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RULE NO. 424(b)(1)
REGISTRATION NO. 333-31429
PROSPECTUS
OFFER TO EXCHANGE
SERIES B 8 3/4% SENIOR SUBORDINATED NOTES DUE 2007
FOR ALL OUTSTANDING 8 3/4% SENIOR SUBORDINATED NOTES DUE 2007
OF
YOUNG BROADCASTING INC.
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER
10, 1997 UNLESS EXTENDED.
Young Broadcasting Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions
set forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its Series B 8 3/4% Senior Subordinated Notes due 2007 (the "Series B
Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
this Prospectus is a part, for each $1,000 principal amount of its outstanding
8 3/4% Senior Subordinated Notes due 2007 (the "Series A Notes"), of which
$200,000,000 in aggregate principal amount are outstanding on the date hereof.
The form and terms of the Series B Notes are the same as the form and terms of
the Series A Notes (which they replace) except that the Series B Notes will
bear a "Series B" designation and will have been registered under the
Securities Act and, therefore, will not bear legends restricting their
transfer, and holders of the Series B Notes will not be entitled to certain
rights of holders of Series A Notes under the Registration Rights Agreement
(as defined), which rights will terminate upon the consummation of the
Exchange Offer. The Series B Notes will evidence the same debt as the Series A
Notes (which they replace) and will be entitled to the benefits of an
Indenture dated as of June 15, 1997 governing the Series A Notes and the
Series B Notes (the "Indenture"). The Series A Notes and the Series B Notes
are sometimes referred to herein collectively as the "Notes." See "Description
of the Notes" and "The Exchange Offer."
THE COMPANY HAS NOT ISSUED, AND DOES NOT HAVE ANY CURRENT FIRM ARRANGEMENTS
TO ISSUE, ANY SIGNIFICANT INDEBTEDNESS TO WHICH THE SERIES B NOTES WOULD RANK
SENIOR IN RIGHT OF PAYMENT. THE SERIES B NOTES WILL BE GENERAL UNSECURED
OBLIGATIONS OF THE COMPANY AND WILL BE SUBORDINATED IN RIGHT OF PAYMENT TO ALL
EXISTING AND FUTURE SENIOR DEBT (AS DEFINED) OF THE COMPANY, INCLUDING ALL
INDEBTEDNESS OF THE COMPANY UNDER THE SENIOR CREDIT FACILITY (AS DEFINED).
PURSUANT TO THE TERMS OF THE INDENTURE, THE SERIES B NOTES WILL BE GUARANTEED,
JOINTLY AND SEVERALLY, FULLY AND UNCONDITIONALLY, BY ALL OF THE COMPANY'S
SUBSIDIARIES (THE "SUBSIDIARY GUARANTORS"). THE SUBSIDIARY GUARANTEES (AS
DEFINED) WILL BE GENERAL UNSECURED OBLIGATIONS OF THE SUBSIDIARY GUARANTORS
AND WILL BE SUBORDINATED IN RIGHT OF PAYMENT TO ALL EXISTING AND FUTURE SENIOR
DEBT OF THE SUBSIDIARY GUARANTORS. AS OF MARCH 31, 1997, ON A PRO FORMA BASIS
AFTER GIVING EFFECT TO THE SERIES A NOTES OFFERING (AS DEFINED), THE COMPANY
AND THE SUBSIDIARY GUARANTORS, ON A CONSOLIDATED BASIS, WOULD HAVE HAD
APPROXIMATELY $93.8 MILLION OF SENIOR DEBT AND APPROXIMATELY $376.8 MILLION OF
INDEBTEDNESS RANKING PARI PASSU WITH THE SERIES A NOTES OUTSTANDING, WITH THE
ABILITY, SUBJECT TO CERTAIN LIMITATIONS DESCRIBED HEREIN, TO INCUR
APPROXIMATELY $200.0 MILLION OF ADDITIONAL SENIOR DEBT PURSUANT TO THE SENIOR
CREDIT FACILITY, OF WHICH APPROXIMATELY $185.0 MILLION WOULD HAVE BEEN
AVAILABLE FOR THE PURPOSE OF FINANCING ACQUISITIONS.
Each Series B Note will bear interest from its issuance date. Holders of
Series A Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the issuance date of the Series B
Notes. Such interest will be paid with the first interest payment on the
Series B Notes. Interest on the Series A Notes accepted for exchange will
cease to accrue upon issuance of the Series B Notes.
The Series B Notes will be redeemable, in whole or in part, at the option of
the Company on or after June 15, 2002, at the redemption prices set forth
herein plus accrued interest to the date of redemption. In addition, at any
time before June 15, 2000, the Company, at its option, may redeem the Series B
Notes, in part, with the net proceeds of one or more Public Equity Offerings
(as defined), at a redemption price equal to 108 3/4% of the principal amount
thereof, plus accrued interest to the date of redemption; provided, however,
that after any such redemption the aggregate principal amount of the Notes
outstanding must equal at least 66.7% of the aggregate principal amount of the
Notes originally issued.
Upon a Change of Control (as defined), each holder of Series B 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. See "Risk Factors--Risk of Inability to Finance Change of
Control Offer." In addition, the Company will be obligated to offer to
repurchase the Series B Notes at 100% of their principal amount plus accrued
interest to the date of repurchase in the event of certain asset sales. See
"Description of the Notes."
The Company will accept for exchange any and all validly tendered Series A
Notes not withdrawn prior to 5:00 p.m., New York City time, on September 10,
1997, unless extended by the Company in its sole discretion, (the "Expiration
Date"). Tenders of Series A Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. The Exchange Offer is
subject to certain customary conditions. See "The Exchange Offer--Conditions."
Series A Notes may be tendered only in integral multiples of $1,000. In the
event the Company terminates the Exchange Offer and does not accept for
exchange any Series A Notes, the Company will promptly return all previously
tendered Series A Notes to the holders thereof.
SEE "RISK FACTORS," WHICH BEGINS ON PAGE 15 OF THIS PROSPECTUS, FOR A
DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR
SERIES A NOTES IN THE EXCHANGE OFFER.
(Continued on following page)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS PROSPECTUS IS JULY 29, 1997
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(Continued from previous page)
The Series A Notes were sold by the Company and the Subsidiary Guarantors on
June 23, 1997 to the Initial Purchaser (as defined) in a transaction not
registered under the Securities Act in reliance upon an exemption under the
Securities Act. The Initial Purchaser subsequently resold the Series A Notes
to qualified institutional buyers in reliance upon Rule 144A under the
Securities Act. Accordingly, the Series A Notes may not be reoffered, resold
or otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Series B Notes are being
offered hereunder in order to satisfy the obligations of the Company under the
Registration Rights Agreement. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the Series B Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company or any Subsidiary Guarantor
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Series B Notes are acquired in the ordinary course of
such holder's business and that such holder does not intend to participate and
has no arrangement or understanding with any person to participate in the
distribution of such Series B Notes. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "--Resale of the Series B Notes." Each
holder of the Series A Notes (other than certain specified holders) who wishes
to exchange the Series A Notes for Series B Notes in the Exchange Offer will
be required to represent in the Letter of Transmittal that (i) it is not an
affiliate of the Company or any of the Subsidiary Guarantors, (ii) the Series
B Notes to be received by it are being acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it has
no arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Series B Notes. Each broker-dealer (a
"Participating Broker-Dealer") that receives Series B Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of Series B Notes
received in exchange for Series A Notes where such Series A Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any
such resale. See "Plan of Distribution."
Holders of Series A Notes not tendered and accepted in the Exchange Offer
will continue to hold such Series A Notes and will be entitled to all the
rights and benefits and will be subject to the limitations applicable thereto
under the Indenture and with respect to transfer under the Securities Act. The
Company will pay all the expenses incurred by it incident to the Exchange
Offer. See "The Exchange Offer."
There has not previously been any public market for the Series A Notes or
the Series B Notes. The Company does not intend to list the Series B Notes on
any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active market
for the Series B Notes will develop. See "Risk Factors--Absence of a Public
Market Could Adversely Affect the Value of Series B Notes." Moreover, to the
extent that Series A Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Series A Notes
could be adversely affected.
The Series B Notes will be available initially only in book-entry form. The
Company expects that the Series B Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined), which will be
deposited with, or on behalf of, The Depositary Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Note representing the Series B
Notes will be shown on, and transfers thereof to qualified institutional
buyers will be effected through, records maintained by the Depositary and its
participants. After the initial issuance of the Global Note, Series B Notes in
certified form will be issued in exchange for the Global Note only on the
terms set forth in the Indenture. See "Book Entry--Delivery and Form."
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.
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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 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 February 1997, 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 twelve television stations in geographically
diverse markets. Six of the stations are affiliated with American Broadcasting
Companies, Inc. ("ABC"), four are affiliated with CBS Inc. ("CBS"), one is
affiliated with National Broadcasting Company, Inc. ("NBC"), and one is an
independent station. 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's sole independent television
station, KCAL, Los Angeles, California ("KCAL"), is 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 March 31,
1997, after giving pro forma effect to the KCAL, KELO and Quad Cities
Acquisitions (as defined below), including annualized net expense reductions,
as if such transactions had occurred on April 1, 1996, the Company would have
had net revenues and broadcast cash flow (as defined) of $261.1 million and
$123.3 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.
<TABLE>
<CAPTION>
PRO FORMA
NET REVENUES FOR TWELVE MONTHS
ENDED MARCH 31, 1997
-----------------------------------
YEAR NETWORK MARKET PERCENTAGE OF
STATION ACQUIRED AFFILIATION MARKET RANK AMOUNT TOTAL
- ------- -------- ----------- ------------------------------- ------ --------------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
KCAL 1996 IND Los Angeles, California 2 $110.7 42.4%
WKRN 1989 ABC Nashville, Tennessee 33 23.7 9.1
WTEN 1989 ABC Albany, New York 52 14.8 5.7
WRIC 1994 ABC Richmond, Virginia 59 17.4 6.7
WATE 1994 ABC Knoxville, Tennessee 60 15.3 5.8
WBAY 1994 ABC Green Bay, Wisconsin 70 14.9 5.7
KWQC 1996 NBC Quad Cities 88 13.0 5.0
WLNS 1986 CBS Lansing, Michigan 106 14.2 5.4
KELO(1) 1996 CBS Sioux Falls, South Dakota 107 12.0 4.6
KLFY 1988 CBS Lafayette, Louisiana 121 14.2 5.4
WKBT 1986 CBS La Crosse-Eau Claire, Wisconsin 130 4.6 1.8
WTVO 1988 ABC Rockford, Illinois 135 6.3 2.4
------ ----
$261.1 100%
====== ====
</TABLE>
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(1) Except as otherwise indicated, all references in this Offering Memorandum
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.
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The Company continually seeks to increase its revenues and broadcast cash
flow. In each of the past five fiscal years, the Company has achieved broadcast
cash flow margins of approximately 45.0% or more. Net revenues increased by
26.0% and broadcast cash flow increased by 23.5% for the year ended December
31, 1996, compared to the year ended December 31, 1995. Such 1996 results
include the performance of the stations acquired pursuant to the KCAL, KELO and
Quad Cities Acquisitions for the periods beginning on their respective dates of
acquisition (as discussed below). 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), and the Company had
approximately $905,000 of net income during 1996, the Company incurred net
losses in each of the four fiscal years ended December 31, 1995. The Company's
net losses during such periods 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 Notes 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.
The Company's operations are conducted through its direct and indirect
wholly-owned Subsidiaries, which will guarantee the Series B Notes, jointly and
severally, fully and unconditionally, on a senior subordinated unsecured basis.
As a holding company, the Company owns no significant assets other than its
equity in the Subsidiaries. See "Risk Factors--Holding Company Structure;
Dependence on Cash Flow From Subsidiaries."
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
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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 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 (as defined) 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. The
Company does not presently have any agreements to acquire any television
stations. As of March 31, 1997, the Company 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.
RECENT DEVELOPMENTS
KCAL Acquisition. On November 22, 1996, the Company acquired (the "KCAL
Acquisition") the assets of KCAL from KCAL Broadcasting, Inc., a subsidiary of
The Walt Disney Company ("Disney"), for $368.0 million, plus approximately
$19.5 million for net working capital included as part of the purchased assets.
For the twelve months ended March 31, 1997, KCAL generated aggregate net
revenues of approximately $110.7 million and broadcast cash flow of
approximately $43.6 million, resulting in a broadcast cash flow margin of
approximately 39.4%. Based upon its review of current operating budgets and
expenses and 1996 operating results of KCAL, the Company has identified, on a
line item basis for the twelve months ended March 31, 1997, annualized expense
reductions of approximately $21.9 million for personnel and other costs and
$5.1 million of net programming cost savings associated with seven sitcom
programs, the liabilities for which were not 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."
1996 Public Offering and ABC Repurchase. On October 4, 1996, the Company and
selling stockholders of the Company completed a public offering (the "October
1996 Offering") of 7,361,398 shares of the Company's Class A Common Stock,
generating proceeds to the Company of approximately $162.9 million (net of
underwriting discounts and commissions and the expenses of the October 1996
Offering). Concurrently with the closing of the October 1996 Offering, the
Company repurchased (the "ABC Repurchase") from Capital Cities/ABC, Inc., a
subsidiary of Disney, 1,500,000 shares of the Company's non-voting Class C
Common Stock (the "ABC Stock") and warrants of the Company to purchase an
additional 750,000 shares of such Common Stock (the "ABC Warrants") for an
aggregate cash purchase price of approximately $54.8 million. See "Certain
Transactions." In addition, the Company used $20.0 million of such proceeds to
repay in full its then outstanding indebtedness, including interest, under its
Senior Credit Facility.
Amended and Restated Senior Credit Facility. To enable the Company to finance
the KCAL Acquisition, on November 15, 1996, the Company amended and restated
its then existing $200.0 million senior credit facility to provide for a $500.0
million senior credit facility (the "Senior Credit Facility"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The Company used the remaining
net proceeds of the October 1996 Offering, approximately $305.0 million of
borrowings under the Senior Credit Facility and $6.0 million of its existing
cash balances to finance the KCAL Acquisition and to pay approximately $10.7
million of related fees and expenses.
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KELO Acquisition. On May 31, 1996, the Company acquired (the "KELO
Acquisition") from a subsidiary of Midcontinent Media, Inc. for $50.0 million
all of the assets of television station KELO ("KELO"). KELO is the CBS
affiliate in Sioux Falls, South Dakota and Rapid City, South Dakota. The
Company also purchased approximately $2.0 million of accounts receivable at a
3% discount.
For the twelve months ended March 31, 1997, KELO generated aggregate net
revenues of approximately $12.0 million and broadcast cash flow of
approximately $6.0 million, resulting in a broadcast cash flow margin of 50.0%.
Based upon its review of operating budgets and results for KELO, the Company
identified prior to the KELO Acquisition, on a line item basis, approximately
$1.4 million of annualized expense reductions that the Company is currently
implementing at KELO. See "Forward-Looking Statements." Such reductions are in
the area of personnel and benefits savings, programming costs and purchased
services.
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.
For the twelve months ended March 31, 1997, the Quad Cities Station generated
aggregate net revenues and broadcast cash flow of approximately $13.0 million
and $6.9 million, respectively, resulting in a broadcast cash flow margin of
53.1%. Based upon its review of operating budgets and results for the Quad
Cities Station, the Company identified prior to the Quad Cities Acquisition, on
a line item basis, approximately $1.8 million of annualized expense reductions
that the Company is currently 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.
Series A Notes Offering. On June 16, 1997, the Company completed the Series A
Notes Offering. The Company used the net proceeds of the Series A Notes
Offering (approximately $198.2 million) to repay certain outstanding
indebtedness under the Senior Credit Facility. See "--The Series A Notes
Offering" below.
Stock Repurchases. During April and May of 1997, the Company repurchased
approximately 459,000 shares of its Class A Common Stock in open-market
purchases pursuant to a stock repurchase program for an aggregate purchase
price of approximately $12.3 million. The Company is authorized, subject to
certain limitations, to effect up to an aggregate of $20.0 million of such
purchases. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
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 the ABC Stock and the ABC Warrants (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,
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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 "Existing
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 $55.0 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 SERIES A NOTES OFFERING
Series A Notes.......... The Series A Notes were sold by the Company and the
Subsidiary Guarantors on June 23, 1997 to Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the
"Initial Purchaser") pursuant to a Purchase Agreement
dated June 16, 1997 (the "Purchase Agreement"). The
Initial Purchaser subsequently resold the Series A
Notes to qualified institutional buyers in reliance
upon Rule 144A under the Securities Act.
Registration Rights Pursuant to the Purchase Agreement, the Company, the
Agreement.............. Subsidiary Guarantors and the Initial Purchaser
entered into a Registration Rights Agreement dated
June 23, 1997 (the "Registration Rights Agreement"),
which grants the holders of the Series A Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
rights which terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
Securities Offered...... $200,000,000 aggregate principal amount of Series B 8
3/4% Senior Subordinated Notes due 2007.
The Exchange Offer...... $1,000 principal amount of the Series B Notes in
exchange for each $1,000 principal amount of Series A
Notes. As of the date hereof, $200,000,000 aggregate
principal amount of Series A Notes are outstanding.
The Company will issue the Series B Notes to holders
on or promptly after the Expiration Date.
Based on no-action letters issued by the staff of the
Commission to third parties, the Company believes the
Series B Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise
transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company or
any Subsidiary Guarantor within the meaning of Rule
405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions
of the Securities Act, provided that such Series B
Notes are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such Series B Notes.
Each Participating Broker-Dealer that receives Series
B Notes for its own account pursuant to the Exchange
Offer must acknowledge that it will
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deliver a prospectus in connection with any resale of
such Series B Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be
deemed to admit that it is an "underwriter" within
the meeting of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in
connection with resales of Series B Notes received in
exchange for Series A Notes where such Series A Notes
were acquired by such Participating Broker-Dealer as
a result of market-making activities or other trading
activities. The Company has agreed that, for a period
of 180 days after the Expiration Date, it will make
this Prospectus available to any Participating
Broker-Dealer for use in connection with any such
resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Series B
Notes could not rely on the position of the staff of
the Commission communicated in no-action letters and,
in the absence of an exception therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any resale transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company.
Expiration Date......... 5:00 p.m., New York City time, on September 10, 1997,
unless the Exchange Offer is extended, in which case
the term "Expiration Date" means the latest date and
time to which the Exchange Offer is extended.
Accrued Interest on the
Series B Notes and the
Series A Notes..
Each Series B Note will bear interest from its
issuance date. Holders of Series A Notes that are
accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the issuance
date of the Series B Notes. Such interest will be
paid with the first interest payment on the Series B
Notes. Interest on the Series A Notes accepted for
exchange will cease to accrue upon issuance of the
Series B Notes.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer......... conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions."
Procedures for
Tendering Series A
Notes..................
Each holder of Series A Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Series A Notes and any
other required documentation to the Exchange Agent
(as defined) at the address set forth therein. By
executing the Letter of Transmittal, each holder will
represent to the Company that, among other things,
the Series B Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
business of the person receiving such Series B Notes,
whether or not such person is the holder, that
neither the holder nor any such other person
8
<PAGE>
has any arrangement or understanding with any person
to participate in the distribution of such Series B
Notes and that neither the holder nor any such other
person is an "affiliate," as defined under Rule 405
of the Securities Act, of the Company or any
Subsidiary Guarantor. See "The Exchange Offer--
Purpose and Effect of the Exchange Offer" and "--
Procedures for Tendering."
Untendered Series A Following the consummation of the Exchange Offer,
Notes.................. holders of Series A Notes eligible to participate but
who do not tender their Series A Notes will not have
any further exchange rights and such Series A Notes
will continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the market
for such Series A Notes could be adversely affected.
Consequences of Failure
to Exchange............
The Series A Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted securities.
Accordingly, such Series A Notes may be resold only
(i) to the Company, (ii) pursuant to Rule 144A or
Rule 144 under the Securities Act or pursuant to
another exemption under the Securities Act, (iii)
outside the United States to a foreign person
pursuant to the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act. See
"The Exchange Offer--Consequences of Failure to
Exchange."
Shelf Registration If any holder of the Series A Notes (other than any
Statement.............. such holder which is an "affiliate" of the Company or
any Subsidiary Guarantor within the meaning of Rule
405 under the Securities Act) is not eligible under
applicable securities laws to participate in the
Exchange Offer, and such holder has provided
information regarding such holder and the
distribution of such holder's Series A Notes to the
Company for use therein, the Company has agreed to
register the Series A Notes with a shelf registration
statement (the "Shelf Registration Statement") and
use its best efforts to cause it to be declared
effective by the Commission as promptly as practical
on or after the consummation of the Exchange Offer.
The Company has agreed to maintain the effectiveness
of the Shelf Registration Statement for, under
certain circumstances, a maximum of two years, to
cover resales of the Series A Notes held by any such
holders.
Special Procedures for
Beneficial Owners......
Any beneficial owner whose Series A Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering
its Series A Notes, either make appropriate
arrangements to register ownership of the Series A
Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take
considerable time.
9
<PAGE>
The Company will keep the Exchange Offer open for not
less than twenty days in order to provide for the
transfer of registered ownership.
Guaranteed Delivery Holders of Series A Notes who wish to tender their
Procedure.............. Series A Notes and whose Series A Notes are not
immediately available or who cannot deliver their
Series A Notes, the Letter of Transmittal or any
other documents required by the Letter of Transmittal
to the Exchange Agent (or comply with the procedures
for book-entry transfer) prior to the Expiration Date
must tender their Series A Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights....... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Series A
Notes and Delivery of
Series B Notes.........
The Company will accept for exchange any and all
Series A Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Series B Notes
issued pursuant to the Exchange Offer will be
delivered on or promptly after the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer."
Use of Proceeds......... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Exchange Agent.......... First Union National Bank (the "Exchange Agent").
THE SERIES B NOTES
General................. The form and terms of the Series B Notes are the same
as the form and terms of the Series A Notes except
that (i) the Series B Notes will bear a "Series B"
designation, (ii) the Series B Notes will have been
registered under the Securities Act and, therefore,
will not bear legends restricting their transfer, and
(iii) the holders of Series B Notes will not be
entitled to certain rights of holders of Series A
Notes under the Registration Rights Agreement,
including the provisions providing for an increase in
the interest rate on the Series A Notes in certain
circumstances relating to the timing of the Exchange
Offer, which rights will terminate when the Exchange
Offer is consummated. See "The Exchange Offer--
Purpose and Effect of the Exchange Offer." The Series
B Notes will evidence the same debt as the Series A
Notes (which they replace) and will be entitled to
the benefits New Notes Indenture. See "Description of
the Notes."
Securities Offered...... $200,000,000 aggregate principal amount of Series B 8
3/4% Senior Subordinated Notes due 2007.
Maturity Date........... June 15, 2007.
Interest Rate and The Series B Notes will bear interest at a rate of 8
Payment Dates.......... 3/4% per annum. Interest on the Series B Notes will
be payable semi-annually on each June 15 and December
15.
10
<PAGE>
Optional Redemption..... The Series B Notes will be redeemable, in whole or in
part, at the option of the Company on or after June
15, 2002, at the redemption prices set forth herein
plus accrued interest to the date of redemption. In
addition, at any time before June 15, 2000, the
Company, at its option, may redeem the Series B
Notes, in part, with the net proceeds of one or more
Public Equity Offerings, at a redemption price equal
to 108 3/4% of the principal amount thereof, plus
accrued interest to the date of redemption; provided,
however, that after any such redemption the aggregate
principal amount of the Notes outstanding must equal
at least 66.7% of the aggregate principal amount of
the Notes originally issued.
Change of Control....... Upon the occurrence of a Change of Control, each
holder of the Series B Notes may require the Company
to repurchase all or a portion of such holder's
Series B Notes at a price equal to 101% of their
principal amount plus accrued interest, if any, to
the date of repurchase. There can be no assurance
that, in the event of a Change of Control, the
Company will have, or be able to obtain, sufficient
funds to repurchase the Series B Notes. A Change of
Control also may cause an acceleration under the
Senior Credit Facility and other Senior Debt, if any,
in which case the subordination provisions of the
Series B Notes would require payment in full of all
such accelerated Senior Debt before repurchase of the
Series B Notes. See "Risk Factors--Risk of Inability
to Finance Change of Control Offer."
Offers to Purchase...... In the event of certain asset sales, the Company will
be required to offer to repurchase the Series B Notes
at 100% of their principal amount plus accrued
interest, if any, to the date of repurchase with the
net proceeds of such asset sales.
Ranking................. The Series B Notes will be general unsecured
obligations of the Company and will be subordinated
in right of payment to all existing and future Senior
Debt, including all indebtedness of the Company under
the Senior Credit Facility. As of March 31, 1997, on
a pro forma basis after giving effect to the Series A
Notes Offering, the Company and the Subsidiary
Guarantors, on a consolidated basis, would have had
approximately $93.8 million of Senior Debt and
approximately $376.8 million of indebtedness ranking
pari passu with the Notes outstanding, with the
ability, subject to certain limitations, to incur
approximately $200.0 million of additional Senior
Debt pursuant to the Senior Credit Facility, of which
approximately $185.0 million would have been
available for the purpose of financing new
acquisitions.
Guarantees.............. The Series B Notes will be guaranteed, jointly and
severally, fully and unconditionally, on a senior
subordinated basis by the Subsidiary Guarantors (the
"Subsidiary Guarantees"). The obligations of any
Subsidiary Guarantor with respect to its Subsidiary
Guarantee will be subordinated in right of payment,
to the same extent as the obligations of the Company
in respect of the Series B Notes, to all existing and
future Senior Debt of such Subsidiary Guarantor,
which will include any guarantee by such Subsidiary
Guarantor of the Company's indebtedness under the
Senior Credit Facility.
11
<PAGE>
Certain Covenants..... The Indenture imposes certain limitations on the
ability of the Company and certain of its Subsidiaries
to, among other things, 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 Series B 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.
For additional information regarding the Series B Notes, see "Description of
the Notes."
RISK FACTORS
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISKS TO BE CONSIDERED BY
HOLDERS WHO TENDER THEIR SERIES A NOTES IN THE EXCHANGE OFFER.
12
<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, 1996, which have been
derived from the Company's audited consolidated financial statements. The
historical consolidated financial data of the Company for the three months
ended March 31, 1996 and 1997 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 and other financial data have been presented as if the
sale of the Series A Notes and the application of the net proceeds therefrom
(the "Series A Notes Offering"), the KCAL, KELO and Quad Cities Acquisitions
(including related borrowings and annualized net expense reductions), the
October 1996 Offering, the January 1996 Notes Offering 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 Series A Notes Offering had been
effected on March 31, 1997. The summary pro forma financial data do 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>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31, TWELVE MONTHS
-------------------------------------- --------------------------- ENDED
PRO FORMA (UNAUDITED) PRO FORMA MARCH 31, 1997
1994 1995 1996 1996(1) 1996 1997 1997(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)........ $78,788 $122,530 $154,343 $261,542 $27,699 $61,279 $61,279 $261,070
Operating expenses,
including selling,
general and
administrative
expenses.............. 33,800 51,614 64,689 103,941 13,234 26,878 26,878 104,198
Amortization of program
license rights........ 4,400 6,418 11,034 32,924 1,754 10,448 10,448 33,651
Depreciation and
amortization(3)....... 15,280 24,572 30,946 51,127 6,164 12,140 12,189 50,660
Corporate overhead..... 2,052 3,348 4,344 4,644 1,085 1,535 1,535 5,018
Non-cash
compensation(4)....... 6,497 1,167 848 848 -- 240 240 1,088
------- -------- -------- -------- ------- ------- ------- --------
Operating income....... 16,759 35,411 42,482 68,058 5,462 10,038 9,989 66,455
Interest expense....... 19,105 32,644 42,838 65,522 9,698 15,557 15,869 65,011
Other expenses
(income).............. 3 233 (1,261) 837 (898) 47 47 887
------- -------- -------- -------- ------- ------- ------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. (2,349) 2,534 905 $ 1,699 (3,338) (5,566) $(5,927) $ 557
======== ======= ========
Extraordinary loss on
extinguishment of
debt(5)............... (6,027) (9,125) -- -- --
------- -------- -------- ------- -------
Net income (loss)...... $(8,376) $ (6,591) $ 905 $(3,338) $(5,566)
======= ======== ======== ======= =======
OTHER FINANCIAL DATA:
Ratio of earnings to
fixed charges(6)...... -- 1.1x 1.0x 1.0x -- -- -- 1.0x
Cash flow provided by
operating
activities(7)......... $12,697 $ 28,978 $ 35,092 -- $ 8,891 $17,362 -- --
Payments for program
license liabilities... 4,170 6,747 10,385 $ 32,771 1,855 10,667 $10,667 $ 33,552
Broadcast cash flow(8). 40,818 64,169 79,269 124,830 12,610 23,734 23,734 123,320
Broadcast cash flow
margin................ 51.8% 52.4% 51.4% 47.7% 45.5% 38.7% 38.7% 47.2%
Operating cash flow(9). $38,766 $ 60,821 $ 74,926 $120,186 $11,525 $22,199 $22,199 $118,302
Capital expenditures
(excluding station
acquisitions)......... 1,206 4,484 4,992 10,424 718 831 831 7,288
Ratio of operating cash
flow to interest
expense............... 1.8x 1.4x 1.8x
Ratio of long-term debt
to operating cash
flow.................. 5.7x
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,178 $ 1,378
Total assets.............................................. 862,276 863,436
Long-term debt (including current portion)................ 668,787 670,547
Stockholders' equity (deficit)............................ 75,771 75,771
</TABLE>
(Footnotes begin on next page)
13
<PAGE>
(1) Pro forma adjustments are based on annualized expense reductions relating
to the KCAL, Quad Cities and KELO Acquisitions of approximately $21.9
million, $1.8 million and $1.4 million, respectively, for the year ended
December 31, 1996, and approximately $16.4 million, $1.3 million and $1.0
million, respectively, for the twelve months ended March 31, 1997.
(2) Net revenues are total revenues net of agency and national representation
commissions. Pro forma adjustments are based on additional network
compensation payable to the Company under a new affiliation agreement at
KELO and a programming change at the Quad Cities Station in the aggregate
amount of approximately $179,000 for the year ended December 31, 1996 and
$69,000 for the twelve months ended March 31, 1997. In addition, pro forma
adjustments are based on a decrease in net revenues of $803,000 for the
year ended December 31, 1996 and $660,000 for the twelve months ended March
31, 1997 relating to seven sitcoms not purchased in connection with the
KCAL Acquisition.
(3) Pro forma adjustments reflect the amortization of intangibles associated
with the KCAL, Quad Cities and KELO Acquisitions 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 January 1996 Notes Offering and the Notes.
(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, below-market
options to purchase shares of Common Stock and contribution of shares into
the Company's defined contribution plan. Non-cash compensation in 1996 and
for the three months ended March 31, 1997 primarily reflect contributions
of shares of Common Stock into the Company's defined contribution plan.
(5) Extraordinary loss for the years ended December 31, 1994 and 1995 resulted
from the early extinguishment of debt. See Note 5 to Notes to Consolidated
Financial Statements.
(6) For purposes of this ratio, "fixed charges" are defined as interest,
amortization of debt expense and a portion of rental expense representing
the interest factor, and "earnings" are defined as income (loss) before
income taxes, extraordinary items, cumulative effect of change in
accounting principles and fixed charges. Earnings were insufficient to
cover fixed charges by $2.3 million for the year ended December 31, 1994
and $3.3 million, $5.6 million and $5.9 million for the quarters ended
March 31, 1996, 1997 and pro forma March 31, 1997, respectively.
(7) For pro forma purposes, information is not determinable.
(8) "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.
(9) "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.
14
<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 Series B Notes offered hereby.
SUBSTANTIAL LEVERAGE
The Company has consolidated indebtedness that is substantial in relation to
its total stockholders' equity. At March 31, 1997, the Company had outstanding
long-term indebtedness (including current installments) of approximately
$668.8 million, with a total stockholders' equity of approximately $75.8
million. After giving pro forma effect to the Series A Notes Offering, the
total long-term indebtedness of the Company outstanding at March 31, 1997
would have been approximately $670.5 million, with a total stockholders'
equity of approximately $75.8 million. After giving pro forma effect to the
Series A Notes Offering, the interest expense of the Company would have been
$65.0 million for the twelve months ended March 31, 1997.
The Company will have significant cash interest expense relating to the
Notes and its indebtedness under the Existing Notes and the Senior Credit
Facility, and a significant amount of the Company's cash flow will be required
for debt service. The average interest rate accrued on the Company's long-term
indebtedness during the year ended December 31, 1996 was 9.5%.
The degree to which the Company is leveraged could have important
consequences to holders of the Series B Notes 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 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 pay interest
and principal on the Series B Notes and 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 approximately
$8.4 million for the year ended December 31, 1994, a net loss of approximately
$6.6 million for the year ended December 31, 1995 and net
15
<PAGE>
income of approximately $905,000 for the year ended December 31, 1996. On a
pro forma basis for the year ended December 31, 1996 and the three months
ended March 31, 1997, after giving effect to the KCAL, KELO and Quad Cities
Acquisitions and the Series A Notes Offering, the Company would have reported
on a consolidated basis net income of approximately $1.7 million and net loss
of approximately $5.9 million, 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 9 to Notes to Consolidated Financial Statements.
SUBORDINATION; PAYMENT RESTRICTIONS
The Series B Notes and the Subsidiary Guarantees will be unsecured and
subordinated in right of payment to all existing and future Senior Debt of the
Company and the Subsidiary Guarantors, including borrowings under the Senior
Credit Facility. As a result, in the event of a default under the Company's or
any Subsidiary Guarantor's Senior Debt, holders of that Senior Debt will be
entitled to receive payment in full prior to any payment being made on the
Series B Notes or such Subsidiary Guarantor's Subsidiary Guarantee,
respectively. In addition, the indebtedness outstanding from time to time
under the Senior Credit Facility will be secured by substantially all of the
assets of the Company and its subsidiaries and the lenders thereunder will
have a claim on such assets prior to the claims of holders of the Series B
Notes. As of March 31, 1997, after giving pro forma effect to the Series A
Notes Offering, the Company would have had approximately $93.8 million of
Senior Debt. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description
of the Notes--Ranking and Subordination."
In the event of a payment default under the Senior Credit Facility, no
payments may be made on account of the principal, premium, if any, or interest
on the Series B Notes until such default has been cured or waived. In
addition, under certain circumstances, no payments may be made for a specified
period with respect to the principal, premium, if any, or interest on the
Series B Notes if a nonpayment default exists under the Senior Credit
Facility. See "Description of the Notes--Ranking and Subordination."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture and each of the Indentures relating to the Existing Notes (the
"Existing Notes Indentures") will restrict, among other things, the Company's
and certain of 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 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 prohibits the Company from
prepaying its indebtedness and from making 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 Indenture and the Existing Notes
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, including the Series B Notes.
16
<PAGE>
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" and "Description of the Notes--Covenants."
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 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 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."
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.
Adam Young and Vincent Young collectively 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 may 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.
NETWORK AFFILIATION; RELIANCE ON NETWORK PROGRAMMING; RELIANCE ON PROGRAMMING
Six of the Company's twelve 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, which is an independent station,
are materially dependent
17
<PAGE>
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 stations other than KCAL 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 the
Company's then three owned 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, 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 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
18
<PAGE>
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. KCAL represents 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 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.
HOLDING COMPANY STRUCTURE; DEPENDENCE ON CASH FLOW FROM SUBSIDIARIES
The Company's operations are conducted through its direct and indirect
wholly-owned Subsidiaries, which will guarantee the Notes, jointly and
severally, fully and unconditionally, on a senior subordinated unsecured
basis. 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. Accordingly, the
Company's ability to make interest and principal payments when due to holders
of the Notes and its ability to purchase the Notes upon a Change of Control is
dependent upon the receipt of sufficient funds from the Subsidiaries, which
may be restricted by the terms of existing and future senior indebtedness of
the Subsidiaries, including the terms of existing and future guarantees given
by the Subsidiaries of Company indebtedness. As a result, the Notes and the
Subsidiary Guarantees effectively will be subordinated to all existing and
future senior indebtedness and other liabilities and commitments of the
Subsidiaries.
19
<PAGE>
RISK OF INABILITY TO FINANCE CHANGE OF CONTROL OFFER
In the event of a Change of Control, the Company will be required to offer
to repurchase all of the outstanding Series B Notes at a price equal to 101%
of the principal amount thereof, plus accrued interest to the date of
repurchase. A Change of Control under the Indenture would also constitute a
change of control under the Existing Notes Indentures, pursuant to which the
Company would be required to offer to repurchase all outstanding Existing
Notes. The Company does not presently have sufficient funds available to
purchase all of the outstanding Series B Notes were they to be tendered in
response to an offer made as a result of a Change of Control. The terms of the
Indenture relating to the November 1994 Notes (the "November 1994 Indenture")
restricts the Company from repurchasing Indebtedness which is pari passu in
right of payment with the November 1994 Notes except to the extent that the
Company has amounts available under its restricted payment covenant basket.
Therefore, in the event of a Change of Control, until all November 1994 Notes
are repurchased or except to the extent that the Company has amounts available
under its restricted payment covenant basket contained in the November 1994
Indenture, the November 1994 Indenture would prohibit the Company from
repurchasing Series B Notes tendered in response to an offer made as a result
of a Change of Control. In addition, the Senior Credit Facility will restrict
the Company's ability to make such a purchase and there can be no assurance
that the Company would be able to obtain such funds through a refinancing of
the Series B Notes to be purchased or otherwise, or that the lenders for the
Senior Credit Facility would permit such a purchase. A Change of Control also
may cause an acceleration under the Senior Credit Facility and other Senior
Debt, if any, in which case the subordination provisions of the Series B Notes
would require payment in full of all such accelerated Senior Debt before
repurchase of the Series B Notes. The inability to repay Senior Debt, if
accelerated, and to effect an offer to repurchase the Series B Notes upon a
Change of Control would constitute events of default under the Indenture.
Also, the requirement that the Company offer to repurchase the Series B Notes
in the event of a Change of Control may have the effect of deterring a third
party from effecting a transaction that would constitute a Change of Control.
See "Description of the Notes--Change of Control."
FRAUDULENT CONVEYANCE; POSSIBLE STRUCTURAL SUBORDINATION
In the event of the bankruptcy or insolvency of any of the Subsidiary
Guarantors, the incurrence of the Subsidiary Guarantee of such Subsidiary
Guarantor would be subject to review under relevant federal and state
fraudulent conveyance and similar statutes in a bankruptcy or reorganization
case or a lawsuit by or on behalf of creditors of such Subsidiary Guarantor.
Under those statutes, if a court were to find that the Subsidiary Guarantee of
such Subsidiary Guarantor was incurred with the intent of hindering, delaying
or defrauding creditors or that such Subsidiary Guarantor received less than a
reasonably equivalent value or fair consideration therefor and, at the time of
its incurrence, such Subsidiary Guarantor either (i) was insolvent or rendered
insolvent by reason thereof, (ii) was engaged in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small capital
or (iii) intended to or believed that it would incur debts beyond its ability
to pay as they matured or became due, the court could void those obligations.
The measure of insolvency for purposes of a fraudulent conveyance claim will
vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the
sum of its debts at that time is greater than the then fair value of its
assets or if the fair salable value of its assets at that time is less than
the amount that would be required to pay its probable liability on its
existing debts as they become absolute and mature. The Company believes that,
after giving effect to the Series A Notes Offering and the incurrence of the
Subsidiary Guarantees by the Subsidiary Guarantors, each of the Subsidiary
Guarantors will be (i) neither insolvent nor rendered insolvent by the
incurrence of its Subsidiary Guarantee, (ii) in possession of sufficient
capital to run its business effectively and (iii) incurring debts within its
ability to pay as the same mature or become due. No assurance can be given,
however, that the assumptions and methodologies used by the Company in
reaching its conclusions about its solvency would be adopted by a court or
that a court would concur with those conclusions.
In the event the Subsidiary Guarantee of a Subsidiary Guarantor was voided
as a fraudulent conveyance, holders of the Series B would effectively be
subordinated to all indebtedness and other liabilities and commitments of such
Subsidiary Guarantor.
20
<PAGE>
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF SERIES B NOTES
Prior to the Exchange Offer, there has not been any public market for the
Series A Notes. The Series A Notes have not been registered under the
Securities Act and will be subject to restrictions on transferability to the
extent that they are not exchanged for Series B Notes by holders who are
entitled to participate in this Exchange Offer. The holders of Series A Notes
(other than any such holder that is an "affiliate" of the Company or any
Subsidiary Guarantor within the meaning of Rule 405 under the Securities Act)
who are not eligible to participate in the Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Series A Notes. The Series B Notes
will constitute a new issue of securities with no established trading market.
The Company does not intend to list the Series B Notes on any securities
exchange or to seek their admission to trading in any automated quotation
system. The Initial Purchasers have advised the Company that they currently
intend to make a market in the Series B Notes, but they are not obligated to
do so and may discontinue such market making at any time without notice. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and may be limited during the Exchange Offer and the pendency
of any Shelf Registration Statement. Accordingly, no assurance can be given
that an active public or other market will develop for the Series B Notes or
as to the liquidity of the trading market for the Series B Notes. If a trading
market does not develop or is not maintained, holders of the Series B Notes
may experience difficulty in reselling the Series B Notes or may be unable to
sell them at all. If a market for the Series B Notes develops, any such market
may be discontinued at any time.
If a public trading market develops for the Series B Notes, future trading
prices of the Series A Notes will depend on many factors, including, among
other things, prevailing interest rates, the Company's operating results and
the market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Series B Notes may trade at a discount from
their principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Series B Notes in exchange for the Series A Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company
of such Series A Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Series
A Notes desiring to tender such Series A Notes in exchange for Series B Notes
should allow sufficient time to ensure timely delivery. The Company is under
no duty to give notification of defects or irregularities with respect to the
tenders of Series A Notes for exchange. Series A Notes that are not tendered
or are tendered but not accepted will, following the consummation of the
Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, certain
registration rights under the Registration Rights Agreement will terminate. In
addition, any holder of Series A Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Series B Notes may be
deemed to have received restricted securities and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transactions. Each holder of the
Series A Notes (other than certain specified holders) who wishes to exchange
the Series A Notes for Series B Notes in the Exchange Offer will be required
to represent in the Letter of Transmittal that (i) it is not an affiliate of
the Company or any of the Subsidiary Guarantors, (ii) the Series B Notes to be
received by it are being acquired in the ordinary course of its business and
(iii) at the time of commencement of the Exchange Offer, it has no arrangement
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Series B Notes. Each Participating Broker-Dealer that
receives Series B Notes for its own account in exchange for Series A Notes,
where such Series A Notes were acquired by such Participating Broker-Dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Series B Notes. See "Plan of Distribution." To the extent that Series A
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Series A Notes could be adversely
affected. See "The Exchange Offer."
21
<PAGE>
THE COMPANY
The Company owns and operates twelve 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. KCAL is 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 $3.9 million) and is payable over the remaining
three-year period, without interest, in equal annual installments, with two
such installments having been paid on November 14, 1995 and 1996. 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 repurchased the
ABC Stock and the ABC Warrants concurrently with the closing of the October
1996 Offering. 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
Acquisition and to repay all of its debt obligations, including its
obligations under its then existing senior 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.
22
<PAGE>
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
to 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.
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.
On October 4, 1996, the Company and selling stockholders of the Company
completed the October 1996 Offering of 7,361,398 shares of the Company's Class
A Common Stock, generating net proceeds to the Company of approximately $162.9
million. The Company used such net proceeds to repurchase the ABC Stock and
ABC Warrants and to repay in full its then outstanding indebtedness under the
Senior Credit Facility.
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Series B Notes in the
Exchange Offer. The net proceeds of approximately $198.2 million from the
issuance of the Series A Notes were used to repay certain then outstanding
indebtedness under the Senior Credit Facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 and as adjusted to give effect to the Series A Notes Offering. This
table should be read in conjunction with the Consolidated Financial Statements
and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of Senior Credit Facility.......... $ 1,963 $ 1,963
Current portion of capital lease obligations....... 598 598
Acquisition purchase price obligation.............. 934 934
--------- ---------
Total short-term debt............................ 3,495 3,495
Long-term debt, less current maturities:
Senior Credit Facility............................. 290,037 91,797 (1)
8 3/4% Senior Subordinated Notes due 2007.......... -- 200,000
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.......................... 668 668
Acquisition purchase price obligation.............. 4,587 4,587
--------- ---------
Total long-term debt............................. 665,292 667,052
--------- ---------
Total debt........................................... 668,787 670,547
Stockholders' equity:
Class A Common Stock, $.001 par value; 20,000,000
shares authorized; 12,241,608 shares issued and
outstanding(2) ................................... 12 12
Class B Common Stock, $.001 par value; 20,000,000
shares authorized; 2,017,230 shares issued and
outstanding(3).................................... 2 2
Class C Common Stock, $.001 par value; 20,000,000
shares authorized; 0 shares issued and
outstanding....................................... 0 0
Additional paid-in capital......................... 234,023 234,023
Accumulated deficit................................ (158,266) (158,266)
--------- ---------
Total stockholders' equity......................... 75,771 75,771
--------- ---------
Total capitalization................................. $ 744,558 $ 746,318
========= =========
</TABLE>
- --------
(1) The Company has the ability, subject to certain limitations, to borrow an
aggregate amount of up to approximately $200.0 million under the Senior
Credit Facility for general corporate purposes, $185.0 million of which
may be used for financing acquisitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
(2) Does not include 13,600 shares of Class A Common Stock issuable upon
exercise of options granted to independent directors, 9,600 of which were
granted pursuant to the Company's 1995 Stock Option Plan. See
"Management."
(3) Does not include 1,092,188 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 368,338 shares of Common Stock
that are available for future grants under the 1995 Stock Option Plan. See
"Management."
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<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The following unaudited pro forma consolidated balance sheet of the Company
as of March 31, 1997 is based on the historical consolidated balance sheet of
the Company, and is presented as if the Series A Notes Offering had occurred
on March 31, 1997. The unaudited pro forma consolidated balance sheet should
be read in conjunction with the Company's Consolidated Financial Statements
appearing elsewhere in this Prospectus. The pro forma information is not
necessarily indicative of the 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 financial position.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1996 and the three months ended March 31, 1996 and 1997 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 KCAL, Quad Cities and KELO Acquisitions (including
related borrowings and annualized net expense reductions), the Series A Notes
Offering, the October 1996 Offering, the January 1996 Notes Offering and the
ABC Repurchase 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 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 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 operations that would have been
reported had such events actually occurred on the date specified, nor is it
indicative of the Company's future results.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
YOUNG
BROADCASTING PRO FORMA
AT AT
MARCH 31, 1997 ADJUSTMENTS MARCH 31, 1997
-------------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 2,178 $ (800)(1) $ 1,378
Accounts receivable less allow-
ance for doubtful accounts...... 50,911 50,911
Program rights, current.......... 14,665 14,665
Prepaid expenses................. 3,517 3,517
-------- -------- --------
Total current assets........... 71,271 (800) 70,471
Property and equipment, net of ac-
cumulated depreciation............ 141,586 141,586
Program rights, noncurrent......... 2,199 2,199
Other noncurrent assets............ 1,518 1,518
Intangible assets, net of accumu-
lated amortization................ 619,629 619,629
Deferred financing costs, net of
accumulated amortization.......... 26,073 1,960 (1) 28,033
-------- -------- --------
Total assets................... $862,276 $ 1,160 $863,436
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................. $ 16,701 $ 16,701
Accrued expenses and other lia-
bilities........................ 15,576 $ (600)(1) 14,976
Program license liabilities, cur-
rent............................ 12,475 12,475
Long-term debt, current.......... 2,897 2,897
Capital lease obligations, cur-
rent............................ 598 598
-------- -------- --------
Total current liabilities...... 48,247 (600) 47,647
Program license liabilities,
noncurrent........................ 1,516 1,516
Long-term debt, noncurrent......... 294,624 (198,240)(1) 96,384
8 3/4% Senior Subordinated Notes
due 2007.......................... 200,000 (1) 200,000
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
Deferred income taxes and other li-
abilities......................... 72,118 72,118
-------- -------- --------
Total liabilities.............. $786,505 $ 1,160 $787,665
-------- -------- --------
Stockholders' equity:
Common stock....................... 14 14
Additional paid-in capital......... 234,023 234,023
Accumulated deficit................ (158,266) (158,266)
-------- -------- --------
Total stockholders' equity..... 75,771 -- 75,771
-------- -------- --------
Total liabilities and stock-
holders' equity............... $862,276 $ 1,160 $863,436
======== ======== ========
</TABLE>
- --------
(1) To record the Series A Notes Offering, the deferred financing costs, the
repayment of a portion of the Company's Senior Credit Facility and accrued
interest.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
QUAD CITIES MID-
YOUNG STATION CONTINENT KCAL
BROADCASTING 3.5 MONTHS FIVE MONTHS ELEVEN MONTHS PRO FORMA
YEAR ENDED 8 3/4% DEBT ENDED ENDED ENDED OTHER 1996 YEAR ENDED
DECEMBER 31, PRO FORMA APRIL 15, MAY 31, NOVEMBER 23, PRO FORMA DECEMBER 31,
1996(1) ADJUSTMENTS SUBTOTAL 1996 1996 1996 ADJUSTMENTS 1996
------------ ----------- -------- ----------- ----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Gross revenue........ $ 180,957 $180,957 $4,662 $5,696 $124,158 $ (7,737)(4) $ 307,736
Less commissions..... 26,614 26,614 744 696 18,287 (147)(4) 46,194
----------- ------- -------- ------ ------ -------- -------- -----------
Net revenues.......... 154,343 154,343 3,918 5,000 105,871 (7,590) 261,542
----------- ------- -------- ------ ------ -------- -------- -----------
Operating expenses.... 35,614 35,614 827 1,923 45,532 (19,263)(5) 64,633
Amortization of
program rights....... 11,034 11,034 367 98 32,078 (10,653)(5) 32,924
Selling, general and
administrative
expenses............. 29,075 29,075 1,129 819 9,002 (717)(5) 39,308
Depreciation and
amortization......... 30,946 196 (2) 31,142 879 348 7,951 10,807 (6) 51,127
Corporate overhead.... 4,344 4,344 101 -- 1,302 (1,103)(7) 4,644
Non-cash compensation
paid in Common Stock. 848 848 -- -- -- 848
----------- ------- -------- ------ ------ -------- -------- -----------
Total operating
expenses............. 111,861 196 112,057 3,303 3,188 95,865 (20,929) 193,484
----------- ------- -------- ------ ------ -------- -------- -----------
Operating income...... 42,482 (196) 42,286 615 1,812 10,006 13,339 68,058
Interest expense..... 42,838 1,250 (1) 44,088 -- -- -- 21,434 (8) 65,522
Other expenses
(income)............ (1,261) (1,261) (6) 5 -- 2,099 (3) 837
----------- ------- -------- ------ ------ -------- -------- -----------
Income (loss) before
provision for income
taxes................ 905 (1,446) (541) 621 1,807 10,006 (10,194) 1,699
Provision for income
taxes................ -- -- -- -- 620 -- (620)(9) --
----------- ------- -------- ------ ------ -------- -------- -----------
Income (loss) after
provision for income
taxes................ $ 905 $(1,446) $ (541) $ 621 $1,187 $ 10,006 $ (9,574) $ 1,699
=========== ======= ======== ====== ====== ======== ======== ===========
Income after provision
for income taxes per
common share(10)..... $ 0.08 $ 0.12
=========== ===========
Shares used in
earnings per share
calculation.......... 11,783,122 14,477,499
=========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations
27
<PAGE>
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(1) Reflects net additional interest expense related to the issuance of the
Notes.
(2) Reflects the amortization expense on the new debt financing costs related
to the Notes.
(3) Eliminates interest income related to the proceeds of the January 1996
Notes Offering prior to the use of such funds for the Quad Cities and
KELO Acquisitions.
(4) Reflects the additional network compensation payable to the Company under
a new affiliation agreement at KELO and a programming change at the Quad
Cities Station in the aggregate amount of approximately $179,000. In
addition, reflects a decrease in net revenues of $803,000 relating to
seven sitcoms not purchased in connection with the KCAL Acquisition.
Further, conforms the barter revenue and barter expense policy of KCAL,
to the Company's policy for such matters. There was no effect on
operating income for this adjustment.
(5) Reflects $21.9 million, $1.8 million and $1.4 million of anticipated
annualized cost savings related to excess personnel, programming and
other costs to be eliminated prospectively in connection with the KCAL,
Quad Cities and KELO Acquisitions, respectively. In addition, reflects a
$897,000 program amortization adjustment for the seven sitcoms not being
purchased in connection with the KCAL Acquisition. Replacement programs
are assumed to be revenue neutral (revenue equals program costs).
Further, conforms the barter revenue and barter expense policy of KCAL,
to the Company's policy for such matters. There was no effect on
operating income for this adjustment.
(6) Reflects the amortization of intangibles associated with the KCAL, Quad
Cities and KELO Acquisitions 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 January 1996 Notes Offering.
(7) Eliminates the Quad Cities Station and KCAL station management fees of
$101,000 and $1.3 million, respectively, net of additional corporate
office expense.
(8) Reflects interest expense on the January 1996 Notes, the Notes and the
drawdown from the Senior Credit Facility as if the Quad Cities, KELO and
KCAL Acquisitions, the October 1996 Offering and the repurchase of the
ABC Stock and the ABC Warrants had occurred on January 1, 1996.
(9) Eliminates the KELO tax provision.
(10) The computation of historical 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 had a
dilutive effect) the effect of common shares contingently issuable,
primarily from stock options and exercise of warrants and pro forma
earnings per share assumes the issuance by the Company of 5,250,000
shares of the Company's Class A Common Stock in the October 1996
Offering, net of the repurchase of the ABC Stock and the ABC Warrants, as
if such transactions had occurred on January 1, 1996.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
YOUNG QUAD CITIES MID-
BROADCASTING STATION CONTINENT KCAL PRO FORMA
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED 8 3/4% DEBT ENDED ENDED ENDED OTHER 1996 ENDED
MARCH 31, PRO FORMA MARCH 31, FEBRUARY 29, MARCH 31, PRO FORMA MARCH 31,
1996 ADJUSTMENTS SUBTOTAL 1996 1996 1996 ADJUSTMENTS 1996
------------ ----------- -------- ------------ ------------ ------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Gross revenue........ $ 32,242 -- $32,242 $3,977 $3,156 $34,234 $(1,995)(4) $ 71,614
Less commissions..... 4,543 -- 4,543 512 375 4,463 (30)(4) 9,863
---------- ----- ------- ------ ------ ------- ------- ----------
Net revenues.......... 27,699 -- 27,699 3,465 2,781 29,771 (1,965) 61,751
---------- ----- ------- ------ ------ ------- ------- ----------
Operating expenses.... 6,803 -- 6,803 807 963 11,412 (5,732)(5) 14,253
Amortization of
program rights....... 1,754 -- 1,754 318 132 9,769 (2,252)(5) 9,721
Selling, general and
administrative
expenses............. 6,431 -- 6,431 980 639 4,899 (581)(5) 12,368
Depreciation and
amortization......... 6,164 36 (2) 6,200 879 228 2,503 2,846 (6) 12,656
Corporate overhead.... 1,085 -- 1,085 101 -- 335 (361)(7) 1,160
---------- ----- ------- ------ ------ ------- ------- ----------
Total operating
expenses............. 22,237 36 22,273 3,085 1,962 28,918 (6,080) 50,158
---------- ----- ------- ------ ------ ------- ------- ----------
Operating income...... 5,462 (36) 5,426 380 819 853 4,115 11,593
Interest expense..... 10,623 312 (1) 10,935 -- -- -- 5,445 (8) 16,380
Other expenses
(income)............ (1,823) (1,823) (6) (23) -- 1,849 (3) (3)
---------- ----- ------- ------ ------ ------- ------- ----------
(Loss) income before
provision for income
taxes................ (3,338) (348) (3,686) 386 842 853 (3,179) (4,784)
Provision for income
taxes................ -- -- -- 290 -- (290)(9) --
---------- ----- ------- ------ ------ ------- ------- ----------
(Loss) income after
provision for income
taxes................ $ (3,338) $(348) $(3,686) $ 386 $ 552 $ 853 $(2,889) $ (4,784)
========== ===== ======= ====== ====== ======= ======= ==========
Loss after provision
for income taxes per
common share(10)..... $ (0.32) $ (0.34)
========== ==========
Shares used in
earnings per share
calculation.......... 10,466,634 14,216,634
========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations
29
<PAGE>
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(1) Reflects net additional interest expense related to the issuance of the
Notes.
(2) Reflects the amortization expense on the new debt financing costs related
to the Notes.
(3) Eliminates interest income related to the proceeds of the January 1996
Notes Offering prior to the use of such funds for the Quad Cities and KELO
Acquisitions.
(4) Reflects the additional network compensation payable to the Company under
a new affiliation agreement at KELO and a programming change at the Quad
Cities Station in the aggregate amount of approximately $110,000. In
addition, reflects a decrease in net revenues of $143,000 relating to seven
sitcoms not purchased in connection with the KCAL Acquisition. Further,
conforms the barter revenue and barter expense policy of KCAL, to the
Company's policy for such matters. There was no effect on operating income
for this adjustment.
(5) Reflects $5.5 million, $443,000 and $349,000 of anticipated cost savings
related to excess personnel, programming and other costs to be eliminated
prospectively in connection with the KCAL, Quad Cities and KELO
Acquisitions, respectively. In addition, reflects a $366,000 program
amortization adjustment for the seven sitcoms not being purchased in
connection with the KCAL Acquisition. Replacement programs are assumed to
be revenue neutral (revenue equals program costs). Further, conforms the
barter revenue and barter expense policy of KCAL, to the Company's policy
for such matters. There was no effect on operating income for this
adjustment.
(6) Reflects the amortization of intangibles associated with the KCAL, Quad
Cities and KELO Acquisitions 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 January 1996 Notes Offering.
(7) Eliminates the Quad Cities Station and KCAL station management fees of
$101,000 and $335,000, respectively, net of additional corporate office
expense.
(8) Reflects interest expense on the January 1996 Notes, the Notes and the
drawdown from the Senior Credit Facility as if the Quad Cities, KELO and
KCAL Acquisitions, the October 1996 Offering and the repurchase of the ABC
Stock and the ABC Warrants had occurred on January 1, 1996.
(9) Eliminates the KELO tax provision.
(10) The computation of historical 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 had a dilutive
effect) the effect of common shares contingently issuable, primarily from
stock options and exercise of warrants and pro forma earnings per share
assumes the issuance by the Company of 5,250,000 shares of the Company's
Class A Common Stock in the October 1996 Offering, net of the repurchase of
the ABC Stock and the ABC Warrants, as if such transactions had occurred on
January 1, 1996.
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
YOUNG
BROADCASTING PRO FORMA
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, PRO FORMA MARCH 31,
1997 ADJUSTMENTS 1997
------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Operating Data:
Gross revenue......................... $ 71,812 $ 71,812
Less commissions...................... 10,533 10,533
---------- ----- ----------
Net revenues............................ 61,279 61,279
---------- ----- ----------
Operating expenses...................... 15,769 15,769
Amortization of program rights.......... 10,448 10,448
Selling, general and administrative
expenses............................... 11,109 11,109
Depreciation and amortization........... 12,140 $ 49(2) 12,189
Corporate overhead...................... 1,535 1,535
Non-cash compensation paid in Common
Stock.................................. 240 240
---------- ----- ----------
Total operating expenses............ 51,241 49 51,290
---------- ----- ----------
Operating income........................ 10,038 (49) 9,989
Interest expense...................... 15,557 312 (1) 15,869
Other expenses........................ 47 47
---------- ----- ----------
Loss after provision for income taxes... $ (5,566) $(361) $ (5,927)
========== ===== ==========
Loss after provision for income taxes,
per common share(3).................... $ (0.39) $ (0.42)
========== ==========
Shares used in earnings per share
calculation............................ 14,255,673 14,255,673
========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations
31
<PAGE>
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(1) Reflects net additional interest expense related to the issuance of the
Notes.
(2) Reflects the amortization expense on the new debt financing costs related
to the Notes.
(3) The computation of historical and pro forma 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 had a
dilutive effect) the effect of common shares contingently issuable,
primarily from stock options and exercise of warrants.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company for the five years ended December 31, 1996 and the three months ended
March 31, 1996 and 1997, which have been derived from the Company's audited
and unaudited consolidated financial statements. The consolidated financial
data of the Company for the three months ended March 31, 1996 and 1997 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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ----------------------
(UNAUDITED)
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues (1)....... $ 59,799 $ 61,792 $ 78,788 $ 122,530 $ 154,343 $ 27,699 $ 61,279
Operating expenses,
including selling,
general and
administrative
expenses.............. 28,066 28,460 33,800 51,614 64,689 13,234 26,878
Amortization of program
license rights........ 3,516 3,969 4,400 6,418 11,034 1,754 10,448
Depreciation and
amortization.......... 18,790 13,859 15,280 24,572 30,946 6,164 12,140
Corporate overhead..... 1,325 1,350 2,052 3,348 4,344 1,085 1,535
Non-cash compensation
(2)................... -- -- 6,497 1,167 848 -- 240
--------- --------- --------- ---------- ---------- ---------- ----------
Operating income....... 8,102 14,154 16,759 35,411 42,482 5,462 10,038
Interest expense....... 29,476 17,778 19,105 32,644 42,838 9,698 15,557
Other expenses
(income).............. 75 141 3 233 (1,261) (898) 47
--------- --------- --------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. (21,449) (3,765) (2,349) 2,534 905 (3,338) (5,566)
Extraordinary loss on
extinguishment of debt
(3)................... (7,452) -- (6,027) (9,125) -- -- --
Cumulative effect of
change in accounting
principle (4)......... -- (1,520) -- -- -- -- --
--------- --------- --------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (28,901) $ (5,285) $ (8,376) $ (6,591) $ 905 $ (3,338) $ (5,566)
========= ========= ========= ========== ========== ========== ==========
Income (loss) per
common share before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ (9.60) $ (3.82) $ (3.62) $ 0.23 $ 0.08 $ (0.32) $ (0.39)
Net income (loss) per
common share (5)...... (12.93) (4.50) (5.42) (0.61) 0.08 (0.32) (0.39)
Weighted average shares
outstanding........... 2,234,370 2,234,370 3,339,794 11,071,154 11,783,122 10,466,634 14,255,673
OTHER FINANCIAL DATA:
Ratio of earnings to
fixed charges (6)..... -- -- -- 1.1x 1.0x -- --
Cash flow provided by
operating activities.. $ 13,449 $ 13,562 $ 12,697 $ 28,978 $ 35,092 $ 8,891 $ 17,362
Payments for program
license liabilities... 4,710 4,003 4,170 6,747 10,385 1,855 10,667
Broadcast cash flow
(7)................... 27,023 29,329 40,818 64,169 79,269 12,610 23,734
Broadcast cash flow
margin................ 45.2% 47.5% 51.8% 52.4% 51.4% 45.5% 38.7%
Operating cash flow
(8)................... $ 25,698 $ 27,979 $ 38,766 $ 60,821 $ 74,926 $ 11,525 $ 22,199
Capital expenditures
(excluding station
acquisitions)......... 572 686 1,206 4,484 4,992 718 831
BALANCE SHEET DATA (AS
OF END OF PERIOD):
Cash and cash
equivalents........... $ 793 $ 4,493 $ 6,304 $ 3,426 $ 7,005 $ 81,261 $ 2,178
Total assets........... 167,327 158,231 316,827 296,098 893,151 364,494 862,276
Long-term debt
(including current
portion).............. 200,397 196,156 305,050 297,993 678,927 373,307 668,787
Stockholders' (deficit)
equity................ (46,401) (51,686) (11,654) (25,544) 80,504 31,078 75,771
</TABLE>
(Footnotes begin on next page)
33
<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, below-market
options to purchase shares of Common Stock and contribution of shares into
the Company's defined contribution plan. Non-cash compensation in 1996 and
for the three months ended March 31, 1997 primarily reflect contributions
of shares of Common Stock into the Company's defined contribution plan.
See "Management."
(3) Extraordinary loss for the years ended December 31, 1992, 1994 and 1995
resulted from the early extinguishment of debt. See Note 5 to Notes to
Consolidated Financial Statements.
(4) 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.
(5) 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.
(6) For purposes of this ratio, "fixed charges" are defined as interest,
amortization and debt expense and a portion of rental expense representing
the interest factor, and "earnings" are defined as income (loss) before
income taxes, extraordinary items, cumulative effect of change in
accounting principles and fixed charges. Earnings were insufficient to
cover fixed charges by $21.4 million, $3.8 million and $2.3 million,
respectively, for each year during the three-year period ended December
31, 1994, and $3.3 million and $5.6 million for the quarters ended March
31, 1996 and 1997, respectively.
(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.
34
<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. Most of the Company's annual gross revenue is generated from local
advertising, which is sold by a station's sales staff directly to local
accounts. 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.
35
<PAGE>
The following table sets forth certain operating data for the years ended
December 31, 1994, 1995 and 1996 and the three months ended March 31, 1996 and
1997.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating income.................. $16,759 $35,411 $42,482 $ 5,462 $10,038
Add:
Amortization of program license
rights......................... 4,400 6,418 11,034 1,754 10,448
Depreciation and amortization... 15,280 24,572 30,946 6,164 12,140
Corporate overhead.............. 2,052 3,348 4,344 1,085 1,535
Non-cash compensation........... 6,497 1,167 848 -- 240
Less:
Payments for program license
liabilities.................... (4,170) (6,747) (10,385) (1,855) (10,667)
------- ------- ------- ------- -------
Broadcast cash flow............... $40,818 $64,169 $79,269 $12,610 $23,734
======= ======= ======= ======= =======
</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, THREE MONTHS ENDED MARCH 31,
------------------------------------------------ --------------------------------
1994 1995 1996 1996 1997
-------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Local.................. $50,063 54.1% $ 77,980 54.3% $ 99,684 55.1% $ 17,295 53.7% $ 46,065 64.1%
National............... 32,327 35.0 51,546 35.9 57,298 31.6 10,867 33.7 20,947 29.2
Network compensation... 4,564 4.9 9,873 6.9 11,335 6.3 2,601 8.1 3,120 4.3
Political.............. 4,546 4.9 1,835 1.3 9,791 5.4 399 1.2 396 0.6
Production and other... 981 1.1 2,321 1.6 2,849 1.6 1,080 3.3 1,283 1.8
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total.................. 92,481 100.0 143,555 100.0 180,957 100.0 32,242 100.0 71,811 100.0
Agency and sales
representative
commissions............ (13,693) (14.8) (21,025) (14.6) (26,614) (14.7) (4,543) (14.1) (10,532) (14.7)
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net revenues............ $78,788 85.2% $122,530 85.4% $154,343 85.3% $ 27,699 85.9% $ 61,279 85.3%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
The following historical financial information for the three months ended
March 31, 1997 includes the results of KCAL (acquired on November 22, 1996),
the Quad Cities Station (acquired on April 15, 1996), and KELO (acquired on
May 31, 1996). The operating results for the three months ended March 31, 1996
do not include the acquired stations.
Net revenues for the three months ended March 31, 1997 were $61.3 million,
an increase of $33.6 million, or 121.3%, compared to $27.7 million for the
three months ended March 31, 1996, with the acquired stations accounting for
$33.1 million of such increase. Improvement in various local market economies
led to an increase in the Company's gross local revenue at the nine original
stations of 4.4%, while gross national was slightly up for 1997 compared to
the same three months in 1996.
36
<PAGE>
Operating expenses, including selling, general and administrative expenses,
for the three months ended March 31, 1997 were $26.9 million, compared to
$13.2 million for the three months ended March 31, 1996, an increase of $13.7
million, or 103.8%, with the acquired stations accounting for approximately
all of such increase.
Amortization of program license rights for the three months ended March 31,
1997 was $10.5 million, compared to $1.8 million for the three months ended
March 31, 1996, an increase of $8.7 million, with the acquired stations
accounting for approximately all of such increase.
Depreciation of property and equipment and amortization of intangible assets
was $12.1 million for the three months ended March 31, 1997, compared to $6.2
million for the same three months in 1996, an increase of $5.9 million, or
95.2%, with the acquired stations accounting for approximately all of such
increase.
The Company made payments for program license liabilities of $10.7 million
during the three months ended March 31, 1997, compared to $1.9 million for the
three months ended March 31, 1996, an increase of $8.8 million, with the
acquired stations accounting for approximately all of such increase.
Corporate overhead for the three months ended March 31, 1997 was $1.5
million, compared to $1.1 million for the comparable period in 1996, an
increase of $450,000, or 41.5%. This increase was the result of additional
personnel costs in 1997.
Non-cash compensation was $240,000 for the three months ended March 31,
1997. This amount represented non-cash charges for an employer-matching stock
plan established January 1, 1997, included in the Company's defined
contribution plan.
Interest income for the three months ended March 31, 1997 was $103,000,
compared to $925,000 for the same period in 1996, a decrease of $822,000. This
decrease is primarily attributable to the lower cash levels resulting from the
use of cash and cash equivalents to finance a portion of the acquisition cost
of new stations.
Interest expense for the three months ended March 31, 1997 was $15.6
million, compared with $9.7 million for the comparable period in 1996, an
increase of $5.9 million, or 60.8%. The increase is primarily attributable to
the Company's higher debt level following three station acquisitions in the
second and fourth quarters of 1996.
As a result of the factors discussed above, the net loss for the Company was
$5.6 million for the three months ended March 31, 1997, compared with a net
loss of $3.3 million for the same period in 1996.
Broadcast cash flow for the three months ended March 31, 1997 was $23.7
million, compared with $12.6 million for the three months ended March 31,
1996, an increase of $11.1 million, or 88.1%, with the acquired stations
accounting for $10.6 million of such increase. As a result, the broadcast cash
flow margin (broadcast cash flow divided by net revenues) for the three months
ended March 31, 1997 and 1996 was 39% and 46%, respectively. The decrease in
broadcast cash flow margins is attributable to the purchase of KCAL.
Independent stations generally operate at lower margins than those affiliated
with networks.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The following historical financial information include the results of KWQC,
KELO and KCAL beginning on April 15, 1996, May 31, 1996 and November 22, 1996,
respectively, the periods commencing upon their respective acquisitions by the
Company.
Net revenues for the year ended December 31, 1996 were $154.3 million, an
increase of $31.8 million, or 26.0%, compared to $122.5 million for the year
ended December 31, 1995, with the acquired stations accounting for $29.4
million of such increase. Political revenue for the year ended December 31,
1996 was $9.8 million, compared to $1.8 million for the year ended December
31, 1995, an increase of $8.0 million. The increase was attributable to 1996
being a national election year with more state and local elections, while 1995
had only limited state and local elections. Network compensation in 1996
increased $1.5 million, or 14.8%, with $1.1 million attributable to the
acquired stations.
37
<PAGE>
Operating expenses, including selling, general and administrative expenses,
for the year ended December 31, 1996 were $64.7 million, compared to $51.6
million for the year ended December 31, 1995, an increase of $13.1 million, or
25.4%. The acquired stations accounted for $12.9 million of the increase and
the remaining increase is primarily attributable to higher local sales
commissions resulting from higher sales volume.
Amortization of program license rights for the year ended December 31, 1996
was $11.0 million, compared to $6.4 million for the year ended December 31,
1995, an increase of $4.6 million, or 71.9%, with the acquired stations
accounting for $3.9 million of such increase.
Depreciation of property and equipment and amortization of intangible assets
was $30.9 million for the year ended December 31, 1996, compared with $24.6
million for the comparable period in 1995, an increase of $6.3 million, or
25.6%. The increase results from depreciation and amortization at the acquired
stations of $5.6 million, and the remaining increase being primarily
attributable to increased capital expenditures in 1996.
The Company made payments for program license liabilities of $10.4 million
during the year ended December 31, 1996, compared to $6.7 million for the year
ended December 31, 1995, an increase of $3.7 million, or 55.2%. Payments
associated with the acquired stations were $3.5 million.
Corporate overhead for the year ended December 31, 1996 was $4.3 million,
compared to $3.3 million for the comparable period in 1995, an increase of
$1.0 million, or 30.3%. This was the result of additional personnel and
administrative costs.
Non-cash compensation paid in Common Stock for the year ended December 31,
1996 was $848,000, compared to $1.2 million for the year ended December 31,
1995.
Net interest expense for the year ended December 31, 1996 was $42.8 million,
compared with $32.6 million for the comparable period in 1995, an increase of
$10.2 million, or 31.3%. The increase is primarily attributable to the
Company's higher debt level following the January 1996 Notes Offering and the
debt associated with the acquisition of three stations.
The Company held a $25 million interest rate swap agreement which expired on
April 18, 1996. The interest expense resulting from this swap agreement
amounted to $315,000 in 1996 and $952,000 in 1995.
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, the net income for the Company
was $905,000 for the year ended December 31, 1996, compared with a net loss of
$6.6 million for the same period in 1995, an increase in net income of $7.5
million. The 1995 net loss includes the extraordinary non-recurring loss of
$9.1 million discussed above.
Broadcast cash flow for the year ended December 31, 1996 was $79.3 million,
compared with $64.2 million for the year ended December 31, 1995, an increase
of $15.1 million, or 23.5%. Broadcast cash flow margins (broadcast cash flow
divided by net revenues) for the year ended December 31, 1996 decreased to
51.4% from 52.4% for the same period in 1995. The increase in broadcast cash
flow was a direct result of the three newly acquired stations and continued
expense controls. The decrease in broadcast cash flow margins is attributable
to the purchase of KCAL, an independent station. Independent stations
generally operate at lower margins than those associated with networks.
Approximately $13.0 million of the increased broadcast cash flow in 1996 is
attributable to the acquired stations.
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.
38
<PAGE>
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 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 $1.9 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.
39
<PAGE>
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, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operations and
funds available under the Senior Credit Facility.
On November 15, 1996, the Senior Credit Facility was amended and restated 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 Revolver Facility has 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. As of March 31, 1997,
there was $292.0 million outstanding under the Senior Credit Facility, with
$185.0 million available, subject to certain conditions, for borrowing for the
purpose of financing acquisitions. The Company applied the net proceeds of the
Series A Notes Offering (approximately $198.2 million) toward repayment of
such outstanding indebtedness.
Pursuant to the Senior Credit Facility, the Company is 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 Indenture and the Existing 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 Indenture and
the Existing 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.
Interest under the Senior Credit Facility is payable at the LIBOR rate, "CD
Rate" or "Base Rate." In addition to the index rates, the Company pays 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 0.875% based upon a
ratio under 4:1 to 2.125% based upon a 6:1 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.
40
<PAGE>
The Senior Credit Facility imposes restrictions on the Company's ability to
incur additional indebtedness. The Company is permitted to incur, subject to
the terms of the Indenture and the Existing 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 the Existing
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 Indenture and the
Existing Indentures.
The Senior Credit Facility requires the Company to maintain certain
financial ratios. The Company is required to maintain a total debt/operating
cash flow ratio ranging from 6.25x presently to 4.50x during the year 2000 and
thereafter. The Company is also required to maintain a senior debt/operating
cash flow ratio ranging from 3.25x presently to 2.25x during the year 2000 and
thereafter. Additionally, the Company is required to maintain an operating
cash flow/total interest expense ratio ranging from 1.50x presently to 2.25x
during the year 2000 and thereafter. The Company is also 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
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 Series A Notes is payable semi-annually on June 15 and
December 15, 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 Indenture and the
Existing 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 or the Existing 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
March 31, 1997, discounted at 11.9%, of $2.5 million) and is payable over the
remaining three-year period, without interest, in equal annual installments,
with two such installments having been paid on November 14, 1995 and 1996. 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
41
<PAGE>
such contracts are made in cash or the concession of advertising spots to the
program provider to resell, or a combination of both. At March 31, 1997,
payments on program license liabilities due in the next twelve months, which
will be paid with cash from operations, amounted to $12.5 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. The
Company does not presently have any agreements to acquire any television
stations. 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 has
approximately $148.0 million of net operating loss ("NOL") carryforwards which
are subject to Section 382 limitations. See Note 9 to Notes to Consolidated
Financial Statements. The Company does not currently anticipate using these
losses in the foreseeable future. Therefore, the NOL has not been recognized.
42
<PAGE>
BUSINESS
The Company owns and operates twelve television stations in geographically
diverse markets. Six of the stations are affiliated with ABC, four are
affiliated with CBS, one is affiliated with NBC, and one is an independent
station. 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's sole independent television station,
KCAL, is 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 March 31, 1997, after giving pro forma effect to
the KCAL, KELO and Quad Cities Acquisitions (including annualized net expense
reductions) as if such transactions had occurred on April 1, 1996, the Company
would have had net revenues and broadcast cash flow of $261.1 million and
$123.3 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.
<TABLE>
<CAPTION>
PRO FORMA
NET REVENUES FOR TWELVE MONTHS
ENDED MARCH 31, 1997
-----------------------------------
YEAR NETWORK MARKET PERCENTAGE OF
STATION ACQUIRED AFFILIATION MARKET RANK AMOUNT TOTAL
- ------- -------- ----------- ------------------------------- ------ --------------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
KCAL 1996 IND Los Angeles, California 2 $110.7 42.4%
WKRN 1989 ABC Nashville, Tennessee 33 23.7 9.1
WTEN 1989 ABC Albany, New York 52 14.8 5.7
WRIC 1994 ABC Richmond, Virginia 59 17.4 6.7
WATE 1994 ABC Knoxville, Tennessee 60 15.3 5.8
WBAY 1994 ABC Green Bay, Wisconsin 70 14.9 5.7
KWQC 1996 NBC Quad Cities 88 13.0 5.0
WLNS 1986 CBS Lansing, Michigan 107 14.2 5.4
KELO 1996 CBS Sioux Falls, South Dakota 106 12.0 4.6
KLFY 1988 CBS Lafayette, Louisiana 121 14.2 5.4
WKBT 1986 CBS La Crosse-Eau Claire, Wisconsin 130 4.6 1.8
WTVO 1988 ABC Rockford, Illinois 135 6.3 2.4
------ ----
$261.1 100%
====== ====
</TABLE>
The Company continually seeks to increase its revenues and broadcast cash
flow. In each of the past five fiscal years, the Company has achieved broadcast
cash flow margins of approximately 45.0% or more. Net revenues increased by
26.0% and broadcast cash flow increased by 23.5% for the year ended December
31, 1996, compared to the year ended December 31, 1995. Such 1996 results
include the performance of the stations acquired pursuant to the KCAL, KELO and
Quad Cities Acquisitions for the periods beginning on their respective dates of
acquisition.
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:
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
43
<PAGE>
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, 1996, the Company's stations recorded new
business sales of approximately $16.9 million.
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
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
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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 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. The Company does not presently have any agreements to acquire or
sell any television stations. As of March 31, 1997, the Company had the
ability, subject to certain limitations, to borrow up to $185.0 million under
the Senior Credit Facility for the purpose of financing acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
THE STATIONS
The Company's stations are geographically diverse, which minimizes the
impact of regional economic downturns. One station is located in the west
region (KCAL-Los Angeles, California), 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).
Six of the Company's twelve 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.
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The following table sets forth general information for each of the Company's
stations:
<TABLE>
<CAPTION>
STATION
COMMERCIAL RANK IN-
MARKET TELEVISION NETWORK STATIONS IN MARKET YEAR
RANK(1) HOUSEHOLDS(2) CHANNEL AFFILIATION IN DMA(3) MARKET(4) SHARE(5) ACQUIRED
------- ------------- ------- ----------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KCAL (Los Angeles, CA).. 2 4,942,440 9 IND 13 6 7 1996
WKRN (Nashville, TN).... 33 782,940 2 ABC 6 3 20 1989
WTEN (Albany, NY)....... 52 506,850 10(6) ABC 4 3 28 1989
WRIC (Richmond, VA)..... 59 460,890 8 ABC 5 3 29 1994
WATE (Knoxville, TN).... 60 456,260 6 ABC 4 2 28 1994
WBAY (Green Bay, WI).... 70 376,380 2 ABC 5 2 31 1994
KWQC (Quad Cities)...... 88 303,810 6 NBC 4 1 43 1996
WLNS (Lansing, MI)...... 106 231,060 6 CBS 4 1 43 1986
KELO (Sioux Falls, SD).. 107 229,310 11(7) CBS 4 1 52 1996
KLFY (Lafayette, LA).... 121 203,880 10 CBS 4 1 58 1988
WKBT (La Crosse-Eau
Claire, WI)............ 130 177,490 8 CBS 4 2 26 1986
WTVO (Rockford, IL)..... 135 166,090 17 ABC 4 3 28 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 February 1997.
(5) Represents an estimate of the 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) WTEN has a satellite station, WCDC (Adams, Massachusetts), Channel 19,
operating under a separate license from the FCC.
(7) KELO has three satellite stations, KDLO (Florence, South Dakota), Channel
3, KPLO (Reliance, South Dakota), Channel 6, and KCLO (Rapid City, South
Dakota), Channel 15, each of which operates under a separate license from
the FCC. KCLO operates in a separate DMA from that of KELO and the other
two satellites, wherein it ranks 173.
The following is a description of each of the Company's stations:
KCAL, Los Angeles, California. The Company acquired KCAL from a subsidiary
of Disney on November 22, 1996. 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
4,942,440 television households and the country's largest television market in
terms of estimated advertising dollars spent on the medium. There are thirteen
reportable stations in the DMA. For the February 1997 ratings period, KCAL was
ranked sixth after the local ABC, NBC, CBS, WB and Fox affiliates, with an
overall sign-on to sign-off in-market share of 7%. KCAL ranked fifth in in-
market revenue share in the fourth quarter of 1996.
KCAL is a prominent news provider in the market, presenting 27 hours of such
programming each week and up to 25 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." In 1996, KCAL was honored with nine Golden
Mikes, including Best 30 Minute Newscast and Best Daytime Newscast, ten Emmys,
five Radio Television News Directors awards, ten New York Film Festival
Awards, 17 Associated Press Awards and 31 Los Angeles Press Club Awards. Since
1991, KCAL has been the most honored local station in Los Angeles for news.
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), Anaheim Angels (5 years remaining), Mighty Ducks of Anaheim (2
years remaining), Los Angeles Clippers (5 years remaining) and Los Angeles
Kings (3 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.
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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 (4th 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
782,940 television households. There are six reportable stations in the DMA.
For the February 1997 ratings period, WKRN was rated third after the CBS and
NBC affiliates, with an overall sign-on to sign-off in-market share of 20%.
The station's syndicated programs include The Cosby Show, Roseanne, Coach,
Full House, Jenny Jones, 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 33 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.)
The Albany market (which includes Schenectady and Troy) is the 52nd largest
DMA, with an estimated 506,850 television households. There are four
reportable stations in the DMA, three of which broadcast in the VHF spectrum.
During the February 1997 ratings period, WTEN was third in the ratings, with a
sign-on to sign-off in-market share of 28%, compared to 32% 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 Rosie. WTEN
has won numerous awards in recent years for both local news and public affairs
programming.
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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, selective syndicated program
acquisition and client marketing programs to maximize revenues. Selective use
of client incentive programs has generated over $1 million of incremental
revenue in the past 14 months.
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 59th largest
DMA, with an estimated 460,890 television households. There are five
reportable commercial television stations in the DMA, three of which are VHF
stations. For the February 1997 ratings period, WRIC was in third place in the
ratings, two points behind WTVR and 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 29%, compared to 31% for WTVR and WWBT. The
station's syndicated programming includes Wheel of Fortune, Jeopardy, Montel
Williams, Ricki Lake and Jerry Springer. 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 60th largest DMA, with an
estimated 456,260 television households. There are four reportable stations in
the DMA, three of which are VHF stations. During the February 1997 ratings
period, WATE ranked second, with a sign-on to sign-off in-market share of 28%.
The station's syndicated programming includes Home Improvement, Jenny Jones,
Coach, Matlock and Rosie. WATE has won numerous awards in recent years from
state journalism organizations for its news operations. It also recently
received its second Emmy Award for sports programming.
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 70th largest DMA, with an estimated 376,380 television
households. There are five reportable stations in the DMA, three of which are
VHF stations. For the February 1997 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
34%, compared to 31% for WBAY. The station's syndicated programming includes
Home Improvement, Seinfeld, Roseanne, Inside Edition, Ricki Lake, Hard Copy
and Jenny Jones. WBAY has won numerous awards in recent years from state
journalism organizations for its news operations.
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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 303,810 television households in eastern
Iowa and western Illinois. There are four reportable stations in the DMA,
three of which are VHF. During the February 1997 ratings period, KWQC retained
its number one position in the market with a sign-on to sign-off in-market
share of 43%. 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,
Montel Williams, 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.
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 231,060 television households. WLNS is one of only two VHF network
affiliates in the DMA. During the February 1997 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 43%. The station has consistently held the
highest rating for several ratings periods. The station's syndicated
programming includes Rosie, Entertainment Tonight, Hard Copy, The Maury Povich
Show and Montel Williams.
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 1997 ratings
period, WLNS's newscasts finished ahead of its closest competitor by 28 share
points at noon and 19 share points at 6:00 p.m. The station also won at 11:00
p.m. by 10 share points. 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 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 14,000 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
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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.
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 107th largest DMA serving an estimated 229,310
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 February 1997 ratings period,
KELO was first in the market with a sign-on to sign-off in-market share of
52%, significantly ahead of the ABC, NBC and FOX/UPN affiliates, who had 28%,
15% 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, FX: The
Series, Geraldo and Matlock.
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.
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.
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.
The Lafayette market is the 121st largest DMA, with an estimated 203,880
television households. KLFY ranks first in the February 1997 ratings period
with an overall sign-on to sign-off in-market share of 58%, and has ranked
first in those viewership measurements consistently for prior ratings periods.
KLFY leads its competition in audience share in 28 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 52%.
The station's syndicated programs include The Maury Povich Show, Home
Improvement, Cosby, Coach, Rosie, Maureen O'Boyle, Hercules and Zena.
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 1997 ratings period, this program received a 6:00-7:00 a.m. in-
market share of 62%. 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
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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 ten 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 130th largest DMA, with an estimated
177,490 television households. The highest-rated local stations in the DMA are
WKBT and WEAU, the NBC affiliate. For the February 1997 ratings period, WKBT
had a sign-on to sign-off in-market share of 26%, which places WKBT second to
WEAU, which had a 42% share. The station's syndicated programming includes
Entertainment Tonight, Roseanne, Married with Children, The Cosby Show, Sally
Jessy Raphael, Baywatch, The Simpsons and Fresh Prince of Bel-Air.
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.
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
and Friday's Child. 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
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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 135th largest DMA, with an estimated 166,090
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
February 1997 ratings period, WTVO was number three in the market, with a
sign-on to sign-off in-market share of 28%, compared to 29% and 32% for the
CBS and NBC affiliates, respectively. The stations's syndicated programs
include Sally Jessy Raphael, Jenny Jones, Rosie, Hard Copy, Entertainment
Tonight and The Simpsons. The station produces local interest programs such as
Spotlight 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
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.
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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 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.
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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 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
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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.
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.
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NETWORK AFFILIATION AGREEMENTS
Each of the Company's network-affiliated stations is affiliated with its
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. 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 or produces 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.
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 8, 1996, the
Telecommunications Act of 1996 (the "1996 Act") was signed into law, the most
comprehensive overhaul of the nation's basic communications law since 1934.
Provisions of the new law which directly 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
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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. Accordingly, on January 24, 1997,
the FCC issued an order amending its applicable rules so that, henceforth,
broadcast stations (both radio and TV) will ordinarily be granted renewal for
a term of eight years. 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, 2004; KLFY, June 1, 2005;
WKRN, August 1, 1997; WATE, August 1, 1997; WLNS, October 1, 1997
(applications for renewal of the WKRN, WATE, and WLNS station licenses are now
pending before the FCC; pursuant to Section 307(c)(3) of the Communications
Act, the licenses for such stations shall continue in effect pending final
action on their respective renewal applications by the FCC); 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. A license renewal application was granted to KCAL by
the FCC on June 6, 1996, several months prior to its acquisition by the
Company. The decision imposed certain reporting conditions regarding the
station's equal employment opportunity (EEO) records; conditions which now
must be met by the Company, as the new licensee. On July 5, 1996, the National
Hispanic Media Coalition ("NHMC"), which had opposed the KCAL renewal
application on EEO grounds before the FCC, appealed the FCC's decision to
renew KCAL's license to the U.S. Court of Appeals for the District of Columbia
Circuit. Both Disney, the former licensee of KCAL, and the Company have
intervened in this proceeding in support of the FCC. The matter remains
pending. In the meantime, KCAL's main station license is now set to expire 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 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
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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. Thus, on November 7, 1996, the FCC
released a "Second Further Notice of Proposed Rulemaking" that seeks
additional comments on a number of local television ownership issues,
including (i) whether to extend the presumptive waiver of the one-to-a-market
rule from the top 25 to the top 50 markets; (ii) whether to modify the
television duopoly rule to allow common ownership of two television stations
in separate DMAs as long as the stations do not have overlapping Grade A
contours; and (iii) whether to permit some exceptions to the duopoly rule in
given markets and given circumstances involving combinations of UHF/UHF and
UHF/VHF stations. In that same proceeding, the FCC also has invited public
comment on whether to grandfather existing LMAs if such agreements are deemed
attributable in a companion proceeding seeking comment on revisions to the
FCC's attribution rules. 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 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
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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 raise any issues or concerns with respect to diversity and
competition. On November 7, 1996, the FCC released a "Further Notice of
Proposed Rulemaking" in that proceeding, seeking additional comment on the
foregoing and certain related issues, including (i) the circumstances, if any,
in which an LMA should be attributed to an entity holding the right to program
more than 15% of the time of a television station; and (ii) whether a
combination of debt and equity exceeding a certain threshold should be
considered to be an attributable interest.
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 eliminated
the prime time access rule ("PTAR"), effective August 30, 1996. PTAR
restricted 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 also recently eliminated 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 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
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broadcasters to air at least three hours of qualifying children's programming
each week. In addition to satisfying certain scheduling, duration and other
criteria, programs will qualify as "educational and informational" 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 (including proposals for free
time to some political candidates), 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 were set to take effect one year after
enactment of the 1996 Act (or February 1, 1997) only if the FCC determined, 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. Prompted by these provisions in the 1996 Act, television
industry representatives developed an age-based TV ratings system (modeled on
the movie industry system) that was voluntarily implemented at the beginning
of this year (i.e., prior to the aforementioned one-year anniversary date).
This new system, however, remains subject to controversy and could be
modified. In the meantime, the FCC has initiated a public proceeding inviting
comments on the industry's new rating system. The FCC has also announced that
it intends to hold hearings on the industry's proposal.
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, as noted, efforts have been undertaken
and remain ongoing to establish and implement a voluntary, industry-initiated
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 now requires 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
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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 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 potentially 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 adopted 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
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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 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. On or
before June 17, 1993, the Company elected to obtain "must carry" status on
certain cable systems in each of its DMAs. This entitled 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. Many of these agreements remain
in place. Elections for the new three year period commencing January 1, 1997
and ending December 31, 1999 were made on or before October 1, 1996. During
the first three-year cycle, the Company reached an agreement with the Home and
Garden Network ("HGN") under which HGN is, on the Company's behalf, authorized
to attempt to conclude more definitive retransmission agreements with certain
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cable operators in exchange for agreeing to carry the HGN channel. A number of
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.
On March 31, 1997, in a 5-4 decision, the U.S. Supreme Court upheld the
constitutionality of the must-carry provisions of the 1992 Cable Act. This
action followed two separate lower court decisions by a special three-judge
panel of the U.S. District Court for the District of Columbia, one in 1993 and
another in 1995 (the latter on remand from an earlier 1994 Supreme Court
decision which had ordered further proceedings on certain factual issues). As
a result of this most recent Supreme Court determination, the regulatory
scheme promulgated by the FCC to implement the must-carry provisions of the
1992 Cable Act will 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 former video
dialtone rules. 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 Digital Television Service. On April 3, 1997, the FCC announced it
had adopted new rules which will allow television broadcasters to provide
advanced digital television ("DTV") service in the United States.
Implementation of DTV 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") 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 is being operated
pursuant to an experimental HDTV license obtained from the FCC. Other stations
have initiated similar experimental authorizations.
The FCC's action on April 3, 1997 also included the adoption of a table of
allotments for DTV, which will provide eligible existing broadcasters with a
second channel on which to provide DTV service. The allotment plan is based on
the use of channels 2-51, although the "core" DTV spectrum will be between
channels 2-46 or 7-51 (depending upon a future decision regarding the
utilization of VHF channels 2-6 for DTV service). Ultimately, the FCC plans to
recover the channels currently used for analog broadcasting and will decide at
a later date the use of the spectrum recovered outside of the core spectrum.
Broadcasters that obtain a DTV channel outside of the core spectrum may
ultimately be required to move to a new channel at the time the analog
channels are recovered.
Under the new service rules for DTV, television broadcasters will be allowed
to use their DTV channels according to their best business judgment. Such uses
can include multiple standard definition program channels, data transfer,
subscription video, interactive materials and high-quality audio signals.
Television broadcasters will, however, be required to provide a free digital
video programming service that is at least comparable to today's analog
service. Broadcasters will not be required to air HDTV programming or,
initially, to simulcast their analog programming on the digital channel.
Affiliates of ABC, CBS, NBC and Fox in the top 10 television markets will be
required to be on the air with a digital signal by May 1, 1999. Affiliates of
those networks in markets 11-30 will be required to be on the air with a
digital signal by November 1, 1999. For all remaining commercial television
stations, including all of the Company's stations, the FCC's new mandated
timetable for the construction of DTV facilities is May 1, 2002.
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DIGITAL CONVERSION
TIMETABLE FOR YOUNG
BROADCASTING INC. STATIONS
<TABLE>
<CAPTION>
FCC MANDATED
TIMETABLE FOR
ANALOG DTV CONSTRUCTION OF
STATION (MARKET) CHANNEL CHANNEL DTV FACILITIES
- ---------------- ------- ------- ---------------
<S> <C> <C> <C>
KCAL, Los Angeles, CA........................... 9 43 May 1, 2002
WKRN, Nashville, TN............................. 2 27 May 1, 2002
WTEN, Albany, NY................................ 10 26 May 1, 2002
WCDC, Adams, MA (satellite of WTEN)............. 19 36 May 1, 2002
WRIC, Richmond, VA.............................. 8 22 May 1, 2002
WATE, Knoxville, TN............................. 6 26 May 1, 2002
WBAY, Green Bay, WI............................. 2 23 May 1, 2002
KWQC, Quad Cities............................... 6 56 May 1, 2002
WLNS, Lansing, MI............................... 6 59 May 1, 2002
KELO, Sioux Falls, SD........................... 11 32 May 1, 2002
KDLO, Florence, SD (satellite of KELO).......... 3 25 May 1, 2002
KPLO, Reliance, SD (satellite of KELO).......... 6 14 May 1, 2002
KCLO, Rapid City, SD (satellite of KELO)........ 15 16 May 1, 2002
KLFY, Lafayette, LA............................. 10 56 May 1, 2002
WKBT, La Crosse-Eau Claire, WI.................. 8 53 May 1, 2002
WTVO, Rockford, IL.............................. 17 16 May 1, 2002
</TABLE>
Although the 1996 Act generally does not address the FCC's DTV transition
plan, it does direct the FCC to limit eligibility for DTV licenses to existing
television broadcast licensees (which it has done) and to adopt regulations to
permit licensees to offer ancillary or supplementary services on designated
frequencies. Such regulations, still to be adopted by the FCC, must preserve
DTV technology and quality and cover any ancillary or supplementary service
regulations applicable to analogous services (except that no ancillary or
supplemental service shall have "must-carry" rights). Moreover, if a DTV
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. The 1996 Act also 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.
A further new development centers on whether the award of new DTV channels
to all television broadcasters should be accompanied by certain newly-defined
public interest responsibilities. On March 11, 1997, President Clinton issued
an executive order establishing a special advisory panel to make
recommendations concerning specific public interest obligations that might be
imposed on television licensees in exchange for the awarding of digital
television licenses. Although the nature and extent of any such obligations is
obviously unsettled at the moment, the Clinton Administration has already
suggested that broadcasters might provide some free time to federal political
candidates as part of their enhanced public interests responsibilities in the
digital era. The FCC's recent decision to assign DTV channels to all incumbent
television station licensees notes that a further, separate proceeding will be
undertaken to explore these issues. In the meantime, the FCC put all
television broadcasters on notice that (a) existing public interest
requirements continue to apply to all broadcast licensees and (b) the agency
may adopt new or additional public interest responsibility rules for digital
television.
During the extended debate on these issues in Congress over the past two
years, some members proposed authorizing the FCC to auction DTV channels,
which would have required existing broadcasters to bid against other potential
users of the spectrum. The more recent focus, however, has been on proposals
to auction the analog channels once they have been returned by television
broadcasters, as well as on such matters as whether to impose any type of
spectrum fee on broadcasters for the use of the DTV channels and whether to
establish
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discrete guidelines for the eventual cessation of analog television service.
Such measures could be contained in budget legislation or a stand-alone
spectrum law. Even without such legislative actions, the Company will incur
significant costs in the conversion to DTV. The Company is unable to predict
the extent or timing of consumer demand for any DTV services or the overall
effect the transition to DTV 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 recently initiated an informal inquiry to review a host of
issues surrounding copyright licensing for the transmission of broadcast
signals, and in particular the cable and satellite carrier compulsory
licenses. However, without further legislation or new federal court rulings,
the issue of whether DBS companies may retransmit local TV station signals
within the TV stations' own market may remain in doubt.
The 1996 Act gives the FCC exclusive jurisdiction over high power DBS
service. The 1996 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.
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 channels of
digital programming.
United States Satellite Broadcasting Company owns and operates five
transponders on Hughes' first satellite and offers a programming service
separate from DIRECTV's service. EchoStar Satellite Corporation ("EchoStar")
controls 21 transponders at 119(degrees) W.L., which can service the entire
continental United States ("CONUS"), and has been providing DBS service since
March 1996. EchoStar also controls 11 transponders at 61.5(degrees) W.L.,
which can serve the eastern half of the U.S. In 1996, EchoStar paid to the
U.S. treasury $52.3 million for the right to operate a 24 transponder system
at 148(degrees) W.L., which can serve the western half of the U.S.
In 1996, MCI Telecommunications Corporation ("MCI") paid to the U.S.
treasury $682.5 million for the right to operate a 28-transponder DBS system
located at 110(degrees) W.L., which is capable of providing CONUS service.
Thereafter, MCI entered into a joint venture called ASkyB with News
Corporation Ltd. (an entity controlled by Rupert Murdoch) to provide DBS
service from MCI's satellite. In a separate proceeding, British
Telecommunications, plc, a United Kingdom company, has proposed to acquire
control of MCI. Regulatory approval of these transactions will be necessary,
but the outcome cannot be predicted.
In March 1997, TEMPO Satellite, Inc. launched a new satellite into
119(degrees) W.L. from which it will provide full-CONUS DBS service from 11
transponders. Other parties have authorizations to provide DBS service, but
have not yet launched their satellites. Certain parties also have applications
pending before the FCC in which they propose to provide DBS service to U.S.
consumers. In addition, entities such a PRIMESTAR Partners, L.P., and Alpha
Star, Inc. provide up to 150 channels of programming direct-to-home via medium
power fixed satellite services ("FSS"). Subscribers to FSS generally must use
36 inch satellite receive dishes. In June 1997, it was announced that Rupert
Murdoch's ASkyB satellite facilities (see above) would be turned over to
PRIMESTAR Partners in exchange for an estimated 30% nonvoting common stock
interest in PRIMESTAR Partners.
In 1996, the United States entered into a bilateral agreement with Mexico
which would allow, subject to certain conditions, the use of satellites
licensed in Mexico to provide DBS service to U.S. consumers. According to
press reports, Mexico is expected to begin licensing procedures for its DBS
satellites later this year. The Company is unable to predict the effect of
existing and future DBS services upon its operations.
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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 Satellite Home Viewer Act ("SHVA") currently prohibits the
retransmission by a satellite carrier of a television broadcast signal of a
network television station to households that receive an adequate quality
over-the-air-signal of a television broadcast station affiliated with such
network and to households that receive (or within the past 90 days had
received) through a cable system the signal of a television station affiliated
with such network. The major television networks and certain of their
affiliates have commenced legal action against certain satellite carriers
under the SHVA alleging unlawful carriage of distant network signals. The
Company cannot predict the impact of this litigation upon its operations.
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 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. See Note 5 to Notes to Consolidated Financial
Statements.
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 "The Company."
66
<PAGE>
EMPLOYEES
As of June 11, 1997, the Company employed approximately 1,298 persons. At
WTEN (Albany, New York), approximately 35 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 continues until August 31, 1999. At KWQC
(Quad Cities), approximately 35 employees are represented by IBEW Local 825
under a current contract which continues until January 1, 2000. At KCAL (Los
Angeles, California), approximately 26 employees are represented by the
American Federation of Television and Radio Artists 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 under a current union contract which
continues April 30, 1999; approximately 76 employees are represented by IBEW
Local 45 under the current union contract which continues until October 31,
1998; and approximately 6 employees are represented by the Directors Guild of
America under a contract which continues until April 30, 1999. 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 9,546
square feet of space in New York (the "Master Lease"). The Master Lease
expires in the year 2000 with respect to 7,600 square feet and in 2002 with
respect to 1,946 square feet. Approximately 7,846 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."
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.......................... 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
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN AREA OWNED OR
AND USE LEASED APPROXIMATE SIZE
------------------------------------------- -------------- -------------------
<S> <C> <C> <C>
Petersburg, VA
--------------
Transmission site Lease of space --
on tower
Chesterfield Co., VA (1)
------------------------
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
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
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN AREA OWNED OR
AND USE LEASED APPROXIMATE SIZE
----------------------------- -------- ----------------
<S> <C> <C> <C>
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.
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>
- --------
(1) Station owns tower structure and related building, with non-exclusive
easement for access to underlying property, which is owned by a third
party.
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.
69
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Vincent J. Young 49 Chairman and Director
Adam Young 83 Treasurer and Director
Ronald J. Kwasnick 50 President and Director
James A. Morgan 48 Executive Vice President and Secretary
Deborah A. McDermott 43 Executive Vice President-Operations
Bernard F. Curry 78 Director
Alfred J. Hickey, Jr. 61 Director
Leif Lomo 68 Director
Michael S. Willner 45 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
70
<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. 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. From January 1995 to June 1996, Mr. Lomo served as 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. Mr. Lomo is
currently a private investor.
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.
71
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table summarizes the compensation for services rendered to the
Company paid in 1994, 1995 and 1996 to the Chief Executive Officer and the
Company's other executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------- ------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
POSITION YEAR ($) ($) ($)(1) ($)(2) (#) ($)(3)
- ------------------ ---- ------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Vincent J. Young........ 1996 750,000 290,000 278,044 -- 202,740 4,500
Chairman (CEO) 1995 650,000 164,486 23,801 -- 266,250 4,500
1994 522,325 160,000 -- 1,011,750 -- 4,500
Adam Young.............. 1996 230,000 67,500 -- -- -- --
Treasurer 1995 200,000 35,000 -- -- -- --
1994 200,000 20,000 -- -- -- --
Ronald J. Kwasnick...... 1996 385,000 135,000 58,797 -- 16,242 4,500
President 1995 335,000 76,512 5,034 -- 32,000 4,500
1994 270,000 80,000 -- 356,750(4) -- 4,500
James A. Morgan......... 1996 322,500 106,000 54,971 -- 13,992 4,500
Executive Vice 1995 280,000 60,577 4,704 -- 157,125 4,500
President 1994 225,000 65,000 -- 268,441(5) -- 4,500
Deborah A. McDermott.... 1996 248,333 90,000 30,294 -- 13,992 4,500
Executive Vice
President-- Operations
</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 "Certain Transactions."
(2) 1994 data includes amounts relating to shares of Class B Common Stock
which were awarded pursuant to the Company's terminated Incentive Stock
Grant Program on November 14, 1994 with respect to 1994 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;
Ronald Kwasnick, $141,645; and James Morgan, $128,155. The foregoing
shares were registered by the Company in November 1995 pursuant to a Form
S-8 Registration Statement under the Securities Act of 1933.
(3) Reflects employer contributions to the Company's 401(k) Plan on behalf of
the named executive officers. For 1994, 1995 and 1996, such contributions
were made in the form of shares of Class A Common Stock valued at fair
market value on the date of issuance.
(4) Includes amounts relating to 65,320 shares of Class B Common Stock issued
in February 1994 pursuant to the terms of a former employment agreement.
(5) Includes amounts relating to 42,600 shares of Class B Common Stock issued
in March 1994 pursuant to the terms of an employment agreement dated as
March 1, 1993.
72
<PAGE>
The following table sets forth information concerning individual grants of
stock options made during 1996 to the named executive officers in the Summary
Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(3)
- ------------------------------------------------------------ ----------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO OF BASE
OPTION EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE(2) DATE 5%($) 10%($)
- ---- ---------- ------------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Vincent J.
Young.... 202,740 43.2% $30.75 11/20/2006 3,920,689 9,935,797
16,260 3.5 33.825(4) 11/20/2006 395,888 926,549
Adam
Young.... -- -- -- -- -- --
Ronald J.
Kwasnick. 32,500 6.9 30.75 11/20/2006 628,502 1,592,746
James A.
Morgan... 30,000 6.4 30.75 11/20/2006 580,155 1,470,227
Deborah A.
McDermott. 30,000 6.4 30.75 11/20/2006 580,155 1,470,227
</TABLE>
- --------
(1) Options may be exercised immediately with respect to 10% of the total
option shares indicated for each of the named executive officers. The
following fixed percentages of such option shares will become exercisable
on November 20, 1997 and on each of the three anniversaries of such date,
in cumulative fashion: 15%, 20%, 25% and 30%, respectively.
(2) The exercise price was established at the market price on the date of
grant, November 20, 1996.
(3) 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 $37.32 and
$47.12, respectively. For the period from November 7, 1994, the effective
date of the Company's initial public offering, through December 31, 1996,
the cumulative total return of the Company's Class A Common Stock has
increased 54%.
(4) 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.
The following table sets forth information at fiscal year-end 1996
concerning stock options held by the named executive officers in the Summary
Compensation Table. No options held by such individuals were exercised during
1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Vincent J. Young............ 155,025 330,225 1,244,689 1,254,688
Adam Young.................. -- -- -- --
Ronald J. Kwasnick.......... 19,250 45,250 152,000 152,000
James A. Morgan............. 148,125 39,000 1,378,688 114,000
Deborah A. McDermott........ 14,000 38,000 104,500 104,500
</TABLE>
73
<PAGE>
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.
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
$370,875 effective as of January 1, 1997. 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." 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 $9,500 in 1996, 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 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 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. For
1996, the Company also made non-matching contributions of shares of Class A
Common Stock equal to 3% of 1996 compensation, or $833,069 in the aggregate,
by issuing an aggregate of 28,481 of such shares based upon the closing price
for such shares as of December 31, 1996 of $29.25 per share. Effective January
1, 1997, the 401(k) Plan was amended to offer a match to employee
contributions equal to .5% for each 1% of compensation an employee
contributes, up to a maximum 3% Company contribution. Such contributions will
be made in the form of Class A Common Stock to be contributed by the Company
to the 401(k) after each calendar quarter with respect to such quarter based
upon the closing price as of the last day of such quarter. The 401(k) applies
a seven-year vesting schedule to all shares contributed based upon the number
of years employed by the Company. 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.
74
<PAGE>
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 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." The Plan is currently,
and has been since its adoption in February 1995, administered by a Stock
Option Committee of the Board of Directors consisting of two "disinterested"
directors, Michael Willner and Alfred Hickey. To qualify as a disinterested
director, a director may not be eligible for grants under the Plan, but may
receive options in respect of annual non-employee director retainer fees.
Incentive stock 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. In determining the eligibility of an individual for
grants under the Plan, as well as in determining the number of shares to be
optioned to any individual, the Stock Option Committee takes into account the
recommendations of the Company's Chairman, Vincent Young, the position and
responsibilities of the individual being considered, the nature and value to
the Company or its subsidiaries of his or her service or accomplishments, his
or her present or potential contribution to the success of the Company or its
subsidiaries, the number and terms of options and SARs already held by an
individual and such other factors as the Stock Option Committee may deem
relevant. In making recommendations to the Stock Option Committee, the
Chairman focuses upon individuals who would be motivated by a direct economic
stake in the equity of the Company. Such individuals are primarily in the
executive management group and in the individual station management groups,
and are evaluated by the Chairman at each grant date based upon the factors
discussed above.
Options may provide for their exercise into shares of any class of the
Company's Common Stock, Class A, Class B or Class C. Each such 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 in connection with certain
significant transactions. Holders of Class C Common Stock, none of which is
presently outstanding, would not be entitled to vote, except as required by
law. All classes of Common Stock entitled to vote on any matter vote together
as a single class, except as otherwise required by law. Shares of Class B
Common Stock may only be held, directly or indirectly, by members of
management and certain family members of management. Accordingly, options
exercisable for shares of Class B Common Stock may only be granted to
individuals within such group.
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 1,500,000. As of June 1, 1997,
options for an aggregate of 1,101,788 shares had been granted to various
individuals, including Vincent Young, Ronald Kwasnick, James Morgan and
Deborah McDermott. The Plan
75
<PAGE>
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.
76
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July 1, 1997
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 and (iii) 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.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK PERCENT OF
--------------------------- ----------------------------- VOTE AS A
BENEFICIAL OWNER NUMBER % NUMBER % SINGLE CLASS(1)
- ---------------- ------------ ------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Vincent J. Young....... 4,517(2)(3) * 1,144,613(4)(5)(6) 49.8 32.6
Adam Young............. -- -- 972,555(4)(7)(8) 48.4 30.1
Ronald J. Kwasnick..... 533(3) * 123,645(6)(9) 6.0 3.8
James A. Morgan........ 833(3)(10) * 214,795(6)(11) 9.9 6.3
Deborah A. McDermott... 1,333(3) * 39,555(6)(12) 1.9 1.2
Margaret Young......... -- * 363,250(8) 18.1 11.3
Putnam Investments, 1,493,024 12.3 -- -- 4.6
Inc...................
and Affiliates(13)
One Post Office Square
Boston, MA 02109
FMR Corp............... 622,400 5.1 -- -- 1.9
and Affiliates(14)
82 Devonshire Street
Boston, MA 02109
Franklin Resources, 610,000 5.0 -- -- 1.9
Inc...................
and Affiliates(15)
777 Mariners Island
Boulevard
San Mateo, CA 94403
Janus Capital Corpora- 1,266,600 10.4 -- -- 3.9
tion..................
and Affiliates(16)
100 Fillmore Street
Denver, CO 80206
Mellon Bank Corpora- 738,000 6.1 -- -- 2.3
tion..................
and Affiliates(17)
One Mellon Bank Center
Pittsburgh, PA 15258
Neuberger & Berman, 689,825 5.7 -- -- 2.1
LLC...................
and Affiliates(18)
605 Third Avenue
New York, NY 10158
Bernard F. Curry(19)... 4,400 * -- -- *
Alfred J. Hickey, 3,400 * -- -- *
Jr.(19)...............
Leif Lomo(19).......... 4,400 * -- -- *
Michael S. Willner(19). 13,400 * -- -- *
All directors and exec-
utive officers, as a
group ................ 32,816 * 2,427,713 96.4 65.0
</TABLE>
(footnotes begin on following page)
77
<PAGE>
- --------
* 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 533 shares held through the 401(k) Plan.
(4) Includes 67,450 shares 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 94,347 shares 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. Also includes 288,150 shares
issuable upon the exercise of options granted pursuant to the Young
Broadcasting Inc. 1995 Stock Option Plan (the "Plan"), 10,126 of which
are exercisable at $21.725 per share, 122,999 of which are exercisable at
$19.75 per share, 3,252 of which are exercisable at $33.825 per share and
18,648 of which are exercisable at $30.75 per share. See "1995 Stock
Option Plan." Also includes 13,417 shares held pursuant to an agreement
dated as of October 1, 1996 which established a voting trust for the
benefit of family members of management, for which Vincent Young acts as
trustee. During the term of the voting trust, which expires October 1,
2006, the trustee has the right to vote the shares subject to the trust.
(6) Does not include those shares issuable upon the exercise of options
granted pursuant to the Plan which are not exercisable within 60 days.
(7) Includes 63,250 shares held by his wife.
(8) Includes 300,000 shares held by Spray-V Limited Partnership for which
Margaret Young, the wife of Adam Young, serves as President of its
general partner and has the authority to vote such shares. The share
information for Ms. Young does not include shares held by Adam Young for
which Ms. Young disclaims beneficial ownership.
(9) Includes 35,250 shares issuable upon the exercise of options granted
pursuant to the Plan, 32,000 of which are exercisable at $19.75 per share
and 3,250 of which are exercisable at $30.75 per share. See "1995 Stock
Option Plan."
(10) Includes 300 shares held by a family trust.
(11) Includes 160,125 shares issuable upon the exercise of options granted
pursuant to the Plan, 157,125 of which are exercisable at $19.75 per
share and 3,000 of which are exercisable at $30.75 per share. See "1995
Stock Option Plan."
(12) Includes 25,000 shares issuable upon the exercise of options granted
pursuant to the Plan, 22,000 of which are exercisable at $19.75 per share
and 3,000 of which are exercisable at $30.75 per share. See "1995 Stock
Option Plan."
(13) Represents shares beneficially owned by Putnam Investment Management,
Inc. ("PIM") (1,303,472) and The Putnam Advisory Company, Inc. (189,552),
wholly-owned subsidiaries of Putnam Investments, Inc. ("PI"), a wholly-
owned subsidiary of Marsh & McLennan Companies, Inc. ("MM"), which shares
of PIM include 799,800 shares beneficially owned by Putnam New
Opportunities Fund which is part of the Putnam Family of Funds, as
reported in a Schedule 13G filed in February 1997. PI and MM disclaim
beneficial ownership of such shares pursuant to Rule 13d-4 under the
Securities Exchange Act of 1934, as amended ("Exchange Act").
(14) Represents shares beneficially owned by Fidelity Management & Research
Company (517,700) and Fidelity Management Trust Company (104,700),
subsidiaries of FMR Corp., as reported in a Schedule 13G filed in
February 1997. Such report also includes individual reporting persons who
control FMR Corp.
(15) Represents shares beneficially owned by Franklin Mutual Advisers, Inc., a
subsidiary of Franklin Resources, Inc. ("Franklin"), as reported in a
Schedule 13G filed in February 1997. Such report also includes individual
reporting persons who control Franklin. All of such reporting persons
disclaim beneficial ownership of such shares pursuant to Rule 13d-4 under
the Exchange Act.
(16) Represents shares beneficially owned by Janus Capital Corporation ("Janus
Capital"), including 1,045,150 shares beneficially owned by Janus Fund,
as reported in a Schedule 13G filed in February 1997. Such report also
includes an individual reporting person who controls Janus Capital. Janus
Capital and such individual disclaim beneficial ownership of such shares
pursuant to Rule 13d-4 under the Exchange Act.
(17) Represents shares beneficially owned by Mellon Bank Corporation and
certain of its direct and indirect subsidiaries acting in various
fiduciary capacities, as reported in a Schedule 13G filed in February
1997.
(18) Represents shares beneficially owned by Neuberger & Berman, LLC and
Neuberger & Berman Management Inc., as reported in a Schedule 13G filed
in February 1997.
(19) Includes 1,000 shares issuable upon the exercise of stock options
exercisable at $20.70 per share, and 2,400 shares issuable upon the
exercise of options granted pursuant to the Plan, 1,200 of which are
exercisable at $28.00 per share and 1,200 of which are exercisable at
$34.00 per share.
78
<PAGE>
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 twelve television
stations other than KWQC-TV (Davenport, Iowa). AYI received commissions of
approximately $4.3 million in the aggregate from the Company's stations in
1996. In addition, at December 31, 1996, the Company's stations had accrued
commissions payable to AYI of approximately $718,000. AYI procured
approximately $57.3 million of total advertising time for the Company's
stations in 1996. 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 by AYI of approximately 9,500 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 presently provides for a monthly rental of
$51,451 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 $554,000 in
rental and other payments from AYI in 1996 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.
Concurrently with the closing of the October 1996 Offering, the Company
repurchased from an affiliate of The Walt Disney Company ("Disney") 1,500,000
shares of the Company's Class C Common Stock and a warrant to purchase an
additional 750,000 shares of such Common Stock. The Company repurchased such
shares 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
repurchased the 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
warrants ($22.80), plus $2, less one-half of the underwriting discount per
share). In 1996, the Company's stations received aggregate annual compensation
of approximately $7.3 million from American Broadcasting Companies, Inc., a
subsidiary of Disney.
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 Company's terminated Incentive Stock Grant Program (the "Program") and
in March 1994 as part of compensation under employment arrangements. The
aggregate outstanding principal amount of such loans at March 31, 1997 was
$1,423,000, including $789,000 to Vincent Young, Chairman and a director of
the Company; $166,000 to Ronald J. Kwasnick, President and a director of the
Company; $157,000 to James A Morgan, Executive Vice President of the Company;
and $86,000 to Deborah McDermott, Executive Vice President-Operations 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 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 was forgiven as
of the end of each full month of employment in good standing during the
twelve-month period ended November 15, 1996. 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.
79
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Series A Notes are, and the Series B Notes will be, issued under an
Indenture (the "Indenture"), dated as of June 15, 1997, by and among the
Company, the Subsidiary Guarantors and First Union National Bank, as trustee
(the "Trustee"). The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act
of 1939 (the "Trust Indenture Act"), as in effect on the date of the
Indenture. The Notes are subject to all such terms, and holders of Notes are
referred to the Indenture and the Trust Indenture Act for a statement of those
terms.
The following is a summary of the material provisions of the Notes and the
Indenture. This summary does not purport to be complete and is subject to the
detailed provisions of, and is qualified in its entirety by reference to, the
Notes and the Indenture. A copy of the proposed form of Indenture may be
obtained from the Company or the Initial Purchaser. The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions." Reference is made to the Indenture for the full definition of
all such terms, as well as any other capitalized terms used herein for which
no definition is provided.
MATURITY AND INTEREST
The Notes are general unsecured obligations of the Company limited in
aggregate principal amount to $200,000,000 and will mature on June 15, 2007.
Interest on the Notes will accrue at the rate of 8 3/4% per annum and will be
payable semi-annually in arrears on June 15 and December 15 in each year,
commencing on December 15, 1997, to holders of record on the immediately
preceding June 1 and December 1, respectively. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of the original issuance of the Notes
(the "Issue Date"). Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable at
the office or agency of the Company maintained for such purpose within the
City of New York or, at the option of the Company, payment of interest may be
made by check mailed to the holders of the Notes at their respective addresses
as set forth in the register of holders of Notes. Until otherwise designated
by the Company, the Company's office or agency in the City of New York will be
the office of the Trustee maintained for such purpose. The Notes will be
issued in fully registered form, without coupons, and in denominations of
$1,000 and integral multiples thereof.
RANKING AND SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated in right of payment, to the extent and in the manner provided
in the Indenture, to the prior payment in full of all Senior Debt of the
Company, whether outstanding on the Issue Date or incurred thereafter. As of
March 31, 1997, after giving pro forma effect to the Series A Notes Offering,
the Company would have had approximately $93.8 million of Senior Debt, with
the ability, subject to certain limitations, to incur approximately $200.0
million of additional Senior Debt pursuant to the Credit Agreement. The
Indenture will, subject to certain financial tests, permit the Company and its
Restricted Subsidiaries to incur additional Indebtedness, including Senior
Debt. See "--Covenants--Limitation on Incurrence of Indebtedness and Issuance
of Disqualified Stock."
Upon any payment or distribution of cash, securities or other property of
the Company to creditors upon any liquidation, dissolution or winding up of
the Company, or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property or securities, the
holders of any Senior Debt of the Company will be entitled to receive payment
in full, in cash or Cash Equivalents, of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the agreements governing such Senior Debt)
before the holders of the Notes will be entitled to receive any payment or
distribution with respect to the Notes.
80
<PAGE>
The Company also may not make any payment upon or in respect of the Notes if
(i) a default in the payment of the principal of, premium, if any, or interest
on, any Designated Senior Debt occurs and is continuing, whether at maturity
or at a date fixed for prepayment or by declaration of acceleration or
otherwise, or (ii) the Trustee has received written notice (a "Payment
Blockage Notice") from the representative of any holders of Designated Senior
Debt that a nonpayment default has occurred and is continuing with respect to
such Designated Senior Debt that permits such holders to accelerate the
maturity of such Designated Senior Debt. Payments on the Notes shall resume
(and all past due amounts on the Notes, with interest thereon as specified in
the Indenture, shall be paid) (i) in the case of a payment default in respect
of any Designated Senior Debt, on the date on which such default is cured or
waived, and (ii) in the case of a nonpayment default in respect of any
Designated Senior Debt, on the earlier of (a) the date on which such
nonpayment default is cured or waived, or (b) 179 days after the date on which
the Payment Blockage Notice with respect to such default was received by the
Trustee, in each case, unless the maturity of any Designated Senior Debt has
been accelerated and the Company has defaulted with respect to the payment of
such Designated Senior Debt. During any consecutive 365-day period, the
aggregate number of days in which payments due on the Notes may not be made as
a result of nonpayment defaults on Designated Senior Debt (a "Payment Blockage
Period") shall not exceed 179 days, and there shall be a period of at least
186 consecutive days in each consecutive 365-day period when such payments are
not prohibited. No event or circumstance that creates a default under any
Designated Senior Debt that (i) gives rise to the commencement of a Payment
Blockage Period or (ii) exists at the commencement of or during any Payment
Blockage Period shall be made the basis for the commencement of any subsequent
Payment Blockage Period unless such default has been cured or waived for a
period of not less than 90 consecutive days following the commencement of the
initial Payment Blockage Period.
As a result of the subordination provisions described above, in the event of
liquidation or insolvency, holders of Notes may recover less ratably than
creditors holding Senior Debt of the Company. In such circumstances, funds
which would otherwise be payable to the holders of the Notes will be paid to
the holders of the Senior Debt to the extent necessary to pay the Senior Debt
in full in cash or Cash Equivalents, and the Company may be unable to meet its
obligations fully with respect to the Notes.
The subordination provisions described above will cease to be applicable to
the Notes upon any defeasance or covenant defeasance of the Notes. See "--
Defeasance."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed by the Subsidiary Guarantors. The obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee will be unconditional and
absolute, irrespective of any invalidity, illegality, unenforceability of any
Note or the Indenture or any extension, compromise, waiver or release in
respect of any obligation of the Company or any other Subsidiary Guarantor
under any Note or the Indenture, or any modification or amendment of or
supplement to the Indenture.
The obligations of any Subsidiary Guarantor under its Subsidiary Guarantee
will be subordinated, to the same extent as the obligations of the Company in
respect of the Notes, to the prior payment in full in cash or Cash Equivalents
of all Senior Debt of such Subsidiary Guarantor, which will include any
guarantee issued by such Subsidiary Guarantor of any Senior Debt, including
Indebtedness represented by guarantees under the Credit Agreement. The
obligations of each Subsidiary Guarantor under its Subsidiary Guarantee will
be limited to the extent necessary to provide that such Subsidiary Guarantee
does not constitute a fraudulent conveyance under applicable law. Each
Subsidiary Guarantor that makes a payment or distribution under its Subsidiary
Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor so long as the exercise of such right does not impair the rights of
holders of Notes under any Subsidiary Guarantee. See "Risk Factors--Fraudulent
Conveyance." A Subsidiary Guarantor shall be released and discharged from its
obligations under its Subsidiary Guarantee under certain limited
circumstances. See "--Covenants--Limitation on Guarantees of Company
Indebtedness by Restricted Subsidiaries" and "--Merger, Consolidation and Sale
of Assets."
81
<PAGE>
REDEMPTION
Mandatory Redemption. The Notes are not subject to any mandatory sinking
fund redemption prior to maturity.
Optional Redemption. Except as set forth below, the Notes are not redeemable
at the Company's option prior to June 15, 2002. Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part, at
the redemption prices (expressed as percentages of the principal amount of the
Notes) set forth below, plus accrued and unpaid interest to the date of
redemption, if redeemed during the twelve-month period beginning on June 15 of
the years indicated below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.......................... 104.375%
2003.......................... 102.917%
2004.......................... 101.458%
2005 and thereafter........... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to June 15, 2000, the
Company, at its option, may redeem the Notes, in part, with the net proceeds
of one or more Public Equity Offerings, at a redemption price equal to 108
3/4% of the principal amount thereof, together with accrued and unpaid
interest to the date of redemption; provided, however, that after any such
redemption the aggregate principal amount of the Notes outstanding must equal
at least 66.7% of the aggregate principal amount of the Notes originally
issued in this Offering.
Selection and Notice. If less than all of the Notes are to be redeemed at
any time, selection of the Notes to be redeemed will be made by the Company in
compliance with the requirements of the principal national securities
exchange, if any, on which the Notes are listed or, if the Notes are not
listed on a securities exchange, on a pro rata basis, by lot or by any other
method as the Trustee shall deem fair and appropriate; provided that Notes
redeemed in part shall only be redeemed in integral multiples of $1,000.
Notices of any optional or mandatory redemption shall be mailed by first class
mail at least 30 but not more than 60 days before the redemption date to each
holder of Notes to be redeemed at such holder's registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed, and the Trustee shall authenticate and mail to the holder of the
original Note a new Note in principal amount equal to the unredeemed portion
of the original Note promptly after the original Note has been canceled. On
and after the redemption date, interest will cease to accrue on Notes or
portions thereof called for redemption.
CHANGE OF CONTROL
In the event of a Change of Control (as defined herein), each holder of
Notes will have the right, subject to the terms and conditions of the
Indenture, to require the Company to offer to repurchase all or any portion
(equal to $1,000 or an integral multiple thereof) of such holder's Notes at a
purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest to the date of repurchase, in
accordance with the terms set forth below (a "Change of Control Offer").
The Credit Agreement prohibits the Company from repurchasing any Notes
pursuant to a Change of Control Offer prior to repayment in full of the Senior
Bank Debt under the Credit Agreement. As of March 31, 1997, after giving pro
forma effect to the Series A Notes Offering, the Company would have had
approximately $93.8 million of Senior Debt, with the ability, subject to
certain limitations, to incur approximately $200.0 million of additional
Senior Debt pursuant to the Credit Agreement. Accordingly, if a Change of
Control were to occur, there can be no assurance that the Company will have
sufficient assets to satisfy its obligations under the Credit Agreement or,
thereafter, to purchase any of the Notes. Any additional credit agreements or
other agreements relating to Senior Debt to which the Company becomes a party
may contain similar restrictions and provisions. Moreover, the Credit
Agreement contains a "change of control" provision that is similar to the
provision in the
82
<PAGE>
Indenture relating to a Change of Control, and the occurrence of such a
"change of control" would constitute a default under the Credit Agreement.
In the event that a Change of Control occurs at a time when the Company is
prohibited from repurchasing the Notes by the Credit Agreement or any other
agreement governing Senior Debt of the Company, the Company shall seek either
to repay such Senior Debt or to obtain the requisite consents of the holders
of such Senior Debt to commence a Change of Control Offer to repurchase the
Notes in accordance with the terms of the Indenture. If the Company is unable
to obtain such consents and/or repay all such Senior Debt, the Company would
remain prohibited from repurchasing any Notes and, as a result, the Company
could not commence a Change of Control Offer to repurchase the Notes within 30
days of the occurrence of the Change of Control, which would constitute an
Event of Default under the Indenture. The Company's failure to commence such a
Change of Control Offer would also constitute an event of default under the
Credit Agreement which would permit the lenders thereunder to accelerate all
of the Company's Senior Bank Debt under the Credit Agreement. If a Change of
Control were to occur, there can be no assurance that the Company would have
sufficient assets to first satisfy its obligations under the Credit Agreement
or other agreements relating to Senior Debt, if accelerated, and then to
repurchase all of the Notes that might be delivered by holders seeking to
accept a Change of Control Offer. See "Risk Factors--Risk of Inability to
Finance Change of Control Offer."
Within 30 days following the occurrence of any Change of Control, the
Company shall mail to each holder of Notes at such holder's registered address
a notice stating: (i) that a Change of Control has occurred and that such
holder has the right to require the Company to repurchase all or a portion
(equal to $1,000 or an integral multiple thereof) of such holder's Notes at a
purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest to the date of purchase (the "Change
of Control Purchase Date"), which shall be a business day, specified in such
notice, that is not earlier than 30 days or later than 60 days from the date
such notice is mailed, (ii) the amount of accrued and unpaid interest as of
the Change of Control Purchase Date, (iii) that any Note not tendered will
continue to accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to the Change of
Control Offer, any Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control
Purchase Date, (v) the procedures, consistent with the Indenture, to be
followed by a holder of Notes in order to accept a Change of Control Offer or
to withdraw such acceptance, and (vi) such other information as may be
required by the Indenture and applicable laws and regulations.
On the Change of Control Purchase Date, the Company will (i) accept for
payment all Notes or portions thereof tendered pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent the aggregate purchase price
of all Notes or portions thereof accepted for payment and any accrued and
unpaid interest on such Notes as of the Change of Control Purchase Date, and
(iii) deliver or cause to be delivered to the Trustee all Notes tendered
pursuant to the Change of Control Offer. If less than all Notes tendered
pursuant to the Change of Control Offer are accepted for payment by the
Company for any reason consistent with the Indenture, selection of the Notes
to be purchased by the Company shall be in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate, provided that
Notes accepted for payment in part shall only be purchased in integral
multiples of $1,000. The Paying Agent shall promptly mail to each holder of
Notes or portions thereof accepted for payment an amount equal to the purchase
price for such Notes plus any accrued and unpaid interest thereon, and the
Trustee shall promptly authenticate and mail to such holder of Notes accepted
for payment in part a new Note equal in principal amount to any unpurchased
portion of the Notes, and any Note not accepted for payment in whole or in
part shall be promptly returned to the holder of such Note. On and after a
Change of Control Purchase Date, interest will cease to accrue on the Notes or
portions thereof accepted for payment, unless the Company defaults in the
payment of the purchase price therefor. The Company will announce the results
of the Change of Control Offer to holders of the Notes on or as soon as
practicable after the Change of Control Purchase Date.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Change of
Control Offer.
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COVENANTS
Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock. The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, create, incur, assume or
directly or indirectly guarantee or in any other manner become directly or
indirectly liable for ("incur") any Indebtedness (including Acquired Debt) or
issue any Disqualified Stock if, at the time of and immediately after giving
pro forma effect to such incurrence of Indebtedness or issuance of
Disqualified Stock, the Debt to Operating Cash Flow Ratio of the Company and
its Restricted Subsidiaries is more than 7.0:1 provided that any Indebtedness
that is not Senior Debt that is permitted to be incurred hereunder by the
Company or any Restricted Subsidiary shall, at the time of incurrence, have a
Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of the Notes.
The foregoing limitations will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"):
(i) Senior Bank Debt arising under the Credit Agreement;
(ii) Indebtedness of any Restricted Subsidiary consisting of a guarantee
of the Company's Senior Bank Debt under the Credit Agreement;
(iii) Indebtedness of the Company represented by the Notes and
Indebtedness of any Subsidiary Guarantor represented by a Subsidiary
Guarantee;
(iv) Indebtedness of the Company represented by the Exchange Notes;
(v) Indebtedness owed by any Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, or owed by the
Company to any Wholly Owned Restricted Subsidiary; provided that any such
Indebtedness shall be at all times held by a Person which is either the
Company or a Wholly Owned Restricted Subsidiary of the Company; and
provided, further that upon either (a) the transfer or other disposition of
any such Indebtedness to a Person other than the Company or another Wholly
Owned Restricted Subsidiary or (b) the sale, lease, transfer or other
disposition of shares of Capital Stock (including by consolidation or
merger) of any such Wholly Owned Restricted Subsidiary to a Person other
than the Company or another Wholly Owned Restricted Subsidiary, the
incurrence of such Indebtedness shall be deemed to be an incurrence that is
not permitted by this clause (v);
(vi) guarantees of any Restricted Subsidiary that are made in accordance
with the provisions of the covenant described under "--Covenants--
Limitation on Guarantees of Company Indebtedness by Restricted
Subsidiaries";
(vii) Indebtedness arising with respect to Interest Rate Agreement
Obligations incurred for the purpose of fixing or hedging interest rate
risk with respect to any floating rate Indebtedness that is permitted by
the terms of the Indenture to be outstanding;
(viii) Purchase Money Indebtedness and Capital Lease Obligations which do
not exceed, as determined in accordance with GAAP, $10,000,000 in the
aggregate at any one time outstanding;
(ix) any Indebtedness incurred in connection with or given in exchange
for the renewal, extension, substitution, refunding, defeasance,
refinancing or replacement of any Indebtedness described in clauses (i),
(ii), (iii) and (iv) above ("Refinancing Indebtedness"); provided that (a)
the principal amount of such Refinancing Indebtedness shall not exceed the
principal amount of the Indebtedness so renewed, extended, substituted,
refunded, defeased, refinanced or replaced (plus the premiums paid in
connection therewith (which shall not exceed the stated amount of any
premium or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Indebtedness being renewed,
extended, substituted, refunded, defeased, refinanced or replaced) and the
expenses incurred in connection therewith); (b) with respect to Refinancing
Indebtedness of any Indebtedness other than Senior Debt, the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being renewed, extended, substituted, refunded, defeased, refinanced or
replaced; and (c) with respect to Refinancing Indebtedness of Indebtedness
other than Senior Debt
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incurred by (1) the Company, such Refinancing Indebtedness shall rank no
more senior, and shall be at least as subordinated, in right of payment to
the Notes as the Indebtedness being renewed, extended, substituted,
refunded, defeased, refinanced or replaced, and (2) a Subsidiary Guarantor,
such Refinancing Indebtedness shall rank no more senior, and shall be at
least as subordinated, in right of payment to the Subsidiary Guarantee as
the Indebtedness being renewed, extended, substituted, refunded, defeased,
refinanced or replaced; and
(x) Indebtedness of the Company in addition to that described in clauses
(i) through (ix) above, and any renewals, extensions, substitutions,
refinancings or replacements of such Indebtedness, so long as the aggregate
principal amount of all such Indebtedness incurred pursuant to this clause
(x) does not exceed $15,000,000 at any one time outstanding.
Limitation on Restricted Payments. The Indenture will provide that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, make any Restricted Payment, unless at the time of and
immediately after giving effect to the proposed Restricted Payment (with the
value of any such Restricted Payment, if other than cash, to be determined by
the Board of Directors of the Company, whose determination shall be conclusive
and evidenced by a board resolution), (i) no Default or Event of Default (and
no event that, after notice or lapse of time, or both, would become an "event
of default" under the terms of any indebtedness of the Company or its
Restricted Subsidiaries) shall have occurred and be continuing or would occur
as a consequence thereof, (ii) the Company could incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph under "--Covenants--
Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock"
and (iii) the aggregate amount of all Restricted Payments made after September
30, 1994 shall not exceed the sum of (a) an amount equal to the Company's
Cumulative Operating Cash Flow less 1.4 times the Company's Cumulative
Consolidated Interest Expense, plus (b) the aggregate amount of all net cash
proceeds received after September 30, 1994 by the Company (but excluding the
net cash proceeds received by the Company from its initial public offering of
Class A Common Stock on November 14, 1994) from the issuance and sale (other
than to a Restricted Subsidiary) of Capital Stock (other than Disqualified
Stock) to the extent that such proceeds are not used to redeem, repurchase,
retire or otherwise acquire Capital Stock or any Indebtedness of the Company
or any Restricted Subsidiary pursuant to clause (ii) of the next paragraph.
The foregoing provisions will not prohibit, so long as there is no Default
or Event of Default continuing, the following actions (collectively,
"Permitted Payments"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such payment would have
been permitted under the Indenture, and such payment shall be deemed to
have been paid on such date of declaration for purposes of clause (iii) of
the preceding paragraph;
(ii) the redemption, repurchase, retirement or other acquisition of any
Capital Stock or any Indebtedness of the Company in exchange for, or out of
the proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary) of Capital Stock of the Company (other than any
Disqualified Stock); and
(iii) the payment to Nationwide Communications Inc. of the deferred
portion of the purchase price for the three television stations that are
subject of the Acquisition Agreement.
Limitation on Asset Sales. The Indenture will provide that the Company will
not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
fair market value (as evidenced by a resolution of the Board of Directors set
forth in an Officers Certificate delivered to the Trustee) of the assets or
other property sold or disposed of in the Asset Sale, and (ii) at least 75% of
such consideration is in the form of cash or Cash Equivalents; provided that
for purposes of this covenant "cash" shall include the amount of any
liabilities (other than liabilities that are by their terms subordinated to
the Notes or any Subsidiary Guarantee) of the Company or such Restricted
Subsidiary (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto) that are assumed by the
transferee of any such assets or other property in such Asset Sale (and
excluding any liabilities that are incurred in connection with or in
anticipation
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of such Asset Sale), but only to the extent that such assumption is effected
on a basis under which there is no further recourse to the Company or any of
its Restricted Subsidiaries with respect to such liabilities.
Within 360 days after any Asset Sale, the Company may elect to apply the Net
Proceeds from such Asset Sale to (a) permanently reduce any Senior Debt of the
Company, and/or (b) make an investment in, or acquire assets directly related
to, the television broadcasting business. Pending the final application of any
such Net Proceeds, the Company may temporarily reduce Senior Bank Debt of the
Company or temporarily invest such Net Proceeds in any manner permitted by the
Indenture. Any Net Proceeds from an Asset Sale not applied or invested as
provided in the first sentence of this paragraph within 360 days of such Asset
Sale will be deemed to constitute "Excess Proceeds."
As soon as practical, but in no event later than 10 business days after any
date (an "Asset Sale Offer Trigger Date") that the aggregate amount of Excess
Proceeds exceeds $5,000,000, the Company shall, if and to the extent permitted
by the agreements governing any Senior Debt of the Company and the Existing
Notes Indenture as in effect on the original issue date of the Notes, commence
an offer to purchase the maximum principal amount of Notes and other
Indebtedness of the Company that ranks pari passu in right of payment with the
Notes (to the extent required by the instrument governing such other
Indebtedness) that may be purchased out of the Excess Proceeds (an "Asset Sale
Offer"); provided that prior to making any such Asset Sale Offer the Company
may, to the extent required pursuant to the Existing Notes Indentures as in
effect on the original issue date of the Notes, use all or a portion of such
Excess Proceeds to redeem Existing Notes. Any Notes and other Indebtedness to
be purchased pursuant to an Asset Sale Offer shall be purchased pro rata based
on the aggregate principal amount of Notes and such other Indebtedness
outstanding and all Notes shall be purchased at an offer price in cash in an
amount equal to 100% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase. To the extent that any Excess Proceeds
remain after completion of an Asset Sale Offer, the Company may use the
remaining amount for general corporate purposes. In the event that the Company
is prohibited under the terms of any agreement governing outstanding Senior
Debt of the Company from repurchasing Notes with Excess Proceeds pursuant to
an Asset Sale Offer as set forth in the first sentence of this paragraph, the
Company shall promptly use all Excess Proceeds to permanently reduce such
outstanding Senior Debt of the Company.
Within 30 days following any Asset Sale Offer Trigger Date, the Company
shall mail to each holder of Notes at such holder's registered address a
notice stating: (i) that an Asset Sale Offer Trigger Date has occurred and
that the Company is offering to purchase the maximum principal amount of Notes
that may be purchased out of the Excess Proceeds (to the extent provided in
the immediately preceding paragraph), at an offer price in cash in an amount
equal to 100% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase (the "Asset Sale Offer Purchase Date"), which
shall be a business day, specified in such notice, that is not earlier than 30
days or later than 60 days from the date such notice is mailed, (ii) the
amount of accrued and unpaid interest as of the Asset Sale Offer Purchase
Date, (iii) that any Note not tendered will continue to accrue interest, (iv)
that, unless the Company defaults in the payment of the purchase price for the
Notes payable pursuant to the Asset Sale Offer, any Notes accepted for payment
pursuant to the Asset Sale Offer shall cease to accrue interest after the
Asset Sale Offer Purchase Date, (v) the procedures, consistent with the
Indenture, to be followed by a holder of Notes in order to accept an Asset
Sale Offer or to withdraw such acceptance, and (vi) such other information as
may be required by the Indenture and applicable laws and regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment the maximum principal amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds
from such Asset Sale (to the extent provided in the second preceding
paragraph), (ii) deposit with the Paying Agent the aggregate purchase price of
all Notes or portions thereof accepted for payment and any accrued and unpaid
interest on such Notes as of the Asset Sale Offer Purchase Date, and (iii)
deliver or cause to be delivered to the Trustee all Notes tendered pursuant to
the Asset Sale Offer. If less than all Notes tendered pursuant to the Asset
Sale Offer are accepted for payment by the Company for any reason consistent
with the Indenture, selection of the Notes to be purchased by the Company
shall be in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes
are not so listed, on a pro rata basis, by lot or by such
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method as the Trustee shall deem fair and appropriate; provided that Notes
accepted for payment in part shall only be purchased in integral multiples of
$1,000. The Paying Agent shall promptly mail to each holder of Notes or
portions thereof accepted for payment an amount equal to the purchase price
for such Notes plus any accrued and unpaid interest thereon, and the Trustee
shall promptly authenticate and mail to such holder of Notes accepted for
payment in part a new Note equal in principal amount to any unpurchased
portion of the Notes, and any Note not accepted for payment in whole or in
part shall be promptly returned to the holder of such Note. On and after an
Asset Sale Offer Purchase Date, interest will cease to accrue on the Notes or
portions thereof accepted for payment, unless the Company defaults in the
payment of the purchase price therefor. The Company will announce the results
of the Asset Sale Offer to holders of the Notes on or as soon as practicable
after the Asset Sale Offer Purchase Date.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Asset Sale
Offer.
Limitation on Liens. The Indenture will provide that the Company will not,
and will not permit any Subsidiary Guarantor to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than Permitted Liens)
on any asset now owned or hereafter acquired, or any income or profits
therefrom or assign or convey any right to receive income therefrom to secure
any Indebtedness; provided that in addition to creating Permitted Liens on its
properties or assets, (i) the Company may create any Lien upon any of its
properties or assets (including, but not limited to, any Capital Stock of its
Subsidiaries) if the Notes are equally and ratably secured thereby, and (ii) a
Subsidiary Guarantor may create any Lien upon any of its properties or assets
(including, but not limited to, any Capital Stock of its Subsidiaries) if its
Subsidiary Guarantee is equally and ratably secured thereby; provided,
however, that if (a) the Company creates any Lien on its assets to secure any
Subordinated Indebtedness of the Company, the Lien securing such Subordinated
Indebtedness shall be subordinated and junior to the Lien securing the Notes
with the same or lesser priorities as the Subordinated Indebtedness shall have
with respect to the Notes, and (b) a Subsidiary Guarantor creates any Lien on
its assets to secure any Subordinated Indebtedness of such Subsidiary
Guarantor, the Lien securing such Subordinated Indebtedness shall be
subordinated and junior to the Lien securing the Subsidiary Guarantee of such
Subsidiary Guarantor with the same or lesser priorities as the Subordinated
Indebtedness shall have with respect to the Subordinated Guarantee.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture will provide that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)
pay dividends or make any other distributions to the Company or any other
Restricted Subsidiary on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (ii) make
loans or advances to the Company or any other Restricted Subsidiary, or (iii)
transfer any of its properties or assets to the Company or any other
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reason of (a) the Credit Agreement as in effect on the Issue Date,
and any amendments, restatements, renewals, replacements or refinancings
thereof; provided that such amendments, restatements, renewals, replacement or
refinancings are no more restrictive in the aggregate with respect to such
dividend and other payment restrictions than those contained in the Credit
Agreement (or, if more restrictive, than those contained in the Indenture)
immediately prior to any such amendment, restatement, renewal, replacement or
refinancing, (b) applicable law, (c) any instrument governing Indebtedness or
Capital Stock of an Acquired Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except
to the extent such Indebtedness was incurred in connection with such
acquisition); provided that (1) such restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Acquired
Person, and (2) the consolidated net income of an Acquired Person for any
period prior to such acquisition shall not be taken into account in
determining whether such acquisition was permitted by the terms of the
Indenture, (d) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business
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and consistent with past practices, (e) Purchase Money Indebtedness for
property acquired in the ordinary course of business that only impose
restrictions on the property so acquired, (f) an agreement for the sale or
disposition of the Capital Stock or assets of such Restricted Subsidiary;
provided that such restriction is only applicable to such Restricted
Subsidiary or assets, as applicable, and such sale or disposition otherwise is
permitted under the covenant described under "--Covenants--Limitation on Asset
Sales;" and provided, further, that such restriction or encumbrance shall be
effective only for a period from the execution and delivery of such agreement
through a termination date not later than 270 days after such execution and
delivery, (g) Refinancing Indebtedness permitted under the Indenture; provided
that the restrictions contained in the agreements governing such Refinancing
Indebtedness are no more restrictive in the aggregate than those contained in
the agreements governing the Indebtedness being refinanced immediately prior
to such refinancing, (h) the Acquisition Agreement or (i) the Indenture.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property
or services) with any Affiliate of the Company (other than the Company or a
Wholly Owned Restricted Subsidiary) unless (i) such transaction or series of
transactions is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction in arm's-length dealings with an unrelated third party,
and (ii) (a) with respect to any transaction or series of transactions
involving aggregate payments in excess of $1,000,000, the Company delivers an
Officers Certificate to the Trustee certifying that such transaction or series
of related transactions complies with clause (i) above and such transaction or
series of related transactions has been approved by a majority of the members
of the Board of Directors of the Company (and approved by a majority of the
Independent Directors or, in the event there is only one Independent Director,
by such Independent Director), and (b) with respect to any transaction or
series of transactions involving aggregate payments in excess of $5,000,000,
an opinion as to the fairness to the Company or such Restricted Subsidiary
from a financial point of view issued by an investment banking firm of
national standing. Notwithstanding the foregoing, this provision will not
apply to (i) employment agreements or compensation or employee benefit
arrangements with any officer, director or employee of the Company entered
into in the ordinary course of business (including customary benefits
thereunder), (ii) any transaction entered into by or among the Company or one
of its Wholly Owned Restricted Subsidiaries with one or more Wholly Owned
Restricted Subsidiaries of the Company, and (iii) the national advertising
representation agreements between the Company (or any of its Restricted
Subsidiaries) and Adam Young, Inc. existing on the date of the Indenture (and
any renewals, extensions or replacements thereof, and any future such
agreements with respect to television stations acquired by the Company or its
Restricted Subsidiaries after the date of the Indenture, so long as such
renewals, extensions, replacements or future agreements are on terms
substantially similar to those of such existing agreements) and other
transactions in existence on the date of the Indenture and described or
referred to in "Certain Transactions."
Limitation on Incurrence of Senior Subordinated Indebtedness. The Indenture
will provide that (i) the Company will not, directly or indirectly, incur,
create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinated or junior in right of payment to any Senior
Debt of the Company and senior in any respect in right of payment to the
Notes, and (ii) the Company will not, directly or indirectly, permit any
Subsidiary Guarantor to incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinated or junior in right of
payment to its Senior Debt and senior in any respect in right of payment to
its Subsidiary Guarantee.
Limitation on Guarantees of Company Indebtedness by Restricted
Subsidiaries. The Indenture will provide that in the event that any Restricted
Subsidiary, directly or indirectly, guarantees any Indebtedness of the Company
other than the Notes (the "Other Indebtedness") the Company shall cause such
Restricted Subsidiary to concurrently guarantee (an "Additional Guarantee")
the Company's Obligations under the Indenture and the Notes to the same extent
that such Restricted Subsidiary guaranteed the Company's Obligations under the
Other Indebtedness (including waiver of subrogation, if any); provided that if
such Other
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Indebtedness is (i) Senior Debt, the Additional Guarantee shall be
subordinated in right of payment to the guarantee of such Other Indebtedness,
in the same manner and to the same extent as the Notes are subordinated to
Senior Debt pursuant to the subordination provisions of the Indenture, and
such Additional Guarantee shall be on the same terms and subject to the same
conditions as the Initial Guarantees given under the Indenture, (ii) Senior
Subordinated Indebtedness, the Additional Guarantee shall be pari passu in
right of payment with the guarantee of the Other Indebtedness, or (iii)
Subordinated Indebtedness, the Additional Guarantee shall be senior in right
of payment to the guarantee of the Other Indebtedness, provided, however, that
each Additional Guarantee shall by its terms provide that the Additional
Guarantor making such Additional Guarantee will be automatically and
unconditionally released and discharged from its obligations under such
Additional Guarantee upon the release or discharge of the guarantee of the
Other Indebtedness that resulted in the creation of such Additional Guarantee,
except a discharge or release by, or as a result of, any payment under the
guarantee of such Other Indebtedness by such Additional Guarantor.
Limitation on Subsidiary Capital Stock. The Indenture will provide that the
Company will not permit any Restricted Subsidiary of the Company to issue any
Capital Stock, except for (i) Capital Stock issued to and held by the Company
or a Wholly Owned Restricted Subsidiary, and (ii) Capital Stock issued by a
Person prior to the time (a) such Person becomes a Restricted Subsidiary, (b)
such Person merges with or into a Restricted Subsidiary or (c) a Restricted
Subsidiary merges with or into such Person; provided that such Capital Stock
was not issued by such Person in anticipation of the type of transaction
contemplated by clauses (a), (b) or (c).
Limitation on Certain Transfers of Assets. The Indenture will provide that
the Company and the Subsidiary Guarantors will not sell, convey, transfer or
otherwise dispose of their respective assets or properties to any of the
Company's Subsidiaries (other than another Subsidiary Guarantor), except for
sales, conveyances, transfers or other dispositions made in the ordinary
course of business and except for capital contributions to any Restricted
Subsidiary, the only material assets of which are broadcast licenses. For
purposes of this provision, any sale, conveyance, transfer, lease or other
disposition of property or assets, having a fair market value in excess of (i)
$1,000,000 for any sale, conveyance, transfer, leases or disposition or series
of related sales, conveyances, transfers, leases and dispositions and (ii)
$5,000,000 in the aggregate for all such sales, conveyances, transfers, leases
or dispositions in any fiscal year of the Company shall not be considered "in
the ordinary course of business."
Future Subsidiary Guarantors. The Indenture will provide that the Company
and each Subsidiary Guarantor shall cause each Restricted Subsidiary of the
Company which, after the date of the Indenture (if not then a Subsidiary
Guarantor), becomes a Restricted Subsidiary to execute and deliver an
indenture supplemental to the Indenture and thereby become an Additional
Guarantor which shall be bound by the Guarantee of the Notes in the form set
forth in the Indenture (without such Additional Guarantor being required to
execute and deliver the Guarantee endorsed on the Notes).
Provision of Financial Statements. The Indenture will provide that, whether
or not the Company is then subject to Section 13(a) or 15(d) of the Exchange
Act, the Company will file with the Commission, so long as the Notes are
outstanding, the annual reports, quarterly reports and other periodic reports
which the Company would have been required to file with the Commission
pursuant to such Section 13(a) or 15(d) if the Company were so subject, and
such documents shall be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required so to file such documents if the Company were so subject. The
Company will also in any event (i) within 15 days of each Required Filing
Date, (a) transmit by mail to all holders of Notes, as their names and
addresses appear in the Note register, without cost to such holders and (b)
file with the Trustee copies of the annual reports, quarterly reports and
other periodic reports which the Company would have been required to file with
the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the
Company were subject to such Sections and (ii) if filing such documents by the
Company with the Commission is prohibited under the Exchange Act, promptly
upon written request and payment of the reasonable cost of duplication and
delivery, supply copies of such documents to any prospective holder at the
Company's cost.
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Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in the City of New York; (iii) maintenance
of corporate existence; (iv) payment of taxes and other claims; (v)
maintenance of properties; and (vi) maintenance of insurance.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture will provide that the Company shall not consolidate or merge
with or into (whether or not the Company is the Surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless (i) the Surviving Person is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) at the time of and immediately after such Disposition, no
Default or Event of Default shall have occurred and be continuing; and (iv)
the Surviving Person will (A) have Consolidated Net Worth (immediately after
giving effect to the Disposition on a pro forma basis) equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction, and (B) at the time of such Disposition and after giving pro
forma effect thereto, the Surviving Person would be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of the
covenant described under "--Covenants--Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock."
The Indenture will provide that in the event of a sale of all or
substantially all of the assets of any Subsidiary Guarantor or all of the
Capital Stock of any Subsidiary Guarantor, by way of merger, consolidation or
otherwise, then the Surviving Person of any such merger or consolidation, or
such Subsidiary Guarantor, if all of its Capital Stock is sold, shall be
released and relieved of any and all obligations under the Subsidiary
Guarantee of such Subsidiary Guarantor if (i) the person or entity surviving
such merger or consolidation or acquiring the Capital Stock of such Subsidiary
Guarantor is not a Subsidiary of the Company, and (ii) the Net Proceeds from
such sale are used after such sale in a manner that complies with the
provisions of the covenant described under""--Covenants--Limitation on Asset
Sales" concerning the disposition of Net Proceeds from an Asset Sale. Except
as provided in the preceding sentence, the Indenture will provide that no
Subsidiary Guarantor shall consolidate with or merge with or into another
Person, whether or not such Person is affiliated with such Subsidiary
Guarantor and whether or not such Subsidiary Guarantor is the Surviving
Person, unless (i) the Surviving Person is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) the Surviving Person (if other than such Subsidiary Guarantor)
assumes all the obligations of such Subsidiary Guarantor under the Notes and
the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) at the time of and immediately after such
Disposition, no Default or Event of Default shall have occurred and be
continuing; and (iv) the Surviving Person will have Consolidated Net Worth
(immediately after giving pro forma effect to the Disposition) equal to or
greater than the Consolidated Net Worth of such Subsidiary Guarantor
immediately preceding the transaction; provided, however, that clause (iv) of
this paragraph shall not be a condition to a merger or consolidation of a
Subsidiary Guarantor if such merger or consolidation only involves the Company
and/or one or more Wholly Owned Restricted Subsidiaries of the Company.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs
in which the Company or any Subsidiary Guarantor is not the Surviving Person
and the Surviving Person is to assume all the obligations of the Company or
any such Subsidiary Guarantor under the Notes and the Indenture pursuant to a
supplemental indenture, such Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Company or
such Subsidiary Guarantor, as the case may be, and the Company or such
Subsidiary Guarantor, as the case may be, would be discharged from its
obligations under the Indenture, the Notes or its Subsidiary Guarantee, as the
case may be.
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EVENTS OF DEFAULT
The Indenture will provide that each of the following constitutes an Event
of Default:
(i) a default for 30 days in the payment when due of interest on any Note
(whether or not prohibited by the subordination provisions of the
Indenture);
(ii) a default in the payment when due of principal on any Note (whether
or not prohibited by the subordination provisions of the Indenture),
whether upon maturity, acceleration, optional or mandatory redemption,
required repurchase or otherwise;
(iii) failure to perform or comply with any covenant, agreement or
warranty in the Indenture (other than the defaults specified in clauses (i)
and (ii) above) which failure continues (A) in the case of any such
covenant, agreement or warranty described herein under "--Covenants--
Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock," "--Covenants--Limitation on Restricted Payments," "--Covenants--
Limitation on Asset Sales," and "Merger, Consolidation and Sale of Assets,"
for 30 days after written notice thereof has been given to the Company by
the Trustee or to the Company and the Trustee by the holders of at least
25% in aggregate principal amount of the then outstanding Notes and (B) in
the case of any other such covenant, agreement or warranty contained in the
Indenture, for 60 days after written notice thereof has been given to the
Company by the Trustee or to the Company and the Trustee by the holders of
at least 25% in aggregate principal amount of the then outstanding Notes;
(iv) the occurrence of one or more defaults under any agreements,
indentures or instruments under which the Company, any Subsidiary Guarantor
or any other Restricted Subsidiary then has outstanding Indebtedness in
excess of $5,000,000 in the aggregate and, if not already matured at its
final maturity in accordance with its terms, such Indebtedness shall have
been accelerated;
(v) except as permitted by the Indenture, any Subsidiary Guarantee shall
for any reason cease to be, or be asserted in writing by any Subsidiary
Guarantor or the Company not to be, in full force and effect, and
enforceable in accordance with its terms;
(vi) one or more judgments, orders or decrees for the payment of money in
excess of $5,000,000, either individually or in the aggregate (net of
amounts covered by reputable and credit worthy insurance company, or by
bond, surety or similar instrument) shall be entered against the Company,
any Subsidiary Guarantor or any other Restricted Subsidiary or any of their
respective properties and which judgments, orders or decrees are not paid,
discharged, bonded or stayed for a period of 60 days after their entry;
(vii) any holder or holders of at least $5,000,000 in aggregate principal
amount of Indebtedness of the Company, any Subsidiary Guarantor or any
other Restricted Subsidiary after a default under such Indebtedness shall
notify the Trustee of the intended sale or disposition of any assets of the
Company, any Subsidiary Guarantor or any other Restricted Subsidiary with
an aggregate fair market value (as determined in good faith by the
Company's Board of Directors) of at least $500,000 that have been pledged
to or for the benefit of such holder or holders to secure such Indebtedness
or shall commence proceedings, or take any action (including by way of set
off), to retain in satisfaction of such Indebtedness or to collect on,
seize, dispose of or apply in satisfaction of such Indebtedness, such
assets of the Company, any Subsidiary Guarantor or any other Restricted
Subsidiary (including funds on deposit or held pursuant to lock-box and
other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company,
any Subsidiary Guarantor or any other Restricted Subsidiary in an
involuntary case or proceeding under any applicable Bankruptcy Law or (b) a
decree or order adjudging the Company, any Subsidiary Guarantor or any
other Restricted Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company, any Subsidiary Guarantor or any other Restricted Subsidiary
under any applicable federal or state law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company, any Subsidiary Guarantor or any other Restricted
Subsidiary or of any substantial part of their respective properties, or
ordering the winding up or liquidation of their affairs, and any such
decree or order for relief shall continue to be in effect, or any such
other decree or order shall be unstayed and in effect, for a period of 60
days; or
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(ix) (a) the Company, any Subsidiary Guarantor or any other Restricted
Subsidiary commences a voluntary case or proceeding under any applicable
Bankruptcy Law or any other case or proceeding to be adjudicated bankrupt
or insolvent, (b) the Company, any Subsidiary Guarantor or any other
Restricted Subsidiary consents to the entry of a decree or order for relief
in respect of the Company, such Subsidiary Guarantor or such Restricted
Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or to the commencement of any bankruptcy or insolvency case
or proceeding against it, (c) the Company, any Subsidiary Guarantor or any
other Restricted Subsidiary files a petition or answer or consent seeking
reorganization or relief under any applicable federal or state law, (d) the
Company, any Subsidiary Guarantor or any other Restricted Subsidiary (x)
consents to the filing of such petition or the appointment of or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company, such Subsidiary
Guarantor or such Restricted Subsidiary or of any substantial part of their
respective property, (y) makes an assignment for the benefit of creditors
or (z) admits in writing its inability to pay its debts generally as they
become due or (e) the Company, any Subsidiary Guarantor or any other
Restricted Subsidiary takes any corporate action in furtherance of any such
actions in this paragraph (ix).
If any Event of Default (other than as specified in clauses (viii) or (ix)
of the preceding paragraph) occurs and is continuing, the Trustee or the
holders of at least 25% in aggregate principal amount of the then outstanding
Notes may, and the Trustee at the request of such holders shall, declare all
the Notes to be due and payable immediately; provided, however, that if any
Indebtedness is outstanding pursuant to the Credit Agreement upon a
declaration of acceleration of the Notes, the principal and interest on the
Notes will not be payable until the earlier of (1) the day which is five
business days after notice of acceleration is given to the Company and the
representative of the lenders under the Credit Agreement, and (2) the date of
acceleration of the Indebtedness under the Credit Agreement. Notwithstanding
the foregoing, in the case of an Event of Default arising from the events
specified in clauses (viii) or (ix) of the preceding paragraph, the principal
of, premium, if any, and any accrued and unpaid interest on all outstanding
Notes shall ipso facto become immediately due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. In the event of a declaration of
acceleration of the Notes because an Event of Default has occurred and is
continuing as a result of the acceleration of any Indebtedness described in
clause (iv) of the preceding paragraph, the declaration of acceleration of the
Notes shall be automatically annulled if the holders of any Indebtedness
described in clause (iv) have rescinded the declaration of acceleration in
respect of such Indebtedness within 15 business days of the date of such
declaration and if (a) the annulment of the acceleration of the Notes would
not conflict with any judgment or decree of a court of competent jurisdiction,
and (b) all existing Events of Default, except non-payment of principal or
interest on the Notes that became due solely because of the acceleration of
the Notes, have been cured or waived.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except (i) a continuing Default or Event of Default in the
payment of the principal of, or premium, if any, or interest on, the Notes
(which may only be waived with the consent of each holder of Notes affected),
or (ii) in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each Note
outstanding. Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
Notes notice of any continuing Default or Event of Default (except a Default
or Event of Default relating to the payment of principal, premium or interest)
if it determines that withholding notice is in their interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture will provide that no director, officer, employee, incorporator
or stockholder of the Company shall have any liability for any obligation of
the Company under the Indenture or the Notes or for any claim based on, in
respect of, or by reason of, any such obligation or the creation of any such
obligation. Each Holder by accepting a Note waives and releases such Persons
from all such liability and such waiver and release is part of the
consideration for the issuance of the Notes.
DEFEASANCE
The Indenture will provide that (i) the Company will be discharged from any
and all obligations in respect of the Notes and the Subsidiary Guarantors will
be released from their Subsidiary Guarantees ("defeasance") or (ii) the
payment of the Notes may not be accelerated upon an Event of Default specified
in clauses (iii), (iv), (v), (vi) or (vii) of "--Events of Default" ("covenant
defeasance"), in either case (i) or (ii) upon irrevocable deposit with the
Trustee, in trust, of money and/or U.S. government obligations which will
provide money in an amount sufficient in the opinion of a nationally
recognized accounting firm to pay the principal of, premium, if any, and each
installment of interest, if any, on the Notes. With respect to covenant
defeasance under clause (ii), the obligations under the Indenture (other than
the covenants that are the subject of such covenant defeasance) and the Events
of Default (other than the Event of Default specified above) shall remain in
full force and effect. Such trust may only be established if, among other
things, (i) (a) with respect to defeasance, the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or there
has been a change in applicable federal income tax law, which in the opinion
of counsel provides that holders of the Notes will not recognize gain or loss
for federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount, in the
same manner and at the same time as would have been the case if such deposit,
defeasance and discharge had not occurred, or (b) with respect to covenant
defeasance, the Company has delivered to the Trustee an opinion of counsel to
the effect that holders of the Notes will not recognize gain or loss for
federal income tax purposes as a result of such deposit and covenant
defeasance and will be subject to federal income tax on the same amount, in
the same manner and at the same time as would have been the case if such
deposit and covenant defeasance had not occurred; (ii) no Default or Event of
Default shall have occurred and be continuing (and no Default or Event of
Default specified in clauses (viii) or (ix) of the first paragraph under
"Events of Default" shall have occurred at any time during the period ending
on the 91st day after the date of such deposit in trust); (iii) the Company
has delivered to the Trustee an opinion of counsel to the effect that such
deposit shall not cause the Trustee or the trust so created to be subject to
the Investment Company Act of 1940; and (iv) certain other customary
conditions precedent shall have been satisfied.
TRANSFER AND EXCHANGE
The registered holder of a Note will be treated as the owner of it for all
purposes. A holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. Neither the Company nor the Registrar shall be
required to issue, register the transfer of or exchange any Note (i) during a
period beginning at the opening of business on the day that the Trustee
receives notice of any redemption from the Company and ending at the close of
business on the day the notice of redemption is sent to holders, (ii) selected
for redemption, in whole or in part, except the unredeemed portion of any Note
being redeemed in part may be transferred or exchanged, and (iii) during a
Change of Control Offer or an Asset Sale Offer if such Note is tendered
pursuant to such Change of Control Offer or Asset Sale Offer and not
withdrawn.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, the Indenture or the Notes
may be amended or supplemented with the written consent of the holders of at
least a majority in aggregate principal amount of the then outstanding
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Notes (including consents obtained in connection with a tender offer or
exchange offer for the Notes), and any existing Default or Event of Default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver shall
not: (i) reduce the principal amount of the Notes whose holders must consent
to an amendment, supplement or waiver, (ii) reduce the principal of or change
the fixed maturity of any Note, or alter the provisions with respect to the
redemption of the Notes in a manner adverse to the holders of the Notes, (iii)
reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of,
premium, if any, or interest on, the Notes (except that holders of at least a
majority in aggregate principal amount of the then outstanding Notes may (a)
rescind an acceleration of the Notes that resulted from a non-payment default,
and (b) waive the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal
of, or premium, if any, or interest on, the Notes, (vii) waive a redemption
payment with respect to any Note, (viii) make any change to the subordination
provisions of the Indenture that adversely affects holders, or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
(i) to cure any ambiguity, defect or inconsistency, (ii) to provide for
uncertificated Notes in addition to or in place of certificated Notes, (iii)
to provide for the assumption of the Company's obligations to holders of the
Notes in the event of any Disposition involving the Company in which the
Company is not the Surviving Person, (iv) to make any change that would
provide any additional rights or benefits to the holders of the Notes or that
does not adversely affect the interests of any such holder, or (v) to comply
with requirements of the Securities and Exchange Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
THE TRUSTEE
In the event that the Trustee becomes a creditor of the Company, the
Indenture contains certain limitations on the rights of the Trustee to obtain
payment of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue as Trustee, or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that, in case an Event of Default
has occurred and has not been cured, the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. The Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
holder of Notes, unless such holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the definition of all other terms used in the
Indenture.
"Acquired Debt" means, with respect to any specified Person, Indebtedness of
any other Person (the "Acquired Person") existing at the time the Acquired
Person merges with or into, or becomes a Subsidiary of, such specified Person,
including Indebtedness incurred in connection with, or in contemplation of,
the Acquired Person merging with or into, or becoming a Subsidiary of, such
specified Person.
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"Acquisition" refers to the purchase by the Company from Nationwide
Communications Inc. of Television Stations WRIC-TV, Richmond, Virginia, WATE-
TV, Knoxville, Tennessee, and WBAY-TV, Green Bay, Wisconsin, pursuant to the
Acquisition Agreement.
"Acquisition Agreement" means the Agreement of Sale, dated June 3, 1994,
between Nationwide Communications Inc. and the Company.
"Additional Guarantee" means any guarantee of the Company's obligations
under the Indenture and the Notes issued after the Issue Date as described in
"--Covenants--Limitation on Guarantees of Company Indebtedness by Restricted
Subsidiaries."
"Additional Guarantor" means any Subsidiary of the Company that guarantees
the Company's obligations under the Indenture and the Notes issued after the
Issue Date as described in "--Covenants--Limitation on Guarantees of Company
Indebtedness by Restricted Subsidiaries" and "--Covenants--Future Subsidiary
Guarantors."
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with") of any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through
the ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) any sale, lease, conveyance or other disposition by
the Company or any Restricted Subsidiary of any assets (including by way of a
sale-and-leaseback) other than in the ordinary course of business (provided
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company shall not be an "Asset Sale" but instead
shall be governed by the provisions of the Indenture described under "Merger,
Consolidation and Sale of Assets"), or (ii) the issuance or sale of Capital
Stock of any Restricted Subsidiary, in each case, whether in a single
transaction or a series of related transactions, to any Person (other than to
the Company or a Wholly-Owned Restricted Subsidiary) for Net Proceeds in
excess of $1,000,000.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors, or any amendment to, succession to or change in any such
law.
"Capital Lease Obligation" of any Person means, at the time any
determination thereof is to be made, the amount of the liability in respect of
a capital lease for property leased by such Person that would at such time be
required to be capitalized on the balance sheet of such Person in accordance
with GAAP.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited,
of such Person, including any Preferred Stock.
"Cash Equivalents" means (a) securities with maturities of one year or less
from the date of acquisition, issued, fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit,
time deposits, overnight bank deposits, bankers' acceptances and repurchase
agreements issued by a Qualified Issuer having maturities of 270 days or less
from the date of acquisition, (c) commercial paper of an issuer rated at least
A-2 by Standard & Poor's Corporation or P-2 by Moody's Investors Service,
Inc., or carrying an equivalent rating by a nationally recognized rating
agency if both of the two named rating agencies cease publishing ratings of
investments, and having maturities of 270 days or less from the date of
acquisition, and (d) money market accounts or funds with or issued by
Qualified Issuers.
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"Change of Control" means the occurrence of either of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a Person shall be deemed to have beneficial ownership of all
shares that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 30% of the total outstanding Voting Stock of the
Company; provided that the Permitted Holders "beneficially own" (as so
defined) a lesser percentage of such Voting Stock than such other Person and
do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors of the
Company, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election to such Board of
Directors, or whose nomination for election by the stockholders of the
Company, was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of such Board of Directors then in office.
"Company" means Young Broadcasting Inc., a Delaware corporation, unless and
until a successor replaces it in accordance with the Indenture and thereafter
means such successor.
"Consolidated Interest Expense" means, with respect to any period, the sum
of (i) the interest expense of the Company and its Restricted Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP
consistently applied, including, without limitation, (a) amortization of debt
discount, (b) the net payments, if any, under interest rate contracts
(including amortization of discounts), (c) the interest portion of any
deferred payment obligation and (d) accrued interest, plus (ii) the interest
component of the Capital Lease Obligations paid, accrued and/or scheduled to
be paid or accrued by the Company during such period, and all capitalized
interest of the Company and its Restricted Subsidiaries, in each case as
determined on a consolidated basis in accordance with GAAP consistently
applied.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently
applied, adjusted, to the extent included in calculating such net income (or
loss), by excluding, without duplication, (i) all extraordinary gains but not
losses (less all fees and expenses relating thereto), (ii) the portion of net
income (or loss) of the Company and its Restricted Subsidiaries allocable to
interests in unconsolidated Persons or Unrestricted Subsidiaries, except to
the extent of the amount of dividends or distributions actually paid to the
Company or its Restricted Subsidiaries by such other Person during such
period, (iii) net income (or loss) of any Person combined with the Company or
any of its Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iv) net gain but
not losses (less all fees and expenses relating thereto) in respect of
dispositions of assets (including, without limitation, pursuant to sale and
leaseback transactions) other than in the ordinary course of business, or (v)
the net income of any Restricted Subsidiary to the extent that the declaration
of dividends or similar distributions by that Restricted Subsidiary of that
income to the Company is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any Person on any date, the
equity of the common and preferred stockholders of such Person and its
Restricted Subsidiaries as of such date, determined on a consolidated basis in
accordance with GAAP consistently applied.
"Credit Agreement" means the Amended and Restated Credit Agreement, entered
into on November 15, 1996, between the Company, the lenders named therein,
Morgan Guaranty Trust Company of New York, as Syndication Agent, Canadian
Imperial Bank of Commerce, as Documentation Agent, and Bankers Trust Company,
as Administrative Agent and Issuing Bank, as the same may be amended,
modified, renewed, refunded, replaced or refinanced from time to time,
including (i) any related notes, letters of credit, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as
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amended, modified, renewed, refunded, replaced or refinanced from time to
time, and (ii) any notes, guarantees, collateral documents, instruments and
agreements executed in connection with any such amendment, modification,
renewal, refunding, replacement or refinancing.
"Cumulative Consolidated Interest Expense" means, as of any date of
determination, Consolidated Interest Expense from October 1, 1994 to the end
of the Company's most recently ended full fiscal quarter prior to such date,
taken as a single accounting period.
"Cumulative Operating Cash Flow" means, as of any date of determination,
Operating Cash Flow from October 1, 1994 to the end of the Company's most
recently ended full fiscal quarter prior to such date, taken as a single
accounting period.
"Debt to Operating Cash Flow Ratio" means, with respect to any date of
determination, the ratio of (i) the aggregate principal amount of all
outstanding Indebtedness of the Company and its Restricted Subsidiaries as of
such date on a consolidated basis, plus the aggregate liquidation preference
or redemption amount of all Disqualified Stock of the Company and its
Restricted Subsidiaries (excluding any such Disqualified Stock held by the
Company or its Wholly Owned Restricted Subsidiaries), to (ii) Operating Cash
Flow of the Company and its Restricted Subsidiaries on a consolidated basis
for the four most recent full fiscal quarters ending on or immediately prior
to such date, determined on a pro forma basis after giving pro forma effect to
(i) the incurrence of such Indebtedness and (if applicable) the application of
the net proceeds therefrom, including to refinance other Indebtedness, as if
such Indebtedness was incurred, and the application of such proceeds occurred,
at the beginning of such four-quarter period; (ii) the incurrence, repayment
or retirement of any other Indebtedness by the Company and its Restricted
Subsidiaries since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired at the beginning of such four-
quarter period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average balance of such Indebtedness at the end of each month during such
four-quarter period); (iii) in the case of Acquired Debt, the related
acquisition as if such acquisition had occurred at the beginning of such four-
quarter period; and (iv) any acquisition or disposition by the Company and its
Restricted Subsidiaries of any company or any business or any assets out of
the ordinary course of business, or any related repayment of Indebtedness, in
each case since the first day of such four-quarter period, assuming such
acquisition or disposition had been consummated on the first day of such four-
quarter period.
"Default" means any event that is, or after the giving of notice or passage
of time or both would be, an Event of Default.
"Designated Senior Debt" means (i) the Senior Bank Debt, and (ii) any other
Senior Debt of the Company permitted to be incurred under the Indenture the
principal amount of which is $20,000,000 or more at the time of the
designation of such Senior Debt as "Designated Senior Debt" by the Company in
a written instrument delivered to the Trustee.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such
Person is the Surviving Person) or the sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of such Person's
assets.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof (other than upon a change of
control of the Company in circumstances where the holders of the Notes would
have similar rights), in whole or in part on or prior to the stated maturity
of the Notes.
"Dollars" and "$" means lawful money of the United States of America.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Film Contracts" means contracts with suppliers that convey the right to
broadcast specified films, videotape motion pictures, syndicated television
programs or sports or other programming.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, and
whether or not contingent, (i) all indebtedness of such Person for borrowed
money or for the deferred purchase price of property or services or which is
evidenced by a note, bond, debenture or similar instrument, (ii) all Capital
Lease Obligations of such Person, (iii) all obligations of such Person in
respect of letters of credit or bankers' acceptances issued or created for the
account of such Person, (iv) all Interest Rate Agreement Obligations of such
Person, (v) all liabilities secured by any Lien on any property owned by such
Person even if such Person has not assumed or otherwise become liable for the
payment thereof to the extent of the value of the property subject to such
Lien, (vi) all obligations to purchase, redeem, retire, or otherwise acquire
for value any Capital Stock of such Person, or any warrants, rights or options
to acquire such Capital Stock, now or hereafter outstanding, (vii) to the
extent not included in (vi), all Disqualified Stock issued by such Person,
valued at the greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends thereon, and (viii) to the extent not
otherwise included, any guarantee by such Person of any other Person's
indebtedness or other obligations described in clauses (i) through (vii)
above. "Indebtedness" of the Company and the Restricted Subsidiaries shall not
include current trade payables incurred in the ordinary course of business and
payable in accordance with customary practices, and non-interest bearing
installment obligations and accrued liabilities incurred in the ordinary
course of business which are not more than 90 days past due. For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified Stock which
does not have a fixed repurchase price shall be calculated in accordance with
the terms of such Disqualified Stock as if such Disqualified Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by the
fair market value of, such Disqualified Stock, such fair market value is to be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock.
"Independent Director" means a director of the Company other than a director
(i) who (apart from being a director of the Company or any Subsidiary) is an
employee, associate or Affiliate of the Company or a Subsidiary or has held
any such position during the previous five years, or (ii) who is a director,
employee, associate or Affiliate of another party to the transaction in
question.
"Initial Guarantees" means the guarantees of the Company's obligations under
the Indenture and the Notes by the Initial Guarantors.
"Initial Guarantors" means (i) Young Broadcasting of Albany, Inc., a
Delaware corporation, (ii) Young Broadcasting of La Crosse, Inc., a Wisconsin
corporation, (iii) Young Broadcasting of Lansing, Inc., a Michigan
corporation, (iv) Winnebago Television Corporation, an Illinois corporation,
(v) Young Broadcasting of Nashville, Inc., a Delaware corporation, (vi) YBT,
Inc., a Delaware corporation, (vii) WKRN, L.P., a Delaware limited
partnership, (viii) Young Broadcasting of Louisiana, Inc., a Delaware
corporation, (ix) LAT, Inc., a Delaware corporation, (x) KLFY, L.P., a
Delaware limited partnership, (xi) Young Broadcasting of Richmond, Inc., a
Delaware corporation, (xii) Young Broadcasting of Green Bay, Inc., a Delaware
corporation, (xiii) Young Broadcasting of Knoxville, Inc., a Delaware
corporation, (xiv) WATE, L.P., a Delaware limited partnership, (xv) YBK, Inc.,
a Delaware corporation, (xvi) Young Broadcasting of Davenport, Inc., a
Delaware corporation, (xvii) Young Broadcasting of Sioux Falls, Inc., a
Delaware corporation, (xviii) Young Broadcasting of Rapid City, Inc., a
Delaware corporation, (xix) Young Broadcasting of Los Angeles, Inc., a
Delaware corporation, and (xx) Fidelity Television, Inc., a California
corporation.
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"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"Interest Rate Agreement Obligations" means, with respect to any Person, the
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against
fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates of such Person) in the form of
loans, Guarantees, advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Capital Stock or other securities and all other items that are
or would be classified as investments on a balance sheet prepared in
accordance with GAAP.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of, or agreement to give, any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Proceeds" means, with respect to any Asset Sale by any Person, the
aggregate cash proceeds received by such Person and/or its Affiliates in
respect of such Asset Sale, which amount is equal to the excess, if any, of
(i) the cash received by such Person and/or its Affiliates (including any cash
payments received by way of deferred payment pursuant to, or monetization of,
a note or installment receivable or otherwise, but only as and when received)
in connection with such Asset Sale, over (ii) the sum of (a) the amount of any
Indebtedness that is secured by such asset and which is required to be repaid
by such Person in connection with such Asset Sale, plus (b) all fees,
commissions and other expenses incurred by such Person in connection with such
Asset Sale, plus (c) provision for taxes, including income taxes, attributable
to the Asset Sale or attributable to required prepayments or repayments of
Indebtedness with the proceeds of such Asset Sale, plus (d) a reasonable
reserve for the after-tax cost of any indemnification payments (fixed or
contingent) attributable to seller's indemnities to purchaser in respect of
such Asset Sale undertaken by the Company or any of its Restricted
Subsidiaries in connection with such Asset Sale plus (e) if such Person is a
Restricted Subsidiary, any dividends or distributions payable to holders of
minority interests in such Restricted Subsidiary from the proceeds of such
Asset Sale.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Operating Cash Flow" means, with respect to any period, the Consolidated
Net Income of the Company and its Restricted Subsidiaries for such period,
plus (i) extraordinary net losses and net losses realized on any sale of
assets during such period, to the extent such losses were deducted in
computing Consolidated Net Income, plus (ii) provision for taxes based on
income or profits, to the extent such provision for taxes was included in
computing such Consolidated Net Income, and any provision for taxes utilized
in computing the net losses under clause (i) hereof, plus (iii) Consolidated
Interest Expense of the Company and its Restricted Subsidiaries for such
period, plus (iv) depreciation, amortization and all other non-cash charges,
to the extent such depreciation, amortization and other non-cash charges were
deducted in computing such Consolidated Net Income (including amortization of
goodwill and other intangibles, including Film Contracts and write-downs of
Film Contracts), minus (v) any cash payments contractually required to be made
with respect to Film Contracts (to the extent not previously included in
computing such Consolidated Net Income).
"Permitted Holders" means (i) any of Adam Young or Vincent Young; (ii) the
spouse, ancestors, siblings, descendants (including children or grandchildren
by adoption) of any such siblings or the spouse of any of the
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Persons described in clause (i); (iii) in the event of the incompetence or
death of any of the Persons described in clauses (i) and (ii), such Person's
estate, executor, administrator, committee or other personal representative,
in each case who at any particular date shall beneficially own or have the
right to acquire, directly or indirectly, Capital Stock of the Company; (iv)
any trusts created for the benefit of the Persons described in clause (i),
(ii) or (iii) or any trust for the benefit of any such trust; or (v) any
Person controlled by any of the Persons described in clause (i), (ii), (iii)
or (iv). For purposes of this definition, "control," as used with respect to
any Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through ownership of voting securities or by contract or otherwise.
"Permitted Investments" means (i) any Investment in the Company or any
Wholly Owned Restricted Subsidiary; (ii) any Investments in Cash Equivalents;
(iii) any Investment in a Person (an "Acquired Person") if, as a result of
such Investment, (a) the Acquired Person becomes a Wholly Owned Restricted
Subsidiary of the Company, or (b) the Acquired Person either (1) is merged,
consolidated or amalgamated with or into the Company or one of its Wholly
Owned Restricted Subsidiaries and the Company or such Wholly Owned Restricted
Subsidiary is the Surviving Person, or (2) transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or one of its Wholly
Owned Restricted Subsidiaries; (iv) Investments in accounts and notes
receivable acquired in the ordinary course of business; (v) notes from
employees issued to the Company representing (x) loans for the payment of the
exercise price of options to purchase Capital Stock of the Company or (y)
loans to satisfy federal income tax withholding requirements relating to the
issuance of Capital Stock of the Company pursuant to the Company's Incentive
Stock Grant Program, in an aggregate amount not to exceed $2,000,000
outstanding at any one time; (vi) any securities received in connection with
an Asset Sale that complies with the covenant described under "Covenants--
Limitations on Asset Sales"; (vii) any Investment represented by the Company's
obligations to Nationwide Communications Inc. pursuant to the Acquisition
Agreement; (viii) Interest Rate Agreement Obligations permitted pursuant to
the second paragraph of the covenant described under "--Covenants--Incurrence
of Indebtedness and Issuance of Disqualified Stock"; (ix) any Guarantee issued
by any Subsidiary of the Company in respect of Senior Debt and any Subsidiary
Guarantee; and (x) any other Investments that do not exceed $5,000,000 in
amount in the aggregate at any one time outstanding.
"Permitted Liens" means (i) Liens on assets or property of the Company that
secure Senior Debt of the Company and Liens on assets or property of a
Restricted Subsidiary that secure Senior Debt of such Restricted Subsidiary,
in each case in which such Senior Debt is permitted under the provisions of
the covenant described under "--Covenants--Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock" and provided that the
provisions described under "--Covenants--Limitations on Guarantees of Company
Indebtedness by Restricted Subsidiaries" are complied with; (ii) Liens
securing Indebtedness of a Person existing at the time that such Person is
merged into or consolidated with the Company or a Restricted Subsidiary;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of
such Person; (iii) Liens on property acquired by the Company or a Restricted
Subsidiary; provided that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any other property;
(iv) Liens arising from Capital Lease Obligations permitted under the
Indenture; (v) Liens arising from Purchase Money Indebtedness permitted under
the Indenture; (vi) Liens in respect of Interest Rate Agreement Obligations
permitted under the Indenture; (vii) Liens in favor of the Company or any
Restricted Subsidiary; (viii) Liens incurred, or pledges and deposits in
connection with, workers' compensation, unemployment insurance and other
social security benefits, and leases, appeal bonds and other obligations of
like nature incurred by the Company or any Restricted Subsidiary in the
ordinary course of business; (ix) Liens imposed by law, including, without
limitation, mechanics', carriers', warehousemen's, materialmen's, suppliers'
and vendors' Liens, incurred by the Company or any Restricted Subsidiary in
the ordinary course of business; and (x) Liens for ad valorem, income or
property taxes or assessments and similar charges which either are not
delinquent or are being contested in good faith by appropriate proceedings for
which the Company has set aside on its books reserves to the extent required
by GAAP.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
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"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person
in accordance with and at the contract rate (including, without limitation,
any rate applicable upon default) specified in the agreement or instrument
creating, evidencing or governing such Indebtedness, whether or not, pursuant
to applicable law or otherwise, the claim for such interest is allowed as a
claim in such Insolvency or Liquidation Proceeding.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Stock) of the Company, pursuant to an effective
registration statement filed under the Securities Act, the net proceeds of
which to the Company (after deducting any underwriting discounts and
commissions) exceed $25,000,000.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in connection with the purchase of property
or assets for the business of the Company and its Restricted Subsidiaries.
"Qualified Issuer" means (A) any lender that is a party to the Credit
Agreement; and (B) any commercial bank (i) which has capital and surplus in
excess of $100,000,000, and (ii) the outstanding short-term debt securities of
which are rated at least A-2 by Standard & Poor's Corporation or at least P-2
by Moody's Investors Service, Inc., or carry an equivalent rating by
nationally recognized rating agency if both the two named rating agencies
cease publishing ratings of investments.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment" means (i) any dividend or other distribution declared
or paid on any Capital Stock of the Company or any of its Restricted
Subsidiaries (other than dividends or distributions payable solely in Capital
Stock (other than Disqualified Stock) of the Company or such Restricted
Subsidiary or dividends or distributions payable to the Company or any Wholly
Owned Restricted Subsidiary); (ii) any payment to purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Company or any
Restricted Subsidiary or other Affiliate of the Company (other than any
Capital Stock owned by the Company or any Wholly Owned Restricted Subsidiary);
(iii) any payment to purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness that is subordinated in right of payment to the
Notes other than a purchase, redemption, defeasance or other acquisition or
retirement for value that is paid for with the proceeds of Refinancing
Indebtedness that is permitted under the covenant described under "--
Covenants--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock"; or (iv) any Restricted Investment. Notwithstanding the
foregoing, a "Restricted Payment" shall not include the repurchase of the
Company's DEF Preferred Stock (as defined in the Company's Prospectus dated
November 7, 1994 relating to the November 1994 Notes (the "Prospectus"), and
related warrants pursuant to the Financing Plan as described in the
Prospectus.
"Restricted Subsidiary" means each direct or indirect Subsidiary of the
Company other than an Unrestricted Subsidiary.
"Senior Bank Debt" means (i) the Indebtedness outstanding or arising under
the Credit Agreement up to a maximum principal amount of $500,000,000, less
any required repayments which result in a permanent reduction in the
commitments thereunder, (ii) all Obligations incurred by or owing to the
holders of such Indebtedness outstanding or arising under the Credit Agreement
(including, but not limited to, all fees and expenses of counsel and all other
charges, fees and expenses), and (iii) all Interest Rate Agreement Obligations
arising pursuant to the Interest Rate and Currency Exchange Agreement dated as
of June 30, 1989 between the Company and
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Morgan Guaranty Trust Company of New York (or its assigns), any schedule
thereto or any confirmation of an interest rate swap transaction thereunder,
as the same may be amended or modified from time to time.
"Senior Debt" means (A) with respect to the Company, the principal of and
interest (including Post-Petition Interest) on, and all other amounts owing in
respect of, (i) Senior Bank Debt, (ii) any other Indebtedness permitted to be
incurred by the Company under the terms of the Indenture (including, but not
limited to, reasonable fees and expenses of counsel and all other charges,
fees and expenses incurred in connection with such Indebtedness), unless the
instrument creating or evidencing such Indebtedness or pursuant to which such
Indebtedness is outstanding expressly provides that such Indebtedness is on a
parity with or subordinated in right of payment to the Notes, and (B) with
respect to any Subsidiary Guarantor, the principal of and interest (including
Post-Petition Interest) on, and all other amounts owing in respect of, (i)
such Subsidiary Guarantor's obligations in respect of the Senior Bank Debt,
including its obligations as a guarantor thereof, and (ii) any other
Indebtedness permitted to be incurred by such Subsidiary Guarantor under the
terms of the Indenture (including, but not limited to, reasonable fees and
expenses of counsel and all other charges, fees and expenses incurred in
connection with such Indebtedness), unless the instrument creating or
evidencing such Indebtedness or pursuant to which such Indebtedness is
outstanding expressly provides that such Indebtedness is on a parity with or
subordinated in right of payment to the Subsidiary Guarantee of such
Subsidiary Guarantor. Notwithstanding the foregoing, Senior Debt shall not
include (i) any Indebtedness for federal, state, local or other taxes, (ii)
any Indebtedness among or between the Company, any Restricted Subsidiary
and/or their Affiliates, (iii) any Indebtedness incurred for the purchase of
goods or materials, or for services obtained, in the ordinary course of
business or any Obligations in respect of any such Indebtedness, (iv) any
Indebtedness that is incurred in violation of the Indenture, (v) Indebtedness
evidenced by the Notes or the Subsidiary Guarantees, or (vi) Indebtedness of a
Person that is expressly subordinate or junior in right of payment to any
other Indebtedness of such Person.
"Senior Subordinated Indebtedness" means (A) with respect to the Company,
all Indebtedness of the type referred to in clause (A)(ii) of the definition
of Senior Debt unless the instrument creating or evidencing such Indebtedness
or pursuant to which such Indebtedness is outstanding expressly provides that
such Indebtedness is either Senior Debt of the Company or is subordinated in
right of payment to the Notes, and (B) with respect to each Subsidiary
Guarantor, all Indebtedness of the type referred to in clause (B)(ii) of the
definition of Senior Debt unless the instrument creating or evidencing such
Indebtedness or pursuant to which such Indebtedness is outstanding expressly
provides that such Indebtedness is either Senior Debt of such Subsidiary
Guarantor or subordinated in right of payment to the Subsidiary Guarantee of
such Subsidiary Guarantor. Notwithstanding the foregoing, Senior Subordinated
Indebtedness shall not include any Indebtedness of the type referred to in
clauses (i), (ii), (iii) and (iv) at the end of the definition of Senior Debt.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor of the type referred to in clause (A)(ii) or (B)(ii) of
the definition of Senior Debt if the instrument creating or evidencing such
Indebtedness or pursuant to which such Indebtedness is outstanding expressly
provides that such Indebtedness is (A) if incurred by the Company,
subordinated in right of payment to the Notes, or (B) if incurred by a
Subsidiary Guarantor, subordinated in right of payment to the Subsidiary
Guarantee of such Subsidiary Guarantor.
"Subsidiary" of any Person means (i) any corporation more than 50% of the
outstanding Voting Stock of which is owned or controlled, directly or
indirectly, by such Person or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries thereof, or (ii)
any limited partnership of which such Person or any Subsidiary of such Person
is a general partner, or (iii) any other Person (other than a corporation or
limited partnership) in which such Person, or one or more other Subsidiaries
of such Person, or such Person and one or more other Subsidiaries thereof,
directly or indirectly, has more than 50% of the outstanding partnership or
similar interests or has the power, by contract or otherwise, to direct or
cause the direction of the policies, management and affairs thereof.
"Subsidiary Guarantees" means the Initial Guarantees and any Additional
Guarantees.
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"Subsidiary Guarantors" means the Initial Guarantors and any Additional
Guarantors.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or
the Person to which such Disposition is made.
"Television Stations" means the Television Stations presently known as WKRN-
TV, Nashville, Tennessee, WTEN-TV, Albany, New York, WLNS-TV, Lansing,
Michigan, KLFY-TV, Lafayette, Louisiana, WKBT-TV, La Crosse-Eau Claire,
Wisconsin, WTVO-TV, Rockford, Illinois, WRIC-TV, Richmond, Virginia, WATE-TV,
Knoxville, Tennessee, WBAY-TV, Green Bay, Wisconsin, KWQC-TV, Davenport, Iowa,
KELO-TV, Sioux Falls, South Dakota and KCAL-TV, Los Angeles, California.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
an Unrestricted Subsidiary by the Board of Directors of the Company; provided
that (i) if such Subsidiary is formed or created by the Company, such
Subsidiary (a) is designated as an Unrestricted Subsidiary prior to such
formation or creation, (b) has total assets at the time of such formation or
creation with a fair market value not exceeding $1,000, and (c) does not own
any Capital Stock of the Company or any Restricted Subsidiary, (ii) if such
Subsidiary is acquired by the Company, such Subsidiary is designated as an
Unrestricted Subsidiary prior to the consummation of such acquisition, (iii)
no portion of any Indebtedness or any other obligation (contingent or
otherwise) of such Subsidiary (a) is guaranteed by, or is otherwise the
subject of credit support provided by the Company or any of its Restricted
Subsidiaries (b) is recourse to or obligates the Company or any of its
Restricted Subsidiaries in any way, or (c) subjects any property or asset of
the Company or any of its Restricted Subsidiaries directly or indirectly,
contingently or otherwise, to the satisfaction of such Indebtedness or other
obligation, (iv) neither the Company nor any of its Restricted Subsidiaries
has any contract, agreement, arrangement or understanding with such Subsidiary
other than on terms as favorable to the Company or such Restricted Subsidiary
as those that might be obtained at the time from Persons that are not
Affiliates of the Company, and (v) neither the Company nor any of its
Restricted Subsidiaries has any obligation (a) to subscribe for additional
shares of Capital Stock of such Subsidiary, or (b) to maintain or preserve
such Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results. Any such designation by the Company's
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolution of the Company's Board of Directors
giving effect to such designation and a certificate stating that such
designation complies with the foregoing conditions. Notwithstanding the
foregoing or any other provision of the Indenture to the contrary, no assets
of the Television Stations may be held at any time by any Unrestricted
Subsidiary, other than assets transferred to Unrestricted Subsidiaries that in
the aggregate are not material to such broadcasting operations. In the event
of any Disposition involving the Company in which the Company is not the
Surviving Person, the Board of Directors of the Surviving Person may (x) prior
to such Disposition, designate any of its Subsidiaries, and any of the
Company's Subsidiaries being acquired pursuant to such Disposition that are
not Restricted Subsidiaries, as Unrestricted Subsidiaries, and (y) after such
Disposition, designate any of its direct or indirect Subsidiaries as an
Unrestricted Subsidiary under the same conditions and in the same manner as
the Company under the terms of the Indenture.
"Voting Stock" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment at final maturity, in respect thereof, with
(b) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment, by (ii) the then
outstanding aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary with
respect to which all of the outstanding voting securities (other than
directors' qualifying shares) of which are owned, directly or indirectly, by
the Company or a Surviving Person of any Disposition involving the Company, as
the case may be.
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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 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
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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.
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
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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."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Series A Notes were originally sold by the Company on June 23, 1997 to
the Initial Purchaser pursuant to the Purchase Agreement. The Initial
Purchaser subsequently resold the Series A Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. As a condition to
the Purchase Agreement, the Company, the Subsidiary Guarantors and the Initial
Purchaser entered into the Registration Rights Agreement pursuant to which
each of the Company and the Subsidiary Guarantors agreed, for the benefit of
the holders, that it would, at its own cost, (i) within 60 days after the
original issue date of the Series A Notes, file a registration statement (the
"Exchange Offer Registration Statement") with the Commission with respect to
the Exchange Offer for the Series B Notes and (ii) use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act within 120 days after the date on which the Exchange Offer
Registration Statement is required to be filed with the Commission. The
Company and the Subsidiary Guarantors will offer the Series B Notes (and the
related guarantees) in exchange for surrender of the Series A Notes (and the
related guarantees). The Company and the Subsidiary Guarantors will keep the
Exchange Offer open for not less than 20 business days (or longer if required
by applicable law) after the date notice of the Exchange Offer is mailed to
the holders of the Series A Notes. For each of the Series A Notes surrendered
pursuant to the Exchange Offer, the holder who surrendered such Series A Note
will receive a Series B Note having a principal amount equal to that of the
surrendered Series A Note and a related guarantee. Based on no-action letters
issued by the staff of the Commission to third parties, the Company believes
the Series B Notes (and the related guarantees) will be freely transferable by
holders thereof and any person who receives the Series B Notes after the
Exchange Offer without further registration under the Securities Act only if
(i) the Series B Notes were acquired in the ordinary course of business of
such holder or such other person, (ii) neither such holder nor such other
person is engaging in or intends to engage in a distribution of the Series B
Notes and (iii) neither such holder nor such other person has an arrangement
or understanding with any person to participate in the distribution of the
Series B Notes. However, any purchaser of Series A Notes who is an "affiliate"
of the Company or any of the Subsidiary Guarantors or who intends to
participate in the Exchange Offer for the purpose of distributing the Series B
Notes (i) will not be able to rely on the position of the staff of the
Commission, (ii) will not be able to tender its Series A Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Series A Notes, unless such sale or transfer is made pursuant to an
exemption from such requirements.
Each holder of the Series A Notes (other than certain specified holders) who
wishes to exchange the Series A Notes for Series B Notes in the Exchange Offer
will be required to represent in the Letter of Transmittal that (i) it is not
an affiliate of the Company or any of the Subsidiary Guarantors, (ii) the
Series B Notes to be received by it are being acquired in the ordinary course
of its business and (iii) at the time of commencement of the Exchange Offer,
it has no arrangement with any person to participate in the distribution
(within the meaning of the Securities Act) of the Series B Notes. In addition,
in connection with any resales of Series B Notes, any Participating Broker-
Dealer who acquired the Series A Notes for its own account as a result of
market-making or other trading activities must deliver a prospectus meeting
the requirements of the Securities Act. The Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Series B Notes (other than a resale of an
unsold allotment from the original sale of the Series A Notes) with the
prospectus contained in the Exchange Offer Registration Statement. Under the
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, subject to similar prospectus
delivery requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such Series B Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company and the Subsidiary Guarantors to effect such an
Exchange Offer, or, under certain other circumstances, including if for any
other reason the Exchange Offer is not consummated within 240 days after the
original issue date of the Series A Notes, each of the Company and the
Subsidiary Guarantors, jointly and severally, will at its cost, (a) as
promptly as reasonably practicable, file a shelf registration statement
covering resales of the Series A Notes (the
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"Shelf Registration Statement"), (b) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act and
(c) use its best efforts to keep effective the Shelf Registration Statement
until the earlier of two years after its effective date and such time as all
of the applicable Series A Notes have been sold thereunder. The Company will,
in the event of the filing of the Shelf Registration Statement, provide to
each holder of the Series A Notes copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Series A Notes (and the
related guarantees). A holder that sells its Series A Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
the provisions of the Registration Rights Agreement which are applicable to
such a holder (including certain indemnification obligations).
If the Company and the Subsidiary Guarantors fail to comply with the above
provisions or if the registration statement described above fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable with respect to the Series A Notes as follows:
(i) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 60 days following the Issue Date, Additional
Interest shall be accrued on the Series A Notes over and above the stated
interest at a rate of .50% per annum for the first 90 days immediately
following the 46th day after the Issue Date, such Additional Interest rate
increasing by an additional .25% per annum at the beginning of each
subsequent 90-day period;
(ii) if an Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 120 days following the date on
which such registration statement is required to be filed, then, commencing
on the 121st day after the date on which such registration statement is
required to be filed, Additional Interest shall be accrued on the Series A
Notes over and above the stated interest at a rate of .50% per annum for
the first 90 days immediately following the 90th day after the date on
which such registration statement is required to be filed such Additional
Interest rate increasing by an additional .25% per annum at the beginning
of each subsequent 90-day period or;
(iii) if (A) the Company and the Subsidiary Guarantors have not exchanged
Series B Notes for all Series A Notes validly tendered in accordance with
the terms of the Exchange Offer on or prior to 60 days after the date on
which the Exchange Offer Registration Statement was declared effective or
(B) if applicable, the Shelf Registration Statement has been declared
effective and such Shelf Registration Statement ceases to be effective at
any time prior to the third anniversary of its effective date (unless all
the Series A Notes have been sold thereunder), then Additional Interest
shall be accrued on the Series A Notes over and above the stated interest
at a rate of .50% per annum for the first 90 days commencing on (x) the
61st day after such effective date, in the case of (A) above, or (y) the
day such Shelf Registration Statement ceases to be effective in the case of
(B) above, such Additional Interest rate increasing by an additional .25%
per annum at the beginning of each subsequent 90-day period;
provided, however that the Additional Interest rate on the Series A Notes may
not exceed in the aggregate 1.0% per annum; and provided further that (1) upon
the filing of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (ii) above), or (3) upon the
exchange of Series B Notes for all Series A Notes tendered (in the case of
clause (iii)(A) above), or upon the effectiveness of the Shelf Registration
Statement which had ceased to remain effective (in the case of clause (iii)(B)
above), Additional Interest on the Series A Notes as a result of such clause
(or the relevant subclause thereof), as the case may be, shall cease to
accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment
dates as the Series A Notes. The amount of Additional Interest will be
determined by multiplying the applicable Additional Interest rate by the
principal amount of the Series A Notes
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multiplied by a fraction, the numerator of which is the number of days such
Additional Interest rate was applicable during such period (determined on the
basis of a 360-day year comprised on twelve 30-day months), and the
denominator of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which is filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of Series A Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Series A Notes will not have any further registration rights and such
Series A Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Series A Notes
could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Series A
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Series B Notes in exchange for each $1,000 principal amount of outstanding
Series A Notes accepted in the Exchange Offer. Holders may tender some or all
of their Series A Notes pursuant to the Exchange Offer. However, Series A
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Series B Notes are the same as the form and terms
of the Series A Notes except that (i) the Series B Notes bear a "Series B"
designation and a different CUSIP Number from the Series A Notes, (ii) the
Series B Notes have been registered under the Securities Act and hence will
not bear legends restricting the transfer thereof and (iii) the holders of the
Series B Notes will not be entitled to certain rights under the Registration
Rights Agreement, which rights will terminate when the Exchange Offer is
terminated. The Series B Notes will evidence the same debt as the Series A
Notes and will be entitled to the benefits of the New Notes Indenture.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of Series A Notes were outstanding. The Company has fixed the close of
business on July 29, 1997 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
Holders of Series A Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Series A Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Series B Notes from the Company.
If any tendered Series A Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Series A Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Series A Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Series A
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses" below.
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 10, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. Notwithstanding the
foregoing, the Company will not extend the Expiration Date beyond September
12, 1997.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Series A Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE SERIES B NOTES
The Series B Notes will bear interest from their date of issuance. Holders
of Series A Notes that are accepted for exchange will receive, in cash,
accrued interest thereon to, but not including, the date of issuance of the
Series B Notes. Such interest will be paid with the first interest payment on
the Series B Notes on December 15, 1997. Interest on the Series A Notes
accepted for exchange will cease to accrue upon issuance of the Series B
Notes.
Interest on the Series B Notes is payable semi-annually on each June 15 and
December 15.
PROCEDURES FOR TENDERING
Only a holder of Series A Notes may tender such Series A Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal, or such facsimile,
together with the Series A Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
To be tendered effectively, the Series A Notes, Letter of Transmittal and
other required documents must be completed and received by the Exchange Agent
at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. Delivery of the Series A Notes may be
made by book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the Company
the representations set forth above in the second paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute the agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF SERIES A NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SERIES A NOTES SHOULD BE SENT TO
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THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Series A Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by a member firm of the Medallion System (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Series A Notes listed therein, such Series A Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Series A
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Series A Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Series A Notes at the book-entry transfer facility, The Depository Trust
Company (the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Series A Notes by causing such Book-Entry
Transfer Facility to transfer such Series A Notes into the Exchange Agent's
account with respect to the Series A Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the
Series A Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of
Transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Series A Notes and withdrawal of tendered
Series A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Series A Notes not properly tendered or any Series
A Notes the Company's acceptance of which would, in the opinion of counsel for
the Company, be unlawful. The Company also reserves the right in its sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Series A Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Series A Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Series A Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give
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such notification. Tenders of Series A Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any
Series A Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Notes and (i) whose Series A Notes
are not immediately available, (ii) who cannot deliver their Series A Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer,
prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Series A Notes and the principal amount of Series A Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Series A Notes (or a confirmation of book-
entry transfer of such Series A Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility), and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Series A Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Series A Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Series A Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Series A Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received
by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Series A Notes to be
withdrawn (the "Depositor"), (ii) identify the Series A Notes to be withdrawn
(including the certificate number(s) and principal amount of such Series A
Notes, or, in the case of Series A Notes transferred by book-entry transfer,
the name and number of the account at the Book-Entry Transfer Facility to be
credited), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Series A Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Series A Notes register the transfer of such Series A Notes into the name of
the person withdrawing the tender and (iv) specify the name in which any such
Series A Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Series A Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Series B Notes will be issued with respect thereto
unless the Series A Notes so withdrawn are validly retendered. Any Series A
Notes which have been tendered but which are not accepted for exchange will be
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returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Series A Notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Series B Notes for, any Series
A Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Series A Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its Subsidiaries; or
(b) any law, rule, regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer and contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Series A Notes and
return all tendered Series A Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Series A Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Series A Notes (see "--Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Series A Notes which have not been withdrawn.
EXCHANGE AGENT
First Union National Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
First Union National Bank
1525 W.T. Harris Blvd.
C3C/NC 1179
Charlotte, North Carolina 28288
Attn: Reorg
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
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The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses includes fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Series B Notes will be recorded at the same carrying value as the Series
A Notes, which is face value, as reflected in the Company's accounting records
on the date of exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by the Company. The expenses related to the issuance of the
Notes and of the Exchange Offer will be amortized over the term of the
Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Series A Notes that are not exchanged for Series B Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Series A
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) so long as the Series A Notes are eligible for resale
pursuant to Rule 144A under the Securities Act, to a person inside the United
States whom the seller reasonably believes is a qualified institutional buyer
within the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant
to another exemption from the registration requirements of the Securities Act
(and based upon an opinion of counsel reasonably acceptable to the Company),
(iii) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE SERIES B NOTES
With respect to resales of Series B Notes, based on no-action letters issued
by the staff of the Commission to third parties, the Company believes that a
holder or other person who receives Series B Notes, whether or not such person
is the holder (other than a person that is an "affiliate" of the Company or
any Subsidiary Guarantor within the meaning of Rule 405 under the Securities
Act), who receives Series B Notes in exchange for Series A Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the Series B Notes, will be allowed to
resell the Series B Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Series B Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Series B Notes in the Exchange Offer for
the purpose of distributing or participating in a distribution of the Series B
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters, and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction, unless an exemption from registration is otherwise
available. Further, each Participating Broker-Dealer that receives Series B
Notes for its own account in exchange for Series A Notes, where such Series A
Notes were acquired by such Participating Broker-Dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Series B Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Series B Notes are to
be acquired by the holder or the person receiving such Series B Notes, whether
or not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Series B Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Series B Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company or any Subsidiary Guarantor within the
meaning of Rule 405 under the Securities Act, and (v) the holder or any such
other person acknowledges that if such holder or other person participates in
the Exchange Offer for the purpose of distributing the Series B Notes
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<PAGE>
it must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale of the Series B Notes and
cannot rely on those no-action letters. As indicated above, each Participating
Broker-Dealer that receives a Series B Note for its own account in exchange
for Series A Notes must acknowledge that it will deliver a prospectus in
connection with any resale of such Series B Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of counsel described below)
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service (the "Service") will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. The Company
recommends that each holder consult such holder's own tax adviser as to the
particular tax consequences of exchanging such holder's Series A Notes for
Series B Notes, including the applicability and effect of any state, local or
foreign tax laws.
Cooperman Levitt Winikoff Lester & Newman, P.C., counsel to the Company, has
advised the Company that in its opinion, the exchange of the Series A Notes
for Series B Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for federal income tax purposes because the Series B Notes should
not be considered to differ materially in kind or extent from the Series A
Notes. Rather, the Series B Notes received by a holder should be treated as a
continuation of the Series A Notes in the hands of such holder. As a result,
there should be no federal income tax consequences to holders exchanging
Series A Notes for Series B Notes pursuant to the Exchange Offer.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Series B Notes (and the
related guarantees) initially will be represented by a single, permanent
global certificate in definitive, fully registered form (the "Global Note").
The Global Note will be deposited on the Issue Date with, or on behalf of, The
Depository Trust Company, New York, New York ("DTC") and registered in the
name of a nominee of DTC.
Notes (i) held by or transferred to "foreign purchasers" or (ii) held by
qualified institutional buyers (as defined in Rule 144A under the Securities
Act) ("QIBs") or Accredited Investors who are not QIBs who elect to take
physical delivery of their certificates instead of holding their interest
through the Global Note (and which are thus ineligible to trade through DTC)
(collectively referred to herein as the "Non-Global Purchasers") will be
issued in registered form (the "Certificated Security"). Upon the transfer to
a QIB of any Certificated Security initially issued to a Non-Global Purchaser,
such Certificated Security will, unless the transferee requests otherwise or
the Global Note has previously been exchanged in whole for a Certificated
Security, be exchanged for an interest in the Global Note.
The Global Note. The Company expects that pursuant to procedures established
by DTC (i) upon the issuance of the Global Note, DTC or its custodian will
credit, on its internal system, the principal amount of Notes of the
individual beneficial interests represented by such global securities to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests
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<PAGE>
of persons other than participants). Such accounts initially will be
designated by or on behalf of the Initial Purchasers and ownership of
beneficial interests in the Global Note will be limited to persons who have
accounts with DTC ("participants") or person who hold interests through
participants. QIBs may hold their interests in the Global Note directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in any of the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on, the Global Note will be made to DTC or its nominee,
as the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Note, will credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the Global Note as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Note held through such participants will be
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell Notes to persons in states which require physical delivery
of the Notes, or to pledge such securities, such holder must transfer its
interest in the Global Note, in accordance with the normal procedures of DTC
and with the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if
there is an Event of Default under the Indenture, DTC will exchange the Global
Note for Certificated Securities, which it will distribute to its
participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is
under no obligation to perform such procedures, and such
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<PAGE>
procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Note.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Series B Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Series B
Notes received in exchange for Series A Notes where such Series A Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that for a period of 180 days after the date of this
Prospectus, it will make this Prospectus, as amended or supplemented,
available to any Participating Broker-Dealer for use in connection with any
such resale.
The Company will not receive any proceeds from any sales of the Series B
Notes by Participating Broker-Dealers. Series B Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Series B Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Series B Notes. Any Participating
Broker-Dealer that resells the Series B Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Series B Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Series B Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
LEGAL MATTERS
Certain legal matters with respect to the Series B Notes offered hereby will
be passed upon for the Company by Cooperman Levitt Winikoff Lester & Newman,
P.C., New York, New York.
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<PAGE>
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus and in the Registration Statement and the financial statement
schedule listed in Item 16(b) and included 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, 1996 and 1995 and for
each of the three years in the period ended September 30, 1996, 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.
ADDITIONAL INFORMATION
The Company and the Subsidiary Guarantors have filed with the Commission a
Registration Statement on Form S-4 (together with all amendments, exhibits and
schedules thereto, the "Registration Statement") under the Securities Act with
respect to the Series B Notes offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission, and to which reference is hereby made. Statements contained in
this Prospectus as to the contents of any contract, agreement or any other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to such exhibit to the Registration Statement for
a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Registration Statement can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20459, and at the Commission's regional offices at Seven
World Trade Center, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement can be obtained from the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20459,
at prescribed rates.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files periodic reports and other information
with the Commission. The Company has agreed that it will continue to furnish
the information required by the Exchange Act to the Commission so long as any
Notes are outstanding even if it would be entitled under the Exchange Act not
to furnish such information.
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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, 1995 and 1996.............. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996...................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1994, 1995 and 1996................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996...................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Consolidated Balance Sheet as of March 31, 1997 (unaudited)............... F-22
Consolidated Statements of Operations for the Three Months Ended March 31,
1996 and 1997 (unaudited)................................................ F-23
Consolidated Statement of Stockholders' Equity (Deficit) for the Three
Months Ended March 31, 1997 (unaudited).................................. F-24
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1996 and 1997 (unaudited)................................................ F-25
Notes to Consolidated Financial Statements (unaudited).................... F-26
</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, 1996 and 1995........................... F-28
Statement of Operations for the Years Ended September 30, 1996, 1995 and
1994..................................................................... F-29
Statement of Changes in KCAL Broadcasting Group Equity for the Years Ended
September 30, 1996, 1995 and 1994........................................ F-29
Statement of Cash Flows for the Years Ended September 30, 1996, 1995 and
1994..................................................................... F-30
Notes to Financial Statements............................................. F-31
</TABLE>
KWQC-TV
(A DIVISION OF BROAD STREET TELEVISION, L.P.)
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................. F-37
Balance Sheets as of December 31, 1995 and December 25, 1994.............. F-38
Statements of Operations for the Years Ended December 31, 1995, December
25, 1994 and December 31, 1993........................................... F-39
Statements of Divisional Equity for the Years Ended December 31, 1995,
December 25, 1994 and December 31, 1993.................................. F-40
Statements of Cash Flows for the Years Ended December 31, 1995, December
25, 1994 and December 31, 1993........................................... F-41
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Notes to Financial Statements............................................. F-42
Balance Sheets as of March 31, 1996 and March 26, 1995 (unaudited)........ F-46
Statements of Operations for the Three Months Ended March 31, 1996 and
March 26, 1995 (unaudited)............................................... F-47
Statements of Divisional Equity for the Three Months Ended March 31, 1996
and March 26, 1995 (unaudited)........................................... F-48
Statements of Cash Flows for the Three Months Ended March 31, 1996 and
March 26, 1995 (unaudited)............................................... F-49
Notes to Financial Statements (unaudited)................................. F-50
</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-51
Combined Balance Sheets as of August 31, 1995 and 1994.................... F-52
Combined Statements of Earnings and Retained Earnings for the Years Ended
August 31, 1995, 1994 and 1993........................................... F-53
Combined Statements of Cash Flows for the Years Ended August 31, 1995,
1994 and 1993............................................................ F-54
Notes to Combined Financial Statements.................................... F-55
Condensed Combined Balance Sheets as of February 29, 1996 and February 28,
1995 (unaudited)......................................................... F-59
Condensed Combined Statements of Earnings and Retained Earnings for the
Three and Six Months Ended February 29, 1996 and February 28, 1995
(unaudited).............................................................. F-60
Condensed Combined Statements of Cash Flows for the Six Months Ended
February 29, 1996 and February 28, 1995 (unaudited)...................... F-61
Notes to Condensed Combined Financial Statements (unaudited).............. F-62
</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, 1995 and 1996, 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,
1996. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Young Broadcasting Inc. and subsidiaries at December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
February 14, 1997
F-3
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)............... $ 3,425,633 $ 7,004,744
Trade accounts receivable, less allowance for
doubtful accounts of $785,000 in 1995 and
$2,210,000 in 1996.............................. 27,431,914 60,152,494
Current portion of loans receivable--officers
(Note 12)....................................... 808,783 391,862
Current portion of program license rights (Notes
2 and 4)........................................ 6,426,198 21,678,077
Prepaid expenses................................. 956,052 1,852,728
------------ ------------
Total current assets............................. 39,048,580 91,079,905
------------ ------------
Property and equipment (Notes 2 and 11):
Land and land improvements....................... 5,165,489 6,168,847
Buildings and building improvements.............. 23,094,346 34,405,906
Broadcast equipment.............................. 87,023,341 174,107,936
Office furniture, fixtures and other equipment... 5,306,416 8,174,769
Vehicles......................................... 1,385,790 3,942,307
------------ ------------
121,975,382 226,799,765
Less accumulated depreciation and amortization... 62,844,245 79,497,810
------------ ------------
Net property and equipment....................... 59,131,137 147,301,955
Program license rights, excluding current portion
(Notes 2 and 4).................................. 3,180,397 2,436,121
Deposits and other assets......................... 1,545,285 457,354
Loans receivable--officers, excluding current
portion (Note 12)................................ 1,194,175 1,040,445
Broadcasting licenses and other intangibles, less
accumulated amortization of $63,852,304 in 1995
and $73,462,193 in 1996 (Note 2)................. 180,722,385 624,074,518
Deferred charges less accumulated amortization of
$1,536,057 in 1995 and $4,338,888 in 1996 (Notes
2, 3 and 5)...................................... 11,275,993 26,760,865
------------ ------------
Total assets..................................... $296,097,952 $893,151,163
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Trade accounts payable........................... $ 4,482,852 $ 23,392,064
Accrued expenses and other liabilities:
Interest (Notes 6 and 7)......................... 6,920,874 13,359,133
Other............................................ 3,391,684 5,802,974
------------ ------------
Total accrued expenses........................... 10,312,558 19,162,107
Current installments of program license liability
(Notes 2 and 4)................................. 5,817,936 17,312,771
Current installments of long-term debt (Note 6).. 907,834 11,913,237
Current installments of obligations under capital
leases (Note 11)................................ 48,335 802,851
------------ ------------
Total current liabilities........................ 21,569,515 72,583,030
Program license liability, excluding current
installments (Notes 2 and 4)..................... 3,035,951 2,403,121
Long-term debt, excluding current installments
(Note 6)......................................... 51,949,014 295,535,960
11.75% Senior Subordinated Notes (Note 7)......... 120,000,000 120,000,000
10.125% Senior Subordinated Notes (Note 7)........ 125,000,000 125,000,000
9% Senior Subordinated Notes (Note 7)............. -- 125,000,000
Deferred tax liability (Note 9)................... -- 71,450,273
Obligations under capital leases, excluding
current installments (Note 11)................... 87,589 674,556
------------ ------------
Total liabilities................................ 321,642,069 812,646,940
------------ ------------
Stockholders' (deficit) equity (Note 8):
Class A Common Stock, $.001 par value. Authorized
20,000,000 shares; issued and outstanding
4,955,088 shares at 1995 and 12,208,127 shares
at 1996......................................... 4,955 12,209
Class B Common Stock, $.001 par value. Authorized
20,000,000 shares; issued and outstanding
2,029,620 shares at 1995 and 2,022,230 shares at
1996............................................ 2,029 2,022
Class C Common Stock, $.001 par value. Authorized
20,000,000 shares; issued and outstanding
3,563,473 shares at 1995 and 0 at 1996.......... 3,564 --
Additional paid-in capital....................... 128,051,024 233,190,382
Accumulated deficit.............................. (153,605,689) (152,700,390)
------------ ------------
Total stockholders' (deficit) equity............. (25,544,117) 80,504,223
------------ ------------
Total liabilities and stockholders' (deficit)
equity.......................................... $296,097,952 $893,151,163
============ ============
</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,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net operating revenue................ $ 78,788,183 $122,529,927 $154,342,931
------------ ------------ ------------
Operating expenses................... 17,650,963 28,033,649 35,614,209
Amortization of program license
rights.............................. 4,399,915 6,418,181 11,033,812
Selling, general and administrative
expenses............................ 16,149,417 23,580,352 29,074,947
Depreciation and amortization........ 15,280,392 24,572,388 30,945,622
Corporate overhead................... 2,051,891 3,347,931 4,343,449
Non-cash compensation (Notes 8 and
10)................................. 6,497,480 1,166,651 848,469
------------ ------------ ------------
Operating income..................... 16,758,125 35,410,775 42,482,423
------------ ------------ ------------
Interest income...................... 175,551 378,380 2,098,939
Interest expense..................... (19,104,468) (32,644,274) (42,837,629)
Other expenses, net.................. (179,043) (611,138) (838,434)
------------ ------------ ------------
(19,107,960) (32,877,032) (41,577,124)
------------ ------------ ------------
(Loss) income before extraordinary
item................................ (2,349,835) 2,533,743 905,299
Extraordinary loss on extinguishment
of debt (Note 5).................... (6,026,668) (9,125,000) --
------------ ------------ ------------
Net (loss) income.................... (8,376,503) (6,591,257) 905,299
Preferred dividends.................. (9,712,397) -- --
------------ ------------ ------------
Net (loss) income applicable to
common stockholders................. $(18,088,900) $ (6,591,257) $ 905,299
============ ============ ============
(Loss) income per common share:
(Loss) income before extraordinary
item................................ $ (3.62) $ .23 $ .08
Extraordinary loss on extinguishment
of debt............................. (1.80) (.84) --
------------ ------------ ------------
Net (loss) income.................... $ (5.42) $ (.61) $ .08
============ ============ ============
Weighted average shares.............. 3,339,794 11,071,154 11,783,122
============ ============ ============
</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, 1994...... $ 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
Class C Common
Stock........... -- -- -- -- -- -- (27) -- (285) (8,186,433) --
Net (loss) for
1995............ -- -- -- -- -- -- -- -- -- -- (6,591,257)
----- ---- ----- ----- ----- ---- ------- ------ ------ ------------ -------------
Balance at Decem-
ber 31, 1995..... -- -- -- -- -- -- 4,955 2,029 3,564 128,051,024 (153,605,689)
Repurchase and
retirement of
Class A Common
Stock........... -- -- -- -- -- -- (111) -- -- (2,923,693) --
Contribution of
shares into
Company's
defined
contribution
plan............ -- -- -- -- -- -- 28 -- -- 728,641 --
Exercise of
stock options... -- -- -- -- -- -- 16 -- -- 313,495 --
Issuance of
stock options
below market
value........... -- -- -- -- -- -- -- -- -- 15,400 --
Conversion of
Class C Common
Stock to Class A
Common Stock.... -- -- -- -- -- -- 2,064 -- (2,064) -- --
Issuance of
Class A Common
Stock........... -- -- -- -- -- -- 5,250 -- -- 161,772,765 --
Repurchase of
Class C Common
Stock........... -- -- -- -- -- -- -- -- (1,500) (54,767,250) --
Conversion of
Class B Common
Stock to Class A
Common Stock.... -- -- -- -- -- -- 7 (7) -- -- --
Net income for
1996............ -- -- -- -- -- -- -- -- -- -- 905,299
----- ---- ----- ----- ----- ---- ------- ------ ------ ------------ -------------
Balance at Decem-
ber 31, 1996..... $ -- $ -- $ -- $ -- $ -- $ -- $12,209 $2,022 $0 $233,190,382 $(152,700,390)
===== ==== ===== ===== ===== ==== ======= ====== ====== ============ =============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balance at Janu-
ary 1, 1994...... $(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
Class C Common
Stock........... (8,186,745)
Net (loss) for
1995............ (6,591,257)
----------------
Balance at Decem-
ber 31, 1995..... (25,544,117)
Repurchase and
retirement of
Class A Common
Stock........... (2,923,804)
Contribution of
shares into
Company's
defined
contribution
plan............ 728,669
Exercise of
stock options... 313,511
Issuance of
stock options
below market
value........... 15,400
Conversion of
Class C Common
Stock to Class A
Common Stock.... --
Issuance of
Class A Common
Stock........... 161,778,015
Repurchase of
Class C Common
Stock........... (54,768,750)
Conversion of
Class B Common
Stock to Class A
Common Stock.... --
Net income for
1996............ 905,299
----------------
Balance at Decem-
ber 31, 1996..... $80,504,223
================
</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,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................... $ (8,376,503) $ (6,591,257) $ 905,299
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization of
property and equipment............ 7,108,170 13,640,551 16,832,919
Amortization of program license
rights............................ 4,399,915 6,418,181 11,033,812
Amortization of broadcasting
licenses, other intangibles and
deferred charges.................. 8,172,222 10,931,837 14,112,703
Non-cash compensation paid in Com-
mon Stock......................... 6,497,480 1,166,651 848,469
Non-cash interest expense on out-
standing indebtedness............. 57,338 420,712 357,147
Loss on disposal of fixed assets... -- -- 106,601
Extraordinary loss on extinguish-
ment of debt...................... 6,026,668 9,125,000 --
Deferred acquisition and debt refi-
nancing costs incurred............ (10,900,000) (3,437,500) (13,125,000)
Increase in trade accounts receiv-
able.............................. (4,730,606) (3,111,102) (4,367,243)
Increase in prepaid expenses....... (530,296) (197,842) (703,641)
Increase (decrease) in trade ac-
counts payable.................... 1,198,745 (713,168) 6,067,699
Increase in accrued expenses....... 3,773,863 1,326,436 3,023,127
------------ ------------ ------------
Net cash provided by operating activ-
ities............................... 12,696,996 28,978,499 35,091,892
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of Nationwide stations...... (145,000,000) -- --
Purchase of KCAL-TV.................. -- -- (387,508,018)
Purchase of KWQC-TV.................. -- -- (57,173,000)
Purchase of KELO-TV.................. -- -- (48,281,308)
Capital expenditures................. (1,205,858) (4,484,478) (4,991,766)
(Increase) decrease in deposits and
other assets........................ (22,983) (1,315,839) 1,113,231
------------ ------------ ------------
Net cash used in investing activi-
ties................................ (146,228,841) (5,800,317) (496,840,861)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term
debt................................ 185,000,000 -- 305,000,000
Proceeds from issuance of public sub-
ordinated debt...................... 120,000,000 125,000,000 125,000,000
Borrowings from working capital fa-
cility.............................. -- 17,000,000 25,400,000
Principal payments on old long-term
debt................................ (165,400,774) -- --
Principal payments on new long-term
debt................................ (4,000,000) (149,235,202) (79,164,798)
Principal payments on old subordi-
nated debt.......................... (29,440,773) -- --
Payment of call premium on old subor-
dinated debt........................ (3,319,381) -- --
Deferred acquisition and debt refi-
nancing costs incurred.............. (5,235,043) (3,694,868) (4,872,776)
Net proceeds from issuance of Class A
Common Stock........................ 65,068,972 -- 161,778,015
Repurchase of D, E & F Preferred
Stock............................... (47,757,966) -- --
Repurchase of Class A and C Common
Stock............................... -- (8,186,745) (57,692,555)
Proceeds from issuance of Class C
Common Stock........................ 25,000,000 -- --
Proceeds from exercise of options.... -- 50,000 313,511
Principal payments under capital
lease obligations................... (402,177) (243,108) (48,335)
Payments on programming license lia-
bilities............................ (4,169,673) (6,747,028) (10,384,982)
------------ ------------ ------------
Net cash provided by (used in) fi-
nancing activities.................. 135,343,185 (26,056,951) 465,328,080
------------ ------------ ------------
Net increase (decrease) in cash...... 1,811,340 (2,878,769) 3,579,111
Cash and cash equivalents at begin-
ning of year........................ 4,493,062 6,304,402 3,425,633
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 6,304,402 $ 3,425,633 $ 7,004,744
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid........................ $ 17,265,826 $ 29,199,781 $ 35,980,944
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 eleven network affiliated (four with CBS, six with ABC,
and one with NBC), and one independent commercial television broadcasting
stations in the states of Michigan, Wisconsin, Louisiana, Illinois, Tennessee,
New York, Virginia, Iowa, South Dakota and California.
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
advance payment is not generally required. Credit losses are provided for in
the financial statements and have consistently 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 the 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, 1996 of $302.0 million
approximates its fair value as its interest rate floats with market
conditions. At December 31, 1996, the Company's $120.0 million (11 3/4%),
$125.0 million (10 1/8%), and $125.0 million (9%) senior subordinated notes
were trading in the public market with ask prices of 107, 98.5 and 97.3,
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 their 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. 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.
F-8
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
the future minimum lease payments at the inception of the lease, less
accumulated depreciation. Major renewals and improvements are charged to the
property and equipment accounts. 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. 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 5).
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 7), concurrent with an amendment to
its Senior Credit Facility (see Note 6). 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 5).
Deferred charges incurred during 1996 consisted primarily of debt issuance
costs incurred in connection with the Company's 9% Senior Subordinated Notes
issued on January 16, 1996 (see Note 7) and an amendment to and restatement of
its Senior Credit Facility on November 15, 1996 (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.
F-9
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $67,000, $22,000 and $36,000
in 1994, 1995 and 1996, 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, 1995 and 1996, of
$1.1 million and $5.0 million, respectively.
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 9).
Earnings Per Share
Net (loss) income per common share is computed by dividing net (loss) income
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 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 adopted Statement No. 121 in the first quarter of 1996. The effect of
the adoption had no impact on the Company's results of operations.
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") plus outstanding receivables of the stations. Of
the purchase price, $5,000,000 was in the form of a note and will be paid over
a five year period, without interest, in equal annual installments. The net
present value of such note, discounted at 11.9%, was $3,092,000 and $2,449,000
at December 31, 1995 and 1996, respectively. 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. The operating results of the
Nationwide Stations are included in the Company's consolidated results of
operations for the entire year in 1995 and 1996.
F-10
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 15, 1996, the Company acquired from Broad Street Television, L.P.
the assets of KWQC-TV ("KWQC"), Channel 6, in Davenport, Iowa, for
approximately $55 million plus outstanding receivables of the station. The
acquisition was accounted for as a purchase. Based on the Company's allocation
of the purchase price, intangible assets amounted to $44.3 million and will be
amortized over their estimated lives which will not exceed 40 years. The KWQC
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") due 2006 (see Note 7). The operating results of KWQC are
included in the Company's consolidated results of operations from the date of
acquisition.
On May 31, 1996, the Company acquired from Midcontinent Television of South
Dakota, a wholly owned subsidiary of Midcontinent Media, Inc., the assets of
KELO-TV ("KELO"), Channel 11, in Sioux Falls, South Dakota and its satellite
stations for $50 million plus outstanding receivables of the stations. This
acquisition was accounted for as a purchase. Based on the Company's allocation
of the purchase price, intangible assets amounted to $25.0 million and will be
amortized over their estimated lives which will not exceed 40 years. The KELO
acquisition was financed with approximately $15.7 million of net proceeds from
the January 1996 Notes, $25.4 million under the Senior Credit Facility, a $3.0
million promissory note and the remaining balance from cash balances of the
Company. The operating results of KELO are included in the Company's
consolidated results of operations from the date of acquisition.
On November 22, 1996, the Company acquired from a subsidiary of the Walt
Disney Company ("Disney") the assets of KCAL-TV ("KCAL"), Channel 9, in Los
Angeles, California, for $368 million plus working capital of approximately
$19.5 million of the station. The acquisition was accounted for as a purchase.
Based on the Company's preliminary allocation of the purchase price,
intangible assets amounted to approximately $314.1 million and will be
amortized over their estimated lives which will not exceed 40 years. The KCAL
acquisition was financed with approximately $305.0 million under the Senior
Credit Facility and the remaining from an equity offering in 1996 (see Note
8). The operating results of KCAL are included in the Company's consolidated
results of operations from the date of acquisition.
The following unaudited pro forma information for 1994 gives effect to the
Nationwide Stations Acquisition (including expense reductions) as if it had
been effected on January 1, 1994. In addition, the following unaudited pro
forma information for 1995 and 1996 gives effect to the acquisitions of KWQC,
KELO and KCAL (including expense reductions) and the WTVO affiliation
agreement as if they had been effected on January 1, 1995 and 1996. The pro
forma information for the years ended December 31, 1994, 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 dates and do not purport
to project results of operations of the Company in any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
(UNAUDITED)
1994(1) 1995(2) 1996(2)
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Operating Revenue (3).......................$117,140. $245,788 $261,542
Operating Income............................... 31,588 57,262 68,255
Income before extraordinary item............... 7,243 (6,674) 3,512
Net (loss) income.............................. 1,216 (15,799) 3,512
Net (loss) income applicable to common
shareholders.................................. $ (8,496) $(15,799) $ 3,512
Net (loss) income per common share............. $ (1.08) $ (1.43) $ 0.30
</TABLE>
--------
(1) Pro forma adjustments to net revenues include additional annualized
network compensation payable to the Company under the Nationwide
Stations affiliation agreements of $3.4 million in 1994.
F-11
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma adjustments relating to the Nationwide Stations include
annualized expense reductions of approximately $4.1 million and
additional corporate overhead of approximately $550,000 in 1994.
(2) Pro forma adjustments to net revenues include additional annualized
network compensation payable to the Company under the WTVO and KELO
affiliation agreements and a programming change atKWQC in the aggregate
amount of $665,000 and $179,000, respectively, for the years ended
December 31, 1995 and 1996. Proforma adjustments to net revenues also
include a decrease of $2.7 million and $803,000, for the years ended
December 31, 1995 and 1996, relating to seven sitcoms not being
purchased in connection with the KCAL acquisition.
Pro forma adjustments include expense reductions relating to the KWQC,
KELO and KCAL acquisitions of approximately $22.5 million and $22.8
million, respectively, for the years ended December 31, 1995 and 1996.
(3) Net operating revenue is total revenue net of agency and national
representation commissions.
4. PROGRAM LICENSE RIGHTS AND LIABILITY
The Company entered into agreements for program license rights which became
available in 1995 and 1996 of approximately $6.8 million and $7.4 million,
respectively.
The unpaid program license liability, which is reflected in the December 31,
1996 balance sheet, is payable during each of the years subsequent to 1996 as
follows: 1997, $17.3 million; 1998, $2.1 million and 1999, $312,000.
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 $9.8 million and $12.8
million at December 31, 1995 and 1996, respectively.
5. 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 $2.7 million
were charged to earnings as part of an extraordinary item in 1994. In
addition, a call premium amounting to $3.3 million was paid to the
Subordinated Debt Holders in connection with the early extinguishment of that
debt. This amount was also included in the 1994 extraordinary item.
Deferred financing costs, arising from the 1994 Refinancing, with a net
carrying value of $9.1 million 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").
F-12
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt (excluding Senior Subordinated Notes) at December 31, 1995
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Senior Credit Facility................................ $ 49,765 $ 302,000
Nationwide Seller Note................................ 3,092 2,449
Midcontinent Seller Note.............................. -- 3,000
---------- -----------
Total long-term debt.................................. 52,857 307,449
Less:
Scheduled current maturities........................ 908 908
Additional payments of excess cash required......... -- 11,005
---------- -----------
Long-term debt excluding all current installments..... $ 51,949 $ 295,536
========== ===========
</TABLE>
On November 14, 1994, the Company established a senior credit facility
("Senior Credit Facility").
On November 15, 1996, the Company amended and restated its Senior Credit
Facility ("Amendment"). The Amendment provides for borrowings of up to an
aggregate amount of $500.0 million consisting of a seven year amortizing term
loan facility ("Term Loan") in the amount of $300.0 million and a seven year
reducing revolving credit facility ("Revolver") in the amount of $200.0
million.
At December 31, 1996, the Company had outstanding borrowings of $300.0
million under the Term Loan, and $2.0 million under the Revolver. The
aggregate fixed maturities under the Term Loan for each year subsequent to
December 31, 1996 are as follows: 1997, $11.0 million; 1998, $21.7 million;
1999, $35.7 million; 2000, $40.9 million; 2001, $55.4 million; and $135.3
million thereafter.
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 (depending upon the level of
the Company's total debt to operating cash flow ratio at the end of such year)
amount to the lenders before April 30 of the subsequent year. Payments
pursuant to this requirement permanently reduce outstanding debt under
Facility A. For the year ended December 31, 1996, an excess cash flow payment
of $11.0 million will be paid to the lenders before April 30, 1997.
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 0.25% based upon a ratio under 4:1
to 2.75% based upon a 6.5:1 or greater ratio. For the year ended December 31,
1996, this floating percentage was 2.0%. For the year ended December 31, 1996,
the effective interest rate for amounts outstanding under the Senior Credit
Facility was 7.83%.
The Senior Credit Facility contains, among other things, limitations on
dividends and investments, and requires the Company to maintain certain
financial ratios. At December 31, 1996, 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.
F-13
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had outstanding swap agreements in 1994, 1995 and 1996 with a
commercial bank who was also a lender under the Senior Credit Facility. The
last of such swaps expired on April 18, 1996. The Company paid a fixed
interest rate of 9.81% and the Company receives interest, from the commercial
bank, based upon a three month LIBOR. The net interest rate differential paid
and received was recognized as an adjustment to interest expense and amounted
to approximately $1.9 million, $1.0 million and $315,000 for the years ended
December 31, 1994, 1995, and 1996, respectively. At December 31, 1996, the
Company did not hold any derivative instruments.
The Midcontinent Seller Note bears interest at 8.25%, payable quarterly and
matures in full on May 31, 1998.
The aggregate fixed maturities, including accreted non-cash interest, under
the Nationwide Seller Note for each year subsequent to December 31, 1996 are
as follows: 1997, $1.0 million; 1998, $1.0 million, and $1.0 million in 1999.
7. SENIOR SUBORDINATED NOTES
On November 14, 1994, the Company issued 11 3/4% Senior Subordinated Notes
due 2004 with an aggregate principal amount of $120.0 million (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 a redemption price equal to 111
3/4% of the principal amount thereof, 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 $125.0 million (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 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.
On January 16, 1996, the Company issued 9% Senior Subordinated Notes due
2006 with an aggregate principal amount of $125.0 million. Interest on the
January 1996 Notes is payable semi-annually on January 15 and July 15,
commencing July 15, 1996. The January 1996 Notes are redeemable, in whole or
in part, at the option of the Company on or after January 15, 2001, at the
redemption prices set forth in the Indenture, pursuant to which the January
1996 Notes were issued, plus accrued interest to the date of redemption. In
addition, at anytime before January 15, 1999, the Company, at its option, may
redeem up to $42 million of the January 1996 Notes, with the net proceeds of
one or more public equity offerings, at a redemption price equal to 109% of
the principal amount thereof, plus accrued interest to the date of redemption.
The Company's November 1994 Notes, June 1995 Notes, and January 1996 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.
F-14
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
8. STOCKHOLDERS' EQUITY
Common Stock
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.
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.
On November 14, 1994, ABC invested $25.0 million in the Company, receiving
1.5 million shares of the Company's non-voting Class C Common Stock ("ABC
Stock") and warrants to purchase 750,000 shares of Class C Common Stock ("ABC
Warrants"). The ABC Stock and ABC Warrants were repurchased on October 4, 1996
(see Stock Repurchases below).
On December 30, 1992, the Company instituted an Incentive Stock Grant
Program ("Program"). In August 1994, the Company granted 106,500 shares for
1993 awards and charged $2.0 million to operations in the third quarter of
1994 based on the initial public offering price for the Company's Class A
Common Stock. The Company issued another 106,500 shares for 1994 awards
concurrent with the closing of the offering and charged $2.0 million to
operations in the fourth quarter of 1994 based on the initial public offering
price.
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 $2.1 million to
operations in the first quarter of 1994 based on the initial public offering
price for the Company's Class A Common Stock.
On May 22, 1995, the Company adopted the Young Broadcasting Inc. 1995 Stock
Option Plan ("1995 Stock Option Plan") and terminated the Program.
On October 4, 1996, the Company completed an additional public offering of
its Class A Common Stock, (the "Offering"). The Offering included 5,250,000
shares sold by the Company and 2,111,398 shares sold by selling stockholders
of the Company. The net proceeds to the Company of $162.9 million were used to
pay down $20.0 million under the Senior Credit Facility, repurchase the ABC
Stock and ABC Warrants for $54.8 million (see paragraph below), and $1.1
million of other related expenses. The Company used the remaining net
proceeds, approximately $87.0 million, to partially finance the KCAL-TV
acquisition.
F-15
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The terms of the Senior Credit Facility and the Indentures relating to the
Company's outstanding Senior Subordinated Notes (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 unless the total debt/operating cash flow ratio is less than
5.5x and the aggregate amount of all dividends does not exceed $20.0 million.
Under the Indentures, the Company is not permitted to pay any dividends on its
Common Stock unless the Company would continue to have the ability to incur
indebtedness. In addition, under the Indentures, dividends 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. At December 31, 1996, under the terms of the Senior
Credit Facility, the Company could not have paid any dividend.
Stock Option Plans
At December 31, 1996, the Company has reserved 13,600 shares of its Class A
Common Stock and 1,244,526 shares of Class B Common Stock in connection with
stock options.
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).
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. Subject to stockholder approval at the 1997
Annual Meeting of Stockholders, the total number of shares with respect to
which options and SARs may be granted under the 1995 Stock Option Plan is
currently 1,254,126. As of December 31, 1996, non-qualified and incentive
stock options for an aggregate of 1,106,188 shares at various prices from
$19.75 to 30.75 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.
The Company regularly contributed Class A Common Stock into its defined
contribution plan (see Note 10) for the years ended 1994, 1995 and 1996.
F-16
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Under the Company's stock option plans, independent directors, officers and
employees may be granted options to purchase the Company's stock at no less
than the fair market value on the date of the option grant. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, ("SFAS No. 123") "Accounting for Stock-Based
Compensations." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plan
been determined based on the fair market value at the grant date for awards in
1995 and 1996, consistent with the provisions of SFAS No. 123, the Company's
net income (loss) and income (loss) per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net (loss) income--as reported..................... $ (6,591) $ 905
Net (loss) income--pro forma....................... $ (9,057) $ (1,274)
Net (loss) income per common share--as reported.... $ (0.61) $ 0.08
Net (loss) income per common share--pro forma...... $ (0.82) $ (0.11)
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years. The
fair value for these options was estimated at the date of grant using the
Black-Scholes model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield........................................... 0
Expected stock price volatility................................... 25%
Risk-free interest rate:
1995............................................................ 7.45%
1996............................................................ 5.92%
Expected life of options.......................................... 5 years
</TABLE>
The weighted average fair value of options granted during 1995 and 1996 was
$6.98 and $10.41, respectively.
Changes during 1995 and 1996 in stock options are summarized as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1994.............. -- $ --
Granted..................................... 668,825 19.80
---------
Outstanding at December 31, 1995.............. 668,825 19.80
Granted..................................... 475,400 30.67
Exercised................................... (15,874) 19.75
Forfeited................................... (12,563) 19.75
---------
Outstanding at December 31, 1996.............. 1,115,788 $24.45
=========
</TABLE>
F-17
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options for 93,137 shares and 446,937 shares were exercisable at December
31, 1995 and 1996, respectively.
Exercise prices for options outstanding at December 31, 1996 range from a
minimum of approximately $19.75 per share to a maximum of approximately $34.00
per share. The average remaining maximum term of options outstanding is
approximately ten years.
Stock Repurchases
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. On 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.
The Company repurchased 1.5 million shares of the Company's Class C Common
Stock (the "ABC Stock") and warrants to purchase 750,000 shares of such Class
C Common Stock (the "ABC Warrants") from Capital Cities/ABC, Inc., a wholly
owned subsidiary of Disney, concurrently with the closing of the Offering. The
Company repurchased the ABC Stock at a per share price equal to the difference
between the public offering price per share ($32.50) of the Class A Common
Stock, less the underwriting discount per share. The Company repurchased 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.
9. INCOME TAXES
At December 31, 1996, the Company had net operating loss ("NOL")
carryforwards for tax purposes of approximately $148.0 million expiring at
various dates through 2011. 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 NOLs to offset future taxable income.
Approximately $20.0 million of the $148.0 million NOL 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, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
Fixed Assets...................................... $ 13,070 $ --
Accounts Receivable............................... 314,000 884,000
Intangibles....................................... 4,694,298 --
Other............................................. 82,759 221,591
NOL Carryforwards................................. 56,908,668 59,295,496
Less: Valuation allowance........................... (61,861,391) (60,401,087)
----------- ------------
Total deferred tax assets....................... $ 151,404 $ --
----------- ------------
Deferred tax liabilities:
Fixed Assets...................................... $ -- $ 410,113
Intangibles....................................... -- 71,268,168
Other............................................. 151,404 49,580
----------- ------------
Total deferred tax liabilities.................. $ 151,404 $ 71,727,861
----------- ------------
Net deferred tax liabilities........................ $ -- $(71,727,861)
=========== ============
</TABLE>
F-18
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Based upon the standards set forth in Statement No. 109, the benefit of
$60.4 million for the above deferred tax asset has been offset by a valuation
allowance.
10. EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution plans ("Plan") which provide
retirement benefits for all eligible employees. Adam Young Inc. employees also
participate in this Plan (see Note 12). 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, 1994, the Company accrued a non-matching
stock contribution (21,696 shares of Class A Common Stock) equal to 3% of
eligible 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
stock contribution (27,685 shares of Class A Common Stock) equal to 3% of
eligible employee compensation amounting to $729,000. The Company effected
such contributions by issuing the shares on January 5, 1996.
For the year ended December 31, 1996, the Company accrued a non-matching
stock contribution (28,481 shares of Class A Common Stock) equal to 3% of
eligible employee compensation amounting to approximately $833,000. The
Company effected such contributions by issuing the shares on January 10, 1997.
On January 1, 1997, the Company adopted and established a matching stock
plan ("Matching Plan"). According to the Matching Plan, the Company will
contribute one-half of every dollar a participant contributes, up to the first
3% of the participant's pay.
11. 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, 1995 and 1996, the
net amount of property and equipment recorded under capital leases was
$167,000 and $1,488,000 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, 1996 are as
follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Year ending December 31:
1997..................................... $ 803 $2,144
1998..................................... 514 1,745
1999..................................... 160 691
2000..................................... -- 600
2001..................................... -- 616
Thereafter............................... -- 428
------ ------
Total minimum lease payments........... $1,477 $6,224
====== ======
</TABLE>
See Note 12 regarding sublease income from a related party.
F-19
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. 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 $2.6
million, $3.8 million, and $4.3 million for 1994, 1995, and 1996,
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, 1995 and 1996, the Company had accrued commissions payable
of $266,000 and $718,000, 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 approximated $1.2 million, and related
accumulated depreciation and amortization approximated $923,000 and $979,000
at December 31, 1995 and 1996, 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 $551,000, $537,000, and $554,000 during
1994, 1995 and 1996, respectively.
The approximate minimum noncancelable lease payments to be received for each
of the years subsequent to December 31, 1996 if the Company does not recapture
any of the subleased space and improvements as permitted under the sublease
are as follows: 1997, $612,000; 1998, $632,000; 1999, $632,000; 2000,
$448,000; 2001 $78,000 and thereafter $39,000.
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 8).
The aggregate amount of such loans outstanding, including accrued interest at
December 31, 1996 was approximately $1.7 million. 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 between 1995 and 1999.
On November 8, 1995, the Board of Directors approved a loan forgiveness
program (the "Loan Forgiveness Program") for the payment that was due in 1995
and 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.
F-20
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes the Company's results of operations for each
quarter of 1996 and 1995 (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>
1996
Net revenues............ $ 27,699 $ 36,060 $ 35,387 $ 55,197
Operating income........ 5,462 11,977 9,403 15,640
Net (loss) income before
extraordinary item..... (3,338) 1,877 (1,043) 3,409
Net (loss) income....... (3,338) 1,877 (1,043) 3,409
Net (loss) income per
common share........... $ (0.32) $ 0.17 $ (0.10) $ 0.24
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
</TABLE>
The results for the second quarter of 1995 include an extraordinary loss of
approximately $9.1 million ($0.84 per share) related to the early
extinguishment of debt (See Note 5).
F-21
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 2,177,605
Trade accounts receivable, less allowance for doubtful accounts
of $2,028,000................................................. 50,910,491
Current portion of program license rights...................... 14,665,232
Prepaid expenses............................................... 3,517,442
-------------
Total current assets........................................... 71,270,770
-------------
Property and equipment, net..................................... 141,586,059
Program license rights, excluding current portion............... 2,198,857
Deposits and other assets....................................... 1,518,563
Broadcasting licenses and other intangibles, less accumulated
amortization of $78,108,345.................................... 619,629,238
Deferred charges less accumulated amortization of $5,285,506.... 26,072,828
-------------
Total Assets.................................................... $ 862,276,315
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable......................................... $ 16,700,528
Accrued expenses............................................... 15,575,630
Current installments of program license liability.............. 12,475,543
Current installments of long-term debt......................... 2,897,460
Current installments of obligations under capital leases....... 598,016
-------------
Total current liabilities..................................... 48,247,177
Program license liability, excluding current installments....... 1,516,233
Long-term debt, excluding current installments.................. 664,623,463
Deferred taxes and other liabilities............................ 72,118,191
-------------
Total liabilities............................................. 786,505,064
-------------
Stockholders' equity:
Class A Common Stock, $.001 par value. Authorized 20,000,000
shares; issued and outstanding 12,241,608 shares.............. 12,242
Class B Common Stock, $.001 par value. Authorized 20,000,000
shares; issued and outstanding 2,017,230 shares............... 2,017
Additional paid-in capital..................................... 234,023,424
Accumulated deficit............................................ (158,266,432)
-------------
Total stockholders' equity.................................... 75,771,251
-------------
Total liabilities and stockholders' equity.................... $ 862,276,315
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Net operating revenue........................... $ 27,699,023 $ 61,278,958
-------------- --------------
Operating expenses.............................. 6,802,347 15,768,630
Amortization of program license rights.......... 1,754,416 10,448,451
Selling, general and administrative expenses.... 6,431,305 11,109,098
Depreciation and amortization................... 6,164,052 12,139,886
Corporate overhead.............................. 1,084,510 1,534,861
Non-cash compensation........................... -- 240,030
-------------- --------------
Operating income................................ 5,462,393 10,038,002
-------------- --------------
Interest income................................. 924,936 103,337
Interest expense................................ (9,697,839) (15,557,012)
Other expense, net.............................. (27,936) (150,369)
-------------- --------------
(8,800,839) (15,604,044)
-------------- --------------
Net loss........................................ $ (3,338,446) $ (5,566,042)
============== ==============
Net loss per common share....................... $ (0.32) $ (0.39)
============== ==============
Weighted average shares......................... 10,466,634 14,255,673
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
CLASS A CLASS B CLASS C CAPITAL DEFICIT EQUITY
------- ------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $12,209 $2,022 -- $233,190,382 $(152,700,390) $80,504,223
Contribution of shares
into Company's defined
contribution plan..... 28 -- -- 833,042 -- 833,070
Conversion of Class B
Common Stock to Class
A Common Stock........ 5 (5) -- -- --
Net loss for March 31,
1997.................. -- -- -- -- (5,566,042) (5,566,042)
------- ------ ---- ------------ ------------- -----------
Balance at March 31,
1997................... $12,242 $2,017 $-- $234,023,424 $(158,266,432) $75,771,251
======= ====== ==== ============ ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $ (3,338,446) $ (5,566,042)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment................................... 3,369,717 6,547,116
Amortization of program license rights....... 1,754,416 10,448,451
Amortization of broadcasting licenses, other
intangibles and deferred charges............ 2,794,335 5,592,770
Non-cash compensation........................ -- 240,030
Non-cash interest expense on outstanding
indebtedness................................ 91,980 71,726
Deferred acquisition and debt refinancing
costs incurred.............................. (3,125,000) --
Decrease in trade accounts receivable........ 5,957,465 9,377,925
Increase in prepaid expenses................. (1,335) (1,409,396)
Decrease in trade accounts payable........... (468,538) (4,946,851)
Increase (decrease) in accrued expenses...... 1,856,848 (2,993,437)
-------------- --------------
Net cash provided by operating activities...... 8,891,442 17,362,292
-------------- --------------
INVESTING ACTIVITIES
Capital expenditures........................... (718,460) (831,220)
Decrease (increase) in deposits and other
assets........................................ 80,216 (20,764)
Increase in broadcast licenses and other
intangibles................................... -- (200,249)
-------------- --------------
Net cash used in investing activities.......... (638,244) (1,052,233)
-------------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of public subordinated
debt.......................................... 125,000,000 --
Principal payments on long-term debt........... (49,764,798) (10,000,000)
Deferred acquisition and debt refinancing costs
incurred...................................... (861,522) (258,582)
Repurchase of Class A Common Stock............. (2,923,804) --
Principal payments under capital lease
obligations................................... (12,952) (211,473)
Payments on programming license liabilities.... (1,855,125) (10,667,143)
-------------- --------------
Net cash provided by (used in) financing
activities.................................... 69,581,799 (21,137,198)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 77,834,997 (4,827,139)
Cash and cash equivalents at beginning of year. 3,425,633 7,004,744
-------------- --------------
Cash and cash equivalents at March 31.......... $ 81,260,630 $ 2,177,605
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid.................................. $ 6,804,156 $ 18,200,882
Income taxes paid.............................. $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<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) and one
independent commercial television broadcasting stations in the states of
Michigan, Wisconsin, Louisiana, Illinois, Tennessee, New York, Virginia, Iowa,
South Dakota and California. 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 the consolidated financial position and the consolidated
results of operations and cash flows for such period. Operating results of
interim periods are not necessarily indicative of results for a full year.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (SFAS 128), "Earnings Per Share," which establishes new standards for
computing and presenting earnings per share. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company does not anticipate the effect of
adopting this new standard to have a material effect on the Company's
consolidated financial position or results of operations.
3. SUBSEQUENT EVENTS
On April 14, 1997, the Company announced that its Board of Directors had
approved the initiation of an ongoing stock buyback program for up to $20
million of the Company's Class A Common Stock. As of April 30, 1997, the
Company had repurchased and retired 108,000 shares at an approximate cost of
$2.8 million.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Young Broadcasting Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in KCAL Broadcasting Group equity, and of cash flows
present fairly, in all material respects, the financial position of KCAL
Broadcasting Group ("KCAL", which represented a broadcasting group of The Walt
Disney Company until November 22, 1996) at September 30, 1996 and 1995 and the
results of its operations, and its cash flows for each of the three years in
the period ended September 30, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Young Broadcasting of Los Angeles, Inc. management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
July 10, 1997
F-27
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
BALANCE SHEET
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 38,133 $ 36,829
Accounts receivable (net of allowances of $350 in 1996 and
$1,041 in 1995)........................................... 17,126 17,998
Broadcast program rights................................... 22,142 25,030
Deferred income taxes ..................................... 2,265 10,011
Prepaid expenses........................................... 311 260
-------- --------
Total current assets..................................... 79,977 90,128
Broadcast program rights..................................... 3,545 6,294
Property, plant and equipment, net........................... 13,107 13,898
Intangible assets, net....................................... 214,726 221,442
-------- --------
Total assets............................................. $311,355 $331,762
======== ========
LIABILITIES AND BROADCASTING GROUP EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............. $ 4,330 $ 5,832
Broadcast program rights payable........................... 25,718 30,123
-------- --------
Total current liabilities................................ 30,048 35,955
Broadcast program rights payable............................. 5,125 9,658
Deferred income taxes........................................ 4,595 10,011
-------- --------
Total liabilities........................................ 39,768 55,624
-------- --------
Commitments and contingencies (Note 8).......................
Broadcasting group equity.................................... 271,587 276,138
-------- --------
Total liabilities and broadcasting group equity.......... $311,355 $331,762
======== ========
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
STATEMENT OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................... $120,330 $113,990 $102,995
Expenses:
Program amortization............................. 50,167 51,523 45,759
Program write-offs............................... -- -- 14,556
Other operating expenses......................... 27,905 26,151 25,484
Selling, general and administrative.............. 23,487 25,029 24,619
Depreciation..................................... 3,264 3,520 4,155
Amortization of intangibles...................... 6,716 7,342 7,937
-------- -------- --------
Total expenses................................. 111,539 113,565 122,510
-------- -------- --------
Income (loss) before income taxes.................. 8,791 425 (19,515)
Income tax provision............................... 935 -- --
-------- -------- --------
Net income (loss).................................. $ 7,856 $ 425 $(19,515)
======== ======== ========
</TABLE>
STATEMENT OF CHANGES IN KCAL BROADCASTING GROUP EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Beginning of year.................................. $276,138 $246,145 $243,722
Net income (loss).................................. 7,856 425 (19,515)
Net transactions with Disney (Note 4).............. (12,407) 29,568 21,938
-------- -------- --------
$271,587
End of year........................................ $276,138 $246,145
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
STATEMENT OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 7,856 $ 425 $(19,515)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation................................. 3,264 3,520 4,155
Amortization of intangibles.................. 6,716 7,342 7,937
Amortization of broadcast program rights..... 35,816 35,771 47,617
Payments for broadcast program rights........ (39,117) (49,002) (49,771)
Changes in assets and liabilities:
Accounts receivable.......................... 872 (421) (1,103)
Other assets................................. (51) (81) 122
Accounts payable............................. (1,502) 88 2,538
Deferred income taxes........................ 2,330 -- --
-------- -------- --------
Cash used in operating activities................ 16,184 (2,358) (8,020)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment..... (2,473) (3,900) (3,759)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transactions with Disney (Note 4).......... (12,407) 29,568 21,938
-------- -------- --------
Increase in cash and cash equivalents............ 1,304 23,310 10,159
Cash and cash equivalents, beginning of year..... 36,829 13,519 3,360
-------- -------- --------
Cash and cash equivalents, end of year........... $ 38,133 $ 36,829 $ 13,519
======== ======== ========
</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 acquired Capital Cities. In connection with the acquisition, Disney
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 were not sold by Disney upon its divestiture of KCAL (see
Note 9). Selected financial information associated with the retained
programming is as follows:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance Sheet
Broadcast program rights.................. $ -- $ 130 $ 3,248
Broadcast program rights payable.......... -- 4,449 19,760
Statement of Operations
Revenues.................................. $ 37 $ 2,038 $ 2,905
Program amortization expense.............. 130 3,118 4,871
Program write-offs........................ -- -- 3,550
-------- --------- ---------
Operating loss............................ $ (93) $ (1,080) $ (5,516)
======== ========= =========
Statement of Cash Flows
Cash payments............................. $ 4,449 $ 15,311 $ 18,586
======== ========= =========
</TABLE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Advertising revenue is recorded when the related advertisement is broadcast
and is presented 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,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Goodwill less accumulated amortization of $36,067 in
1996 and $31,480 in 1995............................... $150,384 $154,971
FCC license, less accumulated amortization of $15,672 in
1996 and $13,669 in 1995............................... 64,342 66,345
Advertiser relationships, less accumulated amortization
of $32,231 in 1996 and $32,105 in 1995................. -- 126
-------- --------
$214,726 $221,442
======== ========
</TABLE>
Goodwill represents the excess of Disney's purchase cost for KCAL over the
fair value of their net assets at the date of acquisition. Both the goodwill
and FCC license are being amortized over 40 years using the straight-line
method. Advertiser relationships are amortized over 8 years using an
accelerated method.
F-32
<PAGE>
KCAL BROADCASTING GROUP
(A BROADCASTING GROUP OF THE WALT DISNEY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ 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. The
amounts realized upon the sale of the broadcast operations, as described in
Note 9, was sufficient to cover the stated carrying value of the assets of
KCAL (including the intangible assets) at September 30, 1996.
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,
----------------------------
1996 1995 1994
------------------ ---------
<S> <C> <C> <C>
Balance Sheet
Broadcast program rights..................... $ 6,078 $ 8,168 $ 11,378
Broadcast program rights payable............. 7,152 12,444 18,783
Statement of Cash Flows
Cash payments................................ $ 7,583 $ 7,267 $ 8,092
</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,
---------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Programming costs paid by Disney................ $ 4,818 $14,638 $ 18,585
Salaries, employee benefits and payroll taxes... 15,574 14,468 13,129
Corporate overhead allocations.................. 1,520 1,201 1,626
Net cash transfers.............................. (38,479) 133 (11,000)
Other........................................... 4,160 (872) (402)
-------- ------- --------
Total......................................... $(12,407) $29,568 $ 21,938
======== ======= ========
</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,
------------------------
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Current
Federal.......................................... $ (354) $(5,015) $(5,204)
State............................................ (60) (860) (893)
------ ------- -------
(414) (5,875) (6,097)
------ ------- -------
Deferred
Federal.......................................... 457 4,696 6,093
State............................................ 892 1,179 4
------ ------- -------
1,349 5,875 6,097
------ ------- -------
$ 935 $ 0 $ 0
====== ======= =======
</TABLE>
Components of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Programming costs.................................... $ 2,265 $ 10,011
Loss carryforwards................................... 21,540 20,658
Fixed assets and other............................... (108) 761
-------- --------
Total deferred tax assets.......................... $ 23,697 $ 31,430
Deferred Tax Liabilities:
Licenses............................................. (26,027) (26,683)
-------- --------
Net Deferred Tax Assets/(Liabilities):
Before valuation allowance........................... (2,330) 4,747
Valuation Allowance.................................... 0 (4,747)
-------- --------
Net Deferred Tax Assets/(Liabilities)................ $ (2,330) $ 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,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Tax at federal income tax rate.................... $ 3,077 $ 149 $(6,830)
State taxes, net of federal income tax benefit.... 528 25 (1,171)
Amortization of goodwill.......................... 1,881 1,881 1,881
Valuation allowance............................... (4,747) (2,177) 6,068
Other............................................. 196 122 52
------- ------- -------
$ 935 $ 0 $ 0
======= ======= =======
</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. As described in
Note 9, substantially all of the assets of KCAL were sold to an unrelated
third party. Disney has no obligation to pay KCAL or the purchaser for any tax
attributes that remain unutilized.
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 year ended September 30, 1994, a valuation allowance of $6,068 was
established. For the years ended September 30, 1995 and September 30, 1996,
prior valuation allowances were reduced by $2,177 and $4,747, respectively. In
addition to the amounts in the table above, in 1996, income tax benefits of
$468 were allocated to Broadcasting group equity representing the tax benefits
associated with employee stock option transactions.
NOTE 6--BARTER TRANSACTIONS
Total barter sales amounted to $14,351 in 1996, $15,752 in 1995 and $12,698
in 1994. 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, 1996 and 1995 consisted of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1995
-------- ---------
<S> <C> <C>
Land.................................................. $ 3,100 $ 3,100
Buildings and improvements............................ 4,287 4,165
Leasehold improvements................................ 1,466 1,446
Furniture, fixtures and equipment..................... 36,622 41,386
Accumulated depreciation.............................. (32,368) (36,199)
-------- ---------
Property, plant and equipment, net.................... $ 13,107 $ 13,898
======== =========
</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 transmitter 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 $1,411 in 1996, $1,110 in 1995 and $1,365 in 1994. The aggregate minimum
rental commitments for all non-cancelable operating leases with terms of more
than one year are as follows:
<TABLE>
<S> <C>
1997.................................. $1,306
1998.................................. 1,368
1999.................................. 11
2000.................................. 11
------
Total............................... $2,696
======
</TABLE>
Broadcast program rights
In addition to the program rights recorded in the balance sheet as of
September 30, 1996, 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, 1996. These unrecorded
contractual commitments totaled $28,581 as of September 30, 1996.
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, results of operations or liquidity.
NOTE 9--SUBSEQUENT EVENT
On November 22, 1996, substantially all of the assets of KCAL Broadcasting
Group were sold to Young Broadcasting of Los Angeles, Inc., a wholly-owned
subsidiary of Young Broadcasting Inc. for $387,000 in cash.
F-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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>
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-49
<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-50
<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-51
<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-52
<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-53
<PAGE>
COMBINED FINANCIAL STATEMENTS OFMIDCONTINENT 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-54
<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-55
<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-56
<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-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.)
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-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.)
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-59
<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-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.)
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-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 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-62
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THE OFFER CONTAINED HEREIN OTHER THAN THOSE CON-
TAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURIS-
DICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements................................................ 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 15
The Company............................................................... 22
Use of Proceeds........................................................... 23
Capitalization............................................................ 24
Pro Forma Consolidated Financial Data..................................... 25
Selected Consolidated Financial Data...................................... 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 35
Business.................................................................. 43
Management................................................................ 70
Principal Stockholders.................................................... 77
Certain Transactions...................................................... 79
Description of the Notes.................................................. 80
Description of Capital Stock.............................................. 104
The Exchange Offer........................................................ 107
Certain Federal Income Tax Consequences................................... 115
Book Entry; Delivery and Form............................................. 115
Plan of Distribution...................................................... 117
Legal Matters............................................................. 117
Experts................................................................... 118
Additional Information.................................................... 118
Index to Financial Statements............................................. F-1
</TABLE>
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------------------------------
PROSPECTUS
------------------------------
$200,000,000
YOUNG BROADCASTING INC.
OFFER TO EXCHANGE
SERIES B 8 3/4% SENIOR
SUBORDINATED NOTES DUE 2007 FOR ALL OUTSTANDING
8 3/4% SENIOR SUBORDINATED NOTES DUE 2007
JULY 29, 1997
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