from preventing an affiliate from broadcasting the
programming of another network; (4) the dual network rule that prevents a
single entity from owning more than one broadcast television network
(separately, the FCC has revised the dual network rule pursuant to the 1996
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Act); and (5) the network territorial exclusivity rule that prohibits an
agreement between a network and an affiliate that would prevent another
station in the same community from broadcasting a network program not taken by
the affiliate, and prohibits an agreement that would prevent another station
located in a different community from broadcasting any of the network's
programs. Moreover, in a separate but related proceeding initiated on June 14,
1995, the FCC is considering whether to modify or repeal rules that currently
forbid a network from influencing an affiliate's advertising rates during non-
network broadcast time, and whether to modify or repeal a rule forbidding a
network from acting as an advertising representative for the sale of non-
network time.
Other matters which could affect the Company's broadcast properties include
technological innovations and developments generally affecting competition in
the mass communications industry, such as the recent initiation and future
expansion of direct broadcast satellite service, the continued establishment
of wireless cable systems and low power television stations, and the
potentially expanded role of telephone companies in the distribution of video
services.
Distribution of Video Services by Telephone Companies. Recent actions by
Congress, the FCC and the courts all presage significant future involvement in
the provision of video services by telephone companies. In particular, the
1996 Act completely revises the law governing cable and telephone company
competition and cross-ownership by eliminating the former cable/telco cross-
ownership ban and all of the FCC's current video dialtone rules. The 1996 Act
does, however, retain (in modified form) prohibitions on certain cable/telco
buy-outs. Prior to passage of the 1996 Act, the Cable Act of 1984 generally
prohibited a local exchange carrier ("LEC") from owning a cable television
system or offering video programming directly to subscribers in the LEC's
local telephone service area. In recent years, the FCC has permitted LECs to
provide video programming under its "video dialtone" ("VDT") common carrier
regulatory scheme. The FCC's original VDT policy permitted in-service-area
delivery of video programming by LECs and exempted them from the 1984 Cable
Act's franchising requirements so long as the facilities of the LEC were used
for transmission of video programming on a common carrier basis, a policy that
had been challenged in court by both cable and telephone interests. The 1996
Act, however, explicitly nullifies these regulatory efforts.
Instead, the 1996 Act provides telephone companies with four options for
entering into the video services market, all four of which are subject to the
buy-out provisions: (1) wireless entry (which is not subject to cable
regulation); (2) common carrier entry (which is subject to Title II common
carrier regulation, but not subject to cable regulation); (3) cable system
entry (which is subject to cable regulation); and (4) "open video system"
entry, which is a new mode of entry established by the 1996 Act that allows a
common carrier to program 33% of its video distribution system, while making
the rest of its capacity available to unaffiliated program providers. The
hybrid common carrier/cable rules governing open video systems will entirely
replace the FCC's former VDT rules. The open video system rules generally
subject open video system operators to reduced regulation. For example, such
operators are not required to obtain a local franchise, nor are they subject
to rate regulation. The 1996 Act also limits fees that open video operators
may have to pay to local franchising entities and clarifies that such
operators are not subject to Title II common carrier requirements. Open video
system operators are required, however, to comply with certain cable
regulations, including the must-carry/retransmission consent requirements and
the rules governing carriage of public educational and governmental channels.
Under recently released FCC rules, a cable company will be permitted to
operate open video systems outside of its cable franchise areas, and within
its cable franchise area if it is subject to "effective competition" as
defined in the Act.
On June 3, 1996, the FCC released a Second Report and Order adopting new
rules regarding open video systems under the 1996 Act. These rules, inter
alia, (1) restrict the amount of capacity that a carrier or its affiliates may
use to provide programming directly to subscribers; (2) prohibit an operator
from discriminating among video programming providers with regard to carriage;
(3) permit an operator to carry on only one channel any video programming
service that is offered by more than one programming provider; and (4)
prohibit an operator from unreasonably discriminating in favor of itself and
its affiliates with regard to material or information provided for the purpose
of selecting programming or presenting information to subscribers. On
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August 8, 1996, the FCC released a third Report and Order and Second Order on
Reconsideration generally reaffirming its rules for open video systems.
Although telephone companies may now provide video programming to their
telephone subscribers, the 1996 Act maintains the general prohibition on
cable/telco buy-outs. Neither a LEC nor any affiliate thereof may acquire more
than a 10% financial interest, or any management interest, in a cable operator
serving the LEC's telephone service area. Similarly, a cable operator may not
acquire a 10% financial interest, or any management interest, in a LEC
providing telephone exchange service within the cable operator's franchise
area. Joint ventures between LECs and cable operators to provide video or
telecommunications in the same market are also prohibited. The Act does
provide for a number of limited exceptions to the buy-out and joint venture
prohibitions.
The 1992 Cable Act. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"). Some of its provisions such as signal carriage, retransmission consent
and equal employment opportunity requirements, have a direct effect on
television broadcasting. Other provisions, some of which have been changed or
substantially modified by the 1996 Act, are focused exclusively on the
regulation of cable television but can still have an indirect effect on the
Company because of the competition between over-the-air television stations
and cable systems.
The signal carriage, or "must carry", provisions of the 1992 Cable Act and
FCC rules require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
Systems with twelve or fewer usable activated channels and more than 300
subscribers must carry the signals of at least three local commercial
television stations. A cable system with more than 12 usable activated
channels, regardless of the number of subscribers, must carry the signals of
all local commercial television stations, up to one-third of the aggregate
number of usable activated channels of such system. The 1992 Cable Act also
includes a retransmission consent provision that prohibits cable operators and
other multichannel video programming providers from carrying broadcast
stations without obtaining their consent in certain circumstances. The must
carry and retransmission consent provisions are related in that television
broadcasters, on a cable system-by-system basis, must make a choice once every
three years whether or not to proceed under the must carry rules or to waive
that right to mandatory but uncompensated carriage and negotiate a grant of
retransmission consent to permit the cable system to carry the stations'
signal, in most cases in exchange for some form of consideration from the
cable operator.
Under rules adopted to implement these must carry and retransmission consent
provisions, local television stations were required to make their initial
elections of must carry or retransmission consent by June 17, 1993. Stations
that failed to elect were deemed to have their signals carried under the must
carry provisions. On or before June 17, 1993, the Company elected to obtain
"must carry" status on certain cable systems in each of its DMAs. This
entitles the Company to carriage on those systems until December 31, 1996. In
certain other situations, the Company entered into non-compensation
"retransmission consent" agreements with cable systems located outside its
designated market areas in order to reaffirm or add carriage in such extended
areas. Finally, with respect to most cable systems located at the core of its
local markets, the Company elected to pursue retransmission consent agreements
whereby the cable system would compensate its stations for carriage. In
several instances, agreements were reached in which the cable operator agreed
to commit to purchase specific levels of advertising (or production services)
in exchange for the Company granting retransmission consent (i.e., carriage),
generally for a period of three years. In most of these core market
situations, however, the local cable operator either refused to negotiate or
failed to offer any reasonable form of compensation. In order to permit cable
operators to continue to carry the Company's signals in such situations, the
Company offered temporary retransmission consent agreements under which, upon
60 days notice, the Company can withdraw its consent. These agreements remain
in place. Elections for the three year period commencing January 1, 1997 and
ending December 31, 1999 must be made on or before October 1, 1996. The
Company either has or is in the process of making such elections. The Company
reached an agreement with the Home and Garden Network ("HGN") under which HGN
is, on the Company's behalf, attempting to conclude more definitive
retransmission agreements with certain cable operators in exchange for
agreeing to carry the HGN channel. Some such agreements have been completed
and others are still being negotiated. The Company is unable to predict how
many such agreements will be effectuated and on what terms.
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On April 8, 1993, a special three-judge panel of the U.S. District Court for
the District of Columbia upheld the constitutionality of the must carry
provisions of the 1992 Act. However, on June 27, 1994, the U.S. Supreme Court,
in a 5-4 decision, vacated the lower court's judgment and remanded the case to
the District Court for further proceedings. Although the Supreme Court found
the must carry rules to be content-neutral and supported by legitimate
governmental interests under appropriate constitutional tests, it also found
that genuine issues of material fact still remained that must be resolved on a
more detailed evidentiary record. On December 12, 1995, the same three-judge
panel of the District Court again upheld the constitutionality of the must
carry rules. Another Supreme Court appeal is already underway, but a further
decision is not expected until sometime next year. In the meantime, however,
the FCC's new must carry regulations implementing the 1992 Cable Act remain in
effect.
The 1992 Cable Act also codified the FCC's basic equal employment
opportunity ("EEO") rule and the use of certain EEO reporting forms currently
filed by television broadcast stations. In addition, pursuant to the 1992
Cable Act's requirements, the FCC has adopted new rules providing for a review
of the EEO performance of each television station at the mid-point in its
license term (in addition to renewal time). Such a review gives the FCC an
opportunity to evaluate whether the licensee is in compliance with the FCC's
processing criteria and to notify the licensee of any deficiencies in its
employment profile.
The 1992 Cable Act was amended in several important respects by the 1996
Act. Most notably, as discussed above, the 1996 Act repeals the cross-
ownership ban between cable and telephone entities and the FCC's current video
dialtone rules. These provisions, among others, foreshadow significant future
involvement in the provision of video services by telephone companies. The
Company cannot predict the impact that telco entry into video programming will
have upon the broadcasting industry.
The 1996 Act also repeals or curtails several cable-related ownership and
cross-ownership restrictions. For example, as noted above, the 1996 Act
eliminates the broadcast network/cable cross-ownership limitations and the
statutory prohibition on TV/cable cross-ownership.
Advanced Television Service. The FCC has proposed the adoption of rules for
implementing advanced television ("ATV") service in the United States.
Implementation of digital ATV will improve the technical quality of television
signals receivable by viewers, and, if implemented as anticipated, will enable
television broadcasters the flexibility to provide new services, including
high-definition television ("HDTV"), simultaneous multiple programs of
standard definition television ("SDTV"), and data broadcasting. In mid-May,
1996, WRC-TV, the NBC owned and operated station in Washington, D.C., was
chosen to create a fully operational model HDTV station as part of a joint
project sponsored by the Consumer Electronics Manufacturers Association and
the Association for Maximum Service Television. The station will be operated
pursuant to an experimental HDTV license obtained from the FCC. Other stations
may seek similar experimental authorizations.
The FCC must, however, adopt special service rules before regular
broadcasting with the new ATV technology can begin. The FCC began an ATV
rulemaking proceeding in 1987 and, by late 1992, decided to assign to each
existing broadcaster a second channel for the purpose of transitioning to ATV
service. Under the transition plan, which would commence upon FCC adoption of
the ATV transmission standard and allotment plan, broadcasters would have six
years to begin ATV broadcasting on their second channel, and fifteen years to
continue current "NTSC" broadcasts on their original channel. For most of this
period, "simulcasting" would be required--i.e., broadcasters would be required
to transmit the same programs on both the ATV and NTSC channels.
Although the 1996 Act generally does not address this transition plan, it
does direct the FCC--if the FCC issues additional licenses for ATV--to limit
eligibility for such licenses to existing television broadcast licensees and
to adopt regulations to permit future licensees to offer ancillary or
supplementary services on designated frequencies. Such regulations, however,
must preserve ATV technology and quality and cover any ancillary or
supplementary service regulations applicable to analogous services (except
that no ancillary or supplemental
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service shall have "must-carry" rights). Moreover, if an ATV licensee is
directly or indirectly compensated for the provision of ancillary or
supplementary services, the FCC is directed to collect an annual fee (or some
other method of payment) that (1) recovers an amount that would have been
recovered had such services been licensed pursuant to a spectrum auction and
(2) avoids unjust enrichment. With respect to the 1992 transition plan, the
1996 Act states that if broadcasters are issued a transition channel, either
the original or additional license held by the broadcaster must be surrendered
to the FCC for reallocation, reassignment, or both. Proposals have been
advanced in Congress and within the current Administration to auction the
returned channels for other uses.
Other recent developments may alter the FCC's 1992 transition plan. In a
1995 further notice of proposed rulemaking, the FCC formally has questioned
all of its earlier ATV decisions except for its prior determination to award
second channels to existing broadcasters. For example, the agency is
considering a shorter (e.g., ten year) transition period, and likely will
adopt modified simulcasting rules. In the meantime, on May 9, 1996, the FCC
initiated a formal proceeding looking toward final adoption of new technical
standards that would govern ATV service. On August 15, 1996, the FCC issued a
separate proposal for establishing an ATV channel allotment and assignment
plan. The allotment proposal calls for assigning most TV broadcasters a
transitional channel between channels 7-59, to be followed at the end of the
transition with a "repacking" of all TV stations between channels 7-51. This
allotment plan is designed to allow for reallocation of spectrum at the low
and high ends of the current broadcast band for other uses. The proposal would
require some broadcasters to change channels twice before they obtain their
permanent ATV channel. A decision on the ATV allotment plan is expected in
1997.
Recently, some members of Congress have proposed authorizing the FCC to
auction ATV channels, which would require existing broadcasters to bid against
other potential providers of ATV service. Such authority could be contained in
budget legislation or a stand-alone spectrum law. Even if ATV channels are
awarded without auction to existing broadcasters, the implementation of ATV
will impose some near-term financial burdens on stations providing the
service. At the same time, there is potential for increased revenues from new
ATV services (although, as noted, subscription services will be subject to FCC
fees). While the Company believes the FCC will authorize ATV, the Company
cannot predict precisely when or under what conditions such an authorization
will occur, when NTSC operations must cease, or the overall effect the
transition to ATV might have on the Company's business.
Direct Broadcast Satellite Systems. The FCC has authorized the provision of
video programming directly to home subscribers through high-powered direct
broadcast satellites ("DBS"). DBS systems currently are capable of
broadcasting over 175 channels of digital television service directly to
subscribers equipped with 18-inch receive dishes and decoders. Generally, the
signal of local broadcast stations are not carried on DBS systems. The U.S.
Copyright Office, however, recently issued an "advisory letter" in response to
a request by American Sky Broadcasting in which it stated that it would not
question DBS companies that file copyright statements that include the
retransmission of local TV station signals within the television station's
market.
The Telecommunications Act of 1996 ("Act") gives the FCC exclusive
jurisdiction over high power DBS service. The Act also preempts local (but not
state) governments from imposing taxes or fees on direct-to-home ("DTH")
services, including DBS, and directs the FCC to promulgate regulations
prohibiting local (including state) governments from maintaining zoning
regulations that restrict the use of DBS receive-only dishes in residential
areas. The FCC has adopted rules to implement the statutory requirement
regarding zoning issues. Finally, the Act requires that multichannel video
programming distributors, such as DBS operators, scramble or block channels
providing indecent or sexually explicit adult programming. The
constitutionality of this provision has been challenged.
Hughes Communications Galaxy ("Hughes"), an affiliate of General Motors
Company, successfully launched its first satellite in December 1993, its
second satellite in August 1994 and a third satellite in June 1995 as an in-
orbit spare. The third satellite might also be used to provide additional
capacity. DIRECTV, Inc. ("DIRECTV"), an affiliate of Hughes, operates 27
transponders on these satellites, enabling it to offer over 175
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channels of digital programming. AT&T and DIRECTV have entered into an
exclusive agreement for AT&T to market and distribute DIRECTV's DBS service
and related equipment to AT&T's customer base. As part of this agreement, AT&T
is making an initial investment of approximately $137.5 million to acquire
2.5% of the equity of DIRECTV with an option to increase its investment up to
30% over five years.
United States Satellite Broadcasting ("USSB") owns and operates five
transponders on Hughes' first satellite and offers a programming service
separate from DIRECTV's service, with over 25 channels of programming.
EchoStar Satellite Corporation ("EchoStar") launched a high power satellite in
December 1995 and has been providing service since March 1996. EchoStar
expects to launch its second satellite in Fall 1996. EchoStar is expected to
offer as much as 125 channels (with 21 transponders) when its system is fully
operational.
In 1995, the FCC denied a request for extension of time for Advanced
Communications Corporation ("ACC") to construct and launch DBS satellites and
revoked ACC's permit. In January 1996, the FCC auctioned the channels
previously held by ACC. For $682.5 million, MCI Telecommunications Corporation
("MCI") acquired the right to operate 28 transponders on DBS satellites
located at the orbital position, previously held by ACC, capable of serving
the entire continental United States. Thereafter, MCI entered into a joint
venture with News Corporation Limited ("News Corp.") to provide DBS service.
MCI and News Corp. are expected to provide about 175 channels of programming
by the end of 1997.
Other parties have authorizations to provide DBS service, but have not yet
launched their satellites. Other parties also have applications pending before
the FCC, in which they propose to provide DBS service to U.S. consumers. In
addition, entities, like PRIMESTAR Partners L.P. and AlphaStar, Inc., provide
up to 150 channels of programming direct-to-home via medium power fixed
satellite services ("FSS"). Subscribers to FSS services generally must use 36
inch satellite receive dishes. The Company is unable to predict the effect of
existing and future DTH services upon its operations.
As part of the 1996 Act, Congress recently required the FCC to promulgate
regulations to prohibit restrictions that impair a viewer's ability to receive
video programming services through over-the-air reception devices, multi-point
distribution service, or direct broadcast satellite services. The legislation
also awards the FCC exclusive jurisdiction to regulate the provision of
direct-to-home satellite services, and limits the authority of local
jurisdictions to tax direct-to-home satellite service providers.
The foregoing does not purport to be a complete summary of all the
provisions of the Communications Act, the 1996 Act, or the 1992 Cable Act, nor
of the regulations and policies of the FCC thereunder. Proposals for
additional or revised regulations and requirements are pending before and are
being considered by Congress and federal regulatory agencies from time to
time. Also, various of the foregoing matters are now, or may become, the
subject of court litigation, and the company cannot predict the outcome of any
such litigation or the impact on its broadcast business.
1992 RESTRUCTURING
As a result of recessionary conditions in the broadcast television industry
and in the national economy as a whole, the Company experienced difficulties
during periods of 1991 and 1992 in maintaining its cash flow at the levels
required by the financial ratio covenants under its then existing long-term
debt instruments. In September 1991, the lenders under the Old Credit Facility
declared an event of default for failure to satisfy such covenants and, as a
result, the Company was prohibited from making further payments to its
subordinated debtholders during the continuance of the default. On June 11,
1992, while restructuring negotiations were continuing between the Company and
the holders of its long-term debt, three subordinated debtholders filed an
involuntary petition under Chapter 11 of the Bankruptcy Code against the
Company, which the Company converted, for strategic reasons, to a voluntary
petition on July 31, 1992. None of the Subsidiaries were joined in the
petition. The voluntary petition was dismissed at the mutual request of all
participants on August 25, 1992 as the
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Company and its long-term debtholders had reached an agreement in principle on
a restructuring of the debt and equity of the Company. The closing of the
restructuring occurred on December 30, 1992.
As part of the restructuring, the Company and its long-term debtholders
entered into a series of amendments to their respective agreements which, in
general, modified principal amortization schedules and covenants. Concurrently
with the execution of these amendments, the Company cured all previous
violations under the agreements and paid principal in the amount of $2.2
million and regular accrued interest in the amount of $9.1 million. Of $6.2
million of default interest then outstanding, $3.1 million was forgiven and
$3.1 million was added to the principal amount of the debt obligations
outstanding after the restructuring. In addition, $11.6 million of regular
accrued interest was added to such principal amount outstanding after the
restructuring. The Company and its subordinated debtholders also entered into
separate agreements whereby the holders exchanged their notes for new notes,
shares of redeemable non-convertible non-participating preferred stock with
cumulative stated dividend rates and warrants to purchase shares of the
Company's Common Stock.
As a result of the restructuring, the Company charged an extraordinary item
of $7.5 million (net of the $3.1 million of forgiven default interest) to its
earnings in 1992 and recorded deferred charges of $3.7 million for legal and
other professional fees.
As part of the Financing Plan, the Company replaced the Old Credit Facility
with the Senior Credit Facility and repaid all of its other then outstanding
long-term debt. See "Prospectus Summary--Background."
EMPLOYEES
As of July 31, 1996, the Company employed approximately 1,061 persons. KCAL
currently employs approximately 323 employees. At WTEN (Albany, New York),
approximately 32 employees are represented by Local 166, International
Brotherhood of Electrical Workers ("IBEW"). The current union contract with
IBEW Local 166 continues until June 30, 1998. At WTVO (Rockford, Illinois),
approximately 13 employees are represented by IBEW Local 1220 under a current
contract which expires on August 31, 1996. IBEW Local 166 has commenced a
proceeding before the National Labor Relations Board to require the Company to
bargain with it for an additional 12 employees employed in a production unit
at WTVO. The Company believes it has no obligation to bargain for such a unit
and is contesting the proceedings. At KWQC (Quad Cities), approximately 32
employees are represented by IBEW Local 825. The Company and IBEW Local 825
are in the process of bargaining a first union contract. At KCAL (Los Angeles,
California), approximately 32 employes are represented by the American
Federation of Television and Radio Artists ("AFTRA") under a current union
contract which continues until January 31, 1998; approximately 11 employees
are represented by the International Alliance of Theatrical Stage Employees
and Moving Picture Machine Operators ("IATSE") under a current union contract
which continues until April 30, 1999; approximately 110 employees are
represented by IBEW Local 45 under a current union contract which continues
until October 31, 1998; and approximately 8 employees are represented by the
Directors Guild of America ("DGA") which is in the process of negotiating a
successor union contract with KCAL. No other employees of the Company are
represented by unions. The Company believes its relations with its employees
are satisfactory.
PROPERTIES
The Company's principal executive offices are located at 599 Lexington
Avenue, New York, New York 10022. The Company leases approximately 7,600
square feet of space in New York under a ten-year lease agreement expiring in
the year 2000 (the "Master Lease"). Approximately 5,900 square feet of the
Company's leasehold has been sublet to Adam Young Inc., an affiliate of the
Company, for the balance of the term under the Master Lease. Vincent J. Young,
the Company's Chairman, and Adam Young, the Company's Treasurer, collectively
beneficially own all of the outstanding capital stock of Adam Young Inc. The
terms of the lease were negotiated on an arms-length basis. The Company
believes that the rent under the lease is at rates comparable to other
subleases for office space in New York City at such location. See "Certain
Transactions."
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The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in downtown or business districts. The
transmitter sites and antenna sites are generally located in elevated areas so
as to provide maximum market coverage. The following table contains certain
information describing the general character of the Company's properties,
including properties to be acquired pursuant to the KCAL Acquisition:
<TABLE>
<CAPTION>
METROPOLITAN AREA OWNED OR
AND USE LEASED APPROXIMATE SIZE
------------------------------- -------------- ----------------
<S> <C> <C> <C>
KCAL(1)........ Los Angeles, California
-----------------------
Office and studio Owned 30,000 sq. ft.
Office and studio Leased 18,000 sq. ft.
Transmission tower site Leased 60,000 sq. ft.
WKRN........... Nashville, Tennessee
--------------------
Office and studio Owned 43,100 sq. ft.
Transmission tower site Owned 49 acres
WTEN........... Albany, NY
----------
Office and studio Owned 40,000 sq. ft.
New Scotland, NY
----------------
Transmission tower site Owned 2,800 sq. ft.
WRIC .......... Richmond, VA
------------
Office and studio Owned 44,000 sq. ft.
Land Owned 4 acres
Petersburg, VA
--------------
Transmission site Lease of space --
on tower
Chesterfield Co., VA (2)
------------------------
Transmission tower and building Owned
WATE........... Knoxville, TN
-------------
Office and studio Owned 34,666 sq. ft.
Land Owned 2.65 acres
Knox County, TN
---------------
Transmitter building Owned 3,532 sq. ft.
Land Owned 9.5 acres
House Mountain, TN
------------------
Prospective tower site Owned 5 acres
WBAY........... Green Bay, WI
-------------
Office and studio Owned 90,000 sq. ft.
Land Owned 1.77 acres
DePere, WI
----------
Transmission tower site Owned 3.51 acres
</TABLE>
- --------
(1) To be acquired pursuant to the KCAL Acquisition.
(2) Station owns tower structure and related building, with non-exclusive
easement for access to underlying property, which is owned by a third
party.
65
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN AREA OWNED OR
AND USE LEASED APPROXIMATE SIZE
------------------------------------------- -------- -------------------
<S> <C> <C> <C>
KWQC.. Davenport, Iowa
---------------
Office and Studio Owned 59,786 sq. ft.
Garage Owned 1,350 sq. ft.
Land Owned 86,978 sq. ft.
Alternate Satellite Dish Site Leased 900 sq. ft.
Bettendorf, Iowa
----------------
Building Owned 5,520 sq. ft.
Transmission Tower Site Owned 68.688 acres (2
parcels)
Auxiliary Transmitter Site Leased 200 sq. ft. (plus
easement for tower
anchors and guy
wires for tower
located on adjacent
owned property)
KELO.. Sioux Falls, South Dakota
-------------------------
Land, office, studio and transmission tower Owned 23,700 sq. ft.
Reliance, South Dakota
----------------------
Transmission tower Owned 10.46 acres
Rapid City, South Dakota
------------------------
Office and studio Leased 3,555 sq. ft.
Transmission tower Owned 1 acre
Philip, South Dakota
--------------------
Transmission tower Leased 8.23 acres
Wall, South Dakota
------------------
Transmission tower Leased 4 acres
Beresford, South Dakota
-----------------------
Transmission tower Leased 2.1 acres
DeSmet Township, South Dakota
-----------------------------
Transmission tower Owned 24,000 sq. ft.
Garden City, South Dakota
-------------------------
Transmission tower Owned 1 acre
Auxiliary transmission tower Owned 1 acre
Farmer, South Dakota
--------------------
Transmission tower Owned 1 acre
Mt. Vernon, South Dakota
------------------------
Transmission tower Owned 1 acre
White Lake, South Dakota
------------------------
Transmission tower Owned 1 acre
New Underwood, South Dakota
---------------------------
Transmission tower Leased 200 sq. ft.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN AREA OWNED OR
AND USE LEASED APPROXIMATE SIZE
----------------------- -------- ----------------
<S> <C> <C> <C>
WLNS.......................... Lansing, Michigan
-----------------
Office and studio Owned 19,000 sq. ft.
Land Owned 5 acres
Meridian, Michigan
------------------
Transmission tower site Owned 40 acres
KLFY.......................... Lafayette, Louisiana
--------------------
Office and studio Owned 25,000 sq. ft.
Land Owned 3 acres
Maxie, Louisiana
----------------
Transmission tower site Leased 22,500 sq. ft.
WKBT.......................... La Crosse, Wisconsin
--------------------
Office and studio Owned 12,600 sq. ft.
Gailesville, Wisconsin
----------------------
Transmission tower site Owned 133,600 sq. ft.
WTVO.......................... Rockford, Illinois
------------------
Office and studio Owned 15,200 sq. ft.
Land Owned 14 acres
</TABLE>
LEGAL PROCEEDINGS
The Company currently and from time-to-time is involved in litigation
incidental to the conduct of its business. There are no pending legal
proceedings to which the Company or any of the Subsidiaries is a party, or to
which any of their respective properties is subject, which, in the opinion of
Company management, is likely to have a material adverse effect on the
Company's business or financial condition.
67
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Vincent J. Young 48 Chairman and Director
Adam Young 83 Treasurer and Director
Ronald J. Kwasnick 49 President and Director
James A. Morgan 47 Executive Vice President and Secretary
Deborah A. McDermott 42 Executive Vice President-Operations
Bernard F. Curry 78 Director
Alfred J. Hickey, Jr. 60 Director
Leif Lomo 67 Director
Michael S. Willner 44 Director
</TABLE>
Vincent J. Young has been the Chairman and a director of the Company since
its inception in 1986. Mr. Young is also a member of the Compensation and
Audit Committees of the Company. Mr. Young co-founded the Company with Adam
Young. Vincent Young is also a director and the President of each of the
corporate Subsidiaries. Currently, he is also the Chairman and a director of
Adam Young Inc., a national television representation firm, a position he has
held since 1980. Prior to becoming the Chairman of the Company, he worked at
Adam Young Inc. for ten years in various marketing and representative
capacities, including Vice-President, General Sales Manager, Eastern Sales
Manager and Manager of the Chicago office. Vincent Young is the son of Adam
Young.
Adam Young has been the Treasurer and a director of the Company since its
inception. Mr. Young is also a director and an executive officer of each of
the corporate Subsidiaries. Mr. Young founded Adam Young Inc. in 1944 and has
been active in television station representation since that time. Mr. Young is
currently the Treasurer and a director of Adam Young Inc. Prior to the
formation of the Company, Mr. Young owned minority interests in two radio
stations, and a 30% interest in a television station in Youngstown, Ohio. Mr.
Young served on the Board of Directors of the Television Advertising Bureau
from 1977 to 1979 and has twice been President of the Station Representative
Association, initially from 1955 through 1957, then from 1978 through 1980.
Ronald J. Kwasnick has been the President of the Company since its inception
and became a director in December 1994. From 1986 to 1989, Mr. Kwasnick was
also the General Manager of WLNS, the Company's station in the Lansing,
Michigan market. Mr. Kwasnick joined the Company in 1986, after working as
Executive Vice President/Television for Adams Communications since 1984, where
he served as General Manager of a group of network-affiliated television
stations. Previously, since 1980, he had been the General Manager and
President of WILX in Lansing, Michigan. Prior to that, he spent ten years
working in various television sales management positions.
James A. Morgan joined the Company as its Executive Vice President in March
1993 and became the Secretary of the Company in September 1994. Mr. Morgan is
also the Executive Vice President and Secretary of each of the corporate
Subsidiaries. From 1984 until he joined the Company, he was a director and
Senior Investment Officer at J.P. Morgan Capital Corporation involved in
investing the firm's own capital in various leveraged and early growth stage
companies.
Deborah A. McDermott became the Executive Vice President--Operations of the
Company in May 1996, and has been General Manager of WKRN, the Company's ABC
network affiliate serving the Nashville, Tennessee market, since 1990. From
1986 to 1989, when WKRN was acquired by the Company, and thereafter through
February 1990, she was Station Manager of that station.
Bernard F. Curry, a director of the Company since December 1994, serves as
Chairman of the Company's Audit Committee. Mr. Curry served from 1982 as a
director and from December 1992 as the Chairman of the
68
<PAGE>
Audit Committee of Morgan Trust Company of Florida, N.A. until it was merged
into J.P. Morgan Florida, FSB in January 1994. He has served the surviving
bank in the same capacities since August 1991. The surviving bank is an
indirect wholly-owned subsidiary of J.P. Morgan & Co. Incorporated.
Alfred J. Hickey, Jr., a director of the Company since December 1994, is a
member of the Company's Compensation Committee. In May 1990, Mr. Hickey became
the Vice President--Institutional Sales of Legg Mason, a brokerage firm, and
acted in such capacity until May 1991. Mr. Hickey was a private investor from
May 1991 until June 1993 when he became the Vice President--International
Sales of Southeast Research Partners, a brokerage firm, and acted in such
capacity until October 1994. Mr. Hickey is currently a private investor.
Leif Lomo, a director of the Company since December 1994, is a member of the
Company's Audit Committee. Mr. Lomo is currently the President of Marley Pump,
a division of United Dominion Company, which is principally engaged in the
manufacture and marketing of submersible pumps for small water well
applications and the distribution of gasoline. From 1987 to 1994, Mr. Lomo
served as the Chairman of A.B. Chance Industries, Inc., a manufacturer of
electricity-related equipment. Prior to its acquisition by Hubbell
Incorporated in April 1994, Mr. Lomo also acted as President and Chief
Executive Officer of A.B. Chance Industries, Inc.
Michael S. Willner, a director of the Company since December 1994, serves as
Chairman of the Company's Compensation Committee. Mr. Willner co-founded and
has served as President and Chief Operating Officer of Insight Communications
Company, L.P., a cable television operator, since 1985. Prior to that, he
served as Chief Operating Officer of Vision Cable Communications, Inc., part
of the Newhouse family's holdings in the cable television industry. Mr.
Willner currently serves as a director of International CableTel Incorporated
and is a member of the Board of Directors of the National Cable Television
Association.
Each of Vincent Young, Adam Young and Ronald Kwasnick was a director and/or
executive officer of the Company at the time of the June 1992 filing of an
involuntary petition under Chapter 11 of the Bankruptcy Code against the
Company. See "Business--1992 Restructuring."
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualify. All executive officers
serve at the discretion of the Board of Directors.
69
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table summarizes the compensation for services rendered to the
Company paid in 1993, 1994 and 1995 to the Chief Executive Officer and the
Company's other executive officers serving as such as of the end of 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------- ------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)(2) (#) ($)(3)
- ------------------------ ---- ------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Vincent J. Young........ 1995 650,000 164,486 23,801 -- 266,250 4,500
Chairman (CEO) 1994 522,325 160,000 -- 1,011,750 -- 4,500
1993 469,680 -- -- 1,011,750 -- 2,538
Adam Young.............. 1995 200,000 35,000 -- -- -- --
Treasurer 1994 200,000 20,000 -- -- -- --
1993 200,000 -- -- -- -- --
Ronald J. Kwasnick...... 1995 335,000 76,512 5,034 -- 32,000 4,500
President 1994 270,000 80,000 -- 356,750(4) -- 4,500
1993 240,261 14,000 -- 134,900 -- 2,538
James A. Morgan......... 1995 280,000 60,577 4,704 -- 157,125 4,500
Executive Vice President 1994 225,000 65,000 -- 268,441(5) -- 4,500
1993 187,636 -- -- 101,175 -- 1,876
</TABLE>
- --------
(1) Reflects the forgiveness of loans which were made to employees in 1994 and
1995 for the purpose of satisfying their federal income tax withholding
requirements related to non-cash compensation paid in the form of shares
of Common Stock. See "1995 Stock Option Plan" below.
(2) 1994 data includes amounts relating to shares of Class B Common Stock
which were awarded pursuant to the Company's Incentive Stock Grant Program
on November 14, 1994 with respect to 1994 performance. 1993 data includes
amounts relating to shares of Class B Common Stock which were awarded
pursuant to the Company's Incentive Stock Grant Program in August 1994
with respect to 1993 performance. All such shares were valued at $19, the
initial public offering price for the Company's Class A Common Stock, as
follows: Vincent Young, $1,011,750 for 1994 and 1993; Ronald Kwasnick,
$141,645 for 1994 and $134,900 for 1993; James Morgan, $128,155 for 1994
and $101,175 for 1993. The foregoing shares were registered by the Company
in November 1995 pursuant to a Form S-8 Registration Statement under the
Securities Act of 1933.
(3) Reflects employer contributions to the Company's 401(k) Plan on behalf of
the named executive officers. For 1994 and 1995, such contributions were
made in the form of shares of Class A Common Stock valued at fair market
value on the date of issuance.
(4) Includes amounts relating to 65,320 shares of Class B Common Stock issued
in February 1994 relating to a former employment agreement.
(5) Includes amounts relating to 42,600 shares of Class B Common Stock issued
in March 1994 pursuant to the terms of an employment agreement dated as
March 1, 1993.
70
<PAGE>
The following table sets forth information concerning individual grants of
stock options made during 1995 to the named executive officers in the Summary
Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OF BASE FOR OPTION TERM(1)
OPTION EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5%($) 10%($)
---- ---------- ------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Vincent J. Young........ 251,061(2) 37.5% $19.75(3) 2/10/2000 1,369,292 3,027,186
15,189(4) 2.3 21.725(5) 2/10/2000 91,168 201,457
Adam Young.............. -- -- -- -- -- --
Ronald J. Kwasnick...... 32,000(6) 4.8 19.75(3) 2/10/2000 174,610 385,842
James A. Morgan......... 133,125(7) 19.9 19.75(8) 2/15/2000 726,405 1,605,164
24,000(9) 3.6 19.75(3) 2/10/2000 130,957 289,382
</TABLE>
- --------
(1) The assumed annual rates of appreciation of 5% and 10% would result in the
price of the Company's Class A Common Stock increasing to $36.05 and
$45.50, respectively. For the period from November 7, 1994 through
December 31, 1995, the cumulative total return of the Company's Class A
Common Stock has increased 49%.
(2) 122,999 shares are presently exercisable, and 128,062 shares are
exercisable beginning February 10, 1997.
(3) The exercise price was established at the market price on the date of
grant, February 10, 1995.
(4) 10,126 shares are presently exercisable, and 5,063 shares are exercisable
beginning February 10, 1997.
(5) The exercise price was established at 110% of the market price on the date
of grant, as this option is an "incentive" stock option and Mr. Young
possesses more than 10% of the total voting power of the Company's Common
Stock. See "1995 Stock Option Plan" below.
(6) 16,000 shares are presently exercisable, and 16,000 shares are exercisable
beginning February 10, 1997.
(7) 106,500 shares are presently exercisable, and 26,625 shares are
exercisable beginning September 1, 1996.
(8) The exercise price was established at the market price on February 10,
1995. The market price on the date of grant, February 15, 1995, was
$22.00.
(9) 12,000 shares are presently exercisable, and 12,000 shares are exercisable
beginning February 10, 1997.
The following table sets forth information at fiscal year-end 1995
concerning stock options held by the named executive officers in the Summary
compensation Table. No options were exercised during 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL YEAR- THE-MONEY OPTIONS AT
END FISCAL YEAR-END
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Vincent J. Young......... 5,063 261,187 $ 33,036 $2,200,091
Adam Young............... -- -- -- --
Ronald J. Kwasnick....... 5,063 26,937 43,036 228,965
James A. Morgan.......... 58,313 98,812 495,661 839,902
</TABLE>
Those directors who are not also employees of the Company receive as an
annual retainer five year options, having a fair market value exercise price,
to purchase 1,200 shares of Class A Common Stock, and also receive
reimbursement of out-of-pocket expenses incurred for each Board or committee
meeting attended. Nonemployee directors also receive, upon becoming a
director, a five-year option to purchase up to 1,000 shares of Class A Common
Stock at an exercise price equal to 120% of the quoted price on the date of
grant. No other directors are compensated for services as a director.
71
<PAGE>
EMPLOYMENT AGREEMENT
The Company has an employment agreement with James A. Morgan, Executive Vice
President of the Company. The term of Mr. Morgan's employment agreement
expires 90 days after the date on which the Company gives notice of
termination. Under the agreement, Mr. Morgan's base salary is $225,000.
However, such amount may be increased at the discretion of the Board of
Directors, which has approved an increase in Mr. Morgan's base salary to
$322,500 effective as of January 1, 1996. The agreement provides for the
payment of his base salary for twelve months after termination other than by
reason of disability, death or breach of the agreement. Pursuant to the
agreement, 21,300 shares of Common Stock were issued to Mr. Morgan on March 1
of each of 1993 and 1994. The agreement also provided for the issuance of
21,300 additional shares on March 1 of each of 1995 and 1996 as well as 10,650
additional shares on September 1, 1996. However, effective as of February 15,
1995, the employment agreement was amended to provide for the grant of options
under the Company's 1995 Stock Option Plan in lieu of the future issuance of
shares on the basis of two and one-half option shares for each share which was
to be issued. See "1995 Stock Option Plan" below. The exercise dates for the
options and the adjusted number of shares available for exercise are in
accordance with the original provisions of the employment agreement relating
to the issuance of shares.
401(K) PLAN
The Company maintains a retirement plan (the "401(k) Plan") established in
conformity with Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"), covering all of the eligible employees of the Company
and Adam Young Inc., an affiliate of the Company. Pursuant to the 401(k) Plan,
employees may elect to defer up to 15% of their current pre-tax compensation
and have the amount of such deferral contributed to the 401(k) Plan. The
maximum elective deferral contribution was $9,240 in 1995, subject to
adjustment for cost-of-living in subsequent years. Certain highly compensated
employees may be subject to a lesser limit on their maximum elective deferral
contribution. The 401(k) Plan permits, but does not require, matching
contributions and non-matching (profit sharing) contributions to be made by
the Company up to a maximum dollar amount or maximum percentage of participant
contributions, as determined annually by the Company. For 1993, the Company
made non-matching cash contributions on behalf of all eligible employees in
1993, in an amount equal to 1% of 1993 compensation, or $150,000 in the
aggregate. For 1994, the Company made non-matching contributions of shares of
Class A Common Stock equal to 3% of 1994 compensation, or $471,888, in the
aggregate. The Company effected such contribution by issuing an aggregate of
21,696 shares of Class A Common Stock as of March 14, 1995, which shares had a
quoted price on that date of $21.75 per share. For 1995, the Company also made
non-matching contributions of shares of Class A Common Stock equal to 3% of
1995 compensation, or $728,669 in the aggregate, by issuing an aggregate of
27,685 of such shares as of January 5, 1996, which shares had a quoted price
on that date of $26.32 per share. The 401(k) Plan is qualified under Section
401 of the Code so that contributions by employees and employer, if any, to
the 401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by
the Company, if any, will be deductible by the Company when made.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, the members of the compensation committee are Michael S. Willner,
Alfred J. Hickey, Jr. and Vincent J. Young, the Company's Chairman.
1995 STOCK OPTION PLAN
On February 6, 1995, the Company adopted the Young Broadcasting Inc. 1995
Stock Option Plan (the "Plan"). The purpose of the Plan is to promote the
interests of the Company and its stockholders by strengthening the Company's
ability to attract and retain competent employees, to make service on the
Board of Directors of the Company more attractive to present and prospective
non-employee directors and to provide a means to encourage stock ownership and
proprietary interest in the Company by officers, non-employee directors
72
<PAGE>
and valued employees and other individuals upon whose judgment, initiative and
efforts the financial growth of the Company largely depend.
The Plan may be administered by either the entire Board of Directors of the
Company or a committee consisting of two or more members of the Board of
Directors, each of whom is a "disinterested person" within the meaning of Rule
16b-3 promulgated under the Exchange Act. The Board of Directors or committee,
as the case may be, is to determine, among other things, the recipients of
grants, whether a grant will consist of incentive stock options ("ISOs"),
nonqualified stock options or stock appreciation rights ("SARs") (in tandem
with an option or free-standing) or a combination thereof, and the number of
shares to be subject to such options. ISOs may be granted only to officers and
key employees of the Company and its subsidiaries. Nonqualified stock options
and SARs may be granted to such officers and employees as well as to agents
and directors of and consultants to the Company, whether or not otherwise
employees of the Company.
The Plan provides for the granting of ISOs to purchase the Company's Common
Stock at not less than the fair market value on the date of the option grant
and the granting of nonqualified options and SARs with any exercise price.
SARs granted in tandem with an option have the same exercise price as the
related option. The total number of shares with respect to which options and
SARs may be granted under the Plan is currently 1,000,000. As of August 30,
1996, options for an aggregate of 4,800 shares of Class A Common Stock and
637,188 shares of Class B Common Stock had been granted to various
individuals, including Vincent Young, Ronald Kwasnick, James Morgan and
Deborah McDermott. As of August 30, 1996, the Company had not granted any
SARs. The Plan contains certain limitations applicable only to ISOs granted
thereunder. To the extent that the aggregate fair market value, as of the date
of grant, of the shares to which ISOs become exercisable for the first time by
an optionee during the calendar year exceeds $100,000, the option will be
treated as a nonqualified option. In addition, if an optionee owns more than
10% of the total voting power of all classes of the Company's stock at the
time the individual is granted an ISO, the option price per share cannot be
less than 110% of the fair market value per share and the term of the ISO
cannot exceed five years. No option or SAR may be granted under the Plan after
February 5, 2005, and no option or SAR may be outstanding for more than ten
years after its grant.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash, check or, under certain
circumstances, in shares of any class of the Company's Common Stock, or any
combination thereof. SARs, which give the holder the privilege of surrendering
such rights for the appreciation in the Common Stock between the time of the
grant and the surrender, may be settled, in the discretion of the Board or
committee, as the case may be, in cash, Common Stock, or in any combination
thereof. The exercise of an SAR granted in tandem with an option cancels the
option to which it relates with respect to the same number of shares as to
which the SAR was exercised. The exercise of an option cancels any related SAR
with respect to the same number of shares as to which the option was
exercised. Generally, options and SARs may be exercised while the recipient is
performing services for the Company and within three months after termination
of such services.
The Plan may be terminated at any time by the Board of Directors, which may
also amend the Plan, except that without stockholder approval, it may not
increase the number of shares subject to the Plan or change the class of
persons eligible to receive options under the Plan.
73
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of August 30, 1996,
before and after giving effect to the issuance of shares of Class A Common
Stock pursuant to the Offerings, regarding the beneficial ownership of the
Company's Common Stock by (i) each executive officer and director of the
Company, (ii) each stockholder known by the Company to beneficially own 5% or
more of such Common Stock, (iii) the Selling Stockholders and (iv) all
directors and executive officers as a group. Except as otherwise indicated,
the address of each beneficial holder of 5% or more of such Common Stock is
the same as the Company. The table assumes that the Underwriters' over-
allotment option is not exercised.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
------------------------------------------------------
BEFORE CLASS B
OFFERING SHARES AFTER OFFERING COMMON STOCK
--------------------- BEING ---------------------- --------------------------
BENEFICIAL OWNER NUMBER % OFFERED NUMBER % NUMBER %
---------------- --------- ---- --------- --------- ----- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Vincent J. Young........ 4,363(2)(3) * -- 4,363(2)(3) * 1,018,830(4)(5)(6)(7) 47.1
Adam Young.............. -- -- -- -- -- 963,425(4)(8) 47.5
Ronald J. Kwasnick...... 379(3) * -- 379(3) * 104,395(7)(9) 5.1
James A. Morgan......... 679(3)(10) * -- 679(3)(10) * 199,795(7)(11) 9.2
Deborah A. McDermott.... 1,179(3) * -- 1,179(3) * 25,555(7)(12) 1.2
Richard Young........... 1,000 * -- 1,000 * 136,016(5) 6.7
The Goldman Sachs Group,
L.P. and certain
affiliates(13)......... 2,079,375 29.9 1,125,086 954,289 7.8 -- --
85 Broad Street
New York, NY 10004
Capital Cities/ABC,
Inc.(14)............... 2,250,000 31.5 -- -- -- -- --
77 West 66th Street
New York, NY 10023
Putnam Investments, Inc.
and Affiliates(15)..... 881,950 18.1 -- 881,950 7.8 -- --
One Post Office Square
Boston, MA 02109
ITT Hartford Group, Inc.
and Affiliates(16) .... 292,500 6.0 -- 292,500 2.6 -- --
Hartford Plaza
Hartford, CT 06115
Estate of Henry Kramer.. 42,387 * 23,111 19,276 * -- --
IAI Stock Fund.......... 4,331 * 2,362 1,969 * -- --
IAI Value Fund.......... 1,207 * 657 550 * -- --
Bernard F. Curry(17).... 3,200 * -- 3,200 * -- --
Alfred J. Hickey, 2,200 * -- 2,200 * -- --
Jr.(17).................
Leif Lomo(17)........... 3,200 * -- 3,200 * -- --
Michael S. Willner(17).. 12,200 * -- 12,200 * -- --
All directors and
executive officers, as 27,400 * -- 27,400 * 2,244,550 96.1
a group................
<CAPTION>
PERCENT OF VOTE
AS A SINGLE CLASS(1)
-------------------------
BEFORE AFTER
BENEFICIAL OWNER OFFERING OFFERING
---------------- ------------ ------------
<S> <C> <C>
Vincent J. Young........ 38.4 31.0
Adam Young.............. 38.3 30.5
Ronald J. Kwasnick...... 4.1 3.3
James A. Morgan......... 7.5 6.1
Deborah A. McDermott.... 1.0 1.0
Richard Young........... 5.4 4.3
The Goldman Sachs Group,
L.P. and certain
affiliates(13)......... 7.6 2.9
85 Broad Street
New York, NY 10004
Capital Cities/ABC,
Inc.(14)............... 8.2 --
77 West 66th Street
New York, NY 10023
Putnam Investments, Inc.
and Affiliates(15)..... 3.5 2.8
One Post Office Square
Boston, MA 02109
ITT Hartford Group, Inc.
and Affiliates(16) .... 1.2 1.0
Hartford Plaza
Hartford, CT 06115
Estate of Henry Kramer.. * *
IAI Stock Fund.......... * *
IAI Value Fund.......... * *
Bernard F. Curry(17).... * *
Alfred J. Hickey, * *
Jr.(17).................
Leif Lomo(17)........... * *
Michael S. Willner(17).. * *
All directors and
executive officers, as 79.5 64.8
a group................
</TABLE>
(Footnotes begin on following page)
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- --------
* Less than 1%.
(1) Holders of Class A Common Stock are entitled to one vote per share, and
holders of Class B Common Stock are entitled to ten votes per share except
for votes relating to certain significant transactions. Holders of both
classes of Common Stock will vote together as a single class on all
matters presented for a vote, except as otherwise required by law.
(2) Includes 2,812 shares held by his wife.
(3) Includes 379 shares held through the 401(k) Plan.
(4) Includes 67,450 shares of Class B Common Stock held by Adam Young Inc., of
which Adam Young and Vincent Young are executive officers and directors,
and of which they together beneficially own all of the outstanding voting
shares.
(5) Includes 136,016 shares of Class B Common Stock held pursuant to an
agreement dated as of July 1, 1991 which established a voting trust for
the benefit of family members of management, for which Vincent Young and
Richard Young act as trustees. During the term of the voting trust, which
expires July 1, 2001, the trustees have the sole right to vote the shares
subject to the trust. If the trustees cannot agree as to how the shares
shall be voted, each trustee will vote 50% of the shares.
(6) Includes 133,125 shares issuable upon the exercise of options granted
pursuant to the Plan, 10,126 of which are exercisable at $21.725 per share
and 122,999 of which are exercisable at $19.75 per share.
(7) Does not include those shares issuable upon the exercise of options
granted pursuant to the Plan which are not exercisable within 60 days.
(8) Includes 100,000 shares held by his wife.
(9) Includes 16,000 shares issuable upon the exercise of options granted
pursuant to the Plan which are exercisable at $19.75 per share.
(10) Includes shares held by a family trust.
(11) Includes 145,125 shares issuable upon the exercise of options granted
pursuant to the Plan which are exercisable at $19.75 per share.
(12) Includes 11,000 shares issuable upon the exercise of options granted
pursuant to the Plan which are exercisable at $19.75 per share.
(13) Includes shares beneficially owned by certain investment limited
partnerships of which affiliates of The Goldman Sachs Group, L.P. ("GS
Group") are the general partners or managing general partners. Broad
Street Investment Fund I, L.P. owns 1,557,172 shares of Class C Common
Stock; Stone Street Fund 1987 owns 47,925 shares of Class C Common Stock;
Stone Street Fund 1988 owns 49,132 shares of Class C Common Stock; Stone
Street Fund 1989 owns 58,646 shares of Class C Common Stock; Bridge
Street Fund 1987 owns 19,951 shares of Class C Common Stock; Bridge
Street Fund 1988 owns 11,999 shares of Class C Common Stock; and Bridge
Street Fund 1989 owns 24,708 shares of Class C Common Stock. Also
includes 293,940 shares of Class C Common Stock owned by Goldman, Sachs &
Co. and 15,902 shares of Class A Common Stock held in customer accounts
with respect to which Goldman, Sachs & Co. exercises voting or investment
authority, or both. GS Group shares voting and dispositive power with
respect to all shares shown as beneficially owned by them. GS Group
disclaims beneficial ownership of shares held (a) by the investment
limited partnerships to the extent partnership interests in such
partnerships are held by persons other than GS Group and its affiliates
and (b) in customer accounts.
(14) Includes 1,500,000 shares of the Company's non-voting Class C Common
Stock, which are convertible on a one-to-one basis into shares of the
Company's Class A Common Stock, and 750,000 shares of Class C Common
Stock underlying the ABC Warrants, which shares and ABC Warrants are to
be repurchased by the Company upon completion of the Offerings. See
"Certain Transactions." The Walt Disney Company, by virtue of its
ownership of all of the outstanding common stock of Capital Cities/ABC,
Inc., is also deemed a beneficial owner of such shares.
(15) Includes shares beneficially owned by Putnam Investment Management, Inc.,
The Putnam Advisory Company, Inc. and Putnam New Opportunities Fund,
subsidiaries of Putnam Investments, Inc. ("PI"), as reported in a
Schedule 13G filed by PI in June 1996. PI is a wholly-owned subsidiary of
Marsh & McLennan Companies, Inc. ("MM"). PI and MM have disclaimed
beneficial ownership of such shares pursuant to Rule 13d-4 under the
Exchange Act.
(16) Includes shares beneficially owned by Hartford Investment Management
Company, Inc., a subsidiary of ITT Hartford Group, Inc. ("ITT"), and
Hartford Capital Appreciation Fund, Inc., as reported in a Schedule 13G
filed by ITT in February 1996.
(17) Includes 1,000 shares issuable upon the exercise of stock options
exercisable at $20.70 per share, and 1,200 shares issuable upon the
exercise of options granted pursuant to the Plan which are exercisable at
$28.00 per share.
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CERTAIN TRANSACTIONS
Adam Young Inc. ("AYI"), wholly-owned by Adam Young and Vincent Young, is a
national representation firm which procures national advertising on behalf of
television stations in the United States. AYI has entered into sales
representative agreements with each of the Company's eleven television
stations. AYI received commissions of approximately $3.8 million in the
aggregate from the Company's stations in 1995. In addition, at December 31,
1995, the Company's stations had accrued commissions payable to AYI of
approximately $266,000. AYI procured approximately $51.5 million of total
advertising time for the Company's stations in 1995. The Company believes that
the terms of the agreements between AYI and the stations are no less favorable
to the Company than could be obtained from other national representation
firms.
The Company has entered into a sublease (the "Sublease") with AYI for the
use of approximately 5,900 square feet of office space together with
furnishings and equipment at the Company's principal executive offices. The
Sublease expires on September 30, 2000, the expiration date of the Company's
underlying lease. The Sublease provided for a monthly rental of $43,000 until
September 1, 1995, and presently provides for a monthly rental of $44,964
through the end of the term. In addition, AYI must pay a certain percentage of
the taxes, expenses and other amounts payable by the Company pursuant to the
underlying lease. The Company received a total of $537,000 in rental and other
payments from AYI in 1995 pursuant to the Sublease. The Company may terminate
the Sublease by giving prior notice to AYI. The terms of the lease were
negotiated on an arms-length basis. The Company believes that the rent under
the Sublease is at rates comparable to other subleases for office space in its
vicinity. The annual rent charges to AYI by the Company has exceeded the
Company's cost for the space and leasehold improvements made by the Company.
The Company and The American Broadcasting Companies, Inc., an affiliate of
Capital Cities/ABC, Inc., entered into new network affiliation agreements in
October 1994 for each of the Company's ABC-affiliated stations. Effective as
of August 14, 1995, the Company switched the affiliation of WTVO (Rockford,
Illinois) from NBC to ABC. The Company's ABC-affiliated stations received
aggregate annual compensation of $6.8 million from ABC in 1995.
The Company and Disney, the parent of ABC, have entered into an agreement
pursuant to which the Company will repurchase the ABC Stock and the ABC
Warrants concurrently with the closing of the Offerings. Under the agreement,
the Company will repurchase the ABC Stock at $31.03 per share (the public
offering price per share of the Class A Common Stock, less the underwriting
discount per share). The Company will repurchase the ABC Warrants at $10.965
per share (the public offering price per share of the Class A Common Stock and
the per share exercise price of the ABC Warrants ($22.80), plus $2, less one-
half of the underwriting discount per share). ABC currently owns KABC (Los
Angeles, California). Disney has informed the Company that it has determined
to effect the ABC Repurchase for the purpose of resolving any regulatory
issues relating to its continued ownership of an interest in the Company.
The Company made loans in 1994 to certain executive officers and other
employees of the Company to satisfy their federal income tax withholding
requirements related to non-cash compensation paid in the form of shares of
Common Stock. The Company made additional loans to such employees in 1995 to
satisfy their remaining tax obligations related to such non-cash compensation.
The shares were issued to such employees in August and November 1994 pursuant
to the Program and in March 1994 as part of compensation under employment
arrangements. The aggregate outstanding principal amount of such loans at
April 12, 1995 was $2,049,000, including $1,039,000 to Vincent Young, Chairman
and a director of the Company; $219,000 to Ronald J. Kwasnick, President and a
director of the Company; and $206,000 to James A Morgan, Executive Vice
President and Secretary of the Company. The loans bear interest at the rate of
7.21% per annum and are payable in five equal annual installments of principal
and accrued interest. On November 8, 1995, the Board of Directors of the
Company adopted a loan forgiveness policy in order to afford employees who
received grants under the Program with the benefits intended by the Program
without imposing upon them the adverse tax consequences incident thereto.
Under the forgiveness policy, all employees of the Company with such loans
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outstanding who were employed in good standing as of November 15, 1995 could
elect to defer for one year the first installment of principal and related
accrued interest. For all of such electing employees, one-twelfth of such
deferred installment will be forgiven as of the end of each full month of
employment in good standing during the twelve-month period ending November 15,
1996. Thereafter, this policy provides for employee elections similarly to
defer the remaining four installments as they become due with similar monthly
vesting for forgiveness based upon continued employment in good standing.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company has three classes of Common Stock, designated as Class A, Class
B and Class C, each share having a par value of $.001 (the "Common Stock").
The Company also has one class of Preferred Stock, divided into three series
(the "Preferred Stock"), none of which is currently issued. Each class of
Common Stock has substantially identical rights, except with respect to
voting. The Class A Common Stock entitles its holders to one vote per share on
all matters submitted to a vote of the holders of Common Stock. The Class B
Common Stock entitles its holders to ten votes per share, except as described
below. Holders of Class C Common Stock are not entitled to vote, except in
connection with any change to the Company's Certificate of Incorporation (the
"Certificate") which would adversely affect their rights as holders of such
class of Common Stock. Holders of all classes of Common Stock entitled to vote
will vote together as a single class on all matters presented to the
stockholders for their vote or approval except as otherwise required by the
General Corporation Law of the State of Delaware ("Delaware Law").
All of the Company's outstanding shares of Class B Common Stock are held by
Company management and by or in trust for family members of management. The
Certificate provides for a defined "Management Group" which includes such
members of management and also includes a defined group of relatives of
Vincent Young and Adam Young, the Chairman and Treasurer, respectively, of the
Company. The Management Group, by virtue of its ownership of the Class B
Common Stock, with its super voting rights as described below, retain control
over the Company's business and operations. In the event any shares of Class B
Common Stock are transferred outside of the Management Group, such shares will
automatically be converted into shares of Class A Common Stock. In addition,
if the total number of shares of Common Stock held by members of the
Management Group falls to below 10% of the total number of shares of Common
Stock outstanding, all of the outstanding shares of Class B Common Stock
automatically will be reclassified as Class A Common Stock.
Holders of Class C Common Stock may at any time convert their shares into
the same number of shares of Class A Common Stock. Holders of Class A Common
Stock may convert their shares into the same number of shares of Class C
Common Stock, provided that prior notice of such conversion is given to each
holder of shares of Class C Common Stock. In addition, the Company is required
to give notice to holders of Class C Common Stock before it acquires any
shares of Class A Common Stock or takes any other action affecting the voting
rights of Class A Common Stock. In any merger, consolidation or business
combination, the consideration to be received per share by holders of Class A
and Class C Common Stock must be identical to that received by holders of
Class B Common Stock, except that in any such transaction in which shares of
Common Stock are distributed, such shares may differ as to voting rights to
the extent that voting rights now differ among the classes of Common Stock.
The holders of Class A Common Stock and Class B Common Stock vote as a
single class, with each share of each class entitled to one vote per share,
with respect to any proposed (a) "going private" transaction, (b) sale or
other disposition of all or substantially all of the Company's assets, (c)
sale or transfer which would cause a fundamental change in the nature of the
Company's business and (d) merger or consolidation of the Company in which the
holders of the Company's Common Stock will own less than 50% of the Common
Stock following such transaction. A "going private" transaction is any "Rule
13e-3 Transaction," as such term is defined in Rule 13e-3 promulgated under
the Securities Exchange Act of 1934, between the Company and (i) Vincent Young
or Adam Young, or (ii) any affiliate of Vincent Young or Adam Young, or (iii)
any group of which
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Vincent Young or Adam Young or an affiliate of Vincent Young or Adam Young is
a member. An "affiliate" is defined as (i) any individual or entity who or
that, directly or indirectly, controls, is controlled by, or is under common
control with Vincent Young or Adam Young, (ii) any corporation or organization
(other than the Company or a majority-owned subsidiary of the Company) of
which Vincent Young or Adam Young is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of voting
securities, or in which Vincent Young or Adam Young has a substantial
beneficial interest, (iii) a voting trust or similar arrangement pursuant to
which Vincent Young or Adam Young generally controls the vote of the shares of
Common Stock held by or subject to such trust or arrangement, (iv) any other
trust or estate in which Vincent Young or Adam Young has a substantial
beneficial interest or as to which Vincent Young or Adam Young serves as
trustee or in a similar fiduciary capacity, or (v) any relative or spouse of
Vincent Young or Adam Young, or any relative of such spouse, who has the same
residence as Vincent Young or Adam Young.
Under Delaware law, the holders of each class of Common Stock are entitled
to vote as a separate class with respect to any amendment to the Certificate
that would increase or decrease the aggregate number of authorized shares of
such class, increase or decrease the par value of the shares of such class, or
modify or change the powers, preferences or special rights of the shares of
such class so as to affect such class adversely.
For a discussion of the effects of disproportionate voting rights of the
Common Stock, see "Risk Factors--Voting Rights; Control by Certain
Stockholders; Possible Anti-takeover Effect."
Stockholders of the Company have no preemptive rights or other rights to
subscribe for additional shares. Subject to the rights of holders of Preferred
Stock, if any, and the provisions of the Senior Credit Facility and the
Indentures, all holders of Common Stock, regardless of class, are entitled to
share equally on a share-for-share basis in any assets available for
distribution to stockholders on liquidation, dissolution or winding up of the
Company. No shares of any class of Common Stock have conversion rights or are
subject to redemption.
Holders of Common Stock are entitled to receive such dividends, if any, as
may be declared by the Company's Board of Directors out of funds legally
available therefor, but only if all dividends due on the outstanding Preferred
Stock have been paid. Under the Senior Credit Facility and the Indentures, the
Company's ability to declare dividends will be restricted.
PREFERRED STOCK
The Company's Board of Directors is authorized to provide for the issuance
of Preferred Stock in one or more series and to fix the designations,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference, and to fix the number of shares to be included in any such series.
Any Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or
winding up, or both. In addition, any such shares of Preferred Stock may have
class or series voting rights.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware Law. In general, these provisions prohibit a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior to
the proposed business combination, did own) 15% or more of the corporation's
voting stock. These provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of the Company.
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FOREIGN OWNERSHIP
Under the Certificate, the Company is not permitted to issue or transfer on
its books any of its capital stock to or for the account of any alien if after
giving effect to such issuance or transfer, the capital stock held by or for
the account of any alien or aliens would exceed, individually or in the
aggregate, 25% of the Company's capital stock at any time outstanding. Any
issuance or transfer of capital stock in violation of such prohibition will be
void and of no force and effect. The Certificate also provides that no alien
or aliens shall be entitled to vote or direct or control the vote of more than
25% of the total voting power of all of the shares of capital stock of the
Company outstanding and entitled to vote at any time and from time-to-time. In
addition, the Certificate provides that no alien shall be qualified to act as
an officer of the Company and no more than 25% of the total number of
directors of the Company at any time may be aliens. The Certificate further
gives the Board of Directors of the Company all power necessary to administer
the above provisions. See "Business--Federal Regulation of Television
Broadcasting."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Class A Common Stock is
Boston EquiServe Services.
LISTING
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "YBTVA".
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the Offerings, including the ABC Repurchase, the
Company, as of August 30, 1996, would have had outstanding 14,230,357 shares
of Common Stock. Of the 10,480,357 shares outstanding at August 30, 1996,
other than the 1,500,000 shares to be repurchased pursuant to the ABC
Repurchase and 2,111,398 shares to be sold by the Selling Stockholders
(assuming exercise of the Underwriters' over-allotment option), (i) 4,858,007
previously registered shares will be freely tradable without restriction or
further registration under the Securities Act, (ii) 1,575,180 shares are
eligible for sale subject to the volume and other restrictions of Rule 144
under the Securities Act, and (iii) 435,772 shares have or will become
eligible for sale into the open market under Rule 144(k) from time to time,
free of such volume and other restrictions under Rule 144. In addition as of
August 30, 1996 options for 399,237 shares were exercisable and, upon
exercise, such shares will be freely tradable without restriction or further
registration. As of August 30, 1996, the Company also had reserved an
additional 346,938 shares for issuance from time to time pursuant to options
under its 1995 Stock Option Plan which have been registered under the
Securities Act, and such shares may be sold into the open market when issued.
The Company, the Selling Stockholders (other than the Estate of Henry
Kramer, which has advised Merrill Lynch it does not intend to sell its Common
Stock other than in the Offerings for 30 days after the date of this
Prospectus) and certain officers and directors of the Company have each agreed
not to sell or grant any option for the sale of, or otherwise dispose of, any
Common Stock, or any securities convertible into or exchangeable or
exercisable for shares of Common Stock, other than the shares of Common Stock
that may be offered by the Company and the Selling Stockholders in the
Offerings, and not to file or request to be filed, as the case may be, any
registration statement with respect to Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of Merrill
Lynch.
The Company can make no prediction as to the effect, if any, that sales of
additional shares of Class A Common Stock or the availability of shares for
future sale will have on the market price of the Class A Common Stock or the
availability of shares for future sale will have on the market price of the
Class A Common Stock. Sales in the public market of substantial amounts of the
Common Stock, or the perception that such sales could occur, could depress the
prevailing market price for the Class A Common Stock. See "Shares Eligible for
Future Sale."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated
for purposes of Rule 144) who has beneficially owned "restricted
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securities" (as that term is defined in Rule 144) for at least two years
(including the holding period of any prior owner except an affiliate) would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of: (i) one percent of the then outstanding shares of
the same class of Common Stock (approximately 114,624 shares immediately after
the Offerings in the case of Class A Common Stock); or (ii) the average weekly
trading volume of the Class A Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an affiliate of
the Company), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Unless otherwise restricted, such "144(k) shares," subject to the
lock-up agreements described above, may therefore be sold immediately upon the
completion of the Offerings.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Class A Common
Stock by a "Non-U.S. Holder." For purposes of this discussion, a "Non-U.S.
Holder" means any person other than (i) an individual who is a citizen or
resident (as determined for U.S. federal income tax purposes) of the United
States, (ii) a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof
or (iii) an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury regulations, and administrative
interpretations as of the date hereof, all of which may be changed, possibly
with retroactive effect. This discussion is for general information only, does
not address all aspects of U.S. federal income and estate taxation that may be
relevant to Non-U.S. Holders in light of their particular circumstances, and
does not address any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
PROSPECTIVE HOLDERS OF CLASS A COMMON STOCK SHOULD CONSULT THEIR TAX
ADVISORS ABOUT THE PARTICULAR UNITED STATES FEDERAL, STATE AND LOCAL AND NON-
UNITED STATES INCOME AND OTHER TAX CONSEQUENCES TO THEM OF HOLDING AND
DISPOSING OF CLASS A COMMON STOCK.
DIVIDENDS
Subject to the exceptions discussed below, dividends paid to a Non-U.S.
Holder of Class A Common Stock generally will be subject to withholding tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty. For purposes of determining whether tax is to be withheld at a 30%
rate or a reduced rate as specified by an income tax treaty, the Company is
allowed to presume (unless it has knowledge to the contrary) that dividends
paid to an address in a foreign country are paid to a resident of such
country. However, under proposed regulations, in the case of dividends paid
after December 31, 1997 (December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-U.S. Holder generally
would be subject to United States withholding tax at a 31% rate under the
backup withholding rules described below, rather than at a 30% rate or at a
reduced rate under an income tax treaty, unless certain certification
procedures (or, in the case of payments made outside the United States with
respect to an offshore account, certain documentary evidence procedures) are
complied with, directly or through an intermediary. A Non-U.S. Holder that is
eligible for a reduced rate of United States withholding tax pursuant to an
income tax treaty may obtain a refund of any excess amounts currently withheld
by filing an appropriate claim for refund with the U.S. Internal Revenue
Service.
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Upon the filing of an Internal Revenue Service Form 4224 with the Company or
its dividend paying agent, there will be no withholding tax on dividends that
are effectively connected with the Non-U.S. Holder's conduct of a trade or
business within the United States. Instead, the effectively connected
dividends will be subject to regular U.S. income tax in the same manner as if
the Non-U.S. Holder were a U.S. resident. A Non-U.S. Holder that is a foreign
corporation with effectively connected dividends also may be subject under
certain circumstances to an additional "branch profits tax" at a rate of 30%
(or such lower rate as may be specified by an applicable treaty) of its
effectively connected earnings and profits, subject to certain adjustments,
deemed to have been repatriated from the United States.
Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to 31% backup withholding if the Non-U.S. Holder fails to
establish an exemption or to provide a correct tax identification number and
other information to the payor. Under current rules, United States backup
withholding (which generally is imposed at the rate of 31% on certain payments
to persons that fail to furnish the information required under the United
States information reporting requirements) and information reporting generally
will not apply to (i) dividends paid on Common Stock to a Non-U.S. Holder that
is subject to withholding at the 30% rate (or that is subject to withholding
at a reduced rate under an applicable treaty) or (ii) under current law,
dividends paid to a Non-U.S. Holder at an address outside of the United
States. However, under proposed regulations, in the case of dividends paid
after December 31, 1997 (December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-U.S. Holder generally
would be subject to backup withholding at a 31% rate, unless certain
certification procedures (or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.
Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or other agreements, the U.S. Internal Revenue
Service may make its reports available to tax authorities in the recipient's
country of residence.
GAIN ON DISPOSITION OF CLASS A COMMON STOCK
In general, a Non-U.S. Holder will not be subject to U.S. federal income tax
with respect to any gain realized on a sale or other disposition of Class A
Common Stock unless: (i) the gain is effectively connected with a trade or
business of such holder in the United States (or, if an applicable tax treaty
applies, is attributable to a permanent establishment maintained by the Non-
U.S. Holder in the United States); (ii) in the case of certain Non-U.S.
Holders who are non-resident alien individuals and hold the Class A Common
Stock as a capital asset, such individuals are present in the United States
for 183 or more days in the taxable year of the disposition and either the
Non-U.S. Holder has a "tax home" in the United States for federal income tax
purposes or the sale is attributable to an office or other fixed place of
business maintained by the Non-U.S. Holder in the United States; (iii) the
Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates; or (iv) the Company is or has been a
"United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code and certain other conditions are met. (The
Company does not believe that it has been, is, or will become a "U.S. real
property holding corporation" in the foreseeable future.)
If an individual Non-U.S. Holder falls under clause (i) above, such holder
will, unless an applicable treaty provides otherwise, be taxed on the net gain
derived from the disposition under regular graduated United States federal
income tax rates. If an individual Non-U.S. Holder falls under clause (ii)
above, such holder will be subject to a flat 30% tax on the gain derived from
the disposition, which may be offset by certain United States capital losses.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it will be taxed on the net gain derived from such disposition under
regular graduated United States federal income tax rates and may be subject to
an additional branch profits tax at a 30% rate, unless it qualifies for an
exemption or lower rate under an applicable income tax treaty.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX ON DISPOSITIONS
OF CLASS A COMMON STOCK
If the proceeds of a disposition of Class A Common Stock are paid over, by
or through a U.S. office of a broker, the payment is subject to information
reporting and to 31% backup withholding unless the disposing holder certifies
its status as a Non-U.S. Holder or otherwise establishes an exemption.
Generally, U.S. information reporting and backup withholding will not apply to
a payment of disposition proceeds if the payment is made outside the United
States through a non-U.S. office of a non-U.S. broker. However, U.S.
information reporting requirements (but not backup withholding) will apply to
a payment of disposition proceeds outside the United States if: (A) the
payment is made through an office outside the United States of a broker that
is either (i) a U.S. person, (ii) a foreign person which derives 50% or more
of its gross income for certain periods from the conduct of a trade or
business in the United States or (iii) a "controlled foreign corporation" for
U.S. federal income tax purposes; and (B) the broker fails to maintain
documentary evidence that the holder is a Non-U.S. Holder and that certain
conditions are met, or the holder does not otherwise establish that it is
entitled to an exemption. The IRS recently proposed regulations addressing
certain withholding, certification and information reporting rules (some of
which have been mentioned above) which could affect the treatment of the
payment of the proceeds discussed above. Non-U.S. Holders should consult their
tax advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom, the procedures for
obtaining such an exemption, if available, and the possible application of the
proposed regulations addressing the withholding and the information reporting
rules.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
FEDERAL ESTATE TAX
An individual who is not a citizen or resident (as defined for United States
federal estate tax purposes) of the United States who is treated as the owner
of an interest in the Class A Common Stock will be required to include the
value thereof in his gross estate for U.S. federal estate tax purposes, and
may be subject to U.S. federal estate tax unless an applicable estate tax
treaty provides otherwise.
82
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), the Company and the Selling Stockholders have
agreed to sell to each of the underwriters named below (the "U.S.
Underwriters"), and each of the U.S. Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Alex. Brown & Sons
Incorporated, BT Securities Corporation, Goldman, Sachs & Co. and J.P. Morgan
Securities Inc. are acting as representatives (the "U.S. Representatives"),
severally has agreed to purchase, the aggregate number of shares of Class A
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................. 1,040,244
Alex. Brown & Sons Incorporated....................................... 1,040,243
BT Securities Corporation............................................. 1,040,243
Goldman, Sachs & Co................................................... 1,040,243
J.P. Morgan Securities Inc............................................ 1,040,243
---------
Total............................................................ 5,201,216
=========
</TABLE>
The Company and the Selling Stockholders have also entered into a purchase
agreement (the "International Purchase Agreement" and, together with the U.S.
Purchase Agreement, the "Purchase Agreements") with Merrill Lynch
International, Alex. Brown & Sons Incorporated, Bankers Trust International
PLC, Goldman Sachs International and J.P. Morgan Securities Ltd., acting as
representatives (the "International Representatives" and, together with the
U.S. Representatives, the "Representatives"), and certain other underwriters
outside the United States and Canada (collectively, the "International
Underwriters" and, together with the U.S. Underwriters, the "Underwriters").
Subject to the terms and conditions set forth in the International Purchase
Agreement, the Company and the Selling Stockholders have agreed to sell to the
International Underwriters, and the International Underwriters severally have
agreed to purchase, an aggregate of 1,200,000 shares of Class A Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Class A Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of Class A Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain
circumstances, under the Purchase Agreements, the commitments of non-
defaulting Underwriters may be increased. Each Purchase Agreement provides
that the Company is not obligated to sell, and the Underwriters named therein
are not obligated to purchase, the shares of Class A Common Stock under the
terms of the Purchase Agreement unless all of the shares of Class A Common
Stock to be sold pursuant to the Purchase Agreements are contemporaneously
sold.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose to offer the shares of Class A
Common Stock offered hereby to the public initially at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $.87 per share of Class A Common
Stock, and that the U.S. Underwriters may allow, and such dealers may reallow,
a discount not in excess of $.10 per share of Class A Common Stock on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The public offering price per share of Class A Common Stock and the
underwriting discount per share of Class A Common Stock are identical for both
Offerings.
The Selling Stockholders have granted to the U.S. Underwriters and the
International Underwriters options to purchase up to an aggregate of 780,182
shares and 180,000 shares of Class A Common Stock, respectively, at the
initial public offering price, less the underwriting discount. Such options,
which will expire 30 days after the date of this Prospectus, may be exercised
solely to cover over-allotments.
83
<PAGE>
The Company and the Selling Stockholders have been informed that the
Underwriters have entered into an agreement (the "Intersyndicate Agreement")
providing for the coordination of their activities. Pursuant to the
Intersyndicate Agreement, the U.S. Underwriters and the International
Underwriters are permitted to sell shares of Class A Common Stock to each
other. The Company and the Selling Stockholders have been informed that, under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell shares of Class A Common Stock will not offer to sell
or resell shares of Class A Common Stock to persons who are non-U.S. or non-
Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and the International Underwriters and
any bank, broker or dealer to whom they sell shares of Class A Common Stock
will not offer to resell shares of Class A Common Stock to U.S. persons or to
Canadian persons or to persons they believe intend to resell to U.S. persons
or to Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement which, among other things, permits the Underwriters
to purchase from each other and to offer to resell such number of shares of
Class A Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.
The Company, the Selling Stockholders (other than the Estate of Henry
Kramer, which has advised Merrill Lynch it does not intend to sell its Common
Stock other than in the Offerings for 30 days after the date of this
Prospectus) and certain officers and directors of the Company have each agreed
not to sell or grant any option for the sale of, or otherwise dispose of, any
Common Stock, or any securities convertible into or exchangeable or
exercisable for shares of Common Stock, other than the shares of Common Stock
that may be offered by the Company and the Selling Stockholders in the
Offerings, and not to file or request to be filed, as the case may be, any
registration statement with respect to Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of Merrill
Lynch.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
Each of BT Securities Corporation and Bankers Trust International PLC is an
affiliate of Bankers Trust Company ("Bankers Trust"), which is administrative
agent and a lender under the Senior Credit Facility. Each of J.P. Morgan
Securities Inc. and J.P. Morgan Securities Ltd. is an affiliate of Morgan
Guaranty Trust Company of New York ("Morgan Guaranty"), which is documentation
agent and a lender under the Senior Credit Facility. Upon the execution of the
Amendment, each of Bankers Trust and Morgan Guaranty will receive customary
fees in connection therewith and will continue in its respective role.
Each of Merrill Lynch and J.P. Morgan Securities Inc. acted as initial
purchasers in connection with the January 1996 Notes Offering and received
approximately $3.1 million in the aggregate as the initial purchasers'
discount. Each of BT Securities Corporation and J.P. Morgan Securities Inc.
acted as initial purchasers in connection with the June 1995 Notes Offering
and received approximately $3.4 million in the aggregate as the initial
purchasers' discount.
In addition, on December 15, 1995 the Company reached an agreement with J.P.
Morgan Capital Corp., an affiliate of J.P. Morgan Securities Inc. and J.P.
Morgan Securities Ltd., to repurchase 423,259 shares of the Company's Common
Stock for approximately $11.1 million.
Goldman, Sachs & Co. and several of its affiliates are some of the Selling
Stockholders in the Offerings and will receive more than 10% of the net
proceeds of the Offerings. Additionally, prior to the consummation of the KCAL
Acquisition a portion of the net proceeds from the Offerings are expected to
be used to reduce outstanding borrowings under the Senior Credit Facility. See
"Use of Proceeds." Bankers Trust and Morgan Guaranty will each receive its
proportionate share of such pay-down as existing lenders under the Senior
Credit Facility. Because over 10% of the net proceeds of the Offerings is
intended to be paid to members of the National Association of Securities
Dealers, Inc. (the "NASD") participating in the distribution of the Offerings
or associated or affiliated persons of such members, there exists a conflict
of interest requiring the underwriting arrangements for the Offerings to
comply with Rule 2720 of the Conduct Rules of the NASD Manual. Pursuant
84
<PAGE>
to and in accordance with the requirements of Rule 2720, Merrill Lynch has
advised the Company that the Underwriters will not confirm sales to
discretionary accounts without prior written approval of the customer.
In connection with the Offerings, certain Underwriters (and selling group
members, if any) may engage in passive market making transactions in the Class
A Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Exchange Act. Rule 10b-6A permits, upon satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in
passive market making, generally, from entering a bid or effecting a purchase
at a price that exceeds the highest bid for those securities displayed on the
Nasdaq National Market by a market maker that is not participating in the
distribution. Under Rule 10b-6A, each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of
the registration statement under the Securities Act pertaining to the security
to be distributed.
85
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Class A Common Stock offered
hereby will be passed upon for the Company by Cooperman Levitt Winikoff Lester
& Newman, P.C., New York, New York. Certain legal matters will be passed upon
for the Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company included
in this Prospectus and in the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, for the periods indicated in their
reports thereon which appear elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon their
authority as experts in accounting and auditing.
The financial statements and schedule of the Quad Cities Station included in
this Prospectus and in the Registration Statement have been audited by
McGladrey & Pullen, LLP, independent auditors, for the periods indicated in
their reports thereon which appear elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon their
authority as experts in accounting and auditing.
The combined financial statements and schedule of KELO included in this
Prospectus and in the Registration Statement have been audited by Grant
Thornton LLP, independent auditors, for the periods indicated in their reports
thereon which appear elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon their authority as
experts in accounting and auditing.
The financial statements of KCAL as of September 30, 1995 and 1994 and for
each of the three years in the period ended September 30, 1995, included in
this Prospectus, have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in accounting and auditing.
With respect to the unaudited condensed financial statements of KCAL for the
three and nine months periods ended June 30, 1996, included in this
Prospectus, Price Waterhouse LLP reported that they have applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate report dated August 23, 1996 appearing
herein, states that they did not audit and they do not express an opinion on
the unaudited condensed financial statements. Price Waterhouse LLP has not
carried out any significant or additional audit tests beyond those which would
have been necessary if their report had not been included. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied. Price Waterhouse
LLP is not subject to the liability provisions of section 11 of the Securities
Act of 1933 for their report on the unaudited condensed financial statements
because that report is not a "report" or a "part" of the registration
statement prepared or certified by Price Waterhouse LLP within the meaning of
sections 7 and 11 of the Act.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995.............. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995...................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1993, 1994 and 1995................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995...................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Consolidated Balance Sheet as of June 30, 1996 (unaudited)................ F-21
Consolidated Statements of Operations for the Six Months Ended June 30,
1995 and 1996 (unaudited)................................................ F-22
Consolidated Statement of Stockholders' Equity (Deficit) for the Six
Months Ended June 30, 1996 (unaudited)................................... F-23
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1995 and 1996 (unaudited)................................................ F-24
Notes to Consolidated Financial Statements (unaudited).................... F-25
</TABLE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-27
Balance Sheet as of September 30, 1995 and 1994........................... F-28
Statement of Operations for the Years Ended September 30, 1995, 1994 and
1993..................................................................... F-29
Statement of Changes in KCAL Broadcasting Group Equity for the Years Ended
September 30, 1995, 1994 and 1993........................................ F-29
Statement of Cash Flows for the Years Ended September 30, 1995, 1994 and
1993..................................................................... F-30
Notes to Financial Statements............................................. F-31
Report of Independent Accountants......................................... F-37
Condensed Balance Sheet as of June 30, 1996 (unaudited) and September 30,
1995..................................................................... F-38
Condensed Statements of Operations for the Nine and Three Months Ended
June 30, 1996 and 1995 (unaudited)....................................... F-39
Condensed Statement of Changes in KCAL Broadcasting Group Equity for the
Nine Months Ended June 30, 1996 (unaudited).............................. F-39
Condensed Statements of Cash Flows for the Nine Months Ended June 30, 1996
and 1995 (unaudited)..................................................... F-40
Notes to Condensed Financial Statements (unaudited)....................... F-41
</TABLE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................. F-43
Balance Sheets as of December 31, 1995 and December 25, 1994.............. F-44
Statements of Operations for the Years Ended December 31, 1995, December
25, 1994 and December 31, 1993........................................... F-45
Statements of Divisional Equity for the Years Ended December 31, 1995,
December 25, 1994 and December 31, 1993.................................. F-46
Statements of Cash Flows for the Years Ended December 31, 1995, December
25, 1994 and December 31, 1993........................................... F-47
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Notes to Financial Statements............................................. F-48
Balance Sheets as of March 31, 1996 and March 26, 1995 (unaudited)........ F-52
Statements of Operations for the Three Months Ended March 31, 1996 and
March 26, 1995 (unaudited)............................................... F-53
Statements of Divisional Equity for the Three Months Ended March 31, 1996
and March 26, 1995 (unaudited)........................................... F-54
Statements of Cash Flows for the Three Months Ended March 31, 1996 and
March 26, 1995 (unaudited)............................................... F-55
Notes to Financial Statements (unaudited)................................. F-56
</TABLE>
COMBINED FINANCIAL STATEMENTS OF
MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.) AND THE INVESTMENT IN
COMMUNITY TELEVISION SERVICE, INC. (A FIFTY PERCENT INVESTEE OF MIDCONTINENT
MEDIA, INC.)
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-57
Combined Balance Sheets as of August 31, 1995 and 1994.................... F-58
Combined Statements of Earnings and Retained Earnings for the Years Ended
August 31, 1995, 1994 and 1993........................................... F-59
Combined Statements of Cash Flows for the Years Ended August 31, 1995,
1994 and 1993............................................................ F-60
Notes to Combined Financial Statements.................................... F-61
Condensed Combined Balance Sheets as of February 29, 1996 and February 28,
1995 (unaudited)......................................................... F-65
Condensed Combined Statements of Earnings and Retained Earnings for the
Three and Six Months Ended February 29, 1996 and February 28, 1995
(unaudited).............................................................. F-66
Condensed Combined Statements of Cash Flows for the Six Months Ended
February 29, 1996 and February 28, 1995 (unaudited)...................... F-67
Notes to Condensed Combined Financial Statements (unaudited).............. F-68
</TABLE>
Note: Parent company financial statements (Young Broadcasting Inc.) are not
presented herein. The operations of Young Broadcasting Inc. (the
"Company") are conducted through its direct and indirect wholly-owned
Subsidiaries. As a holding company, the Company owns no significant
assets other than its equity in the Subsidiaries, and the Company is
dependent upon the cash flow of the Subsidiaries to meet its own
obligations. Due to the aforementioned factors and to the immateriality
of the Company's operations, when considered in relation to the
Consolidated Financial Statements taken as a whole, separate parent
Company financial statements are not included herein. The separate
financial statements of the Subsidiary Guarantors are not presented
herein as the Consolidated Financial Statements represent, in
substance, the combined financial statements of the Subsidiary
Guarantors.
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Young Broadcasting Inc.
We have audited the accompanying consolidated balance sheets of Young
Broadcasting Inc. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Young
Broadcasting Inc. and subsidiaries at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of amortization for program license rights effective
January 1, 1993.
Ernst & Young LLP
New York, New York
February 12, 1996,
except for Note 16 as to which the date is
May 31, 1996
F-3
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)............. $ 6,304,402 $ 3,425,633
Trade accounts receivable, less allowance for
doubtful accounts of $665,000 in 1994 and
$785,000 in 1995.............................. 24,757,172 27,431,914
Current portion of loans receivable--officers
(Note 14)..................................... 313,320 808,783
Current portion of program license rights
(Notes 2 and 5)............................... 6,403,070 6,426,198
Prepaid expenses............................... 875,685 956,052
------------- -------------
Total current assets........................... 38,653,649 39,048,580
------------- -------------
Property and equipment (Notes 2 and 13):
Land and land improvements..................... 5,127,507 5,165,489
Buildings and building improvements............ 22,946,339 23,094,346
Broadcast equipment............................ 82,667,651 87,023,341
Office furniture, fixtures and other equipment. 5,444,811 5,306,416
Vehicles....................................... 1,510,209 1,385,790
------------- -------------
117,696,517 121,975,382
Less accumulated depreciation and amortization. 49,297,041 62,844,245
------------- -------------
Net property and equipment..................... 68,399,476 59,131,137
Program license rights, excluding current por-
tion (Notes 2 and 5)........................... 3,709,779 3,180,397
Deposits and other assets....................... 229,446 1,545,285
Loans receivable--officers, excluding current
portion (Note 14).............................. 1,253,278 1,194,175
Broadcasting licenses and other intangibles,
less accumulated amortization of $55,761,257 in
1994 and $63,852,304 in 1995 (Note 2).......... 188,884,109 180,722,385
Deferred charges less accumulated amortization
of $360,999 in 1994 and $1,536,057 in 1995
(Notes 2, 3 and 6)............................. 15,697,027 11,275,993
------------- -------------
Total assets................................... $ 316,826,764 $ 296,097,952
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable......................... $ 6,163,251 $ 4,482,852
Accrued expenses and other liabilities:
Interest (Notes 6 and 7)....................... 3,918,667 6,920,874
Other.......................................... 4,738,786 3,391,684
------------- -------------
Total accrued expenses......................... 8,657,453 10,312,558
Current installments of program license liabil-
ity (Notes 2 and 5)........................... 5,075,940 5,817,936
Current installments of long-term debt (Note
7)............................................ 11,993,053 907,834
Current installments of obligations under capi-
tal leases (Note 13).......................... 233,970 48,335
------------- -------------
Total current liabilities...................... 32,123,667 21,569,515
Program license liability, excluding current in-
stallments (Notes 2 and 5)..................... 3,533,847 3,035,951
Long-term debt, excluding current installments
(Notes 6 and 7)................................ 172,678,285 51,949,014
11.75% Senior Subordinated Notes (Notes 3 and
8)............................................. 120,000,000 120,000,000
10.125% Senior Subordinated Notes (Note 8)...... -- 125,000,000
Obligations under capital leases, excluding cur-
rent installments (Note 13).................... 145,062 87,589
------------- -------------
Total liabilities.............................. 328,480,861 321,642,069
------------- -------------
Stockholders' deficit (Notes 3 and 10):
Class A Common Stock, $.001 par value.
Authorized 20,000,000 shares; issued and
outstanding 4,825,205 shares at 1994 and
4,955,088 at 1995............................. 4,825 4,955
Class B Common Stock, $.001 par value.
Authorized 20,000,000 shares; issued and
outstanding 2,039,120 shares at 1994 and
2,029,620 at 1995............................. 2,039 2,029
Class C Common Stock, $.001 par value;
Authorized 20,000,000 shares; issued and
outstanding 3,954,724 at 1994 and 3,563,473 at
1995.......................................... 3,955 3,564
Additional paid-in capital..................... 135,349,516 128,051,024
Accumulated deficit............................ (147,014,432) (153,605,689)
------------- -------------
Total stockholders' deficit.................... (11,654,097) (25,544,117)
------------- -------------
Total liabilities and stockholders' deficit.... $ 316,826,764 $ 296,097,952
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net operating revenue................ $ 61,791,563 $ 78,788,183 $122,529,927
------------ ------------ ------------
Operating expenses................... 13,933,150 17,650,963 28,033,649
Amortization of program license
rights.............................. 3,969,256 4,399,915 6,418,181
Selling, general and administrative
expenses............................ 14,526,597 16,149,417 23,580,352
Depreciation and amortization........ 13,859,140 15,280,392 24,572,388
Corporate overhead................... 1,349,858 2,051,891 3,347,931
Non-cash compensation paid in Common
Stock
(Notes 10 and 12)................... -- 6,497,480 1,166,651
------------ ------------ ------------
Operating income..................... 14,153,562 16,758,125 35,410,775
------------ ------------ ------------
Interest expense, net................ (17,777,559) (19,104,468) (32,644,274)
Other expenses, net.................. (140,604) (3,492) (232,758)
------------ ------------ ------------
(17,918,163) (19,107,960) (32,877,032)
------------ ------------ ------------
(Loss) income before extraordinary
item and cumulative effect of change
in accounting principle............. (3,764,601) (2,349,835) 2,533,743
Extraordinary loss on extinguishment
of debt (Note 6 )................... -- (6,026,668) (9,125,000)
Cumulative effect of change in ac-
counting principle (Note 4)......... (1,520,093) -- --
------------ ------------ ------------
Net loss............................. (5,284,694) (8,376,503) (6,591,257)
Preferred dividends.................. (4,768,755) (9,712,397) --
------------ ------------ ------------
Net loss applicable to common stock-
holders............................. $(10,053,449) $(18,088,900) $ (6,591,257)
============ ============ ============
(Loss) income per common share:
(Loss) income before extraordinary
item and cumulative effect of change
in accounting principle............. $ (3.82) $ (3.62) $ .23
Extraordinary loss on extinguishment
of debt............................. -- (1.80) (.84)
Cumulative effect of change in ac-
counting principle.................. (.68) -- --
------------ ------------ ------------
Net loss............................. $ (4.50) $ (5.42) $ (.61)
============ ============ ============
Weighted average shares.............. 2,234,370 3,339,794 11,071,154
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
PREFERRED STOCK COMMON STOCK CAPITAL DEFICIT
-------------------------------------------- ---------------------- ------------ -------------
SERIES SERIES SERIES SERIES SERIES SERIES CLASS CLASS CLASS
A B C D E F A B C
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Janu-
ary 1, 1993...... $ 190 $ 30 $ 200 $ 123 $ 186 $ 24 $1,647 $ 267 $ -- $ 86,949,181 $(133,353,235)
Net (loss) for
1993............ -- -- -- -- -- -- -- -- -- -- (5,284,694)
----- ---- ----- ----- ----- ---- ------ ------ ------ ------------ -------------
Balance at Decem-
ber 31, 1993..... 190 30 200 123 186 24 1,647 267 -- 86,949,181 (138,637,929)
Issuance of man-
agement shares.. -- -- -- -- -- -- -- 214 -- 4,046,786 --
Issuance of in-
centive stock
grants.......... -- -- -- -- -- -- -- 108 -- 2,050,372 --
Issuance of
Class A Common
Stock........... -- -- -- -- -- -- 3,672 -- -- 65,065,301 --
Issuance of
Class C Common
Stock........... -- -- -- -- -- -- -- -- 1,500 24,998,500 --
Conversion of
Series A, B and
C Preferred
Stock........... (190) (30) (200) -- -- -- (494) 1,450 2,455 (2,991) --
Repurchase of
Series D, E and
F Preferred
Stock........... -- -- -- (123) (186) (24) -- -- -- (47,757,633) --
Net (loss) for
1994............ -- -- -- -- -- -- -- -- -- -- (8,376,503)
----- ---- ----- ----- ----- ---- ------ ------ ------ ------------ -------------
Balance at Decem-
ber 31, 1994..... -- -- -- -- -- -- 4,825 2,039 3,955 135,349,516 (147,014,432)
Contribution of
shares into
Company's
defined
contribution
plan............ -- -- -- -- -- -- 22 -- -- 471,866 --
Issuance of
stock options
below market
value........... -- -- -- -- -- -- -- -- -- 366,094 --
Exercise of
stock options... -- -- -- -- -- -- 19 -- -- 49,981 --
Conversion of
Class B and C
Common Stock to
Class A Common
Stock........... -- -- -- -- -- -- 116 (10) (106) -- --
Repurchase and
retirement of
Class A and C
Common Stock.... -- -- -- -- -- -- (27) -- (285) (8,186,433) --
Net (loss) for
the year ended
December 31,
1995............ -- -- -- -- -- -- -- -- -- -- (6,591,257)
----- ---- ----- ----- ----- ---- ------ ------ ------ ------------ -------------
Balance at Decem-
ber 31, 1995..... $ -- $ -- $ -- $ -- $ -- $ -- $4,955 $2,029 $3,564 $128,051,024 $(153,605,689)
===== ==== ===== ===== ===== ==== ====== ====== ====== ============ =============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
5
<S> <C>
Balance at Janu-
ary 1, 1993...... $(46,401,387)
Net (loss) for
1993............ (5,284,694)
----------------
Balance at Decem-
ber 31, 1993..... (51,686,081)
Issuance of man-
agement shares.. 4,047,000
Issuance of in-
centive stock
grants.......... 2,050,480
Issuance of
Class A Common
Stock........... 65,068,973
Issuance of
Class C Common
Stock........... 25,000,000
Conversion of
Series A, B and
C Preferred
Stock........... --
Repurchase of
Series D, E and
F Preferred
Stock........... (47,757,966)
Net (loss) for
1994............ (8,376,503)
----------------
Balance at Decem-
ber 31, 1994..... (11,654,097)
Contribution of
shares into
Company's
defined
contribution
plan............ 471,888
Issuance of
stock options
below market
value........... 366,094
Exercise of
stock options... 50,000
Conversion of
Class B and C
Common Stock to
Class A Common
Stock........... --
Repurchase and
retirement of
Class A and C
Common Stock.... (8,186,745)
Net (loss) for
the year ended
December 31,
1995............ (6,591,257)
----------------
Balance at Decem-
ber 31, 1995..... $(25,544,117)
================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. $(5,284,694) $ (8,376,503) $ (6,591,257)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization of
property and equipment............. 6,123,592 7,108,170 13,640,551
Amortization of program license
rights............................. 3,969,256 4,399,915 6,418,181
Amortization of broadcasting
licenses, other intangibles and
deferred charges................... 7,735,548 8,172,222 10,931,837
Non-cash compensation paid in Common
Stock.............................. -- 6,497,480 1,166,651
Non-cash interest expense on out-
standing indebtedness.............. -- 57,338 420,712
Extraordinary loss on extinguishment
of debt............................ -- 6,026,668 9,125,000
Cumulative effect of change in ac-
counting principle................. 1,520,093 -- --
Increase in trade accounts receiv-
able............................... (433,340) (4,730,606) (3,111,102)
Increase in prepaid expenses........ (185,440) (530,296) (197,842)
(Decrease) increase in trade ac-
counts payable..................... (1,360,618) 1,198,745 (713,168)
Increase in accrued expenses........ 1,477,684 3,773,863 1,326,436
----------- ------------ ------------
Net cash provided by operating activi-
ties................................. 13,562,081 23,596,996 32,415,999
----------- ------------ ------------
INVESTING ACTIVITIES
Purchase of Nationwide stations....... -- (145,000,000) --
Capital expenditures.................. (685,685) (1,205,858) (4,484,478)
Decrease (increase) in deposits and
other assets......................... 66,067 (22,983) (1,315,839)
----------- ------------ ------------
Net cash used in investing activities. (619,618) (146,228,841) (5,800,317)
----------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term
debt................................. -- 185,000,000 --
Proceeds from issuance of public sub-
ordinated debt....................... -- 120,000,000 125,000,000
Borrowings from working capital facil-
ity.................................. -- -- 17,000,000
Principal payments on old long-term
debt................................. (4,400,000) (165,400,774) --
Principal payments on new long-term
debt................................. -- (4,000,000) (149,235,202)
Principal payments on old subordinated
debt................................. -- (29,440,773) --
Payment of call premium on old subor-
dinated debt......................... -- (3,319,381) --
Deferred acquisition and debt refi-
nancing costs incurred............... (379,159) (16,135,043) (7,132,368)
Net proceeds from issuance of Class A
Common Stock......................... -- 65,068,972 --
Repurchase of D, E & F Preferred
Stock................................ -- (47,757,966) --
Repurchase of Class A and C Common
Stock................................ -- -- (8,186,745)
Proceeds from issuance of Class C Com-
mon Stock............................ -- 25,000,000 --
Proceeds from exercise of options..... -- -- 50,000
Principal payments under capital lease
obligations.......................... (460,811) (402,177) (243,108)
Payments on programming license lia-
bilities............................. (4,002,553) (4,169,673) (6,747,028)
----------- ------------ ------------
Net cash (used in) provided by financ-
ing activities....................... (9,242,523) 124,443,185 (29,494,451)
----------- ------------ ------------
Net increase (decrease) in cash....... 3,699,940 1,811,340 (2,878,769)
Cash and cash equivalents at beginning
of year.............................. 793,122 4,493,062 6,304,402
----------- ------------ ------------
Cash and cash equivalents at end of
year................................. $ 4,493,062 $ 6,304,402 $ 3,425,633
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid......................... $16,054,031 $ 17,265,826 $ 29,199,781
Income taxes paid..................... $ -- $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS OF THE COMPANY
The business operations of Young Broadcasting Inc. and subsidiaries (the
"Company") consist of nine network affiliated (three with CBS and six with
ABC) commercial television broadcasting stations in the states of Michigan,
Wisconsin, Louisiana, Illinois, Tennessee, New York and Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements of
Young Broadcasting Inc., its wholly-owned subsidiaries and three limited
partnerships. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Concentration of Credit Risk
The Company provides advertising air time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit
is extended based on an evaluation of the customer's financial condition, and
generally advance payment is not required. Credit losses are provided for in
the financial statements and consistently have been within management's
expectations.
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 amounts reported in the financial statements and
accompanying notes. The principal areas of judgment relate to allowance for
doubtful accounts and the realizability of program license rights. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
The Company's Senior Debt at December 31, 1995 of $49,765,000 approximates
its fair value as its interest rate floats with market conditions. At December
31, 1995, the Company's $120,000,000 (11 3/4%) and $125,000,000 (10 1/8%)
senior subordinated notes were trading in the public market with ask prices of
112 and 106, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Program License Rights
Program license rights are stated at cost, less accumulated amortization.
Program license rights acquired as part of a station acquisition are recorded
at an appraised value. Program rights with lives greater than one year, and
when the Company has the right to multiple showings, are amortized using an
accelerated method (see Note 4). Program rights expected to be amortized in
the succeeding year and amounts payable within one year are classified as
current assets and liabilities, respectively. Program rights with lives of one
year or less, where the Company is entitled to air each episode one time, are
amortized on a straight-line basis.
Property and Equipment
Property and equipment are stated on the basis of cost, less accumulated
depreciation. Equipment under capital leases is stated at the present value of
minimum lease payments at the inception of the lease, less
F-8
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accumulated depreciation. Major renewals and improvements are charged to the
property and equipment accounts while replacements, maintenance and repairs,
which do not improve or extend the lives of the respective assets, are
expensed currently.
Depreciation and amortization of property and equipment are calculated on
the straight-line basis over the estimated useful lives of the assets.
Equipment held under capital leases is generally amortized on a straight-line
basis over the shorter of the lease term or estimated useful life of the
asset. The estimated useful lives of depreciable assets are as follows:
<TABLE>
<CAPTION>
ESTIMATED
CLASSIFICATION USEFUL LIVES
-------------- ------------
<S> <C>
Land improvements............................................ 5-19 years
Buildings and building improvements.......................... 5-40 years
Broadcast equipment.......................................... 3-10 years
Office furniture, fixtures and other equipment............... 5-8 years
Vehicles..................................................... 3-5 years
</TABLE>
Broadcasting Licenses and Other Intangibles
Intangible assets, which include broadcasting licenses, network affiliation
agreements, and other intangibles are carried on the basis of cost, less
accumulated amortization. Cost is based upon appraisals. Intangible assets are
amortized over varying periods, not exceeding 40 years.
Deferred Charges
Deferred charges incurred during 1994 consisted primarily of debt issuance
costs incurred in connection with the Company's refinancing (see Note 3). As a
result of the refinancing, approximately $6 million of net deferred charges
incurred prior to 1994 were expensed in 1994 and included as part of the
extraordinary item in the accompanying statements of operations (see Note 6).
Deferred charges incurred during 1995 consisted primarily of debt issuance
costs incurred in connection with the Company's 10 1/8% Senior Subordinated
Notes issued on June 12, 1995 (see Note 8), concurrent with an amendment to
its Senior Credit Facility (see Note 7). As a result of the amendment,
approximately $9.1 million of net deferred charges incurred in 1994 were
expensed in 1995 and included as part of the extraordinary item in the
accompanying statements of operations (see Note 6).
Revenue
The Company's primary source of revenue is the sale of television time to
advertisers. Revenue is recorded when the advertisements are broadcast.
Barter Arrangements
The Company, in the ordinary course of business, provides advertising air
time to certain customers in exchange for products or services. Barter
transactions are recorded on the basis of the estimated fair market value of
the products or services received. Revenue is recognized as the related
advertising is broadcast and expenses are recognized when the merchandise or
services are consumed or utilized. Barter revenue transactions related to the
purchase of equipment amounted to approximately $123,000, $67,000 and $22,000
in 1993, 1994 and 1995, respectively, and are depreciated in accordance with
Company policy as stated above. The Company has entered into barter agreements
with program syndicators for television programs with an estimated fair market
value, recorded as assets and liabilities at December 31, 1994 and 1995, of
$1,666,000 and $1,095,000, respectively.
F-9
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return and separate state tax returns. In addition, partnership returns are
filed for its three limited partnerships. Since the partners are all
participants in the consolidation, all partnership income or losses are
ultimately included in the consolidated federal income tax return. The future
utilization of a significant portion of the Company's net operating losses for
federal income tax purposes is subject to an annual limitation (see Note 11).
Earnings Per Share
Net loss per common share is computed by dividing net loss less the amount
applicable to preferred stock dividends, by the weighted average common shares
outstanding during the year. When dilutive, common stock equivalents are
included as stock equivalents using the treasury stock method.
Reclassification of Accounts
Certain prior year amounts have been reclassified to conform to current
year's presentation.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company will adopt Statement No. 121 in the first quarter of
1996 and, based on current circumstances, does not believe that there will be
any effect on amounts reported.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-
Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value based
method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under Opinion No. 25, Statement No. 123 requires
disclosure of the pro forma effect on net income and earnings per share of its
fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of the statement, if earlier. The Company continues
to evaluate the provisions of Statement No. 123 and has not determined whether
it will adopt the recognition and measurement provisions of that Statement,
which the Company expects would result in increased compensation expense in
future periods.
3. ACQUISITION OF STATIONS
On November 14, 1994, the Company acquired from Nationwide Communications
Inc. ("Nationwide") all of the assets of three network affiliated television
stations (WRIC-TV, WATE-TV and WBAY-TV or "Nationwide Stations") for
$150,000,000 ("Acquisition"). Of the purchase price, $5,000,000 was deferred
and will be paid over a five year period, without interest, in equal annual
installments. The net present value of such deferred amount, discounted at
11.9%, was $3,614,000 and $3,092,000 at December 31, 1994 and 1995,
respectively. As part of the Acquisition, the Company received all of the
acquired stations' accounts receivable with a net carrying value of $8,297,000
at November 14, 1994. The Acquisition was accounted for as a purchase. Based
on the Company's allocation of the purchase price, intangible assets amounted
to $94,017,000 and will be amortized over their estimated lives which will not
exceed 40 years.
F-10
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The operating results of the Nationwide Stations are included in the
Company's consolidated 1994 results of operations from the date of Acquisition
and the entire year in 1995. The following unaudited pro forma summary
presents the consolidated 1993 and 1994 results of operations as if the
Acquisition had occurred on January 1, 1993 and 1994, after giving effect to
certain adjustments, including increased network compensation for all nine
stations (see Note 9), annualized expense reductions implemented after the
Acquisition at the Nationwide Stations, amortization of intangibles and
interest expense on the 1994 debt obligations. The actual 1995 results are
presented for comparative purposes. The pro forma results do not purport to be
indicative of what would have occurred had the Acquisition been made as of
January 1, 1993 or 1994.
<TABLE>
<CAPTION>
PRO FORMA ACTUAL
-------------------------------- ----------------
1993 1994 1995
--------------- --------------- ----------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net Operating Revenue.... $ 102,222 $ 117,140 $ 122,530
Operating Income......... 27,521 31,588 35,411
Income before extraordi-
nary item............... 3,667 7,243 2,534
Net income (loss)........ 2,147 1,216 (6,591)
Net loss applicable to
common shareholders..... $ (2,622) $ (8,496) $ (6,591)
Net loss per common
share................... $ (0.35) $ (1.08) $ (0.61)
</TABLE>
The Company financed the Acquisition by implementing a financing plan under
which each of the following were effected concurrently with the Acquisition:
(1) the Company issued 3,672,064 shares of Class A Common Stock pursuant
to an initial public offering ("Offering") at a price of $19 per share and
received net proceeds of $65,069,000;
(2) the Company issued 11 3/4% Senior Subordinated Notes due 2004 (which
resulted in proceeds of $116,400,000, net of underwriting discount of
$3,600,000);
(3) the Company established a new senior credit facility, which provided
the Company with a $200,000,000 line of credit, of which $185,000,000 was
drawn down at closing;
(4) the Company repaid all outstanding indebtedness under the existing
credit agreement, which amounted to $158,716,000, including accrued
interest;
(5) the Company repaid all outstanding indebtedness under an 11%
Promissory Note, which amounted to $1,279,000, including accrued interest;
(6) the Company repurchased all of the Series A Notes and Series B Notes
at 100% of their outstanding principal of $29,441,000, interest of
$2,061,000 and a call premium of $3,319,000 in connection therewith;
(7) the Company entered into an agreement with Capital Cities/ABC, Inc.
("ABC") pursuant to which ABC invested $25,000,000 in the Company and
received shares of the Company's Class C Common Stock and warrants to
purchase 750,000 additional shares of Class C Common Stock;
(8) the Company repurchased all of the Series D, Series E and Series F
Preferred Stock and related warrants which amounted to $42,809,000, plus a
call premium of $4,949,000; and
(9) the Company incurred transaction fees and expenses of $21,741,000
relating to the Acquisition and financing plan.
4. CHANGE IN AMORTIZATION METHOD FOR PROGRAMMING ASSETS
Amortization of programming assets related to syndicated programming for
which the Company has the right to multiple showings has been computed on an
accelerated basis. In years prior to 1993, such programming
F-11
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
was amortized on a straight-line basis over the periods for which the
individual station had the right to show the material. The new method of
amortization was adopted during 1993 to more closely match the advertising
revenues generated by such showings with the Company's recognition of
programming costs. The effect of the change in 1993 decreased operating income
by $470,000. The adjustment of $1,520,000 to apply the new method
retroactively was included in the 1993 statement of operations as a cumulative
effect of a change in accounting principle.
5. PROGRAM LICENSE RIGHTS AND LIABILITY
The Company entered into agreements for program license rights which became
available in 1994 and 1995 of approximately $2,698,000 and $6,755,000,
respectively.
The unpaid program license liability for these rights, which is reflected in
the December 31, 1995 balance sheet, is payable during each of the years
subsequent to 1995 as follows: 1996, $5,817,936; 1997, $1,960,986; 1998,
$887,228; 1999, $151,104; 2000 and thereafter, $36,633.
The obligation for programming that has been contracted for but not recorded
in the accompanying balance sheets because the program rights were not
currently available for airing aggregated approximately $4,771,000 and
$9,771,000 at December 31, 1994 and 1995, respectively.
6. REFINANCING AND EXTRAORDINARY ITEMS
In connection with the financing plan implemented on November 14, 1994
("1994 Refinancing"), deferred financing costs, arising from a 1992
restructuring of the Company's debt, with a net carrying value of $2,707,000
were charged to earnings as part of an extraordinary item in 1994. In
addition, a call premium amounting to $3,319,000 was paid to the Subordinated
Debt Holders in connection with the early extinguishment of that debt. This
amount is also included in the 1994 extraordinary item.
Deferred financing costs, arising from the 1994 Refinancing, with a net
carrying value of $9,125,000 were charged to 1995 earnings as part of an
extraordinary item in connection with the Company's completion of a financing
plan on June 12, 1995 ("June 1995 Refinancing").
7. LONG-TERM DEBT
Long-term debt (excluding Senior Subordinated Notes) at December 31, 1994
and 1995 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------ -----------
<S> <C> <C>
Senior Credit Facility................................. $181,000,000 $49,765,000
Nationwide Seller Note................................. 3,671,000 3,092,000
------------ -----------
Total long-term debt................................... 184,671,000 52,857,000
Less:
Scheduled current maturities......................... 8,408,000 908,000
Additional payments of excess cash required.......... 3,585,000 --
------------ -----------
Long-term debt excluding all current installments...... $172,678,000 $51,949,000
============ ===========
</TABLE>
As part of the 1994 Refinancing and Acquisition on November 14, 1994, the
Company repaid all outstanding indebtedness under the 1992 Credit Agreement.
Concurrently, the Company established a new senior credit facility ("Senior
Credit Facility"). The Senior Credit Facility provides for borrowings of up to
an
F-12
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
aggregate amount of $200,000,000 consisting of $120,000,000 in Facility A,
$55,000,000 in Facility B, and a $25,000,000 revolving credit line in Facility
C.
As part of the June 1995 Refinancing, the Company completed the offering of
$125 million principal amount of its 10 1/8% Senior Subordinated Notes due
2005 (See Note 8), with net proceeds of approximately $120.8 million, being
used to repay approximately $66.9 million of Facility A and $53.9 million of
Facility B under the Senior Credit Facility. Concurrent with the closing of
the June 1995 Notes, the Company entered into an amendment to the Senior
Credit Facility which provides the Company with the ability, among other
things, to reborrow up to an aggregate amount of approximately $126.9 million
in connection with the acquisition of one or more television stations.
At December 31, 1995, the Company had outstanding borrowings of $38,765,000
under Facility A and $11,000,000 under Facility C. In January 1996, the
Company issued $125,000,000 aggregate principal amount of Series A 9% Senior
Subordinated Notes ("January 1996 Notes"). The proceeds of this offering were
used, in part, to repay all borrowings under the Senior Credit Facility (See
Note 16).
The outstanding balance under the Senior Credit Facility at December 31,
1995 has been classified based on the repayment terms of the January 1996
Notes. The aggregate fixed maturities, including accreted non-cash interest
under the Nationwide Seller Note for each year subsequent to December 31, 1995
are as follows: 1996, $1,000,000; 1997, $1,000,000; 1998, $1,000,000 and
$1,000,000 in 1999.
In addition to scheduled principal payments, the Senior Credit Facility
requires the Company to compute at the end of each fiscal year its excess cash
flow, as defined, and to pay 50% or 75% of such amount (depending upon the
level of the Company's total debt to operating cash flow ratio at the end of
such year) to the lenders before April 30 of the subsequent year. Payments
pursuant to this requirement permanently reduce outstanding debt under
Facility A.
The Senior Credit Facility provides, at the option of the Company, that
borrowed funds bear interest based upon the bank's base rate, London Interbank
Offered Rate (LIBOR), the customary "CD Rate" or "Base Rate." In addition to
the index rate, the Company pays a floating percentage on borrowings under
Facility A tied to the interest rate option and the Company's ratio of total
debt to operating cash flow, ranging from 0.50% based upon a ratio under 4:1
to 2.875% based upon a 6:1 or greater ratio. At December 31, 1995, this
floating percentage was 1.0%. At December 31, 1995, the effective interest
rate for amounts outstanding under the Senior Credit Facility was 9.5%. The
weighted average interest rate, after giving effect to an interest rate swap
agreement, was 11.41%.
The Senior Credit Facility contains, among other things, limitations on
dividends, capital expenditures, and investments and requires the Company to
maintain certain financial ratios. At December 31, 1995, the Company was in
compliance with all such covenants. The Senior Credit Facility is secured by a
pledge of all the stock of the Company's subsidiaries and a first priority
lien on substantially all of the assets of the Company. Each of the Company's
subsidiaries guarantee the obligations under the Senior Credit Facility.
At December 31, 1995 the Company has an outstanding swap agreement of
$25,000,000 with a commercial bank who is also a lender under the Senior
Credit Facility. Such swap expires on April 18, 1996. The Company pays a fixed
interest rate of 9.81% and the Company receives interest, from the commercial
bank, based upon a three month LIBOR rate. The three month LIBOR interest rate
for the swap agreement at December 31, 1995 was 6.00%. At December 31, 1995,
the fair value of the interest rate swap agreement was a deferred loss of
approximately $506,000. The net interest rate differential to be paid or
received is recognized as an adjustment to interest expense and amounted to
approximately $3,300,000, $1,900,000 and $952,000 in additional interest
F-13
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expense for the years ended December 31, 1993, 1994 and 1995, respectively.
The Company does not hold any other derivative instruments.
8. SENIOR SUBORDINATED NOTES
On November 14, 1994, the Company issued 11 3/4% Senior Subordinated Notes
due 2004 with an aggregate principal amount of $120,000,000 (the "November
1994 Notes"). Interest on the November 1994 Notes is payable semi-annually on
May 15 and November 15, commencing May 15, 1995. The November 1994 Notes are
redeemable, in whole or in part, at the option of the Company on or after
November 15, 1999, at the redemption prices set forth in the Senior
Subordinated Note Indenture ("Indenture") pursuant to which the November 1994
Notes were issued plus accrued interest to the date of redemption. In
addition, at any time before November 15, 1997, the Company, at its option,
may redeem up to $40 million of the November 1994 Notes, with the net proceeds
of one or more public equity offerings, at the redemption prices set forth in
the Indenture plus accrued interest to the date of redemption.
On June 12, 1995, the Company issued 10 1/8% Senior Subordinated Notes due
2005 with an aggregate principal amount of $125,000,000 (the "June 1995
Notes"). Interest on the June 1995 Notes is payable semi-annually on February
15 and August 15, commencing August 15, 1995. The Company used the net
proceeds of the June 1995 Notes (approximately $120,800,000) to repay certain
outstanding indebtedness under the Senior Credit Facility. The June 1995 Notes
are redeemable, in whole or in part, at the option of the Company on or after
February 15, 2000, at the redemption prices set forth in the Indenture
pursuant to which the June 1995 Notes were issued plus accrued interest to the
date of redemption. In addition, at any time before February 15, 1998, the
Company, at its option, may redeem up to $42 million of the June 1995 Notes,
with the net proceeds of one or more public equity offerings, at a redemption
price equal to 110% of the principal amount thereof, plus accrued interest to
the date of redemption.
The Company's November 1994 Notes and June 1995 Notes (collectively the
"Notes") are general unsecured obligations of the Company and subordinated in
right of payment to all senior debt, including all indebtedness of the Company
under the Senior Credit Facility. The Notes are guaranteed, jointly and
severally, on a senior subordinated unsecured basis by all of the Company's
subsidiaries.
Upon a change of control, each holder of the Notes will have the right to
require the Company to repurchase such holder's Notes at a price equal to 101%
of their principal amount plus accrued interest to the date of repurchase. In
addition, the Company will be obligated to offer to repurchase Notes at 100%
of their principal amount plus accrued interest to the date of repurchase in
the event of certain asset sales.
9. NETWORK AFFILIATION AGREEMENTS
On May 19, 1995, the Company entered into an agreement with ABC whereby the
Company has switched the affiliation of its Rockford, Illinois station, WTVO,
from NBC to ABC, effective as of August 14, 1995. The new ABC affiliation
agreement provides for a contract term of ten years, and increases the annual
compensation of the station by approximately $360,000 for a total of $600,000
for the first full year and will increase the annual compensation by $33,000
in each of the second, third and fourth years for a total of approximately
$700,000 of annual compensation for the remainder of the contract term. In
addition, ABC has provided the Company with certain promotional and equipment
purchase incentives in connection with the affiliation change.
In 1994, the Company and ABC entered into new affiliation agreements with
respect to the Company's then five ABC affiliated stations. The Company also
entered into new affiliation agreements with CBS for each of the Company's
three stations affiliated with the CBS Network. The new affiliation agreements
for all nine stations
F-14
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
mentioned above provide for contract terms of ten years and aggregate
compensation of approximately $10,000,000 per year over this term.
10. STOCKHOLDERS' EQUITY
On November 14, 1994, the Company completed an initial public offering of
its common stock, refinanced its debt and acquired three television stations
(See Notes 3, 7 and 8). As part of these transactions, the stockholders'
equity prior to that date was recapitalized. The following describes the
various classes of stockholders' equity existing after these transactions.
The Company's stockholders' equity consists of three classes of common stock
designated Class A, Class B and Class C which are substantially identical
except for voting rights. The holders of Class A Common Stock are entitled to
one vote per share. Holders of Class B Common Stock are entitled to ten votes
per share. Holders of Class C Common Stock are not entitled to vote. Holders
of all classes of Common Stock entitled to vote will vote together as a single
class. Holders of Class C Common Stock may at any time convert their shares
into the same number of shares of Class A Common Stock and vice versa.
Ownership of Class B Common Stock is restricted to members of management and
by, or in trust for family members of management ("Management Group"). In the
event any shares of Class B Common Stock held by a member of the Management
Group are transferred outside of the Management Group, such shares will
automatically be converted into shares of Class A Common Stock. In addition,
if the total number of shares of Common Stock held by members of the
Management Group falls below 10% of the total number of shares of Common Stock
outstanding, all of the outstanding shares of Class B Common Stock
automatically will be reclassified as Class A Common Stock.
In any merger, consolidation or business combination, the consideration to
be received per share by holders of Class A and Class C Common Stock must be
identical to that received by holders of Class B Common Stock.
Under the Senior Credit Facility and the indentures relating to the Notes,
the Company's ability to declare dividends is restricted.
On November 14, 1994, ABC invested $25,000,000 in the Company, receiving
1,500,000 shares of the Company's non-voting Class C Common Stock and warrants
to purchase 750,000 shares of Class C Common Stock ("Warrants"). The Warrants
are immediately exercisable in whole or in part for a five-year period,
through November 14, 1999, at $22.80 per share, which represents 120% of the
initial public offering price of the Company's Class A Common Stock.
The Company established a Directors Option Plan for its non-employee
directors as part of their compensation. Under this plan, each of the current
directors received an option to acquire 1,000 shares of Class A Common Stock
on or before December 1, 1999 at a purchase price of $20.70 per share (such
price being 120% of the closing price of the Company's stock on December 1,
1994, the initial grant date for these options).
On December 30, 1992, the Company instituted an Incentive Stock Grant
Program ("Program"). The Program provides for the issuance of up to 106,500
shares of the Company's authorized but unissued Common Stock for each of the
years 1993 to 1996 to provide incentives for key officers and employees. Such
grants are allowed only if certain operating performance is attained. In
August 1994, the Company granted 106,500 shares for 1993 awards and charged
$2,023,500 to operations in the third quarter of 1994 based on the initial
public offering price for the Company's Class A Common Stock (see Note 3). The
Company issued another 106,500 shares for 1994 awards concurrent with the
closing of the offering and charged $2,023,500 to operations in the fourth
quarter of 1994 based on the initial public offering price.
F-15
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the Program discussed above, in March 1994, the Company
issued 107,920 shares of Class B Common Stock to two officers in connection
with their employment arrangements. The Company charged $2,050,480 to
operations in the first quarter of 1994 based on the initial public offering
price for the Company's Class A Common Stock.
On February 6, 1995, the Company adopted the Young Broadcasting Inc. 1995
Stock Option Plan ("1995 Stock Option Plan") and terminated the Program.
The 1995 Stock Option Plan was adopted to provide incentives for independent
directors, officers and employees. It may be administered by either the entire
Board of Directors of the Company or a committee consisting of two or more
members of the Board, each of whom is a disinterested person. The Board of
Directors or committee, as the case may be, is to determine, among other
things, the recipients of grants, whether a grant will consist of incentive
stock options ("ISOs"), non-qualified stock options or stock appreciation
rights ("SARs") (in tandem with an option or free-standing) or a combination
thereof, and the number of shares to be subject to such options. ISOs may be
granted only to officers and key employees of the Company and its
subsidiaries. Non-qualified stock options and SARs may be granted to such
officers and employees as well as to agents and directors of and consultants
to the Company, whether or not otherwise employees of the Company.
The 1995 Stock Option Plan provides for the granting of ISOs to purchase the
Company's Common Stock at not less than the fair market value on the date of
the option grant and the granting of non-qualified options and SARs with any
exercise price. SARs granted in tandem with an option have the same exercise
price as the related option. The total number of shares with respect to which
options and SARs may be granted under the 1995 Stock Option Plan is currently
700,000. As of December 31, 1995, non-qualified and incentive stock options
for an aggregate of 665,625 shares at a price of $19.75 have been granted to
various individuals, including various executive officers. Operating results
for 1995 were charged $366,094 in connection with the non-qualified options.
The 1995 Stock Option Plan contains certain limitations applicable only to
ISOs granted thereunder. To the extent that the aggregate fair market value,
as of the date of grant, of the shares to which ISOs become exercisable for
the first time by an optionee during the calendar year exceed $100,000, the
option will be treated as a non-qualified option. In addition, if an optionee
owns more than 10% of the total voting power of all classes of the Company's
stock at the time the individual is granted an ISO, the option price per share
cannot be less than 110% of the fair market value per share and the term of
the ISO cannot exceed five years. No option or SAR may be granted under the
Stock Option Plan after February 5, 2005, and no option may be outstanding for
more than ten years after its grant.
On March 14, 1995, the Company effected the 1994 non-matching stock
contribution, into the Company's defined contribution plan, equal to 3% of
1994 compensation, by issuing an aggregate of 21,696 shares of Class A Common
Stock.
At December 31, 1995, the Company has reserved 7,200 shares of its Class A
Common Stock, 696,800 shares of Class B Common Stock, and 750,000 shares of
its Class C Common Stock in connection with stock options, grants, and
warrants.
On December 15, 1995, the Company reached an agreement with J.P. Morgan
Capital Corporation to repurchase 138,008 shares and 285,251 shares of the
Company's Class A and C Common Stock, respectively, for approximately $11.1
million. As of December 31, 1995, the Company repurchased 26,625 shares of
Class A and 285,251 shares of Class C Common Stock for an aggregate price of
$8.2 million. The remaining 111,383 shares of Class A Common Stock were
repurchased on January 3, 1996 for an aggregate purchase price of $2.9
million.
F-16
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Those directors of the Company who are not also employees of the Company
receive an annual retainer of $10,000 and reimbursement of out-of-pocket
expenses incurred for each Board or committee meeting attended. Such non-
employee directors may elect to receive, in lieu of such cash amount, five
year options, having a fair market value exercise price, to purchase a number
of shares of Class A Common Stock based upon a formula which provides a
substantially equivalent value. Non-employee directors also receive, upon
becoming a director, a five-year option to purchase up to 1,000 shares of
Class A Common Stock at an exercise price equal to 120% of the quoted price on
the date of grant. No other directors are compensated for services as a
director.
11. INCOME TAXES
At December 31, 1995, the Company had net operating loss ("NOL")
carryforwards for tax purposes of approximately $142 million expiring at
various dates through 2010. The availability of NOL carryforwards to offset
future income is subject to limitations imposed by Internal Revenue Code
Section 382 as a result of an ownership change which occurred on November 14,
1994. Under these limitations, the Company may utilize up to $8.9 million per
year of the pre-ownership change NOL to offset future taxable income. In
addition, of the $142 million NOL, approximately $1.1 million is not subject
to the Section 382 limitation since it was generated after the ownership
change.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Fixed Assets........................................ $ -- $ 13,070
Accounts Receivable................................. 93,151 97,974
Intangibles......................................... 4,278,899 4,910,324
Other............................................... 70,575 82,759
NOL Carryforwards................................... 49,540,295 56,908,668
----------- -----------
Total deferred tax assets......................... $53,982,920 $62,012,795
----------- -----------
Deferred tax liabilities
Fixed Assets........................................ $ 622,724 $ --
Other............................................... 170,270 151,404
----------- -----------
Total deferred tax liabilities.................... $ 792,994 $ 151,404
----------- -----------
Net deferred tax assets before valuation allowance.... 53,189,926 61,861,391
Less: Valuation allowance............................. (53,189,926) (61,861,391)
----------- -----------
Net deferred tax assets............................... $ -- $ --
=========== ===========
</TABLE>
Based upon the standards set forth in Statement No. 109, the benefit of
$61,861,391 for remaining temporary differences and the above NOL
carryforwards have been offset by a valuation allowance.
12. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution plan ("Plan") which provides
retirement benefits for all eligible employees. Adam Young Inc. employees also
participate in this Plan (see Note 14). The Plan participants may make pretax
contributions from their salaries up to the maximum allowed by the Internal
Revenue Code. For the year ended December 31, 1993, the Company made a non-
matching contribution equal to 1% of eligible employee compensation which
amounted to $150,000. For the year ended December 31, 1994, the Company
accrued a non-matching stock contribution (21,696 shares of Class A Common
Stock) equal to 3% of eligible
F-17
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employee compensation amounting to $472,000. The Company effected such
contributions by issuing the shares on March 14, 1995.
For the year ended December 31, 1995, the Company accrued a non-matching
contribution (27,685 shares of Class A Common Stock) equal to 3% of eligible
employee compensation amounting to approximately $729,000. The Company
effected such contributions by issuing the shares on January 5, 1996.
13. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various capital leases for certain broadcast
equipment, office furniture, fixtures and other equipment that expire at
various dates during the next three years. At December 31, 1994 and 1995, the
net amount of property and equipment recorded under capital leases was
$413,000 and $167,000, respectively. Amortization of assets held under capital
leases is included with depreciation and amortization of property and
equipment.
The Company also has certain non-cancelable operating leases, primarily for
administrative offices, broadcast equipment and vehicles that expire over the
next six years. These leases generally contain renewal options for periods up
to five years and require the Company to pay all costs such as maintenance and
insurance.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and the present value
of future minimum capital lease payments as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
Year ending December 31:
1996.................................... $ 48,000 $ 678,000
1997.................................... 35,000 545,000
1998.................................... 38,000 500,000
1999.................................... 15,000 471,000
2000.................................... -- 309,000
-------- ----------
Total minimum lease payments.......... $136,000 $2,503,000
======== ==========
</TABLE>
See Note 14 regarding sublease income from a related party.
14. RELATED PARTY TRANSACTIONS
The Company has entered into agreements with Adam Young Inc. (a company
owned by certain stockholders of the Company) whereby Adam Young Inc. will
provide national sales representation for the Company's television stations.
In return, Adam Young Inc. is paid a commission which approximated $1,955,000,
$2,580,000 and $3,798,000 for 1993, 1994 and 1995, respectively. The Company
believes that the commissions they pay Adam Young Inc. are equal to rates that
they would have paid to other third party national sales representatives.
At December 31, 1994 and 1995, the Company had accrued commissions payable
of $509,000 and $266,000, respectively, to Adam Young Inc.
During 1990, the Company began subleasing to Adam Young Inc. certain office
space together with furnishings and equipment under an agreement which expires
in the year 2000. The lease is accounted for under the operating method. The
Company pays real estate taxes and maintenance while insurance is paid for by
Adam Young Inc. The cost of the leasehold improvements, furnishings, and
equipment subject to the sublease
F-18
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximated $1,161,000, and related accumulated depreciation and amortization
approximated $800,000 and $923,000 at December 31, 1994 and 1995,
respectively. The rent charged to Adam Young Inc. exceeds the Company's cost
of such facilities and improvements.
The Company received lease income payments in connection with the
aforementioned sublease arrangement of $516,000, $551,000 and $537,000 during
1993, 1994 and 1995, respectively.
The approximate minimum non cancelable lease payments to be received for
each of the years subsequent to December 31, 1995 if the Company does not
recapture any of the subleased space and improvements as permitted under the
sublease are as follows: 1996, $554,000; 1997, $554,000; 1998, $554,000; 1999,
$554,000 and 2000, $370,000.
During 1994 and 1995, the Company made loans to certain executive officers
and other employees of the Company to satisfy the federal tax withholding
requirements related to non-cash compensation paid in the form of shares of
the Company's Class B Common Stock. Such shares include shares issued pursuant
to the Program in August 1994 and November 1994 and shares issued in March
1994 as part of the compensation under employment arrangements (see Note 10).
The aggregate amount of such loans outstanding at December 31, 1995 was
approximately $2,003,000. The principal amount of the loans will bear
interest, payable annually, at the rate of 7.21%. The loans are secured by
each employee's shares of common stock and the principal is payable in five
equal annual installments commencing November 15, 1995.
On November 8, 1995, the Board of Directors approved a loan foregiveness
program (the "Loan Forgiveness Program") for the payment that was due on
November 15, 1995 and the payments due in subsequent years. Under this
program, participants that chose to participate will have their annual
installments forgiven over the year following the scheduled payment date at
the rate of one twelfth per month, as long as the employee continues to be
employed by the Company.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes the Company's results of operations for each
quarter of 1995 and 1994 (in thousands, except per share amounts). The (loss)
income per common share computation for each quarter and the year are separate
calculations. Accordingly, the sum of the quarterly (loss) income per common
share amounts may not equal the (loss) income per common share for the year.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Net revenues............ $ 26,973 $ 32,371 $ 29,593 $ 33,593
Operating income........ 5,288 10,941 8,615 10,567
Net (loss) income before
extraordinary item..... (2,665) 2,949 251 1,999
Net (loss) income....... (2,665) (6,176) 251 1,999
Net (loss) income per
common share........... $ (0.25) $ (0.57) $ 0.02 $ 0.18
1994
Net revenues............ $ 14,843 $ 18,369 $ 18,156 $ 27,420
Operating income........ 415 5,765 3,539 7,039
Net (loss) income before
extraordinary item..... (3,994) 1,688 (801) 757
Net (loss) income....... (3,994) 1,688 (801) (5,270)
Net (loss) income per
common share........... $ (2.37) $ 0.27 $ (1.00) $ (1.65)
</TABLE>
F-19
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The results of the second quarter of 1995 includes an extraordinary loss of
approximately $9.1 million ($0.84 per share) related to the early
extinguishment of debt (see Note 6).
16. SUBSEQUENT EVENTS
DEBT ISSUANCE
On January 16, 1996, the Company sold $125,000,000 aggregate principal
amount of Series A 9% Senior Subordinated Notes (the "January 1996 Notes") due
2006 to Merrill Lynch & Co. and J.P. Morgan Securities Inc. (the "Initial
Purchasers") pursuant to a purchase agreement dated January 9, 1996. The
Initial Purchasers subsequently resold the January 1996 Notes to qualified
institutional buyers in reliance upon Rule 144A under the Securities Act of
1933.
The net proceeds of the January 1996 Notes, approximately $121.9 million
after deducting the Initial Purchasers' discounts, was used to repay all
outstanding indebtedness including accrued interest under the New Senior
Credit Facility of approximately $50 million. The Company invested the
remaining net proceeds, approximately $71.9 million, in low risk commercial
paper. The Company used approximately $56.0 million of the remaining net
proceeds to finance the Quad Cities acquisition and the balance to partially
finance the Midcontinent acquisition.
RECENT ACQUISITIONS
On April 15, 1996, the Company acquired from Broad Street Television, L.P.
("Quad Cities") the assets of KWQC-TV, Channel 6, in Davenport, Iowa, for $55
million plus outstanding receivables. The acquisition will be accounted for as
a purchase. It is anticipated that a substantial portion of the purchase price
will be allocated to intangible assets. Such intangibles will be amortized
over their estimated lives which will not exceed 40 years.
On May 31, 1996, the Company acquired from Midcontinent Media of South
Dakota, a wholly owned subsidiary of Midcontinent Media, Inc. of Minneapolis,
Minnesota, ("Midcontinent") the assets of KELO-TV, Channel 11, in Sioux Falls,
South Dakota and its satellite stations for $50 million plus outstanding
receivables of the stations. The acquisition will be accounted for as a
purchase. It is anticipated that a substantial portion of the purchase price
will be allocated to intangible assets. Such intangibles will be amortized
over their estimated lives which will not exceed 40 years.
PENDING ACQUISITION
On May 10, 1996, the Company entered into an agreement with a subsidiary of
The Walt Disney Company ("Disney") to acquire the assets of KCAL-TV, Channel
9, in Los Angeles, California. The purchase price for the KCAL assets and for
the stock of a Disney subsidiary, which holds the Federal Communications
Commission License issued for KCAL, is $368.0 million, plus $17.0 million for
net working capital included as part of the purchased assets. This acquisition
will be accounted for as a purchase. It is anticipated that a substantial
portion of the purchase price will be allocated to intangible assets. Such
intangibles will be amortized over their estimated lives over periods ranging
from two to 40 years. The Company expects to finance the acquisition by 1)
issuing Class A common stock pursuant to a public offering providing the
Company with approximately $162.0 million of net proceeds, and 2) amending and
restating its senior credit facility, thus providing the Company with a $500
million term and revolving credit facility.
F-20
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,933,613
Trade accounts receivable, less allowance for doubtful accounts
of $788,000.................................................... 30,613,847
Current portion of loans receivable--officers................... 549,420
Current portion of program license rights....................... 3,774,646
Prepaid expenses................................................ 1,775,130
------------
Total current assets............................................ 44,646,656
------------
Property and equipment
Land and land improvements...................................... 6,062,065
Buildings and building improvements............................. 29,115,605
Broadcast equipment............................................. 116,037,180
Office furniture, fixtures and other equipment.................. 7,304,878
Vehicles........................................................ 2,496,144
------------
161,015,872
Less accumulated depreciation and amortization.................. (69,853,745)
------------
Net property and equipment...................................... 91,162,127
Program license rights, excluding current portion................ 2,351,679
Deposits and other assets........................................ 667,829
Loans receivable--officers, excluding current portion............ 1,194,175
Broadcasting licenses and other intangibles, less accumulated
amortization of $68,636,222..................................... 246,625,428
Deferred charges less accumulated amortization of $2,725,519..... 13,635,941
------------
Total Assets $400,283,835
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable.......................................... $ 5,124,461
Accrued expenses:
Interest........................................................ 12,168,460
Other........................................................... 4,022,671
------------
Total accrued expenses.......................................... 16,191,131
Current installments of program license liability............... 3,809,437
Current installments of long-term debt.......................... 961,850
Current installments of obligations under capital leases........ 40,301
------------
Total current liabilities....................................... 26,127,180
Program license liability, excluding current installments........ 2,243,526
Long-term debt, excluding current installments................... 30,714,176
11.75% Senior Subordinated Notes................................. 120,000,000
10.125% Senior Subordinated Notes................................ 125,000,000
9% Senior Subordinated Notes..................................... 125,000,000
Obligations under capital leases, excluding current installments. 70,707
------------
Total liabilities............................................... 429,155,589
------------
Stockholders' deficit:
Class A Common Stock, $.001 par value. Authorized 20,000,000
shares; issued and outstanding 4,887,264 shares................ 4,888
Class B Common Stock, $.001 par value. Authorized 20,000,000
shares; issued and outstanding 2,029,620 shares................ 2,029
Class C Common Stock, $.001 par value. Authorized 20,000,000
shares; issued and outstanding 3,563,473 shares................ 3,564
Additional paid-in capital...................................... 126,184,867
Accumulated deficit............................................. (155,067,102)
------------
Total stockholders' deficit..................................... (28,871,754)
------------
Total liabilities and stockholders' deficit..................... $400,283,835
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net operating revenue................................ $59,344,071 $63,758,948
----------- -----------
Operating expenses................................... 13,790,570 14,543,783
Amortization of program license rights............... 3,071,767 3,634,712
Selling, general and administrative expenses......... 11,797,725 12,881,164
Depreciation and amortization........................ 12,450,178 13,073,317
Corporate overhead................................... 1,566,215 2,171,073
Non-cash compensation................................ 437,982 15,400
----------- -----------
Operating income..................................... 16,229,634 17,439,499
----------- -----------
Interest income...................................... 215,766 1,282,094
Interest expense, net................................ (16,069,505) (19,742,254)
Other expense, net................................... (91,751) (440,752)
----------- -----------
(15,945,490) (18,900,912)
----------- -----------
Income (loss) before extraordinary item.............. 284,144 (1,461,413)
Extraordinary loss on extinguishment of debt......... (9,125,000) --
----------- -----------
Net income (loss).................................... $(8,840,856) $(1,461,413)
=========== ===========
<CAPTION>
Earnings (loss) per common share
Primary
Before extraordinary item.......................... $ 0.03 $ (0.14)
=========== ===========
Net income (loss).................................. $ (0.82) $ (0.14)
=========== ===========
Fully diluted
Before extraordinary item.......................... $ 0.03 $ (0.14)
=========== ===========
Net income (loss).................................. $ (0.82) $ (0.14)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------ PAID-IN ACCUMULATED EQUITY
CLASS A CLASS B CLASS C CAPITAL DEFICIT (DEFICIT)
------- ------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $4,955 $2,029 $3,564 $128,051,024 $(153,605,689) $(25,544,117)
Repurchase and
retirement of Class A
Common Stock.......... (111) -- -- (2,923,693) -- (2,923,804)
Contribution of shares
into Company's defined
contribution plan..... 28 -- -- 728,641 -- 728,669
Exercise of common
stock options......... 16 -- -- 313,495 -- 313,511
Issuance of common
stock options below
market value.......... -- -- -- 15,400 -- 15,400
Net loss for June 30,
1996.................. -- -- -- -- (1,461,413) (1,461,413)
------ ------ ------ ------------ ------------- ------------
Balance at June 30,
1996................... $4,888 $2,029 $3,564 $126,184,867 $(155,067,102) $(28,871,754)
====== ====== ====== ============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (8,840,856) $ (1,461,413)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment........................................ 6,911,732 7,099,937
Amortization of program license rights........... 3,071,767 3,634,712
Amortization of broadcasting licenses, other
intangibles and deferred charges................. 5,538,446 5,973,380
Non-cash compensation............................ 437,982 15,400
Non-cash interest expense on outstanding
indebtedness..................................... 214,739 183,976
Extraordinary loss on extinguishment of debt..... 9,125,000 --
Deferred acquisition and debt refinancing costs
incurred......................................... (3,437,500) (3,125,000)
(Increase) decrease in trade accounts receivable. (1,159,547) 808,093
Increase in prepaid expenses..................... (221,077) (729,534)
Decrease in trade accounts payable............... (786,778) (332,672)
(Decrease) increase in accrued expenses and other
liabilities...................................... (3,259,328) 6,119,405
------------ ------------
Net cash provided by operating activities.......... 7,594,580 18,186,284
------------ ------------
INVESTING ACTIVITIES
Purchase of KWQC-TV................................ -- (57,173,000)
Purchase of KELO-TV................................ -- (51,281,308)
Capital expenditures............................... (2,938,831) (1,634,703)
(Increase) decrease in deposits and other assets... (166,555) 877,756
Decrease in broadcast licenses and other
intangibles........................................ 31,347 --
------------ ------------
Net cash used in investing activities.............. (3,074,039) (109,211,255)
------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of public subordinated debt. 125,000,000 125,000,000
Borrowings from working capital facility........... 3,500,000 25,400,000
Principal payments on long-term debt............... (129,846,161) (46,764,798)
Deferred acquisition and debt refinancing costs
incurred........................................... (2,026,466) (1,743,280)
Repurchase of Class A Common Stock................. -- (2,923,804)
Proceeds from exercise of Common Stock options..... 50,000 313,511
Principal payments under capital lease obligations. (201,362) (24,916)
Payments on programming license liabilities........ (3,221,885) (3,723,762)
------------ ------------
Net cash (used in) provided by financing
activities......................................... (6,745,874) 95,532,951
------------ ------------
NET (DECREASE) INCREASE IN CASH.................... (2,225,333) 4,507,980
Cash and cash equivalents at beginning of year..... 6,304,402 3,425,633
------------ ------------
Cash and cash equivalents at June 30............... $ 4,079,069 $ 7,933,613
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid...................................... $ 16,945,932 $ 14,304,146
Income taxes paid.................................. $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include those of Young
Broadcasting Inc. and subsidiaries (the "Company"), consisting of eleven
network affiliated (four with CBS, six with ABC and one with NBC) commercial
television broadcasting stations in the states of Michigan, Wisconsin,
Louisiana, Illinois, Tennessee, New York, Virginia, Iowa and South Dakota.
Significant intercompany transactions and accounts have been eliminated. The
accompanying condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. 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.
2. ACQUISITIONS
On April 15, 1996, the Company acquired from Broad Street Television, L.P.
("Quad Cities") the assets of KWQC-TV, Channel 6, in Davenport, Iowa, for
approximately $55 million plus outstanding receivables of the station. This
acquisition was accounted for as a purchase. A substantial portion of the
purchase price was allocated to intangible assets. Such intangibles will be
amortized over their estimated lives which will not exceed 40 years. The Quad
Cities acquisition was financed with approximately $56.2 million of net
proceeds from the January 1996 $125 million 9% Senior Subordinated Notes
Offering (the "January 1996 Notes Offering") due 2006.
On May 31, 1996, the Company acquired from Midcontinent Television of South
Dakota, a wholly owned subsidiary of Midcontinent Media, Inc. of Minneapolis,
Minnesota, ("Midcontinent") the assets of KELO-TV, Channel 11, in Sioux Falls,
South Dakota and its satellite stations for approximately $50 million plus
outstanding receivables of the stations. This acquisition was accounted for as
a purchase. A substantial portion of the purchase price was allocated to
intangible assets. Such intangibles will be amortized over their estimated
lives which will not exceed 40 years. The Midcontinent acquisition was
financed with approximately $15.7 million of net proceeds from the January
1996 Notes Offering, $25.4 million under the Senior Credit Facility, a $3
million promissory note and the remaining balance from cash balances of the
Company.
The following pro forma information gives effect to the Acquisitions of
KWQC-TV and KELO-TV (including expense reductions) and the new affiliation
agreement as if they had been effected on January 1, 1995 and 1996. The pro
forma information for the three months and six months ended June 30, 1995 and
1996 does not purport to represent what the Company's results of operations
would have been if such transactions had been effected at such date and do not
purport to project results of operations of the Company in any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1995(/1/) 1996(/1/) 1995(/1/) 1996(/1/)
--------- --------- --------- ---------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C>
Net Revenues (2)....................... $38,858 $38,894 $71,694 $72,946
Operating Income....................... 12,663 12,994 19,329 20,149
Income (loss) before extraordinary
item................................... 1,941 1,954 (2,179) (2,297)
Net income (loss) applicable to common
stockholders........................... (7,184) 1,954 (11,304) (2,297)
Net income (loss) per common share:
Primary and Fully Diluted.............. $ (0.66) $ 0.18 $ (1.04) $ (0.22)
</TABLE>
F-25
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(1) Pro forma adjustments to 1995 net revenues include additional annualized
network compensation under the new WTVO and KELO affiliation agreements
and a programming change at KWQC in the aggregate amount of $200,000 and
$400,000 for the three and six months ended June 30, 1995, respectively.
Pro forma adjustments to 1996 net revenues include additional network
compensation under the new KWQC and KELO affiliation agreements of $72,000
and $182,000 for the three and six months ended June 30,1996.
Pro forma adjustments for 1995 include expense reductions of approximately
$792,000 and $1.6 million and the elimination of the Quad Cities station
management fee for the three and six months ended June 30, 1995,
respectively. Pro forma adjustments for 1996 include expense reductions of
approximately $306,000 and $1.1 million and the elimination of the Quad
Cities station management fee for the three and six months ended June 30,
1996, respectively.
(2)Net revenues are total revenues net of agency and national representation
commissions.
3. PENDING ACQUISITION
On May 10, 1996, the Company entered into an agreement with a subsidiary of
The Walt Disney Company ("Disney") to acquire from Disney the assets of KCAL-
TV, Channel 9, in Los Angeles, California for $368 million plus $17 million
for net working capital. This acquisition will be accounted for as a purchase.
It is anticipated that a substantial portion of the purchase price will be
allocated to intangible assets. Such intangibles will be amortized over their
estimated lives which will not exceed 40 years.
4. SUBSEQUENT EVENT
The Company and Disney, the parent of ABC, have entered into an agreement
pursuant to which the Company will repurchase the ABC Stock and the ABC
Warrants concurrently with the closing of the Offerings. Under the agreement,
the Company will repurchase the ABC Stock at a per share price equal to the
difference between the public offering price per share of the Class A Common
Stock, less the underwriting discount per share. The Company will repurchase
the ABC Warrants at a per share price equal to the difference between the
public offering price per share of the Class A Common Stock and the per share
exercise price of the ABC Warrants ($22.80), plus $2, less one-half of the
underwriting discount per share.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Walt Disney Company
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in KCAL Broadcasting Group equity, and of cash flows
present fairly, in all material respects, the financial position of KCAL
Broadcasting Group (KCAL, which represents a broadcasting group of The Walt
Disney Company) at September 30, 1995 and 1994 and the results of its
operations, the changes in KCAL Broadcasting Group equity, and its cash flows
for each of the three years in the period ended September 30, 1995 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of The Walt Disney Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
February 15, 1996
F-27
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
BALANCE SHEET
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 36,829 $ 13,519
Accounts receivable (net of allowances of $1,041 in 1995
and $730 in 1994)......................................... 17,998 17,577
Broadcast program rights................................... 25,030 32,231
Deferred income taxes ..................................... 10,011 19,180
Prepaid expenses........................................... 260 179
-------- --------
Total current assets..................................... 90,128 82,686
Broadcast program rights..................................... 6,294 4,172
Property, plant and equipment, net........................... 13,898 13,518
Intangible assets, net....................................... 221,442 228,784
-------- --------
Total assets............................................. $331,762 $329,160
======== ========
LIABILITIES AND BROADCASTING GROUP EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............. $ 5,832 $ 5,744
Broadcast program rights payable........................... 30,123 45,745
-------- --------
Total current liabilities................................ 35,955 51,489
Broadcast program rights payable............................. 9,658 12,346
Deferred income taxes........................................ 10,011 19,180
-------- --------
Total liabilities........................................ 55,624 83,015
-------- --------
Commitments and contingencies (Note 8).......................
Broadcasting group equity.................................... 276,138 246,145
-------- --------
Total liabilities and broadcasting group equity.......... $331,762 $329,160
======== ========
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
STATEMENT OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues.......................................... $113,990 $102,995 $108,144
Expenses:
Program amortization............................ 51,523 45,759 55,079
Program write-offs.............................. -- 14,556 26,100
Other operating expenses........................ 26,151 25,484 24,955
Selling, general and administrative............. 25,029 24,619 23,686
Depreciation.................................... 3,520 4,155 5,251
Amortization of intangibles..................... 7,342 7,937 10,688
-------- -------- --------
Total expenses................................ 113,565 122,510 145,759
-------- -------- --------
Income (loss) before income taxes................. 425 (19,515) (37,615)
Income tax benefit................................ -- -- (12,633)
-------- -------- --------
Net income (loss)................................. $ 425 $(19,515) $(24,982)
======== ======== ========
</TABLE>
STATEMENT OF CHANGES IN KCAL BROADCASTING GROUP EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Beginning of year.................................. $246,145 $243,722 $256,248
Net income (loss).................................. 425 (19,515) (24,982)
Net transactions with Disney (Note 4).............. 29,568 21,938 12,456
-------- -------- --------
End of year........................................ $276,138 $246,145 $243,722
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
STATEMENT OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 425 $(19,515) $(24,982)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation................................. 3,520 4,155 5,251
Amortization of intangibles.................. 7,342 7,937 10,688
Amortization of broadcast program rights..... 35,771 47,617 65,330
Payments for broadcast program rights........ (49,002) (49,771) (39,635)
Changes in assets and liabilities:
Accounts receivable.......................... (421) (1,103) 1,404
Other assets................................. (81) 122 (123)
Accounts payable............................. 88 2,538 (12,045)
Deferred income taxes........................ -- -- (12,633)
-------- -------- --------
Cash used in operating activities................ (2,358) (8,020) (6,745)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment..... (3,900) (3,759) (2,357)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transactions with Disney (Note 4).......... 29,568 21,938 12,456
-------- -------- --------
Increase in cash and cash equivalents............ 23,310 10,159 3,354
Cash and cash equivalents, beginning of year..... 13,519 3,360 6
-------- -------- --------
Cash and cash equivalents, end of year........... $ 36,829 $ 13,519 $ 3,360
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-30
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
NOTE 1--BASIS OF PRESENTATION
In July 1995, The Walt Disney Company (Disney) and Capital Cities/ABC, Inc.
(Capital Cities) entered into a reorganization agreement, pursuant to which
Disney will acquire Capital Cities. In connection with the acquisition, Disney
has agreed to divest itself of KCAL-TV Channel 9, an independent VHF
television station licensed to operate in Los Angeles, California. The
accompanying financial statements include the operations of the KCAL
Broadcasting Group (KCAL), which consists of certain operating assets and
liabilities of KCAL-TV, Inc., KCAL TV L.P., Fidelity Television, Inc. and KHJ-
TV, Inc.
The accompanying financial statements reflect the "carved-out" assets,
liabilities, revenues, expenses and cash flows of KCAL as if KCAL had been
operating as a separate business. Certain corporate, general and
administrative expenses of Disney have been allocated to KCAL (see Note 4) on
various bases which, in the opinion of management, are reasonable. However,
such expenses are not necessarily indicative of, and it is not practicable for
management to estimate the level of, expenses which might have been incurred
had KCAL been operating as a separate business.
These financial statements include certain programming assets and
liabilities which will not be sold by Disney upon its divestiture of KCAL.
Selected financial information associated with the retained programming is as
follows:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance Sheet
Broadcast program rights................... $ 130 $ 3,248 $ 11,669
Broadcast program rights payable........... 4,449 19,760 38,347
Statement of Operations
Revenues................................... $ 2,038 $ 2,905 $ 3,967
Program amortization expense............... 3,118 4,871 6,978
Program write-offs......................... -- 3,550 26,100
-------- -------- ---------
Operating loss............................. $ (1,080) $ (5,516) $ (29,111)
======== ======== =========
Statement of Cash Flows
Cash payments.............................. $ 15,311 $ 18,586 $ 15,386
======== ======== =========
</TABLE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Advertising revenue is recorded when the related advertisement is broadcast
and is net of advertising agency commissions. Management does not believe that
the loss of any single advertiser or advertising agency would have a material
adverse impact on KCAL.
Broadcast program rights
Broadcast program rights consist of rights to broadcast feature films and
syndicated television shows and are stated at the lower of unamortized cost or
estimated net realizable value. Broadcast program rights and the related
liabilities are recorded at the contract value when the program is available
for airing, the license period begins and certain other conditions are met.
Broadcast program rights are generally amortized using an
F-31
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
accelerated method of amortization as programs are aired. The net realizable
value of broadcast program rights for which KCAL is contractually committed is
reviewed periodically and revisions to amortization rates or write-downs to
net realizable value may occur.
The costs of programming expected to be aired within one year are classified
as current assets. Payments to be made within one year under broadcast rights
contracts are classified as current liabilities.
Barter transactions
KCAL provides advertising air time to certain customers in exchange for
programming. Barter transactions are recorded at the estimated fair value of
the exchanged air time. Barter revenues and expenses are recognized when the
advertisement is broadcast.
Presentation of cash flows
Payments for broadcast program rights in the statement of cash flows include
cash payments made by Disney on behalf of KCAL (see Note 4) and exclude
broadcast programming acquired in barter transactions. Broadcast program
rights amortization included in the statement of cash flows excludes
amortization of programming acquired in barter transactions.
All highly liquid investments with maturities of three months or less are
considered to be cash equivalents.
Property, plant and equipment
Property, plant and equipment are stated at cost. Additions and improvements
are capitalized while expenditures for maintenance and repairs are expensed.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 20 years for furniture,
fixtures and equipment, 20 to 40 years for buildings and improvements and the
life of the lease for leasehold improvements.
NOTE 3--INTANGIBLE ASSETS
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1994
-------- --------
<S> <C> <C>
Goodwill less accumulated amortization of $31,480 in
1995 and $26,890 in 1994............................... $154,971 $159,561
FCC license, less accumulated amortization of $13,669 in
1995 and $11,668 in 1994............................... 66,345 68,346
Advertiser relationships, less accumulated amortization
of $32,105 in 1995 and $31,354 in 1994................. 126 877
-------- --------
$221,442 $228,784
======== ========
</TABLE>
Goodwill represents the excess of Disney's purchase cost for KCAL over the
fair value of their net assets at the date of acquisition. Both the goodwill
and FCC license are being amortized over 40 years using the straight-line
method. Advertiser relationships are being amortized over 8 years using an
accelerated method.
F-32
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
At each balance sheet date, KCAL evaluates whether there has been an
impairment in the carrying value of the intangible assets in accordance with
generally accepted accounting principles. Such evaluation is based on various
analyses including undiscounted cash flow and profitability projections.
Accordingly, these analyses incorporate management's best estimate of future
operating results; however, the amounts KCAL may ultimately realize upon the
sale of the broadcast operations could differ from the stated carrying value
of the assets of KCAL (including the intangible assets) at September 30, 1995.
At September 30, 1995, management does not believe there has been an
impairment in the net carrying value of the intangible assets.
NOTE 4--TRANSACTIONS WITH DISNEY
KCAL licensed broadcast programming from certain Disney subsidiaries.
Selected financial information associated with the programming acquired from
Disney is as follows:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance Sheet
Broadcast program rights.................... $ 8,168 $ 11,378 $ 21,483
Broadcast program rights payable............ 12,444 18,783 23,741
Statement of Cash Flows
Cash payments............................... $ 7,267 $ 8,092 $ 216
</TABLE>
Additionally, Disney and certain of its subsidiaries provide a variety of
services to KCAL that are accounted for as intercompany transactions which are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Programming costs paid by Disney................ $14,638 $ 18,585 $ 10,109
Salaries, employee benefits and payroll taxes... 14,468 13,129 12,045
Corporate overhead allocations.................. 1,201 1,626 1,590
Net cash transfers.............................. 133 (11,000) (13,690)
Other........................................... (872) (402) 2,402
------- -------- --------
Total......................................... $29,568 $ 21,938 $ 12,456
======= ======== ========
</TABLE>
In certain cases, Disney makes payments on behalf of KCAL for broadcast
programming purchased by KCAL from third parties.
KCAL's payroll taxes are included in Disney's consolidated payroll tax
filings. Disney charges KCAL for payroll taxes paid on their behalf.
Certain employees of KCAL were paid directly by Disney and participated in
incentive compensation and other employee benefit plans of Disney. These
payroll costs, incentive compensation costs and costs of other employee
benefit plans were charged to KCAL by Disney based upon the actual cost to
Disney.
Substantially all non-union employees of KCAL are eligible to participate in
defined benefit plans sponsored by Disney after completing one year of
service. Upon Disney's divestiture of KCAL, all defined benefit pension
F-33
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
obligations applicable to prior service by KCAL employees will remain an
obligation of Disney. KCAL salaried employees are also eligible to participate
in a defined contribution plan sponsored by Disney which consists of a 401(k)
savings plan covering substantially all salaried employees who have completed
one year of service and make the necessary contributions. Disney's costs
applicable to these plans for KCAL employees are charged to KCAL.
KCAL was allocated costs by Disney for certain corporate services such as
human resources, legal and accounting. Such costs were allocated to KCAL based
on the relative percentage of time spent by Disney's corporate departments.
Charges allocated to KCAL for outside legal fees and insurance premiums were
based on actual costs incurred by Disney. Management believes that the
allocation methods were reasonable in the circumstances.
NOTE 5--INCOME TAXES
The components of income tax benefit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Current
Federal........................................ $(5,015) $(5,204) $ (7,415)
State.......................................... (860) (893) (1,271)
------- ------- --------
(5,875) (6,097) (8,686)
------- ------- --------
Deferred
Federal........................................ 4,696 6,093 (3,244)
State.......................................... 1,179 4 (703)
------- ------- --------
5,875 6,097 (3,947)
------- ------- --------
$ 0 $ 0 $(12,633)
======= ======= ========
</TABLE>
Components of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1995 1994
------- -------
<S> <C> <C>
Deferred Tax Assets:
Programming costs...................................... $10,011 $19,180
Loss carryforwards..................................... 20,658 14,783
Fixed assets and other................................. 761 300
------- -------
Total deferred tax assets............................ $31,430 $34,263
Deferred Tax Liabilities:
Licenses............................................... 26,683 27,339
------- -------
Net Deferred Tax Assets:
Before valuation allowance............................. 4,747 6,924
Valuation Allowance...................................... (4,747) (6,924)
------- -------
Net Deferred Tax Assets................................ $ 0 $ 0
======= =======
</TABLE>
F-34
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The reconciliation of the statutory income tax rate to the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Tax at federal income tax rate................... $ 149 $(6,830) $(13,165)
State taxes, net of federal income tax benefit... 25 (1,171) (2,257)
Amortization of goodwill......................... 1,881 1,881 1,881
Valuation allowance.............................. (2,177) 6,068 856
Other............................................ 122 52 52
------- ------- --------
$ 0 $ 0 $(12,633)
======= ======= ========
</TABLE>
SFAS 109 requires that the consolidated amount of current and deferred
income tax expense for a group that files a consolidated tax return be
allocated among the members of the group when those members issue separate
financial statements. KCAL's income tax provision is computed as if KCAL were
a separate entity from Disney. Disney will not reimburse KCAL for utilization
of certain tax attributes. However, Disney will not charge KCAL for its
separate tax liabilities to the extent of its prior losses.
SFAS 109 requires that deferred income tax assets be reduced by the amount
of any income tax benefits that, based on available evidence, are not expected
to be realized under a "more likely than not" standard. Accordingly, for the
fiscal years ended September 30, 1993 and September 30, 1994, valuation
allowances of $856 and $6,068 were established. For the year ended September
30, 1995, prior valuation allowances were reduced by $2,177.
NOTE 6--BARTER TRANSACTIONS
Total barter sales amounted to $15,752 in 1995, $12,698 in 1994 and $15,849
in 1993. Equal amounts were charged to operating expenses for the respective
period.
NOTE 7--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1995 and 1994 consisted of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1994
-------- --------
<S> <C> <C>
Land................................................... $ 3,100 $ 3,100
Buildings and improvements............................. 4,165 4,054
Leasehold improvements................................. 1,446 1,445
Furniture, fixtures and equipment...................... 41,386 37,869
Accumulated depreciation............................... (36,199) (32,950)
-------- --------
Property, plant and equipment, net..................... $ 13,898 $ 13,518
======== ========
</TABLE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
Leases
KCAL has entered into various operating leases for office and studio space
in Hollywood, California and several microwave and transmission sites
throughout Southern California. Rent expense relating to these leases
F-35
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
was $1,110 in 1995, $1,365 in 1994, and $1,270 in 1993. The aggregate minimum
rental commitments for all non-cancelable operating leases with terms of more
than one year are as follows:
<TABLE>
<S> <C>
1996.................................. $1,036
1997.................................. 46
1998.................................. 45
1999.................................. 11
------
Total............................... $1,138
======
</TABLE>
Broadcast program rights
In addition to the program rights recorded in the balance sheet as of
September 30, 1995, KCAL is contractually committed to purchase programming
for which the availability date and other conditions for recording an asset
and a liability will occur subsequent to September 30, 1995. These unrecorded
contractual commitments totaled $35,219 as of September 30, 1995.
Broadcast license
Television licenses are currently granted for a maximum period of eight
years and are renewable upon application to the FCC. During the period when an
application for renewal is pending, others may file applications for the
license and challenge the incumbent licensee's renewal application in a
comparative hearing, or file petitions to deny the renewal application. KCAL's
last license term expired on December 1, 1993 and KCAL filed a renewal
application in a timely fashion. Certain petitions to deny the renewal have
been filed with the FCC. To date, the FCC has not acted on KCAL's renewal
application or the petition to deny renewal. Based on the FCC's actions in
other renewal proceedings, KCAL expects that the FCC will grant its license
renewal which, based on FCC regulations in effect at December 31, 1993, will
be for a five year period. Subsequent renewals will be based on the current
rules and will be for periods of eight years.
Litigation
In the normal course of business, KCAL is a defendant in certain legal
actions and other claims which are pending. While management cannot predict
the outcome of these matters, it believes that KCAL has meritorious defenses
to these actions and claims. Management believes that the liability, if any,
which may result from such matters will not have a material adverse effect on
KCAL's financial position.
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of The Walt Disney Company
We have reviewed the accompanying condensed balance sheet and related
condensed statements of operations and of cash flows of the KCAL Broadcasting
Group as of June 30, 1996 and for the three and nine month periods then ended
and we have reviewed the related statement of changes in KCAL Broadcasting
Group equity as of and for the nine month period ended June 30, 1996. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards established by the
American Institute of Certified Public Accountants. A review of the interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed financial statements as of June
30, 1996 and for the three and nine month periods then ended for them to be in
conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the balance sheet as of September 30, 1995, and the related
statements of operations, of changes in KCAL Broadcasting Group equity, and of
cash flows for the year then ended (not presented herein), and in our report
dated February 15, 1996 we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet information as of September 30, 1995, is fairly stated
in all material respects in relation to the balance sheet from which it has
been derived.
Price Waterhouse LLP
Los Angeles, California
August 23, 1996
F-37
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
CONDENSED BALANCE SHEET
($ IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
1996 1995
----------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 23,763 $ 36,829
Accounts receivable (net of allowances of
$1,471 in 1996 and $1,041 in 1995)................. 25,458 17,998
Broadcast program rights............................ 11,218 25,030
Deferred income taxes............................... 6,003 10,011
Prepaid expenses.................................... 306 260
-------- --------
Total current assets.............................. 66,748 90,128
Broadcast program rights............................ 3,657 6,294
Property, plant and equipment, net.................. 13,047 13,898
Intangible assets, net.............................. 216,403 221,442
-------- --------
Total assets...................................... $299,855 $331,762
======== ========
LIABILITIES AND KCAL BROADCASTING GROUP EQUITY
Current liabilities:
Accounts payable and other accrued liabilities...... $ 4,094 $ 5,832
Broadcast program rights payable.................... 20,988 30,123
-------- --------
Total current liabilities......................... 25,082 35,955
Broadcast program rights payable.................... 6,472 9,658
Deferred income taxes............................... 6,362 10,011
-------- --------
Total liabilities................................. 37,916 55,624
-------- --------
KCAL broadcasting group equity...................... 261,939 276,138
-------- --------
Total liabilities and broadcasting group equity... $299,855 $331,762
======== ========
</TABLE>
See Notes to Condensed Financial Statements
F-38
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
CONDENSED STATEMENT OF OPERATIONS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -------------------
1996 1995 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues................................. $ 96,171 $ 88,778 $ 33,164 $ 28,232
Expenses:
Amortization of broadcast program
rights................................ 39,229 40,155 12,136 10,992
Other operating expenses............... 23,529 23,127 7,963 7,895
Selling, general and administrative.... 17,165 15,858 5,698 5,261
Depreciation........................... 2,402 2,726 842 751
Amortization of intangibles............ 5,105 5,555 1,713 1,851
-------- -------- --------- ---------
Total expenses....................... 87,430 87,421 28,352 26,750
-------- -------- --------- ---------
Income before income taxes............... 8,741 1,357 4,812 1,482
Income tax provision..................... 359 -- 359 --
-------- -------- --------- ---------
Net income............................... $ 8,382 $ 1,357 $ 4,453 $ 1,482
======== ======== ========= =========
</TABLE>
CONDENSED STATEMENT OF CHANGES IN KCAL BROADCASTING GROUP EQUITY
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, 1996
-----------------
<S> <C>
Beginning of period..................................... $276,138
Net income.............................................. 8,382
Net transactions with Disney............................ (22,581)
--------
End of period........................................... $261,939
========
</TABLE>
See Notes to Condensed Financial Statements
F-39
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 8,382 $ 1,357
Adjustments to reconcile net income to net cash provided
(used) in operating
activities:
Depreciation........................................... 2,402 2,726
Amortization of intangibles............................ 5,105 5,555
Amortization of broadcast program rights............... 28,367 28,343
Payments for broadcast program rights.................. (23,946) (34,714)
Changes in assets and liabilities:
Accounts receivables................................... (7,460) (3,592)
Prepaid expenses....................................... (46) (371)
Accounts payable....................................... (1,738) 1,137
-------- --------
Cash provided by operating activities...................... 11,066 441
Cash flows from investing activities:
Additions to property, plant and equipment............... (1,551) (3,300)
Cash flows from financing activities:
Net transactions with Disney............................. (22,581) 16,756
-------- --------
(Decrease) increase in cash and cash equivalents........... (13,066) 13,897
Cash and cash equivalents, beginning of year............... 36,829 13,519
-------- --------
Cash and cash equivalents, end of period................... $ 23,763 $ 27,416
======== ========
</TABLE>
See Notes to Condensed Financial Statements
F-40
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
($ IN THOUSANDS)
NOTE 1--BASIS OF PRESENTATION
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the interim periods presented are not necessarily indicative of the results
that may be expected for the year ending September 30, 1996. For further
information, refer to the financial statements and footnotes thereto included
in the KCAL Broadcasting Group ("KCAL") financial statements for the year
ended September 30, 1995.
NOTE 2--SALE OF KCAL
On May 10, 1996, The Walt Disney Company ("Disney") entered into an
agreement with Young Broadcasting Inc. ("Young") to sell certain assets of
KCAL to Young for $385 million. The purchase price is subject to certain
working capital adjustments (as defined in the Acquisition Agreement). This
sale is subject to, among other things, Federal Communications Commission
("FCC") approval.
NOTE 3--RETAINED ASSETS
These financial statements include certain programming assets and
liabilities which will not be sold to Young Broadcasting Inc. Selected
financial information associated with the retained programming is as follows
($ in thousands):
Balance Sheet:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
----------- -------------
(UNAUDITED)
<S> <C> <C>
Broadcast program rights........................ $ -- $ 130
Broadcast program rights payable................ 12,099 14,139
</TABLE>
Statement of Operations (Unaudited):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED JUNE
30,
-------------
1996 1995
---- -------
<S> <C> <C>
Revenue................................................... $ 43 $ 2,175
Program amortization expense.............................. 130 5,568
---- -------
Operating loss............................................ $(87) $(3,393)
==== =======
</TABLE>
Statement of Cash Flows (Unaudited):
<TABLE>
<S> <C> <C>
Cash payments for broadcast program rights................. $2,040 $7,980
</TABLE>
F-41
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
NOTE 4--TRANSACTIONS WITH DISNEY
KCAL licensed broadcast programming from certain Disney subsidiaries.
Selected financial information associated with the programming acquired from
Disney is as follows:
Balance Sheet:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
----------- -------------
(UNAUDITED)
<S> <C> <C>
Broadcast program rights........................ $ 6,500 $ 8,168
Broadcast program rights payable................ $13,293 $12,444
</TABLE>
Statement of Cash Flows (Unaudited):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30,
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash payments......................................... $ 2,405 $7,103
</TABLE>
Additionally, Disney and certain of its subsidiaries provide a variety of
services to KCAL that are accounted for as intercompany transactions which are
summarized as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Net cash transfers................................. $(36,406) $ --
Program payments................................... (603) 5,252
Employee benefits.................................. 11,955 10,463
Corporate G & A.................................... 1,049 725
Interest transfers................................. 608 80
Other.............................................. 816 236
---------- ---------
Net transactions with Disney....................... $(22,581) $16,756
========== =========
</TABLE>
NOTE 5--RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 financial statements to
conform to the 1996 presentation.
F-42
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners of
Broad Street Television, L.P.
North Haven, Connecticut
We have audited the accompanying balance sheets of KWQC-TV, a division of
Broad Street Television, L.P., as of December 31, 1995 and December 25, 1994,
and the related statements of operations, divisional equity and cash flows for
each of the years in the three year period ended December 31, 1995. These
financial statements are the responsibility of KWQC's management. 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KWQC-TV as of December 31,
1995 and December 25, 1994, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1995
in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
New Haven, Connecticut
February 13, 1996,
except for Note 6 as
to which the date is
March 12, 1996
F-43
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
BALANCE SHEETS
DECEMBER 31, 1995 AND DECEMBER 25, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS (NOTES 5 AND 6)
Current Assets
Cash and cash equivalents (Note 2)................... $ 468,464 $ 305,922
Accounts receivable, less allowance of $23,428 for
1995 and
$2,403 for 1994..................................... 2,166,378 2,451,137
Other receivables.................................... 285,450 350,776
Broadcast program rights............................. 1,277,163 1,313,034
Other current assets................................. 167,196 207,198
----------- -----------
Total current assets............................... 4,364,651 4,628,067
----------- -----------
Property and Equipment
Land and improvements................................ 1,155,946 1,155,946
Buildings and improvements........................... 4,872,515 4,454,527
Equipment, furniture and fixtures.................... 6,688,707 6,413,801
Construction in progress............................. 81,020 --
----------- -----------
12,798,188 12,024,274
Less accumulated depreciation........................ 6,280,348 5,688,459
----------- -----------
6,517,840 6,335,815
----------- -----------
Broadcast Program Rights, long-term portion............ 3,472,781 4,669,694
----------- -----------
Intangible Assets, less accumulated amortization of
$16,926,821 in
1995 and $14,347,003 in 1994.......................... 13,240,544 15,820,362
----------- -----------
Other Assets........................................... 37,805 82,665
----------- -----------
Total assets....................................... $27,633,621 $31,536,603
=========== ===========
LIABILITIES AND DIVISIONAL EQUITY
Current Liabilities
Broadcast program rights payable..................... $ 1,190,200 $ 1,191,618
Accounts payable and other liabilities............... 435,291 541,742
----------- -----------
Total current liabilities.......................... 1,625,491 1,733,360
Broadcast Program Rights, long-term portion............ 3,179,373 4,284,373
----------- -----------
Total liabilities.................................. 4,804,864 6,017,733
Commitments (Note 4)...................................
Divisional Equity...................................... 22,828,757 25,518,870
----------- -----------
Total liabilities and divisional equity............ $27,633,621 $31,536,603
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-44
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, DECEMBER 25, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Gross revenues.......................... $15,037,261 $14,437,122 $12,514,090
Less agency commissions................. (1,792,698) (1,745,777) (1,478,914)
----------- ----------- -----------
Net operating revenue................. 13,244,563 12,691,345 11,035,176
----------- ----------- -----------
Operating expenses...................... 3,310,058 3,000,235 2,505,900
Amortization of program license rights.. 1,325,784 1,310,136 1,660,231
Selling, general and administrative ex-
penses................................. 3,893,106 3,570,156 3,472,106
Depreciation and amortization........... 3,171,707 3,444,505 3,515,054
Management fees......................... 373,688 361,303 313,241
----------- ----------- -----------
Total operating expenses................ 12,074,343 11,686,335 11,466,532
----------- ----------- -----------
Operating income (loss)............... 1,170,220 1,005,010 (431,356)
Other income............................ 14,667 8,135 7,648
----------- ----------- -----------
Net income (loss)..................... $ 1,184,887 $ 1,013,145 $ (423,708)
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-45
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
STATEMENTS OF DIVISIONAL EQUITY
YEARS ENDED DECEMBER 31, 1995, DECEMBER 25, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year............... $25,518,870 $28,184,866 $30,710,321
Net income (loss)...................... 1,184,887 1,013,145 (423,708)
Net cash transfers..................... (3,875,000) (3,679,141) (2,101,747)
----------- ----------- -----------
Balance, end of year..................... $22,828,757 $25,518,870 $28,184,866
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-46
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, DECEMBER 25, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 1,184,887 $ 1,013,145 $ (423,708)
Adjustments to reconcile net income
(loss) to net cash provided by oper-
ating activities:
Amortization and depreciation....... 3,171,707 3,444,505 3,515,054
Amortization of program license
rights............................. 1,325,784 1,310,136 1,660,231
Bad debt expense.................... 21,025 28,436 22,410
Loss from write-off of program
rights............................. -- -- 364,337
(Loss) gain on disposal of assets... (414) -- 763
Decrease (increase) in accounts re-
ceivable........................... 263,734 (349,795) (264,342)
Decrease (increase) in other receiv-
ables.............................. 65,326 (69,487) (8,092)
Decrease (increase) in other current
assets............................. 40,002 (66,478) 1,133
Decrease (increase) in other assets. 44,860 6,559 (89,224)
(Decrease) increase in accounts
payable and other liabilities...... (106,451) 100,600 (518,424)
----------- ----------- -----------
Net cash provided by operating ac-
tivities......................... 6,010,460 5,417,621 4,260,138
----------- ----------- -----------
INVESTING ACTIVITIES
Capital expenditures.................. (773,914) (567,275) (271,503)
Proceeds from sale of property and
equipment............................ 414 -- 1,500
----------- ----------- -----------
Net cash used in investing activi-
ties............................. (773,500) (567,275) (270,003)
----------- ----------- -----------
FINANCING ACTIVITIES
Net transfers......................... (3,875,000) (3,679,141) (2,101,747)
Payments of program license liabili-
ties................................. (1,199,418) (1,303,390) (1,744,694)
----------- ----------- -----------
Net cash used in financing activi-
ties............................. (5,074,418) (4,982,531) (3,846,441)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents............. 162,542 (132,185) 143,694
Cash and cash equivalents at beginning
of year................................ 305,922 438,107 294,413
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 468,464 $ 305,922 $ 438,107
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-47
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, DECEMBER 25, 1994 AND DECEMBER 31, 1993
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
KWQC-TV ("KWQC"), a division of Broad Street Television, L.P., is an NBC
affiliated television station in Davenport, Iowa.
Fiscal year
KWQC's fiscal year is the 52 or 53 weeks ending on the last Sunday in
December. Prior to 1994, KWQC's financial statements were presented on a
calendar year basis and, as a result of changing to a fiscal year in 1994, the
1994 financial statements represent only 51 weeks.
Cash and cash equivalents
For purposes of the statement of cash flows, cash equivalents include all
investments with original maturities of three months or less that are readily
convertible to cash. For these financial instruments, the carrying amount is a
reasonable estimate of fair value.
Property and equipment
Property and equipment are stated at cost and depreciated utilizing
straight-line and accelerated methods over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Land improvements...................... 15
Buildings and improvements............. 31.5
Equipment, furniture and fixtures...... 5-15
</TABLE>
Intangible assets
Intangible assets are amortized using the straight-line method over their
expected period of benefit.
Lease acquisition costs
Cost associated with the acquisition of various leases on equipment are
being amortized over the remaining useful life of the equipment under lease
(fifteen years).
Broadcast program rights
Film and syndicated program contract rights acquired under license
agreements and the related obligations incurred are recorded as assets and
liabilities under the gross method. When the license periods commence and the
films and programs are available for airing, the assets are amortized on a
straight-line basis over the contract payment period, which approximates the
expected airing period and corresponds to the related revenue flow. The
estimated cost of contract rights expected to be broadcast and charged to
operations during the next year have been classified as current assets. The
liability has been designated as current and noncurrent on the basis of
contractual payment dates. Payments on contracts are due in varying amounts
through August 2000.
Broadcast revenues
Revenue is recognized when advertisements are broadcast.
F-48
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Barter arrangements
KWQC, in the ordinary course of business, provides advertising air time to
certain customers in exchange for products or services. Barter transactions
are recorded on the basis of the estimated fair market value of the products
or services received. Revenue is recognized as the related advertising is
broadcast and expenses are recognized when the merchandise or services are
consumed or utilized.
Employee Profit Sharing Plan
KWQC maintains a 401(k) profit sharing plan for the benefit of substantially
all its employees who meet certain minimum eligibility requirements and who
elect to participate. Under the terms of the Plan, participants can contribute
up to 15% of their pay to the extent permitted by law. KWQC makes semi-annual
matching contributions to the Plan equal to 15% of the employees'
contributions for such period. Participants are immediately vested in their
contribution and in KWQC contributions. KWQC contributions to the Plan were
approximately $20,260, $18,400, and $14,900 during the years ended December
31, 1995, December 25, 1994 and December 31, 1993, respectively.
Income taxes
Broad Street Television, L.P. is not a taxable entity; accordingly, no
provision for income taxes has been made in the financial statements of KWQC.
The partner's respective share of Partnership income or loss is reportable on
their separate tax returns.
Accounting 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. CONCENTRATIONS OF CREDIT RISK
KWQC maintains cash deposits in banks in Iowa which, at times, exceeds
federally insured limits. KWQC has not experienced any losses in these
accounts.
NOTE 3. INTANGIBLE ASSETS
Intangible assets comprise the following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1995 1994 1993
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Advertiser lists.............. 10 years $10,633,000 $10,633,000 $10,633,000
Network affiliation........... 10 years 10,600,000 10,600,000 10,600,000
Broadcast tower agreements.... 15 years 1,600,000 1,600,000 1,600,000
Other intangible assets....... 5-15 years 1,272,000 1,272,000 1,272,000
Goodwill...................... 20 years 6,062,365 6,062,365 6,062,365
----------- ----------- -----------
30,167,365 30,167,365 30,167,365
Less accumulated amortization. 16,926,821 14,347,003 11,723,669
----------- ----------- -----------
$13,240,544 $15,820,362 $18,443,696
=========== =========== ===========
</TABLE>
F-49
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. PROPERTY UNDER OPERATING LEASES
KWQC has operating leases expiring in various years through 1998.
Future minimum payments, by year and in the aggregate, due under significant
noncancelable operating leases with initial or remaining terms of one year or
more, consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996............................. $25,334
1997............................. 8,472
1998............................. 5,204
-------
$39,010
=======
</TABLE>
Total rental expense for the years ended December 31, 1995, December 25,
1994 and December 31, 1993 aggregated $22,624, $31,693 and $26,344,
respectively.
KWQC, as lessor, leases excess capacity on certain of its towers to various
entities for terms ranging from six months to ten years.
Future minimum rentals, by year and in the aggregate, due to KWQC under
noncancelable operating leases, with initial or remaining terms of one year or
more, consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996............................ $ 85,110
1997............................ 66,096
1998............................ 65,130
1999............................ 50,040
2000............................ 32,332
Thereafter...................... 396,032
--------
$694,740
========
</TABLE>
Total rental income included in revenues for the years ended December 31,
1995, December 25, 1994 and December 31, 1993, amounted to $140,176, $127,650
and $124,588, respectively. Included in rental income are amounts relating to
two month-to-month leases. These amounts are not included in future rentals,
as these leases are cancelable at any time.
NOTE 5. TRANSACTIONS WITH AFFILIATES
The Partnership is charged for management services provided by Broad Street
Television Management, Inc. ("Broad Street Management"), an affiliate of Broad
Street Television, L.P., in connection with the operation of KWQC. The fee is
equal to 3% of KWQC's net revenue as defined in the management agreement.
Additionally, all reasonable and customary out-of-pocket expenses incurred by
Broad Street Management are reimbursed by KWQC. These management fees amounted
to $373,689, $361,303 and $313,241 during the years ended December 31, 1995,
December 25, 1994 and December 31, 1993, respectively, of which $3,477, $525
and $2,130 was accrued as of December 31, 1995, December 25, 1994 and December
31, 1993, respectively.
Certain long-term debt of Broad Street Television, L.P. is collateralized by
all the asset of KWQC.
F-50
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. SALE OF KWQC-TV ASSETS
On July 31, 1995, Broad Street Television, L.P. entered into a contract for
sale of substantially all the assets of KWQC for $55 million. This contract
for sale was approved by the Federal Communications Commission (FCC) on March
12, 1996, and the sale is expected to be consummated in April 1996.
NOTE 7. EMERGING ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" which becomes effective for the KWQC's year ending December
29, 1996. Statement No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. KWQC does not
anticipate that the adoption of this standard will have a significant impact
on the financial statements.
F-51
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 26,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 901,042 $ 679,397
Accounts receivable, less allowance of $30,928 in
1996 and $3,328 in 1995........................... 2,361,441 2,837,938
Broadcast program rights........................... 1,250,873 1,299,678
Other current assets............................... 162,952 320,033
----------- -----------
Total current assets............................. 4,676,308 5,137,046
----------- -----------
Property and Equipment
Land and improvements.............................. 1,208,185 1,155,946
Buildings and improvements......................... 4,879,115 4,571,838
Equipment, furniture and fixtures.................. 6,718,686 6,473,969
----------- -----------
12,805,986 12,201,753
Less accumulated depreciation...................... (6,495,508) (5,893,383)
----------- -----------
6,310,478 6,308,370
----------- -----------
Broadcast Program Rights, long-term portion.......... 3,180,755 4,361,299
----------- -----------
Intangible Assets, less accumulated amortization of
$17,590,421 in 1996 and $15,010,603 in 1995......... 12,576,943 15,156,762
----------- -----------
Other Assets......................................... 30,909 71,174
----------- -----------
Total assets..................................... $26,775,393 $31,034,651
=========== ===========
LIABILITIES AND DIVISIONAL EQUITY
Current Liabilities
Broadcast program rights payable................... $ 1,154,413 $ 1,182,135
Accounts payable and other liabilities............. 496,682 650,118
----------- -----------
Total current liabilities........................ 1,651,095 1,832,253
Broadcast Program Rights, long-term portion.......... 2,909,505 3,992,293
----------- -----------
Total liabilities................................ 4,560,600 5,824,546
Divisional equity.................................... 22,214,793 25,210,105
----------- -----------
Total liabilities and divisional equity.......... $26,775,393 $31,034,651
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-52
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 26,
1996 1995
---------- ----------
<S> <C> <C>
Gross revenue........................................... $3,976,862 $3,519,484
Less agency commissions................................. (511,495) (422,751)
---------- ----------
Net operating revenue................................. 3,465,367 3,096,733
---------- ----------
Operating expenses...................................... 806,915 804,607
Amortization of license rights.......................... 318,316 321,751
Selling, general and administrative expenses............ 979,785 868,467
Depreciation and amortization........................... 878,760 878,760
Management fees......................................... 101,098 89,027
---------- ----------
Total operating expenses.............................. 3,084,874 2,962,612
---------- ----------
Operating income........................................ 380,493 134,121
Other income............................................ 5,543 2,514
---------- ----------
Net income............................................ $ 386,036 $ 136,635
========== ==========
</TABLE>
See Notes to Financial Statements.
F-53
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
STATEMENTS OF DIVISIONAL EQUITY
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 26, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning of period.......................... $22,828,757 $25,518,870
Net income.......................................... 386,036 136,635
Net cash transfers.................................. (1,000,000) (445,400)
----------- -----------
Balance, end of period................................ $22,214,793 $25,210,105
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-54
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 26, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 386,036 $ 136,635
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation................. 878,760 878,760
Amortization of program license rights........ 318,316 321,751
Bad debt expense.............................. 7,500 7,000
Decrease (increase) in accounts receivable.... 82,887 (43,025)
Decrease (increase) in other current assets... 4,244 (112,835)
Decrease in other long-term assets............ 6,896 11,491
Increase in accounts payable and other
liabilities.................................. 61,391 108,376
----------- ----------
Net cash provided by operating activities... 1,746,030 1,308,153
----------- ----------
INVESTING ACTIVITIES
Capital expenditures............................ (7,797) (187,715)
----------- ----------
Net cash used in investing activities....... (7,797) (187,715)
----------- ----------
FINANCIAL ACTIVITIES
Net cash transfers.............................. (1,000,000) (445,400)
Payments of program license liabilities......... (305,655) (301,563)
----------- ----------
Net cash used in financing activities....... (1,305,655) (746,963)
----------- ----------
Net increase in cash and cash equivalents... 432,578 373,475
Cash and cash equivalents at beginning of year.... 468,464 305,922
----------- ----------
Cash and cash equivalents at end of period........ $ 901,042 $ 679,397
=========== ==========
</TABLE>
See Notes to Financial Statements.
F-55
<PAGE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND MARCH 26, 1995
(UNAUDITED)
1. The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. The accompanying financial statements are unaudited, but in
the opinion of management reflect all adjustments necessary to present
fairly the net assets of KWQC-TV, a division of Broad Street Television,
L.P., at March 31, 1996 and March 26, 1995, and the related statements of
operations, divisional equity and cash flows for the three month periods
then ended. All adjustments are of a normal recurring nature. The results
are not necessarily indicative of the results to be expected for the full
year. The accompanying financial statements should be read in conjunction
with the audited financial statements of KWQC-TV, a division of Broad
Street Television, L.P., and notes thereto for the fiscal years ended
December 31, 1995 and December 25, 1994.
2. On April 15, 1996, Broad Street Television, L.P. sold substantially all the
assets of KWQC-TV to Young Broadcasting, Inc. for $55 million. This sale
was approved by the Federal Communication Commission on March 12, 1996.
F-56
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Midcontinent Media, Inc.
We have audited the accompanying combined balance sheets of Midcontinent
Television of South Dakota, Inc., (a wholly-owned subsidiary of Midcontinent
Media, Inc.) and the Investment in Community Television Service, Inc. (a fifty
percent investee of Midcontinent Media, Inc.) (together referred to as the
Company) as of August 31, 1995 and 1994 and the related combined statements of
earnings and retained earnings, and cash flows for each of the three years in
the period ended August 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits 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 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 combined financial position of
Midcontinent Television of South Dakota, Inc., and the Investment in Community
Television Service, Inc. as of August 31, 1995 and 1994 and the combined
results of their operations and their cash flows for each of the three years
in the period ended August 31, 1995 in conformity with generally accepted
accounting principles.
Grant Thornton LLP
Minneapolis, Minnesota
February 16, 1996
F-57
<PAGE>
COMBINED FINANCIAL STATEMENTS OF
MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC.
(A FIFTY PERCENT INVESTEE OF MIDCONTINENT MEDIA, INC.)
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31,
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables
Trade, less allowance for doubtful receivables of $58 in
1995 and $50 in 1994....................................... $ 1,863 $1,619
Affiliates and other........................................ 17 15
Current portion of program license rights..................... 221 301
Prepaid expenses.............................................. 32 43
------- ------
Total current assets...................................... 2,133 1,978
PROPERTY, PLANT AND EQUIPMENT--AT COST, less accumulated depre-
ciation and amortization....................................... 2,993 3,305
OTHER ASSETS
Long-term portion of program license rights................... 23 113
Investment in affiliate....................................... 273 190
Due from parent............................................... 6,579 3,979
------- ------
6,875 4,282
------- ------
$12,001 $9,565
======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable.............................................. $ 308 $ 256
Current portion of program license liability.................. 154 208
Accrued liabilities...........................................
Salaries, wages and commissions............................. 467 494
Property, payroll and other taxes........................... 127 123
Profit sharing.............................................. 109 87
Other....................................................... 52 30
Unearned revenue.............................................. 273 219
Income taxes payable.......................................... 1,150 1,080
------- ------
Total current liabilities................................. 2,640 2,497
LONG-TERM PORTION OF PROGRAM LICENSE LIABILITY 20 42
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDER'S EQUITY
Common stock--authorized; 1,000,000 shares of $.01 par value;
issued 1,000 shares.......................................... -- --
Retained earnings............................................. 9,341 7,026
------- ------
9,341 7,026
------- ------
$12,001 $9,565
======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
COMBINED FINANCIAL STATEMENTS OF MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC. (A FIFTY PERCENT
INVESTEE OF MIDCONTINENT MEDIA, INC.)
COMBINED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Revenues
Gross revenues.................................... $12,711 $12,223 $11,362
Commissions....................................... (1,502) (1,412) (1,318)
------- ------- -------
Net revenues.................................... 11,209 10,811 10,044
Operating expenses.................................. 4,428 4,217 4,402
Selling, general and administrative expense......... 2,461 2,445 2,415
Depreciation and amortization....................... 1,039 1,055 1,075
------- ------- -------
Earnings from operations........................ 3,281 3,094 2,152
Other income........................................ 101 84 75
------- ------- -------
Earnings before income taxes and equity in
earnings (loss) of affiliate................... 3,382 3,178 2,227
Income taxes........................................ 1,150 1,080 757
------- ------- -------
Earnings before equity in earnings (loss) of
affiliate...................................... 2,232 2,098 1,470
Equity in earnings (loss) of affiliate.............. 83 (17) (13)
------- ------- -------
NET EARNINGS.................................... 2,315 2,081 1,457
Retained earnings, beginning of year................ 7,026 4,945 3,488
------- ------- -------
Retained earnings, end of year...................... $ 9,341 $ 7,026 $ 4,945
======= ======= =======
Earnings per share.................................. $ 2,315 $ 2,081 $ 1,457
======= ======= =======
Weighted average shares outstanding................. 1,000 1,000 1,000
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
COMBINED FINANCIAL STATEMENTS OF MID CONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC.
(A FIFTY PERCENT INVESTEE OF MIDCONTINENT MEDIA, INC.)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings...................................... $ 2,315 $ 2,081 $ 1,457
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................... 1,039 1,055 1,075
Amortization of program license rights.......... 306 307 560
Equity in (earnings) losses of affiliates....... (83) 17 13
Gain on disposal of assets...................... (3) (4) --
Changes in operating assets and liabilities
Receivables................................... (246) (114) (171)
Prepaid expenses.............................. 11 (7) 39
Due from parent............................... (2,600) (2,753) (2,082)
Accounts payable.............................. 52 84 (158)
Accrued liabilities........................... 21 72 114
Unearned revenues............................. 54 (56) 5
Income taxes payable.......................... 70 323 202
------- ------- -------
Net cash provided by operating activities... 936 1,005 1,054
Cash flows from investing activities
Capital expenditures.............................. (742) (634) (420)
Other............................................. 18 (49) 26
------- ------- -------
Net cash used in investing activities....... (724) (683) (394)
Cash flows from financing activities
Payments on programming license liability......... (212) (246) (596)
Payments on long-term obligations................. -- (77) (64)
------- ------- -------
Net cash used in financing activities....... (212) (323) (660)
------- ------- -------
Net decrease in cash................................ -- (1) --
Cash at beginning of year........................... $ -- $ 1 $ 1
------- ------- -------
Cash at end of year................................. $ -- $ -- $ 1
======= ======= =======
</TABLE>
Supplemental disclosure of cash flow information:
The Company obtained additional program license rights with corresponding
increases to program license liability obligations. The non-cash additions to
program license rights and program license liability obligations for the years
ending August 31, 1995, 1994 and 1993 were $136, $135, and $247.
The accompanying notes are an integral part of these statements.
F-60
<PAGE>
COMBINED FINANCIAL STATEMENTS OF MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC.
(A FIFTY PERCENT INVESTEE OF MIDCONTINENT MEDIA, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND 1994
(ALL AMOUNTS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies applied in preparing the combined financial
statements are as follows:
1. Basis of Presentation
The accompanying combined financial statements include the accounts of
Midcontinent Television of South Dakota, Inc. ("KELO-TV") (a wholly-owned
subsidiary of Midcontinent Media, Inc.) and the Investment in Community
Television Service, Inc. (a fifty percent investee of Midcontinent Media,
Inc.) (together referred to as the "Company"). KELO-TV utilizes the facilities
of Community Television Service, Inc. to broadcast its programming. The
combined financial statements reflect the combined results of operations and
the combined financial position of the Company. All material intercompany
transactions have been eliminated in combination.
2. Nature of Operations
KELO-TV owns and operates four television stations in South Dakota. The
stations' call letters are: KELO (Sioux Falls), KCLO (Rapid City), KPLO
(Reliance) and KDLO (Florence). The stations have an affiliation agreement
with the CBS network. The affiliation agreement for KELO provides for a five
year contract, expiring October 2, 1999, with aggregate compensation to KELO-
TV of approximately $941 per year, subject to actual programming. Each of
KELO's satellite stations have affiliation agreements with CBS that have two
year terms which expire October 2, 1996. Community Television Service, Inc.
consists of a broadcast tower which is utilized by KELO-TV and another Sioux
Falls broadcaster.
3. Program License Rights and Liability
Program license rights are stated at the lower of cost or estimated net
realizable value. The cost of the rights is recorded as an asset and a
liability when the program becomes available for broadcast. The cost of
program license rights is charged to operations primarily on accelerated bases
related to the usage of the program. Program rights expected to be amortized
in the succeeding year and amounts payable within one year are classified as
current assets and liabilities. The program license liability is carried at
the related cost which approximates the fair value.
4. Depreciation and Amortization
Depreciation is recorded to relate the cost of depreciable assets to
operations over their estimated service lives using straight-line and
accelerated methods for financial reporting purposes. Leasehold improvements
are amortized over the lease term or the service lives of the improvements,
whichever is shorter, on a straight-line basis. Accelerated methods are used
for tax reporting purposes. Estimated lives are: buildings and improvements, 5
to 40 years; leasehold improvements, up to 40 years; and equipment, 5 to 20
years.
5. Unearned Revenue
The Company offers local customers billing arrangements whereby the customer
is billed evenly each month over a contract period for a certain amount of air
time. Unearned revenue is the difference between the amount billed to the
customer and the amount earned by airing a customer's commercial.
F-61
<PAGE>
COMBINED FINANCIAL STATEMENTS OF
MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC.
(A FIFTY PERCENT INVESTEE OF MIDCONTINENT MEDIA, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND 1994
(ALL AMOUNTS IN THOUSANDS)
6. Use of Estimates
The preparation of the Company's combined financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and related revenues and expenses. Actual results
could differ from those estimates.
7. Revenue Recognition Policy
The Company's primary source of revenue is the sale of television time to
advertisers. Revenue is recorded when the advertisements are broadcast.
8. Barter Arrangements
KELO-TV has entered into barter agreements with program syndicators for
television programs, in exchange for air time, with estimated fair market
values of $272, $234 and $272 in 1995, 1994, and 1993. Revenues and expenses
are recorded when the program is aired.
NOTE B--INVESTMENT IN AFFILIATE
Midcontinent Media, Inc., owns a fifty-percent interest in Community
Television Service, Inc. which is combined with KELO-TV in these financial
statements. Community Television Service, Inc. owns a 2,000 foot transmission
tower. The equity in earnings (loss) of affiliate is due generally to the
depreciation of the tower. In fiscal 1995, the equity in earnings includes an
adjustment to income resulting from the adjustment of a liability in the
amount of approximately $104 due to a change in the estimated deferred tax
liability.
KELO-TV, on behalf of Midcontinent Media, Inc., pays fifty percent of the
expenses of Community Television Service, Inc. These expenses are included in
the financial statements of KELO-TV and consist of property taxes, utilities,
tower inspection fees and repairs. These expenses were approximately $28, $30,
and $53 in 1995, 1994, and 1993.
NOTE C--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Land........................................................ $ 335 $ 335
Buildings and improvements.................................. 1,759 1,738
Leasehold improvements...................................... 141 141
Equipment................................................... 13,622 13,250
Construction in process..................................... 51 --
------- -------
15,908 15,464
Less accumulated depreciation and amortization.............. 12,915 12,159
------- -------
$ 2,993 $ 3,305
======= =======
</TABLE>
F-62
<PAGE>
COMBINED FINANCIAL STATEMENTS OF
MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC. (A FIFTY PERCENT
INVESTEE OF MIDCONTINENT MEDIA, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND 1994
(ALL AMOUNTS IN THOUSANDS)
NOTE D--PROFIT SHARING PLAN
Midcontinent Media, Inc. has a discretionary profit sharing plan which
covers qualified full-time employees of the Company. The plan covers employees
who have completed one year of continuous service and have attained age 21.
Profit sharing expense, paid by Midcontinent Media, Inc. and allocated to
KELO-TV, for the years ended August 31, 1995, 1994 and 1993 was $109, $88, and
$73.
NOTE E--INCOME TAXES
KELO-TV is included in the consolidated federal income tax return of
Midcontinent Media, Inc. KELO-TV computes its income tax provision in
accordance with an informal tax sharing agreement and income tax percentages
prescribed by Midcontinent Media, Inc. (34% in 1995, 1994, and 1993).
A summary of the tax provision is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ----
<S> <C> <C> <C>
Current expense........................................ $1,156 $1,095 $777
Deferred benefit....................................... (6) (15) (20)
------ ------ ----
Total provision for taxes............................ $1,150 $1,080 $757
====== ====== ====
</TABLE>
The effective tax rate for 1995, 1994, and 1993 is approximately the same as
the statutory federal income tax rate as there are no material permanent
differences. Additionally, KELO-TV is not assessed state income taxes as it
operates in South Dakota, which has no state income tax.
The tax effect of cumulative temporary differences resulting in the net
deferred tax asset included within the intercompany balance due from
Midcontinent Media, Inc. at August 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accruals and reserves............................................ $ 81 $ 83
Other............................................................ (19) (27)
---- ----
$ 62 $ 56
==== ====
</TABLE>
F-63
<PAGE>
COMBINED FINANCIAL STATEMENTS OF
MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.) AND THE INVESTMENT IN
COMMUNITY TELEVISION SERVICE, INC. (A FIFTY PERCENT INVESTEE OF MIDCONTINENT
MEDIA, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND 1994
(ALL AMOUNTS IN THOUSANDS)
NOTE F--COMMITMENTS
KELO-TV conducts portions of its operations in leased facilities. Some of
these lease agreements require the payment of real estate taxes, utilities and
maintenance on the property. Rent expense was $57, $57 and $52 for the years
ended August 31, 1995, 1994 and 1993. Annual future base rental commitments
are as follows:
<TABLE>
<S> <C>
1996.................................................................. $43
1997.................................................................. 25
1998.................................................................. 7
1999.................................................................. 7
2000.................................................................. 7
Thereafter............................................................ 30
</TABLE>
NOTE G--RELATED PARTY TRANSACTIONS
The balance in the due from parent (Midcontinent Media, Inc.) account
resulted from the following transactions:
. Cash activity is recorded in this account. Cash received by KELO-TV is
remitted to the parent bank account, and cash disbursements are paid out
of the parent bank account.
. Services provided to, or received from, affiliates (Midcontinent Media,
Inc. and subsidiaries) are recorded in this account. KELO-TV provided
services to affiliates in the amounts of $203, $189 and $204 in 1995,
1994 and 1993. KELO-TV received services from affiliates in the amounts
of $58, $59 and $65 in 1995, 1994 and 1993.
. Payroll costs are charged to KELO-TV which were paid by Midcontinent
Media, Inc.
Certain corporate administrative and benefit costs incurred for the benefit
of all operating entities have not been allocated to KELO-TV. Management
believes that all material expenditures for the direct benefit of KELO-TV have
been allocated.
NOTE H--SALE OF COMPANY
On January 11, 1996, Midcontinent Media, Inc. signed an agreement with Young
Broadcasting Inc. for the sale of KELO-TV and the Investment in Community
Television Service, Inc. for approximately $47,000 in cash and the issuance of
a $3,000 promissory note. The final purchase price will be adjusted for
certain operating activity up to the date of closing. The sale is, among other
things, subject to FCC approval.
F-64
<PAGE>
COMBINED FINANCIAL STATEMENTS OF MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC. (A FIFTY PERCENT
INVESTEE OF MIDCONTINENT MEDIA, INC.)
CONDENSED COMBINED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables
Trade, less allowance for doubtful receivables of
$72 and $44, respectively......................... $ 1,804 $ 1,840
Affiliates and other............................... 53 50
Current portion of program license rights........... 102 228
Prepaid expenses.................................... 166 204
------- -------
Total current assets........................... 2,125 2,322
PROPERTY, PLANT AND EQUIPMENT--AT COST,
less accumulated depreciation and amortization...... 2,793 3,030
OTHER ASSETS
Long-term portion of program license rights......... 10 43
Investment in affiliate............................. 265 182
Due from parent..................................... 7,313 4,554
------- -------
7,588 4,779
------- -------
$12,506 $10,131
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable.................................... $ 240 $ 285
Current portion of program license liability........ 86 120
Accrued liabilities................................. 586 606
Unearned revenue.................................... 362 302
Income taxes payable................................ 643 603
------- -------
Total current liabilities...................... 1,917 1,916
LONG-TERM PORTION OF PROGRAM LICENSE LIABILITY....... 9 27
COMMITMENTS AND CONTINGENCIES........................ -- --
STOCKHOLDER'S EQUITY
Common Stock--authorized 1,000,000 shares of $.01
par value;
issued 1,000 shares................................ -- --
Retained earnings................................... 10,580 8,188
------- -------
10,580 8,188
------- -------
$12,506 $10,131
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE>
COMBINED FINANCIAL STATEMENTS OF MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC.
(A FIFTY PERCENT INVESTEE OF MIDCONTINENT MEDIA, INC.)
CONDENSED COMBINED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Gross revenues........... $ 3,156 $2,889 $ 6,569 $6,406
Commissions.............. (375) (323) (777) (761)
------- ------ ------- ------
Net revenues........... 2,781 2,566 5,792 5,645
Operating expenses......... 1,095 1,114 2,206 2,149
Selling, general and
administrative............ 639 608 1,289 1,245
Depreciation and
amortization.............. 228 262 457 524
------- ------ ------- ------
Earnings from
operations............ 819 582 1,840 1,727
Other income............... 27 26 50 46
------- ------ ------- ------
Earnings before income
taxes and equity in
loss of affiliate..... 846 608 1,890 1,773
Income taxes............... 290 208 643 603
------- ------ ------- ------
Earnings before equity
in loss of affiliate.. 556 400 1,247 1,170
Equity in loss of
affiliate................. (4) (4) (8) (8)
------- ------ ------- ------
NET EARNINGS........... 552 396 1,239 1,162
Retained earnings,
beginning of period....... 10,028 7,792 9,341 7,026
------- ------ ------- ------
Retained earnings, end of
period.................... $10,580 $8,188 $10,580 $8,188
======= ====== ======= ======
Earnings per share......... $ 552 $ 396 $ 1,239 $1,162
======= ====== ======= ======
Weighted average shares
outstanding............... 1,000 1,000 1,000 1,000
======= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
COMBINED FINANCIAL STATEMENTS OF MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC.
(A FIFTY PERCENT INVESTEE OF MIDCONTINENT MEDIA, INC.)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings....................................... $ 1,239 $ 1,162
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.................... 457 524
Amortization of program license rights........... 132 147
Equity in losses of affiliate.................... 8 8
Changes in operating assets and liabilities...... (1,500) (1,485)
------- -------
Net cash provided by operating activities...... 336 356
Cash flows from investing activities
Capital expenditures............................... (257) (249)
------- -------
Net cash used by investing activities.......... (257) (249)
Cash flows from financing activities
Payments on programming license liability.......... (79) (107)
------- -------
Net cash used in financing activities.......... (79) (107)
Net increase (decrease) in cash...................... -- --
Cash at beginning of period.......................... $ -- $ --
------- -------
Cash at end of period................................ $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
COMBINED FINANCIAL STATEMENTS OF MIDCONTINENT TELEVISION OF SOUTH DAKOTA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MIDCONTINENT MEDIA, INC.)
AND THE INVESTMENT IN COMMUNITY TELEVISION SERVICE, INC.
(A FIFTY PERCENT INVESTEE OF MIDCONTINENT MEDIA, INC.)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(IN THOUSANDS)
NOTE A--BASIS OF PRESENTATION--INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed combined financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring adjustments) considered necessary for a fair
presentation have been included. Results for the interim periods are not
necessarily indicative of the results for an entire year. These condensed
combined interim financial statements should be read in conjunction with the
annual financial statements.
NOTE B--SALE OF COMPANY
On January 11, 1996, Midcontinent Media, Inc. signed an agreement with Young
Broadcasting Inc. for the sale of Midcontinent Television of South Dakota
("KELO") and the investment in Community Television Service, Inc. for
approximately $47,000 in cash and the issuance of a $3,000 promissory note.
The final purchase price will be adjusted for certain operating activity up to
the date of closing. Young Broadcasting Inc. received Federal Communications
Commission ("FCC") approval on March 29, 1996 for the assignment of the KELO
FCC licenses to subsidiaries of Young Broadcasting Inc.
F-68
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements................................................ 3
Available Information..................................................... 3
Information Incorporated by Reference..................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 11
The Company............................................................... 16
Use of Proceeds........................................................... 18
Price Range of Class A Common Stock and Dividend Policy................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Pro Forma Consolidated Financial Data..................................... 21
Selected Consolidated Financial Data...................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 32
Business.................................................................. 40
Management................................................................ 68
Principal and Selling Stockholders........................................ 74
Certain Transactions...................................................... 76
Description of Capital Stock.............................................. 77
Shares Eligible for Future Sale........................................... 79
Certain U.S. Federal Tax Considerations for Non-U.S. Holders of Class A
Common Stock............................................................. 80
Underwriting.............................................................. 83
Legal Matters............................................................. 86
Experts................................................................... 86
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,401,216 SHARES
LOGO
YOUNG BROADCASTING INC.
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
6,401,216 SHARES
YOUNG BROADCASTING INC. LOGO
CLASS A COMMON STOCK
--------------
Of the 6,401,216 shares of Class A Common Stock offered hereby, 5,250,000
shares are being sold by Young Broadcasting Inc. (the "Company") and 1,151,216
shares are being sold by selling stockholders of the Company (collectively, the
"Selling Stockholders"). See "Principal and Selling Stockholders." Of the
6,401,216 shares of Class A Common Stock offered hereby, 5,201,216 shares are
being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 1,200,000 shares are being offered in a
concurrent offering outside the United States and Canada by the International
Underwriters (the "International Offering", and together with the U.S.
Offering, the "Offerings"). The initial public offering price and the
underwriting discount per share are identical for both Offerings. See
"Underwriting." The Company will not receive any of the proceeds from the sale
of the shares by the Selling Stockholders.
The Company's outstanding capital stock is comprised of Class A Common Stock,
Class B Common Stock and Class C Common Stock (collectively, the "Common
Stock"). The rights of holders of Common Stock are identical, except that each
share of Class B Common Stock generally entitles its holder to ten votes,
whereas each share of Class A Common Stock entitles its holder to one vote, and
holders of shares of Class C Common Stock are not entitled to vote except as
provided by law. Immediately after the Offerings, the holders of all of the
Company's Class B Common Stock will have approximately 68% of the combined
voting power with respect to substantially all matters submitted for the vote
of all stockholders. See "Principal and Selling Stockholders" and "Description
of Capital Stock."
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "YBTVA." On September 30, 1996, the last reported sales price of the
Class A Common Stock, as reported by the Nasdaq National Market, was $33 per
share. See "Price Range of Class A Common Stock and Dividend Policy."
SEE "RISK FACTORS" ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED
HEREBY.
--------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $32.50 $1.47 $31.03 $31.03
- --------------------------------------------------------------------------------
Total(3)................... $208,039,520 $9,409,788 $162,907,500 $35,722,232
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several U.S. Underwriters and International Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses, estimated at $1,000,000, payable by the Company.
(3) The Selling Stockholders have granted the U.S. Underwriters and the
International Underwriters options, exercisable within 30 days after the
date hereof, to purchase up to an aggregate of 780,182 and 180,000 shares
of Class A Common Stock, respectively, at the initial price to public per
share, less the underwriting discount, solely to cover over-allotments, if
any. If such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Stockholders will be
$239,245,435, $10,821,255 and $65,516,680, respectively. See
"Underwriting."
--------------
The Class A Common Stock is being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, and
subject to approval of certain legal matters by counsel for the Underwriters
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of certificates for the shares of Class A Common Stock
will be made in New York, New York on or about October 4, 1996.
--------------
MERRILL LYNCH INTERNATIONAL
ALEX. BROWN & SONS
INTERNATIONAL
BANKERS TRUST INTERNATIONAL PLC
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
DRESDNER KLEINWORT BENSON HSBC INVESTMENT BANKING NATWEST SECURITIES LIMITED
SOCIETE GENERALE YAMAICHI INTERNATIONAL (EUROPE) LIMITED
--------------
The date of this Prospectus is September 30, 1996.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the international purchase
agreement (the "International Purchase Agreement"), the Company and the
Selling Stockholders have agreed to sell to each of the underwriters named
below (the "International Underwriters"), and each of the International
Underwriters, for whom Merrill Lynch International, Alex. Brown & Sons
Incorporated, Bankers Trust International PLC, Goldman Sachs International and
J.P. Morgan Securities Ltd. are acting as representatives (the "International
Representatives"), severally has agreed to purchase, the aggregate number of
shares of Class A Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
INTERNATIONAL NUMBER OF
UNDERWRITERS SHARES
------------- ---------
<S> <C>
Merrill Lynch International.......................................... 200,000
Alex. Brown & Sons Incorporated...................................... 200,000
Bankers Trust International PLC ..................................... 200,000
Goldman Sachs International.......................................... 200,000
J.P. Morgan Securities Ltd. ......................................... 200,000
HSBC Investment Bank plc............................................. 40,000
Kleinwort Benson Limited............................................. 40,000
NatWest Securities Limited........................................... 40,000
Societe Generale..................................................... 40,000
Yamaichi International (Europe) Limited.............................. 40,000
---------
Total.............................................................. 1,200,000
=========
</TABLE>
The Company and the Selling Stockholders have also entered into the U.S.
purchase agreement (the "U.S. Purchase Agreement" and, together with the
International Purchase Agreement, the "Purchase Agreements") with Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Alex. Brown &
Sons Incorporated, BT Securities Corporation, Goldman, Sachs & Co. and J.P.
Morgan Securities Inc., acting as representatives (the "U.S. Representatives~"
and, together with the International Representatives, the "Representatives"),
and certain other underwriters in the United States and Canada (collectively,
the "U.S. Underwriters" and, together with the International Underwriters, the
"Underwriters"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, the Company and the Selling Stockholders have agreed to
sell to the U.S. Underwriters, and the U.S. Underwriters severally have agreed
to purchase, an aggregate of 5,201,216 shares of Class A Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Class A Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of Class A Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain
circumstances, under the Purchase Agreements, the commitments of non-
defaulting Underwriters may be increased. Each Purchase Agreement provides
that the Company is not obligated to sell, and the Underwriters named therein
are not obligated to purchase, the shares of Class A Common Stock under the
terms of the Purchase Agreement unless all of the shares of Class A Common
Stock to be sold pursuant to the Purchase Agreements are contemporaneously
sold.
The International Representatives have advised the Company and the Selling
Stockholders that the International Underwriters propose to offer the shares
of Class A Common Stock offered hereby to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $.87 per share of
Class A Common Stock, and that the International Underwriters may allow, and
such dealers may reallow, a discount not in excess of $.10 per share of Class
A Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
83
<PAGE>
The public offering price per share of Class A Common Stock and the
underwriting discount per share of Class A Common Stock are identical for both
Offerings.
The Selling Stockholders have granted to the U.S. Underwriters and the
International Underwriters options to purchase up to an aggregate of 780,182
shares and 180,000 shares of Class A Common Stock at the initial public
offering price, less the underwriting discount. Such options, which will
expire 30 days after the date of this Prospectus, may be exercised solely to
cover over-allotments.
The Company and the Selling Stockholders have been informed that the
Underwriters have entered into an agreement (the "Intersyndicate Agreement")
providing for the coordination of their activities. Pursuant to the
Intersyndicate Agreement, the U.S. Underwriters and the International
Underwriters are permitted to sell shares of Class A Common Stock to each
other. The Company and the Selling Stockholders have been informed that, under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell shares of Class A Common Stock will not offer to sell
or resell shares of Class A Common Stock to persons who are non-U.S. or non-
Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and the International Underwriters and
any bank, broker or dealer to whom they sell shares of Class A Common Stock
will not offer to resell shares of Class A Common Stock to U.S. persons or to
Canadian persons or to persons they believe intend to resell to U.S. persons
or to Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement which, among other things, permits the Underwriters
to purchase from each other and to offer to resell such number of shares of
Class A Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.
The Company, the Selling Stockholders (other than the Estate of Henry
Kramer, which has advised Merrill Lynch it does not intend to sell its Common
Stock other than in the Offerings for 30 days after the date of this
Prospectus) and certain officers and directors of the Company have each agreed
not to sell or grant any option for the sale of, or otherwise dispose of, any
Common Stock, or any securities convertible into or exchangeable or
exercisable for shares of Common Stock, other than the shares of Common Stock
that may be offered by the Company and the Selling Stockholders in the
Offerings, and not to file or request to be filed, as the case may be, any
registration statement with respect to Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of Merrill
Lynch.
Each International Underwriter has agreed that (a) it has not offered or
sold and will not for a period of six months from the Closing Time (as such
term is defined in the International Purchase Agreement), offer or sell to
persons, in the United Kingdom any shares of Common Stock other than to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principals or agents) for the purposes of
their businesses or otherwise in circumstances which have not resulted and
will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations, 1995, (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom, and (c) it
has only issued or passed on and will only issue or pass on to any person in
the United Kingdom any document received by it in connection with the issue of
the Common Stock if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisement) (Exemptions) Order 1996
or is a person to whom such document may otherwise lawfully be issued or
passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or
any other material relating to the Company, the Selling Stockholders or shares
of Common Stock, in any jurisdiction where action for that purpose is
required. Accordingly, the shares of Common Stock may not be offered or sold,
directly or indirectly, and neither this prospectus nor any other offering
material or advertisements in connection with the shares of the Common Stock
may be distributed or published, in or from
84
<PAGE>
any country or jurisdiction except in compliance with any applicable rules and
regulations of such country or jurisdiction.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
Each of BT Securities Corporation and Bankers Trust International PLC is an
affiliate of Bankers Trust Company ("Bankers Trust"), which is administrative
agent and a lender under the Senior Credit Facility. Each of J.P. Morgan
Securities Inc. and J.P. Morgan Securities Ltd. is an affiliate of Morgan
Guaranty Trust Company of New York ("Morgan Guaranty"), which is documentation
agent and a lender under the Senior Credit Facility. Upon the execution of the
Amendment, each of Bankers Trust and Morgan Guaranty will receive customary
fees in connection therewith and will continue in its respective role.
Each of Merrill Lynch and J.P. Morgan Securities Inc. acted as initial
purchasers in connection with the January 1996 Notes Offering and received
approximately $3.1 million in the aggregate as the initial purchasers'
discount. Each of BT Securities Corporation and J.P. Morgan Securities Inc.
acted as initial purchasers in connection with the June 1995 Notes Offering
and received approximately $3.4 million in the aggregate as the initial
purchasers' discount.
In addition, on December 15, 1995 the Company reached an agreement with J.P.
Morgan Capital Corp., an affiliate of J.P. Morgan Securities Inc. and J.P.
Morgan Securities Ltd., to repurchase 423,259 shares of the Company's Common
Stock for approximately $11.1 million.
Goldman, Sachs & Co. and several of its affiliates are some of the Selling
Stockholders in the Offerings and will receive more than 10% of the net
proceeds of the Offerings. Additionally, prior to the consummation of the KCAL
Acquisition a portion of the net proceeds from the Offerings are expected to
be used to reduce outstanding borrowings under the Senior Credit Facility. See
"Use of Proceeds." Bankers Trust and Morgan Guaranty will each receive its
proportionate share of such pay-down as existing lenders under the Senior
Credit Facility. Because over 10% of the net proceeds of the Offerings is
intended to be paid to members of the National Association of Securities
Dealers, Inc. (the "NASD") participating in the distribution of the Offerings
or associated or affiliated persons of such members, there exists a conflict
of interest requiring the underwriting arrangements for the Offerings to
comply with Rule 2720 of the Conduct Rules of the NASD Manual. Pursuant to and
in accordance with the requirements of Rule 2720, Merrill Lynch has advised
the Company that the Underwriters will not confirm sales to discretionary
accounts without prior written approval of the customer.
In connection with the Offerings, certain Underwriters (and selling group
members, if any) may engage in passive market making transactions in the Class
A Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Exchange Act. Rule 10B-6A permits, upon satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in
passive market making, generally, from entering a bid or effecting a purchase
at a price that exceeds the highest bid for those securities displayed on the
Nasdaq National Market by a market maker that is not participating in the
distribution. Under Rule 10b-6A, each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of
the registration statement under the Securities Act pertaining to the security
to be distributed.
85
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF THE CLASS A COMMON STOCK
OFFERED HEREBY IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE
FINANCIAL SERVICES ACT 1986 AND THE COMPANIES ACT 1985 WITH RESPECT TO
ANYTHING DONE BY ANY PERSONS IN RELATION TO THE CLASS A COMMON STOCK IN, FROM
OR OTHERWISE INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH. SEE
"UNDERWRITING."
IN THIS PROSPECTUS, REFERENCE TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS UNLESS STATED OTHERWISE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements................................................ 3
Available Information..................................................... 3
Information Incorporated by Reference..................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 11
The Company............................................................... 16
Use of Proceeds........................................................... 18
Price Range of Class A Common Stock and Dividend Policy................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Pro Forma Consolidated Financial Data..................................... 21
Selected Consolidated Financial Data...................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 32
Business.................................................................. 40
Management................................................................ 68
Principal and Selling Stockholders........................................ 74
Certain Transactions...................................................... 76
Description of Capital Stock.............................................. 77
Shares Eligible for Future Sale........................................... 79
Certain U.S. Federal Tax Considerations for Non-U.S. Holders of Class A
Common Stock............................................................. 80
Underwriting.............................................................. 83
Legal Matters............................................................. 86
Experts................................................................... 86
Index to Financial Statements............................................. F-1
</TABLE>
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6,401,216 SHARES
LOGO
YOUNG BROADCASTING INC.
CLASS A COMMON STOCK
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PROSPECTUS
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MERRILL LYNCH INTERNATIONAL
ALEX. BROWN & SONS
INTERNATIONAL
BANKERS TRUST INTERNATIONAL PLC
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
DRESDNER KLEINWORT BENSON
HSBC INVESTMENT BANKING
NATWEST SECURITIES LIMITED
SOCIETE GENERALE
YAMAICHI INTERNATIONAL (EUROPE) LIMITED
SEPTEMBER 30, 1996
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