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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission file number: 0-25042
YOUNG BROADCASTING INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3339681
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
599 Lexington Avenue 10022
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 754-7070
____________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.001 Par Value
(Title of class)
____________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock of registrant held by non-
affiliates of the registrant as of February 28, 1999 was approximately
$559,467,162.
____________________
Number of shares of Common Stock outstanding as of February 28, 1999:
11,430,557 shares of Class A Common Stock and 2,383,447 shares of Class B Common
Stock.
____________________
DOCUMENTS INCORPORATED BY REFERENCE
Document Location in Form 10-K
-------- in which incorporated
Registrant's Proxy Statement relating to ---------------------
the 1999 Annual Meeting of Stockholders Part III
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YOUNG BROADCASTING INC.
FORM 10-K
Table of Contents
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Page
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PART I
Item 1. Business................................................................................. 1
Item 2. Properties............................................................................... 21
Item 3. Legal Proceedings........................................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders...................................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 26
Item 6. Selected Financial Data.................................................................. 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................... 28
Item 7A Quantitative and Qualitative Disclosures About Market Risks.............................. 36
Item 8. Financial Statements and Supplementary Data.............................................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................... 56
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 56
Item 11. Executive Compensation................................................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 56
Item 13. Certain Relationships and Related Transactions........................................... 56
PART IV
Item 14. Exhibits, Financial Statement, Schedules, and Reports on Form 8-K........................ 56
SIGNATURES.......................................................................................... 61
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FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT, 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, PRICING FLUCTUATIONS IN LOCAL AND
NATIONAL ADVERTISING AND VOLATILITY IN PROGRAMMING COSTS.
PART I
Item 1. Business.
All market rank, rank in market, station audience rating and share, and
television household data in this report are from the Nielsen Station Index
Viewers and Profile dated November 1998, 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").
General
The Company owns and operates twelve television stations in geographically
diverse markets and a national television sales representation firm, Adam Young
Inc. 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.
Each of the Company's stations is owned and operated by a direct or indirect
Subsidiary. The Company is presently the eighth largest ABC network affiliate
group in terms of households reached. 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.
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 that was formed in 1986. The
Company's principal offices are located at 599 Lexington Avenue, New York, New
York 10022, and its telephone number is (212) 754-7070.
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Recent Developments
Long-Term Sports Agreement. On June 16, 1998, the Company entered into a
new long-term agreement with the Los Angeles Lakers ("Lakers") with broadcast
rights through the 2004/2005 season. Under the terms of the seven year deal,
KCAL-TV, Los Angeles, California, will broadcast 41 Lakers pre-season and
regular season away games annually. Additionally, KCAL-TV has the broadcast
rights to all post-season away games not subject to NBA/network commitments.
KCAL-TV has also obtained the exclusive sales rights and control over broadcast,
production and inventory activities. The Company paid an initial rights fee of
$30 million on August 14, 1998 and will pay an additional $18.0 million per
season. In the event that all 41 games are not made available to KCAL-TV or are
canceled, the Company will receive a per game credit.
Stock Repurchase. During September and October 1998, the Company
repurchased 552,800 shares of its Class A Common Stock in open market purchases
pursuant to a stock repurchase program for an aggregate price of approximately
$19.5 million. The Company is authorized, subject to certain limitations, to
effect up to an aggregate of $70.0 million of such purchases.
Adam Young Inc. Merger. On February 5, 1998, the Company entered into an
Agreement and Plan of Merger with Adam Young Inc. ("AYI") and AYI Acquisition
Corporation, a wholly-owned subsidiary of the Company ("Sub"), pursuant to which
AYI was merged with and into Sub and became a wholly-owned subsidiary of the
Company.
The acquisition of AYI has been accounted for as a combination of companies
under common control similar to a pooling-of-interests. The Company issued
526,757 shares of the Company's Class A Common Stock and repurchased from AYI
and cancelled 50,450 shares of Class B Common Stock, together having an
approximate value of $19.3 million, to Vincent Young, the Company's Chairman and
Adam Young, the Company's Treasurer, and his wife, in exchange for all of the
outstanding stock of AYI which was held by these persons.
Historical information related to this acquisition was not included in the
Company's historical results as the impact of this acquisition was to deemed to
be material.
Operating Strategy
The Company continually seeks to increase its revenues and broadcast cash
flow (as defined). 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 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.
The Company's stations utilize a variety of marketing techniques to
increase advertising revenues, including the following:
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. 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 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.
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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 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. 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. The following table sets forth
general information for each of the Company's stations:
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Station
Commercial Rank
Market Television Network Stations In In-Market Year
Rank(1) Households(2) Channel Affiliation in DMA(3) Market(4) Share(5) Acquired
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KCAL (Los Angeles, CA) 2 5,135,140 9 IND 11 6 10 1996
WKRN (Nashville, TN) 30 811,870 2 ABC 7 3 19 1989
WTEN (Albany, NY) 53 507,680 10(6) ABC 4 3 26 1989
WRIC (Richmond, VA) 61 467,730 8 ABC 5 3 28 1994
WATE (Knoxville, TN) 63 446,510 6 ABC 5 3 22 1994
WBAY (Green Bay, WI) 69 384,860 2 ABC 6 2 29 1994
KWQC (Quad Cities) 90 300,490 6 NBC 4 1 44 1996
WLNS (Lansing, MI) 106 237,130 6 CBS 4 1 40 1986
KELO (Sioux Falls, SD) 109 231,180 11(7) CBS 4 1 50 1996
KLFY (Lafayette, LA) 123 200,010 10 CBS 4 1 52 1988
WKBT (La Crosse-
Eau Claire, WI) 129 179,460 8 CBS 4 2 23 1986
WTVO (Rockford, IL) 134 167,170 17 ABC 4 3 25 1988
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(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 November 1998.
(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 172.
The following is a description of each of the Company's stations:
KCAL, Los Angeles, California. The Company acquired KCAL from KCAL
Broadcasting, Inc., a subsidiary of the Walt Disney Company ("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 5,135,140 television households and the
country's largest television market in terms of estimated advertising dollars
spent on the medium. There are eleven reportable stations in the DMA. For the
November 1998 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 10%. KCAL ranked fifth in in-market revenue share in the fourth quarter of
1998.
KCAL is a prominent news provider in the market, presenting 27 1/2 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. In 1997, KCAL won
five Golden Mikes. Since 1991, KCAL has been the most honored local station in
Los Angeles for news. In 1998, KCAL won 8 Emmys and 4 Golden Mikes.
KCAL is also the broadcast station of choice for premier local sports
franchises with over 160 major televised sporting events each year. KCAL
currently has long term agreements with the Los Angeles Lakers (7 years
remaining), Anaheim Angels (2 years remaining), Mighty Ducks of Anaheim (5 years
remaining),
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Los Angeles Clippers (2 years remaining) and Los Angeles Kings (1 year
remaining). The station also has agreements to broadcast PAC 10 Football and
certain boxing events. These contracts enable KCAL to offer advertisers year-
round sports packages aimed at very attractive audience categories.
As the largest market in the country's largest state, Los Angeles enjoys a
diverse industry makeup ranging from entertainment and manufacturing to
international trade and financial services. In addition to Los Angeles County,
KCAL reaches Orange, Santa Barbara and other counties in Southern California.
Orange County alone has ranked fifth, nationally, in both population and
population growth over the last five years. According to Investing in Television
Market Report '98 (4th Edition), published by BIA Publications, Inc. (the "BIA
Guide"), the average household income in the Los Angeles market in 1996 was
$44,015, with an effective buying income projected to grow at an annual rate of
3.1% through 2001. 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 2.0% annually through 2001.
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 30th largest DMA, with an
estimated 811,870 television households. There are seven reportable stations in
the DMA. For the November 1998 ratings period, WKRN was rated third after the
CBS and NBC affiliates, with an overall sign-on to sign-off in-market share of
19%. The station's syndicated programs include Live with Regis and Kathie Lee,
Donnie & Marie, Rosie, Friends, Wheel of Fortune, ER and NYPD Blue.
The quality of the station's newscasts has been regularly recognized by its
broadcasting peers, and was recently awarded a mid-south regional Emmy for News
Excellence, the first Nashville station to win the award in four years. The
station is also a recipient of the prestigious Peabody Award for investigative
journalism. During the last three years, the station won a combined 39 regional
Emmy Awards. The Tennessee Associated Press awarded the station first place for
Investigative, Feature and Sport News reporting. The station has also 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 1996 was $41,340, with effective buying income projected to
grow at an annual rate of 6.3% through 2001. 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 5.7% annually through 2001.
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,
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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 53rd largest
DMA, with an estimated 507,680 television households. There are four reportable
stations in the DMA, three of which broadcast in the VHF spectrum. During the
November 1998 ratings period, WTEN was third in the ratings, with a sign-on to
sign-off in-market share of 26%, compared to 32% for WNYT, the NBC affiliate,
and 32% for WRGB, the CBS affiliate, and 12% for WXXA, the Fox affiliate. The
station's syndicated programs include Wheel of Fortune, Jeopardy, Rosie, and
Jenny Jones. WTEN has won numerous awards in recent years for both local news
and public affairs programming.
Albany is the capital of New York. The largest employers are the New York
State government, the State University of New York and the General Electric
Company. Other prominent corporations located in the area include Lockheed
Martin, Fleet Financial Group, State Farm Insurance, Metropolitan Life Insurance
and Quad Graphics. These employers, which are dependent upon a well-educated and
skilled labor force to remain competitive in their industries, are able to draw
upon the nation's largest concentration per capita of professionals with
doctoral and post-doctoral degrees. According to the BIA Guide, the average
household income in the Albany market in 1996 was $39,089, with effective buying
income projected to grow at an annual rate of 2.8% through 2001. Retail sales
growth in this market is also projected by the BIA Guide to average 2.9%
annually during the same period.
The station has focused on its local newscasts, selective syndicated program
acquisitions and client marketing programs to maximize revenues. Selective use
of client incentive programs has generated over $2.1 million of new revenue in
1998. In the key 4 pm to 8 pm time period, WTEN consistently achieves an overall
first place performance in both households and the primary W25-54 selling
demographic.
WRIC, Richmond, Virginia. WRIC, acquired by the Company in November 1994
from Nationwide Communications Inc. ("Nationwide"), began operations in 1955 and
is affiliated with ABC. The Richmond market (which also includes Petersburg,
Virginia) is the 61st largest DMA, with an estimated 467,730 television
households. There are five reportable commercial television stations in the DMA,
three of which are VHF stations. For the November 1998 ratings period, WRIC was
in third place in the ratings, one point 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 28%, compared to 29% for WTVR and
31% for WWBT. The station's syndicated programming includes Wheel of Fortune,
Jeopardy, Rosie 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 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 1996 was $39,959 with effective buying income projected to grow at an annual
rate of 4.2% through 2001. Retail sales growth is also projected by the BIA
Guide to average 4.4% 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 63rd largest DMA, with an estimated
446,510 television households. There are five reportable stations in the DMA,
three of which are VHF stations. During the November 1998 ratings period, WATE
ranked third, with a sign-on to sign-off in-market share of 22%. The station's
syndicated programming includes Home Improvement, People's Court, Extra 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.
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According to the BIA Guide, the average household income in the Knoxville
market in 1996 was $35,651 with effective buying income projected to grow at an
annual rate of 5.4% through 2001. Retail sales growth is also projected by the
BIA Guide to average 6.1% 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 69th largest DMA, with an estimated 384,860 television
households. There are six reportable stations in the DMA, four of which are VHF
stations. For the November 1998 ratings period, WBAY was tied in the ratings
with WFRV, the CBS affiliate. In audience share, WFRV tied WBAY in the November
1998 ratings period, with a sign-on to sign-off in-market share of 29%. The
station's syndicated programming includes Home Improvement, Seinfeld, Friends,
Inside Edition, Hard Copy and Martha Stewart. WBAY has won numerous awards in
recent years from state journalism organizations for its news operations.
According to the BIA Guide, the average household income in the Green Bay
market in 1996 was $39,216, with effective buying income projected to grow at an
annual rate of 4.2% through 2001. Retail sales growth is also projected by the
BIA Guide to average 4.6% 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
90th largest DMA serving an estimated 300,490 television households in eastern
Iowa and western Illinois. There are four reportable stations in the DMA, three
of which are VHF. During the November 1998 ratings period, KWQC retained its
number one position in the market with a sign-on to sign-off in-market share of
44%. The station has retained the number one position for over thirteen years
and continues to expand news programming and increase market share. The
station's syndicated programming includes Oprah, Jeopardy, Wheel of Fortune,
Martha Stewart 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 25 1/2 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 1996 was $38,475, with effective buying income projected to grow at an
annual rate of 3.1% through 2001. Retail sales growth is also projected by the
BIA Guide to average 2.8% 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 237,130 television households. WLNS is one of only two VHF network
affiliates in the DMA. During the November 1998 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 40%. The station has consistently held the
highest rating for several ratings periods. The station's syndicated programming
includes Rosie, Entertainment Tonight, Hollywood Squares, NYPD Blue, The X-Files
and Montel Williams.
The station attributes its success to a strong commitment to local news and
community involvement. WLNS is the longtime news leader in the Lansing market,
programming 24 hours per week of local news and enjoying the highest viewership
of all local stations. The station has won numerous awards over the years for
its news operations including recognition from The Associated Press for General
Excellence, The
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Michigan Association of Broadcasters for Best Sportscast, and the University
Press Club of Michigan for Best Newscast. Several years ago, WLNS formed a
market exclusive relationship with CrimeStoppers. The station airs hundreds of
PSA's per year which have led to several major crimes being solved and the
apprehension of many felons who were profiled in the spots. The Crime Prevention
Association of Michigan recognized WLNS for its CrimeStoppers effort by making
the station the recipient of its Outstanding Media Award, four years in a row.
WLNS is also noted for its production of news and sports specials including town
hall meetings on gang problems, a jobs telethon, political debates and live
broadcasts of the area's minor league baseball team, the Lansing Lugnuts.
The economy of Lansing is dominated by three employers, the State of
Michigan, General Motor's Buick-Oldsmobile-Cadillac Division ("B.O.C.") and
Michigan State University, giving Lansing an advantage over other Michigan
cities whose economies rely more heavily on, and are more prone to the cyclical
nature of, the domestic automobile industry. Lansing is the capital of Michigan
and its various government agencies employ an aggregate of approximately 15,500
people. B.O.C. has approximately 14,000 employees. Michigan State University has
over 12,000 employees with a student enrollment of over 42,000. Other
significant industry sectors in the area are plastics, non-electrical machinery,
fabricated metal products, food processing and printing. Companies represented
in these groups include Owens-Brockway, John Henry Co. and Dart Container.
According to the BIA Guide, the average household income in the Lansing market
in 1996 was $40,439, with effective buying income projected to grow at an annual
rate of 3.3% through 2001. Retail sales growth in this market is also projected
by the BIA Guide to average 3.7% 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-TV fully serves two DMAs, as Rapid City is a separate
contiguous market. (All references to KELO include KDLO and KPLO. The following
information pertains only to the Sioux Falls DMA.)
The Sioux Falls market is the 109th largest DMA serving an estimated 231,180
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, two of which are VHF. During the November 1998 ratings period, KELO was
first in the market with a sign-on to sign-off in-market share of 50%,
significantly ahead of the ABC, NBC and FOX/UPN affiliates, who had 26%, 15% and
9%, respectively. KELO-TV finished first in every news time period, sometimes
more than doubling the combined audience of its competitors. The station's
syndicated programming includes Rosie, Entertainment Tonight, Maury, Martha
Stewart and Stargate SG-1.
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 1996 was $38,539, with effective buying income projected to grow at an
annual rate of 4.6% through 2001. Retail sales growth is also projected by the
BIA Guide to average 5.7% 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 UPN and 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. Since 1994, the NBC affiliate
in Lake Charles is selling advertising in the Lafayette market with minimal
success.
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The Lafayette market is the 123rd largest DMA, with an estimated 200,010
television households. KLFY ranks first in the November 1998 ratings period with
an overall sign-on to sign-off in-market share of 52%, 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 an in-market share of 44%. The station's syndicated programs
include The Maury Povich Show, Home Improvement, The Nanny, Coach, Rosie, Sally
Jessy Raphael, 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 November
1998 ratings period, this program received a 6:00 - 7:00 a.m. in-market share of
63%. The first 30 minutes of "Passe Partout" are broadcast in French for the
large French-speaking Cajun population in the area; the balance is in English.
KLFY also has won numerous awards in recent years from state journalism
organizations, including the 1995 and 1997 "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 eleven 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 1996 was $32,049, with effective buying income projected to grow at an
annual rate of 4.2% through 2001. Retail sales growth in this market is also
projected by the BIA Guide to average 4.9% 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 twelve-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 129th largest DMA, with an estimated
179,460 television households. The highest-rated local stations in the DMA are
WKBT and WEAU, the NBC affiliate. For the November 1998 ratings period, WKBT had
a sign-on to sign-off in-market share of 23%, which places WKBT second to WEAU,
which had a 38% share. The station's syndicated programming includes Sally Jessy
Raphael, Baywatch, Montel Williams, Hollywood Squares and VIP.
The station's newscasts, collectively broadcast as NewsChannel 8, focuses on
local coverage of news, weather and sports events. NewsChannel 8 offers 3 1/2
hours of local news each weekday.
Over the past several years, WKBT has won awards for news coverage from
state journalism organizations. Currently, WKBT is the only station in La Crosse
to provide closed-captioning of its local
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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 and Operation Firesafe. 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, Stroh Brewing Company and La
Crosse Footwear. Lutheran Hospital, Franciscan Health Systems and Gunderson
Clinic have made La Crosse a health care hub for the entire western Wisconsin
region and, combined, employ approximately 4,400 area residents. Local
educational institutions draw a large student base to the market and include
branches of the University of Wisconsin in La Crosse and Eau Claire, as well as
Viterbo College and Western Wisconsin Technical College. According to the BIA
Guide, the average household income in the La Crosse-Eau Claire market in 1996
was $34,150, with effective buying income projected to grow at an annual rate of
3.6% through 2001. Retail sales growth in this market is also projected by the
BIA Guide to average 4.6% 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 134th largest DMA, with an estimated 167,170
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
November 1998 ratings period, WTVO was number three in the market, with a sign-
on to sign-off in-market share of 25%, compared to 31% for both the CBS and NBC
affiliates. The station's syndicated programs include Sally Jessy Raphael,
Rosie, Hollywood Squares and News Radio. The station produces local interest
programs such as Spotlight 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'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 a cellular phone
plant in nearby Harvard, Illinois. According to the BIA Guide, the average
household income in the Rockford market in 1996 was $40,611, with effective
buying income projected to grow at an annual rate of 3.6% through 2001. Retail
sales growth in this market is also projected by the BIA Guide to average 2.4%
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
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elimination from the marketplace of VHF-only receivers and the expansion of
cable television systems have reduced the VHF signal advantage. Any disparity
between VHF and UHF is likely to diminish even further in the coming era of
digital television. See "Federal Regulation of Television Broadcasting" below.
The Market for Television Programming. Television station revenues are
primarily derived from local, regional and national advertising and, to a lesser
extent, from network compensation and revenues from studio rental and commercial
production activities. Advertising rates are based upon a variety of factors,
including a program's popularity among the viewers an advertiser wishes to
attract, the number of advertisers competing for the available time, the size
and demographic makeup of the market served by the station, and the availability
of alternative advertising media in the market area. Rates are also determined
by a station's overall ratings and share in its market, as well as the station's
ratings and share among particular demographic groups which an advertiser may be
targeting. Because broadcast television stations rely on advertising revenues,
declines in advertising budgets, particularly in recessionary periods, adversely
affect the broadcast industry, and as a result may contribute to a decrease in
the revenues of broadcast television stations.
All television stations in the country are grouped by Nielsen, a national
audience measuring service, into approximately 210 generally recognized
television markets that are ranked in size according to various formulae based
upon actual or potential audience. Each DMA is determined as an exclusive
geographic area consisting of all counties in which the home-market commercial
stations receive the greatest percentage of total viewing hours. Nielsen
periodically publishes data on estimated audiences for the television stations
in the various television markets throughout the country. The estimates are
expressed in terms of the percentage of the total potential audience in the
market viewing a station (the station's "rating") and of the percentage of the
audience actually watching television (the station's "share"). Nielsen provides
such data on the basis of total television households and selected demographic
groupings in the market. Nielsen uses two methods of determining a station's
ability to attract viewers. In larger geographic markets, ratings are determined
by a combination of meters connected directly to selected television sets and
weekly diaries of television viewing, while in smaller markets only weekly
diaries are completed. The Los Angeles and Nashville 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
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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 Federal
Communications Commission ("FCC") and marketplace choices expanded with the
growth of independent stations and cable television services. See "-Federal
Regulation of Television Broadcasting" below.
Cable television systems, which grew at a rapid rate beginning in the early
1970s, were initially used to retransmit broadcast television programming to
paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant competitor
for viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than any
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 60% to
74%.
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
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entertainment programming, including news and syndicated programs purchased for
cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the past
decade, have also emerged as viable competitors for television viewership share.
Each of Time Warner, Inc. and Paramount Communications, Inc. has recently
launched a new television network and have entered into affiliation agreements
with certain independent commercial television stations. The programming made
available by these new networks is presently limited. The Company is unable to
predict the effect, if any, that such networks will have on the future results
of the Company's operations.
In addition, the development of methods of television transmission of video
programming other than over-the-air broadcasting, and in particular the growth
of cable television, has significantly altered competition for audience in the
television industry. These other transmission methods can increase competition
for a broadcasting station by bringing into its market distant broadcasting
signals not otherwise available to the station's audience and also by serving as
a distribution system for non-broadcast programming originated on the cable
system. Through the 1970s, network television broadcasting enjoyed virtual
dominance in viewership and television advertising revenues because network-
affiliated stations competed only with each other in most local markets.
Although cable television systems were initially used to retransmit broadcast
television programming to paid subscribers in areas with poor broadcast signal
reception, significant increases in cable television penetration occurred
throughout the 1970s and 1980s in areas that did not have signal reception
problems. As the technology of satellite program delivery to cable systems
advanced in the late 1970s, development of programming for cable television
accelerated dramatically, resulting in the emergence of multiple, national-scale
program alternatives and the rapid expansion of cable television and higher
subscriber growth rates. Historically, cable operators have not sought to
compete with broadcast stations for a share of the local news audience.
Recently, however, certain cable operators have elected to compete for such
audiences, and the increased competition could have an adverse effect on the
Company's advertising revenues.
Other sources of competition include home entertainment systems (including
video cassette recorder and playback systems, videodisks and television game
devices), "wireless cable" service, satellite master antenna television systems,
low power television stations, television translator stations and, most
recently, direct broadcast satellite video distribution services which transmit
programming directly to homes equipped with special receiving antennas.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now under development
for use with current cable channels or direct broadcast satellites, are expected
to reduce the bandwidth required for television signal transmission. These
compression techniques, as well as other technological developments, are
applicable to all video delivery systems, including over-the-air broadcasting,
and have the potential to provide vastly expanded programming to highly targeted
audiences. Reduction in the cost of creating additional channel capacity could
lower entry barriers for new channels and encourage the development of
increasingly specialized "niche" programming. This ability to reach very
narrowly defined audiences is expected to alter the competitive dynamics for
advertising expenditures. The Company is unable to predict the effect that these
or other technological changes will have on the broadcast television industry or
the future results of the Company's operations.
Programming. Competition for programming involves negotiating with national
program distributors or syndicators which sell first-run and rerun packages of
programming. The stations compete against in-market broadcast station
competitors for exclusive access to off-network reruns (such as Roseanne) and
first-run product (such as Entertainment Tonight) in their respective markets.
Cable systems generally do not compete with local stations for programming,
although various national cable networks from time to time have acquired
programs that would have otherwise been offered to local television stations.
Competition for exclusive news stories and features is also endemic in the
television industry.
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Time Warner, Inc. and Paramount Communications, Inc., each of which has
recently launched a new television network, also own or control a major
production studio. Outside production studios are the primary source of
programming for the networks. It is uncertain whether in the future such
programming, which is generally subject to short-term agreements between the
studios and the networks, will be moved to the new networks.
Advertising. Advertising rates are based upon the size of the market in
which the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic makeup of the market served by the station, the
availability of alternative advertising media in the market area, aggressive and
knowledgeable sales forces, and development of projects, features and programs
that tie advertiser messages to programming. In addition to competing with other
media outlets for audience share, the Company's stations also compete for
advertising revenues, which comprise the primary source of revenues for the
Subsidiaries. The Company's stations compete for such advertising revenues with
other television stations in their respective markets, as well as with other
advertising media, such as newspapers, radio stations, magazines, outdoor
advertising, transit advertising, yellow page directories, direct mail and local
cable systems. Competition for advertising dollars in the broadcasting industry
occurs primarily within individual markets. Generally, a television broadcasting
station in the market does not compete with stations in other market areas. The
Company's television stations are located in highly competitive markets.
Network Affiliation Agreements
Each of the Company's 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.
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As an independent station, KCAL purchases all of its programming, resulting
in proportionally higher programming costs for the station. In this regard, KCAL
retains its entire inventory of advertising and all of the revenue obtained
therefrom. Furthermore, KCAL enters into barter arrangements whereby program
distributors may receive advertising time in exchange for the programming they
provide.
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"), most recently amended in significant respects by the Telecommunications
Act of 1996 (the "1996 Act"). The Communications Act empowers the FCC, among
other things: to determine the frequencies, location and power of broadcast
stations; to issue, modify, renew and revoke station licenses; to approve the
assignment or transfer of control of broadcast licenses; to regulate the
equipment used by stations; and to impose penalties for violations of the
Communications Act or FCC regulations. The FCC has also adopted children's
programming regulations for television broadcasters that effectively require
most television broadcasters to air at least three hours per week of programming
designed to meet the educational and informational needs of children age 16 and
younger. Failure to observe these or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures or, for
particularly egregious violations, the revocation of a license. The Company's
business will be dependent upon its continuing ability to hold television
broadcasting licenses from the FCC.
License Grant and Renewal. As a result of the 1996 Act, broadcast licenses
are now generally granted or renewed for terms of eight years, though licenses
may be renewed for a shorter period upon a finding by the FCC that the "public
interest, convenience and necessity" would be served thereby. The Company must
apply for renewal of each broadcast license. At the time an application is made
for renewal of a license, parties in interest may file petitions to deny, and
such parties, as well as other members of the public, may comment upon the
service the station has provided during the preceding license term and urge
denial of the application. While broadcast licenses are typically renewed by
the FCC, even when petitions to deny are filed against renewal applications,
there can be no assurance that the licenses for the Company's television
stations will be renewed at their expiration dates or, if renewed, that the
renewal terms will be for the maximum eight-year 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. The main station licenses
for the Company's television stations expire on the following dates: WRIC,
October 1, 2004; KLFY, June 1, 2005; WKRN, August 1, 2005, WATE, August 1, 2005;
WLNS, October 1, 2005; WBAY, December 1, 2005; WKBT, December 1, 2005; WTVO,
December 1, 2005; KWQC, February 1, 2006; KCLO, April 1, 2006; KELO, April 1,
2006; KDLO and KPLO (satellites of KELO), April 1, 2006; KCAL, December 1, 2006;
WTEN, June 1, 1999; and WCDC, WTEN's satellite station, April 1, 1999.
Applications for renewal of the licenses for WTEN and WCDC are now pending
before the FCC; pursuant to Section 307(c)(3) of the Communications Act, a
station's license continues in effect pending final action on the renewal
application by the FCC.
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 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
16
<PAGE>
eliminated. It also directs the FCC to modify its waiver policy with respect to
the TV/radio cross-ownership restriction (the so-called "one-to-a-market" rule)
by extending it to radio-television combinations in the top 50 markets. In a
pending rulemaking proceeding, the FCC is considering, among other things (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 under certain
circumstances involving UHF/UHF and UHF/VHF stations. In that same proceeding,
the FCC also is considering whether to grandfather existing television Local
Marketing Agreements ("LMAs") if such agreements are deemed attributable in a
companion proceeding (see below) proposing changes to the FCC's attribution
rules.
The FCC has promulgated rules that limit the ability of individuals and
entities to own or have an ownership interest above a certain level (known as an
"attributable" interest) in broadcast television stations and certain other
media entities. These rules include limits on the number of radio and
television stations in which an entity may have an "attributable" interest both
on a local and on a national basis. In the case of corporations holding
broadcast licenses, all officers and directors of a licensee, and stockholders
who, directly or indirectly, have the right to vote 5% or more of the
outstanding voting stock of a licensee, are generally deemed to have an
"attributable" interest. Certain institutional investors who exert no control
or influence over a licensee may own up to 10% of such outstanding voting stock
before attribution occurs. Under FCC regulations, debt instruments, non-voting
stock and certain limited partnership interests (where the licensee certifies
that the limited partners are not "materially involved" in the management or
operation of the subject media property), as well as voting stock held by non-
minority stockholders in situations where there is a single majority stockholder
are generally not subject to attribution. In addition, the FCC's cross-interest
policy, which precludes an individual or entity from having a "meaningful" but
not "attributable" interest in one media property and an "attributable" interest
in a broadcast, cable or newspaper property in the same area, may be invoked by
the FCC in certain circumstances to reach interests not expressly covered by the
multiple ownership rules.
In a rulemaking proceeding currently pending before the FCC regarding the
attribution rules, the FCC is considering: (1) whether to make non-voting stock
attributable in some instances; (2) whether to raise certain attribution
thresholds; (3) whether to change the insulation standards for non-attribution
of certain limited partnership interests or to develop new standards for certain
members of limited liability companies; (4) whether a combination of debt and
equity exceeding a certain threshold should be considered an attributable
interest; and (5) 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.
Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licensees. 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 one-fifth of the
capital stock of a 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 of which more than one-fourth of its
capital stock 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. Restrictions on alien ownership also apply, in
modified form, to other types of business organizations, including partnerships.
Proposed Legislation and Regulation. The U.S. 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 proposed changes noted above, such
matters include, for example, the following: spectrum use fees; the reception
of distant and/or local market signals directly by home
17
<PAGE>
viewers via satellite providers; political advertising rates (including
proposals for free time to some candidates); potential restrictions on the
advertising of certain products (such as beer, wine and other alcoholic
beverages); the rules and policies to be applied in enforcing the FCC's equal
employment opportunity regulations; the standards to govern the evaluation of
television programming and advertising directed toward children; and violent and
indecent programming. The Company is unable to predict the outcome of future
federal legislation or the impact of any such laws or regulations on the
Company's operations.
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 and retransmission
consent, 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.
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 to proceed under the must carry rules or
to waive that right to mandatory but uncompensated carriage and, instead, to
negotiate a grant of retransmission consent to permit individual cable systems
to carry their signals in exchange for some form of consideration. 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. Elections for the new three
year period commencing January 1, 1997 and ending December 31, 1999 were made on
or before October 1, 1996. New elections, for the three-year period commencing
January 1, 2000 and ending December 31, 2003, must be made on or before October
1, 1999.
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. As a
result, the regulatory scheme promulgated by the FCC to implement the must-carry
provisions of the 1992 Cable Act will remain in effect. Whether and to what
extent such must-carry rights will extend to the new digital television signals
(see below) to be broadcast by licensed television stations (including those
owned by the Company) over the next several years is still a matter to be
determined in a pending FCC rulemaking proceeding.
The 1992 Cable Act was amended in several important respects by the 1996
Act. Most notably, the 1996 Act repeals the cross-ownership ban between cable
and telephone entities and the FCC's former video dialtone rules (permitting
telephone companies to enter the video distribution services market under
several new regulatory options). The 1996 Act also (a) eliminates the broadcast
network/cable cross-ownership limitation and (b) lifts the statutory ban on
TV/cable cross-ownership (without, however, eliminating the separate FCC
regulatory restriction on TV/cable cross-ownership, which remains in place).
Advanced Digital Television Service. On April 3, 1997, the FCC 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. The FCC's action, affirmed and modified by
several subsequent orders, includes a new table of allotments for DTV by which
all eligible existing broadcasters are assigned a second channel on which to
provide DTV service. The allotment plan is based on a so-called "core spectrum"
for DTV service, consisting of channels 2-51.
18
<PAGE>
However, because it was not technically feasible, at the outset, to assign DTV
channels to all eligible stations within the "core spectrum", it will be
necessary for some TV stations to initiate DTV service on a channel other than
2-51. Then, following the more complete implementation of DTV service
(in the year 2006 or beyond, when the FCC reclaims TV channels outside the core
spectrum for other uses), such stations will have to move their DTV service to
another channel that is within the "core spectrum" (i.e., either the channel on
which they are currently broadcasting analog service or a new channel assigned
by the FCC). Four of the Company's stations fall into this category (see chart
below).
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 (in hours broadcast and in
picture quality) 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 ten
television markets will be required to be on the air with a digital signal by
May 1, 1999 - - although certain television licensees in these large markets
actually initiated DTV service before the end of 1998 pursuant to voluntary
commitments. Affiliates of the four major 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.
19
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Station (Market) Analog DTV FCC Mandated
Channel Channel Timetable for
Construction of
DTV Facilities
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KCAL, Los Angeles, California 9 43 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WKRN, Nashville, Tennessee 2 27 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WTEN, Albany, New York 10 26 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WCDC, Adams, Massachusetts 19 36 May 1, 2002
(satellite of WTEN)
- ---------------------------------------------------------------------------------------------------------------------
WRIC, Richmond, Virginia 8 22 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WATE, Knoxville, Tennessee 6 26 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WBAY, Green Bay, Wisconsin 2 23 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
KWQC, Quad Cities 6 56 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WLNS, Lansing, Michigan 6 59 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
KELO, Sioux Falls, South Dakota 11 32 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
KDLO, Florence, South Dakota 3 25 May 1, 2002
(satellite of KELO)
- ---------------------------------------------------------------------------------------------------------------------
KPLO, Reliance, South Dakota 6 14 May 1, 2002
(satellite of KELO)
- ---------------------------------------------------------------------------------------------------------------------
KCLO, Rapid City, South Dakota 15 16 May 1, 2002
(satellite of KELO)
- ---------------------------------------------------------------------------------------------------------------------
KLFY, Lafayette, Louisiana 10 56 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WKBT, La Crosse-Eau Claire, WI 8 53 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
WTVO, Rockford, Illinois 17 16 May 1, 2002
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
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. With respect to the latter, the FCC on November 19, 1998, adopted
new rules requiring broadcasters to pay a fee of 5% of gross revenues received
from "ancillary and supplementary" uses of the DTV spectrum. "Ancillary and
supplementary" services include all subscription services, including
subscription video services, as well as computer software distribution, data
transmission, teletext, interactive materials, aural messages, paging services,
and audio signals. No fees are required for commercial advertising revenues
derived from traditional, free over-the-air broadcasting services. A still
unresolved issue in this area is whether the public interest obligations of
television licensees will be increased in some fashion with the advent of DTV.
The FCC has raised this issue but not yet crafted any specific proposals.
In the meantime, these issues continue to draw the attention of Congress, in
the form of recurring proposals to auction the analog channels once they have
been returned by television broadcasters, setting the timetable for
relinquishment of the analog channels, and, possibly, imposing some type of
spectrum fee on television licensees for the use of the DTV channels. As the
result of a budget law passed in 1997, the FCC is required to reclaim a
television station's analog channel by December 31, 2006 unless fewer than 85%
of the station's viewers can receive the broadcaster's digital service either
off-air or through satellite or cable television. Most recently, the Clinton
Administration's budget submitted to Congress in February 1999 included a plan
to raise $200 million a year by assessing fees on television broadcasters for
use of their analog channels (fees that would be paid until such channels were
ultimately relinquished in favor of DTV channels). 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.
Non-FCC Regulation. Television broadcast stations may be subject to a
number of other federal regulations, as well as numerous state and local laws,
that can either directly or indirectly impact their operations. Included in
this category are rules and regulations of the Federal Aviation Administration
affecting tower height, location and marking, plus federal, state and local
environmental and land use restrictions.
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.
Employees
Approximately 200 of the Company's employees are represented by collective
localized bargaining agreements at various stations.
Item 2. 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.
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
21
<PAGE>
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.
<TABLE>
<CAPTION>
Metropolitan Area Owned or
and Use Leased Approximate Size
------------------ --------- ----------------
<S> <C> <C> <C>
KCAL....................... Los Angeles, California
----------------------- Owned 33,000 sq. ft.
Office and studio Leased 16,198 sq. ft.
Office and studio Leased 60,000 sq. ft.
Transmission tower site
WKRN....................... Nashville, Tennessee
-------------------- Owned 43,100 sq. ft.
Office and studio Owned 2.72 acres
Land Owned 49.33 acres
Transmission tower site
WTEN....................... Albany, NY 39,736 sq. ft.
---------- 2.56 acres
Office and studio Owned
Land Owned
New Scotland, NY
----------------
Transmission tower site
-Land Owned 5.38 acres
Mt. Greylock, Adams, MA
-----------------------
Transmission tower site
-Land Leased 15,000 sq. ft.
WRIC....................... Richmond, VA
------------
Office and studio Owned 34,000 sq. ft.
Land Owned 4 acres
Petersburg, VA
--------------
Transmission site Lease of space --
on tower
Chesterfield Co., VA(1)
-----------------------
Transmitter building Owned 900 sq. ft.
WATE....................... Knoxville, TN
-------------
Office and studio Owned 34,666 sq. ft.
Land Owned 2.65 acres
Knox County, TN
---------------
Transmission tower site Owned 9.57 acres
House Mountain, TN Owned 5 acres
------------------
Prospective tower site
WBAY....................... Green Bay, WI
-------------
Office and studio Owned 90,000 sq. ft.
Land Owned 1.77 acres
DePere, WI
----------
Transmission tower site Owned 3.54 acres
Appleton, WI
------------
Office Leased 1,506 sq. ft.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Metropolitan Area Owned or
and Use Leased Approximate Size
------------------ --------- ----------------
<S> <C> <C> <C>
KWQC....................... Davenport, Iowa
---------------
Office and Studio Owned 59,786 sq. ft.
Land Owned 86,978 sq. ft.
Bettendorf,Iowa
---------------
Transmission tower site Owned 37.323 acres
KELO....................... Sioux Falls, South Dakota
-------------------------
Land, office and studio Owned 23,700 sq. ft.
Transmission tower site Owned 58.23 acres
Auxiliary transmission tower site Leased 26.42 acres
Reliance, South Dakota
----------------------
Transmission tower site Owned 5.83 acres
Rapid City, South Dakota
------------------------
Office and studio Leased 3,555 sq. ft.
Transmission tower site Owned 1 acre
Murdo, South Dakota
-----------------------
Transmission tower site Leased 1 acre
Philip, South Dakota
------------------------
Transmission tower site Leased 8.23 acres
Wall, South Dakota
------------------------
Transmission tower site Leased 4 acres
Beresford, South Dakota
------------------------
Transmission tower site Leased 2.1 acres
Doppler Radar tower site Leased 0.02 acres
Diamond Lake, South Dakota
-------------------------- Owned 1 acre
Transmission tower site
DeSmet, South Dakota Owned 0.55 acres
--------------------------
Transmission tower site
Garden City, South Dakota
--------------------------
Transmission tower site Owned 1 acre
Auxiliary transmission tower site Owned 1 acre
Farmer, South Dakota
--------------------------
Transmission tower site Owned 1 acre
Mt. Vernon, South Dakota
---------------------------
Transmission tower site Owned 1 acre
White Lake, South Dakota Owned 1 acre
---------------------------
Transmission tower site Leased 200 sq. ft.
New Underwood, South Dakota
---------------------------
Transmission tower site
Huron, South Dakota
---------------------------
Doppler Radar tower site Leased 480 sq. ft.
WLNS....................... Lansing, Michigan
---------------------------
Office and studio Owned 19,000 sq. ft.
Land Owned 4.75 acres
Meridian, Michigan
---------------------------
Transmission tower site Owned 40 acres
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Metropolitan Area Owned or
and Use Leased Approximate Size
--------------------------- ---------- ----------------
KLFY....................... Lafayette, Louisiana
---------------------------
Office and studio Owned 24,800 sq.ft.
Land Owned 3.17 acres
Maxie, Louisiana
--------------------------
Transmission tower site Leased 8.25 acres
Proposed transmission tower site Owned 142 acres
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 with non-exclusive easement for
access to underlying property, which is owned by a building.
Item 3. 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 managgement, is likely to have a material adverse effect on the
Company's business or financial condition.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
24
<PAGE>
Executive Officers of the Registrant.
The executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Vincent J. Young 51 Chairman and Director
Adam Young 85 Treasurer and Director
Ronald J. Kwasnick 52 President and Director
James A. Morgan 50 Executive Vice President
Secretary and Director
Deborah A. McDermott 44 Executive Vice President- Operations
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 Chairman of each of the corporate
Subsidiaries. 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. 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, became the Secretary of the Company in September 1994 and became a
director in May 1998. 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.
All executive officers serve at the discretion of the Board of Directors.
25
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol YBTVA. The following table sets forth the range of
the high and low closing sales prices of the Class A Common Stock for the
periods indicated as reported by Nasdaq:
High Low
------ ------
Quarters Ended
March 31, 1997 $31.25 $22.13
June 30, 1997 34.63 24.00
September 30, 1997 38.50 30.50
December 31, 1997 41.25 32.00
March 31, 1998 $53.63 $39.00
June 30, 1998 65.00 46.50
September 30, 1998 69.00 33.38
December 31, 1998 43.13 22.63
At February 26, 1999, there were approximately 38 and 25 stockholders
of record of the Company's Class A and Class B Common Stock, respectively. Such
number does not include beneficial owners holding shares through nominee names.
Dividend Policy
The Company has never paid a dividend on its Common Stock and does not
expect to pay dividends on its Common Stock in the foreseeable future. The terms
of the Senior Credit Facility and the Indentures 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's ability to pay dividends on its Common Stock is limited.
See Management's Discussion and Analysis-Liquidity. Under the Indentures, the
Company is not permitted to pay any dividends on its Common Stock unless at the
time of, and immediately after giving effect to, the dividend no default would
result under the Indentures and the Company would continue to have the ability
to incur indebtedness. In addition, under the Indentures, the dividend may not
exceed an amount equal to the Company's cash flow less a multiple of the
Company's interest expense, plus the net proceeds of the sale by the Company of
additional capital stock.
26
<PAGE>
Item 6. Selected Financial Data.
The following table presents selected consolidated financial data of
the Company for the five years ended December 31, 1998, which have been derived
from the Company's audited consolidated financial statements.
The information in the following table should be read in conjunction
with "Management's Discussion and Analysis" and the Consolidated Financial
Statements and the notes thereto included elsewhere herein. The Company has not
paid dividends on its capital stock during any of the periods presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996 1997 1998
------------ ------------ ------------- ----------- -------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues (1)........................ $ 78,788 $ 122,530 $ 154,343 $ 263,535 $ 277,052
Operating expenses, including selling,
general and administrative expenses 33,800 51,614 64,689 106,708 116,712
Amortization of program license rights 4,400 6,418 11,034 38,279 33,014
Depreciation and amortization........... 15,280 24,572 30,946 46,941 49,472
Corporate overhead...................... 2,052 3,348 4,344 7,150 7,860
Non-cash compensation paid in
common stock (2)........................ 6,497 1,167 848 967 1,146
Merger related
costs...................... - - - - 1,444
---------- ----------- ----------- ----------- -----------
Operating income........................ 16,759 35,411 42,482 63,490 67,404
Interest expense........................ 19,105 32,644 42,838 64,103 62,617
Other expenses (income), net............ 3 233 (1,261) 493 788
---------- ----------- ----------- ----------- -----------
Net (loss) income before extraordinary
item.................................... (2,349) 2,534 905 (1,106) 3,999
...
Extraordinary loss on extinguishment
of debt ................................ (6,027) (9,125) - (9,243) -
Net (loss) income....................... $ (8,376) $ (6,591) $ 905 $ (10,349) $ 3,999
========== =========== =========== =========== ===========
Basic net (loss) income per common
share before extraordinary item......... $(3.62) $0.23 $0.08 $(0.08) $0.28
Basic net (loss) income per common
share .................................. (5.42) (0.61) 0.08 (0.74) $0.28
Basic shares used in earnings per share
Calculation............................. 3,339,794 10,838,972 11,379,298 13,989,969 14,147,522
Other Financial Data:
Cash flow provided by operating
activities.............................. $ 8,527 $ 22,231 $ 24,707 $ 41,025 $ 54,292
Payments for program license
liabilities............................. 4,170 6,747 10,385 38,610 33,337
Broadcast cash flow (3)................. 40,818 64,169 79,269 118,217 127,003
Broadcast cash flow margin.............. 51.8% 52.4% 51.4% 44.9% 45.8%
Operating cash flow (4)................. 38,766 60,821 74,926 111,067 119,143
Capital expenditures.................... $ 1,206 $ 4,484 $ 4,992 $ 9,034 $ 7,524
Balance Sheet Data (as of end of
period):
Total assets............................ $ 316,827 $ 296,098 $ 893,151 $ 845,966 $ 825,668
Long-term debt (including current
portion) 305,050 297,993 678,927 657,672 658,224
Stockholders' (deficit) equity.......... $ (11,654) $ (25,544) $ 80,504 $ 59,846 $ 46,865
</TABLE>
(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, 1996,
1997 and 1998 of shares of Class A Common Stock and in 1995 of shares of
Class A Common Stock and below-market options to purchase shares of Class A
Common Stock.
(3) "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, merger related costs and
corporate overhead, less payments for program license liabilities. The
Company has included broadcast cash flow data because such
27
<PAGE>
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, reimbursement 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.
(4) "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 used by investors to measure a company's ability
to service debt and are 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.
Item 7. 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. Approximately 62% of the 1998 annual gross revenue of the Company's
stations was 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 Adam Young Inc.
("AYI"), a national advertising sales representative which was recently merged
with the Company. The stations generally pay commissions to advertising agencies
on local, regional and national advertising; on national advertising, the
stations also pay commissions to AYI. Effective January 1, 1998, the commissions
paid to AYI have been eliminated for consolidation purposes.
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 income and expense, plus depreciation and amortization (including
amortization of program license rights), non-cash compensation, merger related
costs 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.
28
<PAGE>
The following table sets forth certain operating data for the years
ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Operating Income................................................. $ 42,482 $ 63,490 $ 67,404
Add:
Amortization of program license rights...................... 11,034 38,279 33,014
Depreciation and amortization............................... 30,946 46,941 49,472
Corporate overhead.......................................... 4,344 7,150 7,860
Merger-related
costs................................................. - - 1,444
Non-cash compensation paid in common stock.................. 848 967 1,146
Less:
Payments for program license liabilities.................... (10,385) (38,610) (33,337)
------------------------------------------------------
Broadcast Cash Flow.............................................. $ 79,269 $118,217 $127,003
======================================================
</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,
----------------------------------------------------------------------------------------
1996 1997 1998
---- ---- ----
Amount % Amount % Amount %
----------- --------- ----------- -------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Local.......................... $ 99,684 55.1% $197,519 63.7% $199,177 62.1%
National....................... 57,298 31.6 95,106 30.6 90,281 28.2
Network compensation........... 11,335 6.3 12,600 4.1 12,610 3.9
Political...................... 9,791 5.4 1,322 0.4 13,734 4.3
Production and other........... 2,849 1.6 3,725 1.2 4,848 1.5
----------- ----------- ---------- -------- ----------- ---------
Total......... 180,957 100.0 310,272 100.0 320,650 100.0
Agency and sales representative
commissions.................... (26,614) (14.7) (46,737) (15.1) (43,598)(1) (13.6)
Net Revenues...................... $154,343 85.3% $263,535 84.9% $277,052 86.4%
=========== =========== ========== ======== =========== =========
</TABLE>
(1) National sales commission paid to AYI eliminated for consolidation purposes
were $6.4 million for the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following historical information includes the results of Adam Young Inc.
("AYI") (merger agreement entered into on February 5, 1998), for all of 1998.
The operating results for 1997 do not include AYI, as the results were not
deemed to be material.
Net revenues for the year ended December 31, 1998 were $277.1 million, an
increase of $13.6 million, or 5.2%, compared to $263.5 million for the year
ended December 31, 1997. Improvement in various local market economies led to an
increase in the Company's gross local revenues of 1%, while gross national was
down 5.1% in 1998 compared to 1997. Political revenue for the year ended
December 31, 1998 was $13.7 million, an increase of
29
<PAGE>
$12.4 million from the year ended December 31, 1997. The increase was
attributable to 1998 being a national election year with many state and local
elections, while 1997 had only limited state and local elections.
Operating expenses, including selling, general and administrative expenses for
the year ended December 31, 1998 were $116.7 million, compared to $106.7 million
for the year ended December 31, 1997, an increase of $10.0 million, or 9.4%,
with AYI accounting for $4.7 million of such increase. Additional news costs at
several stations and higher sales expenses relating to the increased sales
accounted for an additional $3.1 million and $857,000, respectively.
Amortization of program license rights for the year ended December 31, 1998
was $33.0 million, compared to $38.3 million for the year ended December 31,
1997, a decrease of $5.3 million, or 13.8%. The entire decrease is attributable
to the Los Angeles Lakers and Clippers, two professional basketball teams, not
playing games in the fourth quarter of 1998 as a result of the National
Basketball Association ("NBA") lockout.
Depreciation of property and equipment and amortization of intangibles was
$49.5 million for the year ended December 31, 1998, compared with $46.9 million
for the comparable period in 1997, an increase of $2.6 million or 5.5%. The
increase is primarily attributable to larger equipment purchases at the end of
1997 which were depreciated during 1998. AYI accounted for approximately
$131,000 of this increase.
The Company made payments for program license liabilities of $33.3 million
during the year ended December 31, 1998, compared to $38.6 million for the year
ended December 31, 1997, a decrease of $5.3 million, or 13.7%. As stated above,
in the amortization of program license rights, the entire decrease is
attributable to the NBA lockout.
Corporate overhead for the year ended December 31, 1998 was $7.9 million,
compared to $7.2 million for the comparable period in 1997, an increase of
$710,000 or 9.9%. This increase was the result of increased occupancy and
administrative costs.
Non-cash compensation paid in Class A Common Stock for the year ended December
31, 1998 was $1.1 million, compared to $1.0 million for the year ended December
31, 1997.
Net interest expense for the year ended December 31, 1998 was $62.6 million,
compared to $64.1 million for the same period in 1997, a decrease of $1.5
million, or 2.3%. The decrease is primarily attributable to lower interest rates
and lower debt levels.
As a result of the factors discussed above, the Company's net income was $4.0
million for the year ended December 31, 1998, compared with a net loss of $10.3
million for the same period in 1997, an increase of $14.3 million. The 1997 net
loss included an extraordinary item of $9.2 million.
Broadcast cash flow for the year ended December 31, 1998 was $127.0 million,
compared with $118.2 million for the year ended December 31, 1997, an increase
of $8.8 million, or 7.5%. Broadcast cash flow margins (broadcast cash flow
divided by net revenues) for the year ended December 31, 1998 increased to 45.8%
from 44.9% for the same period in 1997. The increase in broadcast cash flow and
broadcast cash flow margins was attributable to the increased local and
political revenues, as well as the elimination of AYI commissions.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The following historical financial information includes the results of KWQC-
TV, KELO-TV and KCAL-TV (the "Acquired Stations") which were acquired on April
15, 1996, May 31, 1996, and November 23, 1996, respectively, for the periods
commencing upon their respective acquisition dates by the Company.
Net revenues for the year ended December 31, 1997 were $263.5 million, an
increase of $109.2 million, or 70.8% compared to $154.3 million for the year
ended December 31, 1996, with the Acquired Stations accounting for $107.5
million of such increase. Local and national revenues were $197.5 million and
$95.1 million for the year ended December 31, 1997, compared to $99.7 million
and $57.3 million for the year ended December 31, 1996, increases of $97.8
million and $37.8 million, respectively. The Acquired Stations accounted for
$93.0 million and
30
<PAGE>
$34.6 million of the local and national increases, respectively. Political
revenue for the year ended December 31, 1997 was $1.3 million, a decrease of
$8.5 million from the year ended December 31, 1996. The decrease was
attributable to 1996 being a national election year with more state and local
elections, while 1997 had only limited state and local elections.
Operating expenses, including selling, general and administrative expenses for
the year ended December 31, 1997 were $106.7 million, compared to $64.7 million
for the year ended December 31, 1996, an increase of $42.0 million, or 64.9%.
The Acquired Stations accounted for all of such increase.
Amortization of program license rights for the year ended December 31, 1997
was $38.3 million, compared to $11.0 million for the year ended December 31,
1996, an increase of $27.3 million, or 248.2% with the Acquired Stations
accounting for all of such increase.
Depreciation of property and equipment and amortization of intangibles was
$46.9 million for the year ended December 31, 1997, compared with $30.9 million
for the comparable period in 1996, an increase of $16.0 million or 51.8%. The
Acquired Stations accounted for all of such increase.
The Company made payments for program license liabilities of $38.6 million
during the year ended December 31, 1997, compared to $10.4 million for the year
ended December 31, 1996, an increase of $28.2 million, or 271.1%. The Acquired
Stations accounted for $27.8 million of this increase.
Corporate overhead for the year ended December 31, 1997 was $7.2 million,
compared to $4.3 million for the comparable period in 1996, an increase of $2.9
million, or 67.4%. This was the result of additional personnel, administrative
costs and incentive compensation programs.
Non-cash compensation paid in Common Stock for the year ended December 31,
1997 was $1.0 million, compared to $848,000 for the year ended December 31,
1996.
Net interest expense for the year ended December 31, 1997 was $64.1 million,
compared to $42.8 million for the comparable period in 1996, an increase of
$21.3 million, or 49.8%. The increase is primarily attributable to the Company's
higher debt level associated with the purchase of the Acquired Stations in 1996.
On June 23, 1997, the Company completed an offering (the "June 1997 Notes
Offering") of $200.0 million principal amount of its 8 3/4% Senior Subordinated
Notes due 2007. The Company used the net proceeds of the June 1997 Notes
Offering (approximately $198.2 million) to repay certain outstanding
indebtedness including accrued interest under the then outstanding senior credit
facility.
On November 25, 1997, the Company amended and restated its then outstanding
senior credit facility. Net deferred charges of $9.2 million were recorded as an
extraordinary loss on early extinguishment of debt.
As a result of the factors discussed above, the net loss for the Company was
$10.3 million for the year ended December 31, 1997, compared with net income of
$905,000 for the same period in 1996, a decrease of $11.2 million. The 1997 net
loss includes an extraordinary item of $9.2 million, as discussed above.
Broadcast cash flow for the year ended December 31, 1997 was $118.2 million,
compared with $79.3 million for the year ended December 31, 1996, an increase of
$38.9 million, or 49.1%. Broadcast cash flow margins (broadcast cash flow
divided by net revenues) for the year ended December 31, 1997 decreased to 44.9%
from 51.4% for the same period in 1996. The increase in broadcast cash flow was
a direct result of the Acquired Stations and continued expense controls. The
decrease in broadcast cash flow margins is attributable to the purchase of KCAL-
TV, an independent station. Independent stations generally operate at lower
margins than those associated with networks.
Liquidity and Capital Resources
Cash provided by operations for the year ended December 31, 1998 was $54.3
million as compared to cash provided by operations of $41.0 million in 1997.
Changes in the Company's net cash flows from operating activities
31
<PAGE>
are primarily the result of improvement in net income and the reduction of
accounts receivable and payable during the year ended December 31, 1998 as
compared to the year ended December 31, 1997.
The Company used cash in investing activities for the years ended December 31,
1998 and 1997 of $34.2 million and $11.8 million, respectively. The increase in
1998 was primarily attributable to the $30 million initial rights fee payment to
the Los Angeles Lakers.
Cash used in financing activities for the years ended December 31, 1998 and
1997 was $21.1 million and $34.6 million, respectively. Financing activities for
the year ended December 31, 1998 and 1997 include principal payments under the
Company's senior credit facility (the "Senior Credit Facility") of $37.8 million
and $220.7 million, respectively. In the third quarter of 1998, the Company
borrowed $30.0 million under the working capital facility for the Los Angeles
Lakers payment. In June 1997, the Company received $200.0 million in proceeds
from the issuance of public subordinated debt and applied the net proceeds
therefrom to repay principal under the Senior Credit Facility. In addition, in
September and October of 1998 and the second quarter of 1997, the Company
repurchased 552,800 shares for $19.5 million and 459,000 shares for $12.3
million, respectively, of Class A Common Stock.
It is anticipated that the Company will be able to meet the working capital
needs of the stations, principal and interest payments under the Senior Credit
Facility and the Company's senior subordinated notes (the "Senior Subordinated
Notes"), and to a lesser extent, capital expenditures from cash on hand, cash
flows from operations and funds available under the Senior Credit Facility.
On November 25, 1997, the Company's senior credit facility was amended and
restated to provide the Company with the ability to borrow up to $300.0 million
in the form of five year revolving credit facility (the "Senior Credit
Facility"). As of December 31, 1998, there was $85.0 million outstanding under
the Senior Credit Facility.
The Senior Credit Facility has a $285.0 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.
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 $70.0 million of its borrowing
availability under the Sublimit for the purpose of repurchasing shares of Common
Stock and for paying dividends, subject to the limitations set forth in the
Indentures. In addition, the Company may utilize the undrawn amounts under the
Sublimit to retire or prepay subordinated debt, subject to the limitations set
forth in the Indentures. Undrawn amounts under the Senior Credit 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 0.75% based upon a ratio
under 4:1 to 2.00% 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.
The Senior Credit Facility imposes restrictions on the Company's ability to
incur additional indebtedness. The Company will be permitted to incur, subject
to the terms of the Indentures and satisfaction of the financial covenants of
the Senior Credit Facility, unsecured subordinated debt, provided that the
subordination and mandatory redemption provisions and the maturity of such
indebtedness are comparable to the Company's existing Senior Subordinated Notes
and that the net proceeds in excess of any permitted acquisition are used to
repay the
32
<PAGE>
outstanding balance of the Senior Credit Facility by the amount of such excess.
The Company is also restricted as to the amount of its capital lease obligations
and guarantees. The Senior Credit Facility also restricts the ability of the
Company to amend material terms of the Indentures.
The Senior Credit Facility requires the Company to maintain certain financial
ratios. The Company is required to maintain a total debt/operating cash flow
ratio ranging from 6.25x to 5.00x depending on senior debt leverages. The
Company is also required to maintain a senior debt/operating cash flow ratio
ranging from 2.75x to 2.25x depending on senior debt leverages. Additionally,
the Company is required to maintain an operating cash flow/total interest
expense ratio ranging from 1.75x to 2.25x depending on senior debt leverages.
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 Company is required to apply the proceeds from permitted equity issuances
and certain subordinated debt issuances, to the extent it exceeds the purchase
price for permitted acquisitions or permitted redemptions of Senior Subordinated
Debt, to reduce the Company's senior debt 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.
Interest on the Company's 11 3/4% Senior Subordinated Notes due 2004 (the
"November 1994 Notes") is payable semi-annually on May 15 and November 15;
interest on the June 1995 Notes is payable semi-annually on February 15 and
August 15; interest on the January 1996 Notes is payable semi-annually on
January 15 and July 15; and interest on the June 1997 Notes is payable semi-
annually on June 15 and December 15. The Indentures impose certain limitations
on the ability of the Company and certain of its Subsidiaries to, among other
things, pay dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any Senior Debt and
senior in right of payment to the Notes, incur liens, impose restrictions on the
ability of a Subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company.
The Company regularly enters into program contracts for the right to broadcast
television programs produced by others and program commitments for the right to
broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots to the program
provider to resell, or a combination of both.
On June 16, 1998, the Company entered into a new long-term agreement with the
Los Angeles Lakers ("Lakers") with broadcast rights through the 2004/2005
season. Under the terms of the seven year deal, KCAL-TV, Los Angeles,
California, will broadcast 41 Lakers pre-season and regular season away games
annually. Additionally, KCAL-TV has the broadcast rights to all post-season away
games not subject to NBA/network commitments. KCAL-TV has also obtained the
exclusive sales rights and control over broadcast, production and inventory
activities. The Company paid an initial rights fee of $30 million on August 14,
1998 and will pay an additional $18.0 million per season. In the event that all
41 games are not made available to KCAL-TV or are canceled, the Company will
receive a per game credit.
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."
In June 1998, the Company retained Lazard Freres & Co. LLC to explore
potential strategic alternatives for the Company, including a merger or sale,
among other possibilities. On September 10, 1998, the Company reported that it
was suspending the exploration of a sale of the Company as one of its potential
strategic alternatives.
33
<PAGE>
Impact of Year 2000
State of Readiness
The Company is evaluating the impact of the Year 2000 problem on its business
and its ability to deliver its product to its viewers. The Year 2000 problem is
the result of computer programs being written using two digits (rather than
four) to define the applicable year. Various computer programs that have time-
sensitive software may recognize a date using "00" as the Year 1900 rather than
the Year 2000, which could result in miscalculations or system failures.
The evaluation includes a review of its Year 2000 preparedness relative to its
products and systems, accounting software and computer hardware. The Company is
also evaluating the potential Year 2000 impact as a result of its reliance on
third parties that may have the Year 2000 problem embedded in software and
hardware.
The Company has developed a plan to assess and handle the Year 2000 problem. The
plan is as follows:
1. Inventorying and assessing the impact on affected technology and systems;
2. Developing solutions for affected technology and systems;
3. Modifying or replacing affected technology and systems;
4. Testing and verifying solutions; and
5. Developing contingency plans.
As of February 28, 1999, Item 1 of the Company's Year 2000 Plan was
substantially complete, with no major issues being identified, and an estimated
completion date of April 30, 1999. Items 2 through 5 are underway. The expected
completion date of Items 2 and 3 is June 1999, while Item 4 is estimated to be
completed by August 1999. Contingency plans (Item 5) are not in place at the
present time, however, the Company anticipates them to be completed by August
1999. Such plans will continue to be monitored into 2000.
Costs
Costs incurred to date directly related to addressing the Year 2000 problem
have not been material. Since the Company is not utilizing outside consulting
firms and is utilizing the employment resources within the Company to address
the Year 2000 problem, the Company believes that it will not incur material
costs in connection with becoming Year 2000 compliant. However, the total costs
cannot be known with certainty until the Year 2000 actually arrives.
Risks
All of the Company's computer software is purchased or leased from third party
vendors, and the Company does not currently employ or contract computer
programmers to write Company specific software. The Company has received
communications from its significant third party vendors and service providers
stating that they are generally on target to become Year 2000 compliant in 1999
if they have not already done so. There can be no assurance that these third
party vendors and service providers will complete their own Year 2000 compliant
projects in a timely manner and that failure to do so would not have an adverse
impact on the Company's business. If significant third party revenue sources,
such as a national advertising agency, experience a Year 2000 problem, the
Company could lose revenues for which there is no immediate replacement and
these losses could have a material adverse effect on the Company's business,
financial condition or results of operation.
The Company or a third party's failure to become Year 2000 ready, or its
inability to become compatible with third parties with which it has a material
relationship, may have a material adverse effect on the Company, including
significant signal interruption. However, the Company cannot currently estimate
the extent of any such adverse effects or any at all.
System failures or miscalculations could result in an inability of the Company
to process commercial logs, remit invoices to advertisers, accept an agency's
order or provide viewers with its broadcasts. The Company plans to develop a
contingency plan to help reduce the impact of any unforeseen system failures
which may take place.
34
<PAGE>
Contingency Plan
The Company will develop contingency plans to minimize the effect of any
potential Year 2000 related disruptions. Virtually all of its stations currently
have plans in effect for natural disasters in the event a station is not able to
broadcast in the usual manner. The Company will expand these plans to include
additional systems, software and equipment deemed to be critical to its
broadcasts and business operations. These plans are to be in place by August
1999.
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 $209.0
million of net operating loss ("NOL") carryforwards which are subject to annual
limitations imposed by Internal Revenue Code Section 382. See Note 8 to Notes to
Consolidated Financial Statements.
35
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is required to adopt the provisions of the standard during the first quarter of
2000. Because the Company does not use derivatives, the Company does not expect
that the adoption of the new standard will have a material impact on the results
of operations or financial condition.
36
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 38
Consolidated Balance Sheets as of December 31, 1997 and 1998 39
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 40
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1997 and 1998 41
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 42
Notes to Consolidated Financial Statements 43
Schedule II - Valuation and Qualifying Accounts 55
</TABLE>
37
<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, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
New York, New York
February 1, 1999
38
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1997 1998
----------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 1,652,428 $ 663,298
Trade accounts receivable, less allowance for doubtful accounts of
$1,872,000 in 1997 and $2,012,000 in 1998 60,192,889 53,835,994
Current portion of loans receivable - officers (Note 11) 311,358 530,892
Current portion of program license rights (Notes 2 and 4) 23,327,160 15,250,015
Prepaid expenses 1,996,406 10,845,065
----------------------------
Total current assets 87,480,241 81,125,264
Property and equipment, less accumulated depreciation and amortization of $98,731,094 in
1997 and $122,757,235 in 1998 (Notes 2 and 10) 112,750,987 96,736,970
Program license rights, excluding current portion (Notes 2 and 4) 1,220,121 1,987,123
Deposits and other assets 1,171,852 28,005,890
Loans receivable officers, excluding current portion (Note 11) 600,000 208,041
Broadcasting licenses and other intangibles, less accumulated amortization of $96,631,332
in 1997 and $118,831,102 in 1998 (Note 2) 626,507,872 604,576,679
Deferred charges, less accumulated amortization of $7,236,107 in 1997 and $10,508,840 in
1998 (Note 2) 16,235,423 13,027,559
----------------------------
Total assets $845,966,496 $825,667,526
============================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 18,997,702 $ 14,571,552
Accrued interest (Notes 5 and 6) 12,806,872 13,090,459
Accrued expenses 6,114,268 6,857,710
Current installments of program license liability (Notes 2 and 4) 18,026,986 12,412,040
Current installments of long-term debt (Note 5) 3,907,834 914,171
Current installments of obligations under capital leases (Note 10) 470,981 491,666
----------------------------
Total current liabilities 60,324,643 48,337,598
Program license liability, excluding current installments (Notes 2 and 4) 1,052,659 2,196,256
Long-term debt, excluding current installments (Note 5) 83,076,951 85,000,000
Senior Subordinated Notes (Note6) 570,000,000 570,000,000
Deferred tax liabilities (Note 8) 71,450,273 71,450,273
Obligations under capital leases, excluding current installments (Note 10) 216,362 1,818,273
----------------------------
Total liabilities 786,120,888 778,802,400
----------------------------
Stockholders' equity (Note 7):
Class A Common Stock, $.001 par value. Authorized 20,000,000 shares; issued and
outstanding 11,850,504 shares at 1997 and 11,401,823 shares at 1998 11,851 11,402
Class B Common Stock, $.001 par value. Authorized 20,000,000 shares; issued and
outstanding 1,997,340 shares at 1997 and 2,408,447 shares at 1998 1,997 2,408
Additional paid-in capital 222,881,546 205,523,080
Accumulated deficit (163,049,786) (158,671,764)
----------------------------
Total stockholders' equity 59,845,608 46,865,126
----------------------------
Total liabilities and stockholders' equity $ 845,966,496 $ 825,667,526
============================
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---------------------------------------------------------
<S> <C> <C> <C>
Net operating revenue $154,342,931 $263,534,581 $277,051,669
---------------------------------------------------------
Operating expenses 35,614,209 64,700,352 66,482,606
Amortization of program license rights 11,033,812 38,279,226 33,013,564
Selling, general and administrative expenses 29,074,947 42,007,903 50,228,854
Depreciation and amortization 30,945,622 46,940,592 49,471,437
Corporate overhead 4,343,449 7,150,096 7,860,031
Non-cash compensation (Notes 7 and 9) 848,469 967,112 1,146,335
Merger-related costs - - 1,444,588
---------------------------------------------------------
Operating income 42,482,423 63,489,300 67,404,254
---------------------------------------------------------
Interest income 2,098,939 263,351 264,932
Interest expense (42,837,629) (64,102,237) (62,617,274)
Other expenses, net (838,434) (756,682) (1,052,883)
(41,577,124) (64,595,568) (63,405,225)
---------------------------------------------------------
Income (loss) before extraordinary item 905,299 (1,106,268) 3,999,029
Extraordinary loss on extinguishment of debt - (9,243,128) -
Net (loss) income $ 905,299 $(10,349,396) $ 3,999,029
=========================================================
Income (loss) per common share:
Basic:
Income (loss) before extraordinary item $ .08 $ (.08) $ .28
Extraordinary loss on extinguishment of debt - (.66) -
---------------------------------------------------------
Net income (loss) per common share $ .08 $ (.74) $ .28
=========================================================
Weighted average shares 11,379,298 13,989,969 14,147,522
=========================================================
Diluted:
Income (loss) before extraordinary item $ .08 $ (.08) $ .27
Extraordinary loss on extinguishment of debt - (.66) -
---------------------------------------------------------
Net income (loss) per common share $ .08 $ (.74) $ .27
---------------------------------------------------------
Weighted average shares 11,783,122 13,989,969 14,760,454
=========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Class A Class B Class C Capital Deficit Equity
---------- ---------- ---------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 4,955 $ 2,029 $ 3,564 $128,051,024 $(153,605,689) $(25,544,117)
Repurchase and retirement of Class A
Common Stock (111) - - (2,923,693) -
Contribution of shares into Company's
defined contribution plan 28 - - 728,641 -
Exercise of stock options 16 - - 313,495 - 313,511
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 - 161,778,015
Repurchase of Class C Common Stock - - (1,500) (54,767,250) - (54,768,750)
Conversion of Class B Common Stock to
Class A Common Stock 7 (7) - - -
Net income for 1996 - - - - 905,299 905,299
---------- ---------- ---------- -------------- ---------------- --------------
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 53 - - 1,574,958 -
Exercise of stock options 23 - - 454,227 - 454,250
Repurchase and retirement of Class A
Common Stock (459) - - (12,338,021) -
Conversion of Class B Common Stock to
Class A Common Stock 25 (25) - - -
Net loss for 1997 - - - - (10,349,396) (10,349,396)
---------- ---------- ---------- -------------- ---------------- --------------
Balance at December 31, 1997 11,851 1,997 - 222,881,546 (163,049,786) 59,845,608
Contribution of shares into Company's
defined contribution plan 22 - - 1,103,172 -
Exercise of stock options 16 - - 358,703 - 358,719
Repurchase and retirement of Class A
Common Stock (552) - - (19,488,610) -
Conversion of Class B Common Stock to
Class A Common Stock 65 (65) - - -
Issuance of Class A Common Stock and
Repurchase of Class B Common Stock
for the Adam Young Inc. merger - 476 - 668,269 378,993
Net income for 1998 - - - - 3,999,029 3,999,029
---------- ---------- ---------- -------------- ---------------- --------------
Balance at December 31, 1998 $11,402 $ 2,408 $- $205,523,080 $(158,671,764) $ 46,865,126
========== ========== ========== ============== ================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
----------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income (loss) $ 905,299 $ (10,349,396) $ 3,999,029
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 16,832,919 19,522,619 23,998,934
Amortization of program license rights 11,033,812 38,279,226 33,013,564
Amortization of broadcasting licenses, other intangibles
and deferred charges 14,112,703 27,417,973 25,472,503
Non-cash compensation paid in Common Stock 848,469 967,112 1,146,335
Non-cash interest expense on outstanding indebtedness 357,147 275,588 189,386
Loss on disposal of fixed assets 106,601 467,920 72,977
Extraordinary loss on extinguishment of debt - 9,243,128 -
Deferred acquisition and debt refinancing costs incurred (13,125,000) (1,760,000) -
Payments on programming license liabilities (10,384,982) (38,609,618) (33,336,886)
(Increase) decrease in trade accounts receivable (4,367,243) 480,554 7,571,176
Increase in prepaid expenses (703,641) (143,678) (6,025,061)
Increase (decrease)in trade accounts payable 6,067,699 (5,133,300) (1,468,593)
Increase (decrease) in accrued expenses 3,023,127 366,933 (341,121)
----------------------------------------------
Net cash provided by operating activities 24,706,910 41,025,061 54,292,243
----------------------------------------------
Investing activities
Purchase of KCAL-TV (387,508,018) - -
Purchase of KWQC-TV (57,173,000) - -
Purchase of KELO-TV (48,281,308) - -
Capital expenditures (4,991,766) (9,033,690) (7,524,480)
Decrease (increase) in deposits and other assets 1,113,231 (214,498) (26,362,234)
Increase in broadcast licenses and other intangibles - (2,508,374) (267,186)
----------------------------------------------
Net cash used in investing activities (496,840,861) (11,756,562) (34,153,900)
----------------------------------------------
Financing activities
Proceeds from issuance of long-term debt 305,000,000 - -
Proceeds from issuance of public subordinated debt 125,000,000 200,000,000 -
Borrowings from working capital facility 25,400,000 - 36,527,000
Principal payments on long-term debt (79,164,798) (220,740,000) (37,787,000)
Deferred acquisition and debt refinancing costs incurred (4,872,776) (1,206,520) (64,871)
Net proceeds from issuance of Class A Common Stock 161,778,015 - -
Repurchase of Class A and Class C Common Stock (57,692,555) (12,338,480) (19,489,162)
Proceeds from exercise of options 313,511 454,249 358,719
Principal payments under capital lease obligations (48,335) (790,064) (672,159)
----------------------------------------------
Net cash provided by (used in) financing activities 475,713,062 (34,620,815) (21,127,473)
----------------------------------------------
Net increase (decrease) in cash 3,579,111 (5,352,316) (989,130)
Cash and cash equivalents at beginning of year 3,425,633 7,004,744 1,652,428
----------------------------------------------
Cash and cash equivalents at end of year $ 7,004,744 $ 1,652,428 $ 663,298
==============================================
Supplemental disclosure of cash flow information
Interest paid $ 35,980,944 $ 63,930,212 $ 62,214,784
</TABLE>
See accompanying notes to consolidated financial statements.
42
<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 stations (four with CBS, six
with ABC, and one with NBC), and one independent commercial television
broadcasting station in the states of Michigan, Wisconsin, Louisiana, Illinois,
Tennessee, New York, Virginia, Iowa, South Dakota and California, and a national
television sales representation firm (see Note 3).
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
consolidated 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.
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 are
amortized on a straight-line basis.
Property and Equipment
Property and equipment are stated on the basis of cost, less accumulated
depreciation. Equipment under capital leases is stated at the present value of
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 as incurred.
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:
43
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Estimated
Classification Useful Lives
---------------------------------------------------------------------
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
Property and equipment at December 31, 1997 and 1998 consist of the following:
1997 1998
----------------------
(in thousands)
Land and land improvements $ 8,097 $ 8,035
Buildings and building improvements 37,195 37,726
Broadcast equipment 152,096 158,496
Office furniture, fixtures and other equipment 10,174 10,702
Vehicles 3,920 4,535
---------------------
$211,482 $219,494
=====================
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. It is the Company's
policy to account for broadcasting licenses and other intangibles at the lower
of amortized cost or estimated realizable value. As part of an ongoing review of
the valuation and amortization of broadcasting licenses and other intangibles of
the Company and its subsidiaries, management assesses the carrying value of the
broadcasting licenses and other intangibles if facts and circumstances suggest
that there may be impairment. If this review indicates that the broadcasting
licenses and other intangibles will not be recoverable as determined by a non-
discounted cash flow analysis of the operating assets over the remaining
amortization period, the carrying value of the broadcasting licenses and other
intangibles would be reduced to estimated realizable value.
Deferred Charges
Deferred charges incurred during 1997 consisted primarily of debt issuance costs
incurred in connection with the Company's 8 3/4% Senior Subordinated Notes
issued on June 23, 1997 (see Note 6), and an amendment to its Senior Credit
Facility (see Note 5). As a result of the amendment, approximately $9.2 million
of net deferred charges incurred in 1996 were expensed in 1997 and included as
part of the extraordinary item in the accompanying statements of operations.
Revenue
The Company's primary source of revenue is the sale of television time to
advertisers. Revenue is recorded when the advertisements are broadcast.
Barter Arrangements
The Company, in the ordinary course of business, provides advertising air time
to certain customers in exchange for products or services. Barter transactions
are recorded on the basis of the estimated fair market value of the products or
services received. Revenue is recognized as the related advertising is broadcast
and expenses are recognized when the merchandise or services are consumed or
utilized. Barter revenue transactions related to the purchase of equipment
amounted to approximately $36,000, $681,000 and $203,000 in 1996, 1997, and
1998, respectively, and are depreciated in accordance with Company policy as
stated above. The Company has entered into barter
44
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
agreements with program syndicators for television programs with an estimated
fair market value, recorded as assets and liabilities at December 31, 1997 and
1998, of $5.7 million and $2.5 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 8).
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosure about products and services,
geographic areas and major customers. FAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company
adopted the new requirements in 1998. Management has concluded that the adoption
will not have an effect on the financial statement disclosure for the Company.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company is required to adopt the
provisions of the standard during the first quarter of 2000. Because the Company
does not use derivatives, the Company does not expect that the adoption of the
new standard will have a material impact on the Company's results of operations
or financial condition.
Reclassification of Accounts
Certain prior year amounts have been reclassified to conform to current year's
presentation.
3. Merger
On February 5, 1998, the Company entered into an Agreement and Plan of Merger
with Adam Young Inc. ("AYI") and AYI Acquisition Corporation, a wholly-owned
subsidiary of the Company ("Sub"), pursuant to which AYI was merged with and
into Sub and became a wholly-owned subsidiary of the Company.
The acquisition of AYI has been accounted for as a combination of companies
under common control similar to a pooling-of-interests. The Company issued
526,757 shares of the Company's Class A Common Stock and repurchased 50,450
shares of Class B Common Stock as Treasury Shares, with an approximate value of
$19.3 million, to Vincent Young, the Company's Chairman and to Adam Young, the
Company's Treasurer and his wife in exchange for all of the outstanding stock of
AYI which was held by these persons.
Historical information related to this acquisition was not included in the
Company's historical results as the impact of this acquisition was not deemed to
be material.
4. Program License Rights and Liability
The Company entered into agreements for program license rights which became
available in 1997 and 1998 of approximately $38.1 million and $28.9 million,
respectively.
On June 16, 1998, the Company entered into a new long-term agreement with the
Los Angeles Lakers ("Lakers") with broadcast rights through the 2004/2005
season. Under the terms of the seven year deal, KCAL-TV, Los Angeles,
California, a wholly-owned subsidiary of the Company, will broadcast 41 Lakers
pre-season and regular
45
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
season away games annually. Additionally, KCAL-TV obtained the broadcast rights
to all post-season away games not subject to NBA/network commitments. KCAL-TV
also obtained the exclusive sales rights and control over broadcast, production
and inventory activities. The Company paid an initial rights fee of $30 million
on August 14, 1998, which was recorded as a deposit in the accompanying
consolidated financial statements. The Company will pay an additional $18.0
million per season. In the event that all 41 games are not made available to
KCAL-TV or are canceled, the Company will receive a per game credit.
The unpaid program license liability, which is reflected in the December 31,
1998 balance sheet, is payable during each of the years subsequent to 1998 as
follows: 1999, $12.4 million; 2000, $1.7 million; 2001, $523,000; and $2,000 in
2002.
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 $19.9 million at December 31,
1998.
5. Long -Term Debt
Long-term debt (excluding Senior Subordinated Notes) at December 31, 1997 and
1998 consisted of the following:
1997 1998
------------------------
(dollars in thousands)
Senior Credit Facility $82,260 $85,000
Nationwide Seller Note 1,725 914
Midcontinent Seller Note 3,000 -
------------------------
Total long-term debt 86,085 85,914
Less:
Scheduled current maturities 908 914
Midcontinent Seller Note 3,000 -
------------------------
Long-term debt excluding all current installments $83,077 $85,000
========================
On November 25, 1997, the Company amended and restated its Senior Credit
Facility ("Senior Credit Facility"). The amendment provides for borrowings of up
to an aggregate amount of $300.0 million consisting of a five year revolving
facility ("Revolver").
At December 31, 1998, the Company had outstanding borrowings of $85.0 million
under the Revolver, which approximates its fair value as its interest rate
floats with market conditions. The Company pays an annual commitment fee of
0.375% of the unused commitment.
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 the Revolver
tied to the interest rate option and the Company's ratio of total debt to
operating cash flow, ranging from 0.75% based upon a ratio under 4:1 to 2.00%
based upon a 6:1 or greater ratio. For the year ended December 31, 1998, this
floating percentage was 1.75%. At December 31, 1998, the effective interest rate
for amounts outstanding under the Senior Credit Facility was 7.24%.
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, 1998, 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.
The aggregate fixed maturity, including accreted non-cash interest, under the
Nationwide Seller Note subsequent to December 31, 1998 is $1.0 million in 1999.
46
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Senior Subordinated Notes
Senior Subordinated Notes at December 31, 1997 and 1998 consisted of the
following:
1997 1998
---------------------------------
(in thousands)
11.75% Senior Subordinated Notes $120,000 $120,000
10.125% Senior Subordinated Notes 125,000 125,000
9% Senior Subordinated Notes 125,000 125,000
8.75% Senior Subordinated Notes 200,000 200,000
---------------------------------
$570,000 $570,000
=================================
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. 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.
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. 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.
On January 16, 1996, the Company issued 9% Senior Subordinated Notes due 2006
with an aggregate principal amount of $125.0 million (the "January 1996 Notes").
Interest on the January 1996 Notes is payable semi-annually on January 15 and
July 15. 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.
On June 23, 1997, the Company issued 8 3/4% Senior subordinated Notes due 2007
with an aggregate principal amount of $200.0 million (the "June 1997 Notes").
Interest on the June 1997 Notes is payable semi-annually on June 15th and
December 15th. The June 1997 Notes are redeemable, in whole or in part, at the
option of the Company on or after June 15, 2002, at the redemption prices set
forth in the Indenture, pursuant to which the June 1997 Notes were issued, plus
accrued interest to the date of redemption. In addition, at anytime before June
15, 2000, the Company, at its option, may redeem up to $67 million of the June
1997 Notes, 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.
The Company's November 1994 Notes, June 1995 Notes, January 1996 Notes, and June
1997 Notes (collectively the "Notes") are general unsecured obligations of the
Company and subordinated in right of payment to all senior debt, including all
indebtedness of the Company under the Senior Credit Facility. The Notes are
guaranteed, jointly and severally, on a senior subordinated unsecured basis by
all of the Company's subsidiaries.
Upon a change of control, each holder of the Notes will have the right to
require the Company to repurchase such holder's Notes at a price equal to 101%
of their principal amount plus accrued interest to the date of repurchase. In
addition, the Company will be obligated to offer to repurchase Notes at 100% of
their principal amount plus accrued interest to the date of repurchase in the
event of certain asset sales.
At December 31, 1998, the November 1994 Notes, June 1995 Notes, January 1996
Notes, and the June 1997 Notes were trading in the public market with ask prices
of 107.3, 105.3, 101.0 and 101.5, respectively.
47
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. 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. At December 31, 1998, there were no
holders of Class C Common Stock outstanding.
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
that 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 5% 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 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 stock and
warrants held by Capital Cities/ABC, Inc. for $54.8 million (see stock
repurchases 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.
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
Indentures, the Company is not permitted to pay any dividends on its Common
Stock unless at the time of, and immediately after giving effect to the
dividend, no default would result under the Indentures and the Company would
continue to have the ability to incur indebtedness. In addition, under the
Indentures, 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.
The Company regularly contributed Class A Common Stock into its defined
contribution plan (see Note 9) for the years ended 1996, 1997, and 1998.
Stock Option Plans
- ------------------
On May 22, 1995, the Company adopted the Young Broadcasting Inc. 1995 Stock
Option Plan ("1995 Stock Option Plan").
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 non-employee director. 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.
48
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The 1995 Stock Option Plan provides for the granting of ISOs to purchase the
Company's Common Stock at not less than the fair market value on the date of the
option grant and the granting of non-qualified options and SARs with any
exercise price. SARs granted in tandem with an option have the same exercise
price as the related option. The total number of shares with respect to which
options and SARs may be granted under the 1995 Stock Option Plan is currently
1,500,000. As of December 31, 1998, non-qualified and incentive stock options
for an aggregate of 1,464,370 shares at various prices from $19.75 to $61.20
have been granted to various individuals, including various executive officers.
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.
Those directors who are not also employees of the Company receive an annual
retainer as fixed by the Board of Directors, which may be in the form of cash or
stock options, or a combination of both, and also receive reimbursement of out-
of-pocket expenses incurred for each Board or committee meeting attended. Non-
employee directors also receive, upon becoming a director, a five-year option to
purchase up to 1,000 shares of Class A Common Stock at an exercise price equal
to 120% of the quoted price on the date of grant. No other directors are
compensated for services as a director.
Under the 1995 Stock Option Plan for the year ended December 31, 1998,
independent directors, officers and employees were not granted options to
purchase the Company's stock at 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 1996, 1997, and 1998 consistent with the provisions of SFAS
No. 123, the Company's net (loss) income and (loss) income per share would have
been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- ------
<S> <C> <C> <C>
(dollars in thousands)
Net (loss) income - as reported $ 905 $(10,349) $3,999
Net (loss) income - pro forma $(1,274) $(12,531) $1,183
Net (loss) income per basic common share-as reported $ 0.08 $ (0.74) $ 0.28
Net (loss) income per basic common share-pro forma $ (0.11) $ (0.90) $ 0.08
</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:
Expected dividend yield 0%
Expected stock price volatility 25%
Risk-free interest rate:
1996 5.92%
1997 5.80%
1998 5.04%
Expected life of options 5 years
The weighted average fair value of options granted during 1996, 1997, and 1998
was $10.41, $11.58 and $14.20 respectively.
49
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Changes during 1996, 1997 and 1998 in stock options are summarized as follows:
Stock Options Weighted Average
Outstanding Exercise Price
-------------------- ----------------------
Outstanding at January 1, 1996 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
Granted 246,657 36.16
Granted 13,790 39.88
Exercised (23,000) 19.81
---------
Outstanding at December 31, 1997 1,353,235 26.83
Granted 130,792 26.83
Exercised (16,750) 21.42
Forfeited (2,907) 33.67
---------
Outstanding at December 31, 1998 1,464,370 $28.25
=========
Options for 446,937 shares, 775,563 shares, and 920,755 shares were exercisable
at December 31, 1996, 1997, and 1998, respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
- ---------------- ------------------- ---------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
$19.75-$21.73 599,988 7.0 19.80 599,988 19.80
$28.00-$31.75 491,413 8.3 30.67 233,463 30.69
$34.50-$39.875 260,447 8.8 36.40 73,512 36.26
$43.50-$61.20 112,522 10.0 43.92 13,792 46.93
--------------------- ------------------ ----------------- ------------------- ---------------------
1,464,370 8.50 28.25 920,755 24.28
===================== ================== ================= =================== =====================
</TABLE>
At December 31, 1998, the Company has reserved 41,892 shares of its Class A
Common Stock and 1,422,478 shares of Class B Common Stock in connection with
stock options.
During 1998, there were an additional 396,000 options granted at exercise prices
from $24.50 - $26.95 that are conditioned based on stockholder approval at the
1999 annual meeting of stockholders.
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.
In 1996, 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
50
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
During April and May of 1997, the Company repurchased 459,000 shares of its
Class A Common Stock in open-market purchases pursuant to a stock repurchase
program for an aggregate price of approximately $12.3 million.
During September and October of 1998, the Company repurchased 552,800 shares of
its Class A Common stock in open-market purchases pursuant to a stock repurchase
program for an aggregate price of approximately $19.5 million.
8. Income Taxes
At December 31, 1998, the Company had net operating loss ("NOL") carryforwards
for tax purposes of approximately $209.0 million expiring at various dates
through 2013. The availability of NOL carryforwards to offset future income is
subject to annual limitations imposed by Internal Revenue Code Section 382 as a
result of successive ownership changes.
These limitations are summarized as follows:
NOL Carryforwards Annual Usage Limitation
----------------- -----------------------
$129 million $8.9 million
54 million $20.9 million
26 million No limit
------------
$209 million
============
The amount of NOL carryforwards available to offset income in 1999 is
approximately $64.0 million based upon carryforwards of annual limitations and
NOLs with no limitations. To the extent that an annual NOL limitation is not
used, it carries and accumulates forward to future years.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1998 are as follows:
1997 1998
------------------------------
Deferred tax assets:
Accounts Receivable $ 744,000 $ 804,800
Other 58,392 58,392
NOL Carryforwards 73,852,347 83,467,477
Less: Valuation allowance (51,660,603) (51,249,179)
------------------------------
Total deferred tax assets $ 22,994,136 $ 33,081,490
------------------------------
Deferred tax liabilities:
Fixed Assets $ 3,727,957 $ 6,155,957
Intangibles 90,666,871 98,326,225
Other 49,581 49,581
------------------------------
Total deferred tax liabilities 94,444,409 104,531,763
------------------------------
Net deferred tax liabilities $(71,450,273) $(71,450,273)
==============================
51
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The 1998 effective tax rate varied from the statutory Federal income tax rate as
follows:
1998
----------
Income taxes at the statutory rate $1,217,384
Restructuring costs 260,000
Meals & entertainment 136,400
Valuation allowance (1,613,784)
----------
Total $ -
----------
9. Employee Benefit Plans
The Company sponsors defined contribution plans ("Plan") which provide
retirement benefits for all eligible employees. 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, 1996, the Company accrued a non-matching
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.
For the year ended December 31, 1997, the Company paid and accrued a matching
stock contribution (30,817 shares of Class A Common Stock) equal to 3% of
eligible employee compensation amounting to $967,000. The Company effected such
contributions by issuing the shares on a quarterly basis. The fourth quarter of
1997 was issued on January 16, 1998.
For the year ended December 31, 1998, the Company paid and accrued a matching
stock contribution (25,243 shares of Class A Common Stock) equal to 3% of
eligible employee compensation amounting to $1,146,000. The Company effected
such contributions by issuing the shares on a quarterly basis. The fourth
quarter of 1998 was issued on January 11, 1999.
10. 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 seven years. At December 31, 1997 and 1998, the net amount
of property and equipment recorded under capital leases was $1,259,000 and
$531,000 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 five years. These leases generally contain renewal options for periods of
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, 1998 are as follows:
52
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Capital Leases Operating Leases
------------------------------------------------
(dollars in thousands)
Year ending December 31:
1999 $ 492 $ 3,744
2000 278 3,604
2001 288 3,429
2002 297 2,085
2003 308 1,559
Thereafter 647 1,658
------------------------------------------------
Total minimum lease payments $2,310 $16,079
================================================
11. Related Party Transactions
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 an
Incentive Stock Grant Program ("Program") in August 1994 and November 1994 and
shares issued in March 1994 as part of the compensation under employment
arrangements. The aggregate amount of such loans outstanding, including accrued
interest at December 31, 1998 was approximately $739,000. The principal amount
of the loans will bear interest, payable annually, at the rate of 7.21%. The
loans are secured by each employee's shares of common stock and the principal is
payable in five equal annual installments 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 on November 15,
1995 and the payments due in subsequent years. Under this program, participants
that chose to participate will have their annual installments forgiven over the
year following the scheduled payment date at the rate of one-twelfth per month,
as long as the employee continues to be employed by the Company.
12. Quarterly Financial Data (Unaudited)
The following summarizes the Company's results of operations for each quarter of
1998 and 1997 (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>
1998
Net revenues $64,581 $77,246 $62,944 $72,281
Operating income 8,615 23,114 12,822 22,853
Net (loss) income (7,335) 7,809 (3,452) 6,977
Net (loss) income per common share:
Basic $ (0.52) $ 0.54 $ (0.24) $ 0.51
Diluted $ (0.52) $ 0.52 $ (0.24) $ 0.49
1997
Net revenues $61,279 $71,100 $57,939 $73,217
Operating income 10,038 21,136 9,991 22,325
Net (loss) income before extraordinary
Item (5,566) 5,212 (6,540) 5,788
Net (loss) income (5,566) 5,212 (6,540) (3,455)
Net (loss) income per common share:
Basic $ (0.39) $ 0.37 $ (0.47) $ (0.25)
Diluted $ (0.39) $ 0.37 $ (0.47) $ (0.24)
</TABLE>
53
<PAGE>
Young Broadcasting Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Quarterly depreciation and amortization is provided based on estimates. The
results of the fourth quarter of 1997 are net of a year-end adjustment for
depreciation and amortization of $2.5 million.
The results for the fourth quarter of 1997 include an extraordinary loss of
approximately $9.2 million ($0.66 per share) related to the early extinguishment
of debt.
54
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YOUNG BROADCASTING INC.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------- ----------------- --------------------------------------- --------------- ------------
Additions
---------------------------------------
Bal. at Beginning Charged to Charged to Bal. at end
Description of Period Costs and Expenses Other Accounts (1) Deductions (2) of Period
- ---------------------------------- ----------------- ------------------ ------------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful
Accounts........... $ 785,000 492,000 1,429,000 496,000 $2,210,000
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful
accounts........... $2,210,000 323,000 - 661,000 $1,872,000
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts............ $1,872,000 488,000 52,000 400,000 $2,012,000
</TABLE>
_______
(1) Amount relates to Acquired Stations and merger of Adam Young Inc.
(2) Write-off of uncollectible accounts
55
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information called for by Item 10 is set forth under the heading "Executive
Officers of the Registrant" in Part I hereof and in "Election of Directors" in
the Company's Proxy Statement relating to the 1999 Annual Meeting of
Stockholders (the "1999 Proxy Statement"), which is incorporated herein by this
reference.
Item 11. Executive Compensation.
Information called for by Item 11 is set forth under the heading "Executive
Compensation" in the 1999 Proxy Statement, which is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information called for by Item 12 is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 1999 Proxy
Statement, which is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
Information called for by Item 13 is set forth under the heading "Election
of Directors--Certain Transactions" in the 1999 Proxy Statement, which is
incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial statements and the schedule filed as a part of this report
are listed on the "Index to Consolidated Financial Statements" at page 37
herein. All other schedules are omitted because either (i) they are not
required under the instructions, (ii) they are inapplicable, or (iii) the
information is included in the Consolidated Financial Statements.
(b) The Company did not file any reports on Form 8-K during the fourth
quarter of the year ended December 31, 1998.
56
<PAGE>
EXHIBITS
Exhibit
Number Exhibit Description
- ------ -------------------
3.1(a) Restated Certificate of Incorporation of the Company*
3.1(b) Certificate of Amendment to Restated Certificate of Incorporation of the
Company**
3.1(c) Certificate of Amendment to Restated Certificate of Incorporation of the
Company***
3.2 Second Amended and Restated By-laws of the Company*
3.3 Certificate of Incorporation of Young Broadcasting of La Crosse, Inc.*
3.4 By-laws of Young Broadcasting of La Crosse, Inc.*
3.5 Certificate of Incorporation of Young Broadcasting of Lansing, Inc.*
3.6 By-laws of Young Broadcasting of Lansing, Inc.*
3.7 Certificate of Incorporation of Young Broadcasting of Albany, Inc.*
3.8 By-laws of Young Broadcasting of Albany, Inc.*
3.9 Certificate of Incorporation of Winnebago Television Corporation*
3.10 By-laws of Winnebago Television Corporation*
3.11 Certificate of Incorporation of Young Broadcasting of Nashville, Inc.*
3.12 By-laws of Young Broadcasting of Nashville, Inc.*
3.13 Certificate of Incorporation of YBT, Inc.*
3.14 By-laws of YBT, Inc.*
3.15 Certificate of Limited Partnership of WKRN, L.P.*
3.16 Agreement of Limited Partnership of WKRN, L.P.*
3.17 Certificate of Incorporation of Young Broadcasting of Louisiana, Inc.*
3.18 By-laws of Young Broadcasting of Louisiana, Inc.*
3.19 Certificate of Incorporation of LAT, Inc.*
3.20 By-laws of LAT, Inc.*
3.21 Certificate of Limited Partnership of KLFY, L.P.*
3.22 Agreement of Limited Partnership of KLFY, L.P.*
3.23 Certificate of Incorporation of Young Broadcasting of Knoxville, Inc.*
3.24 By-laws of Young Broadcasting of Knoxville, Inc.*
3.25 Certificate of Incorporation of YBK, Inc.*
3.26 By-laws of YBK, Inc.*
3.27 Certificate of Limited Partnership of WATE, L.P.*
3.28 Agreement of Limited Partnership of WATE, L.P.*
3.29 Certificate of Incorporation of Young Broadcasting of Richmond, Inc.*
3.30 By-laws of Young Broadcasting of Richmond, Inc.*
3.31 Certificate of Incorporation of Young Broadcasting of Green Bay, Inc.*
3.32 By-laws of Young Broadcasting of Green Bay, Inc.*
3.33 Certificate of Incorporation of Young Broadcasting of Davenport, Inc.**
3.34 By-laws of Young Broadcasting of Davenport, Inc.**
3.35 Certificate of Incorporation of Young Broadcasting of Sioux Falls,
Inc.****
3.36 By-laws of Young Broadcasting of Sioux Falls, Inc.****
3.37 Certificate of Incorporation of Young Broadcasting of Rapid City,
Inc.****
3.38 By-laws of Young Broadcasting of Rapid City, Inc.****
3.39 Certificate of Incorporation of Young Broadcasting of Los Angeles,
Inc.****
3.40 By-laws of Young Broadcasting of Los Angeles, Inc.****
3.41 Certificate of Incorporation of Fidelity Television, Inc.****
3.42 By-laws of Fidelity Television, Inc.****
9.1(a) Voting Trust Agreement, dated July 1, 1991, between Adam Young, and
Vincent Young and Richard Young as trustees*
9.1(b) Amendment No. 1, dated as of July 22, 1994, to Voting Trust Agreement*
57
<PAGE>
9.1(c) Amendment No. 2, dated as of April 12, 1995, to Voting Trust Agreement**
9.1(d) Amendment No. 3, dated as of July 5, 1995, to Voting Trust Agreement**
9.1(e) Amendment No. 4, dated as of September 11, 1996, to Voting Trust
Agreement****
9.1(f) Amendment No. 5, dated as of January 21, 1997, to Voting Trust
Agreement****
9.1(g) Voting Trust Agreement, dated October 1, 1996, between Adam Young, and
Vincent Young as trustee ****
10.1 Subscription and Shareholders Agreement, dated May 26, 1988, between the
Company and Ronald J. Kwasnick*
10.2(a) Employment Agreement, dated as of March 1, 1993, between the Company and
James A. Morgan*
10.2(b) Amendment, dated as of March 27, 1995, effective as of February 15,
1995, to Employment Agreement, dated as of March 1, 1993, between the
Company and James A. Morgan*****
10.3 Operating Agreement, dated December 29, 1989, between WKRN, L.P. and
Young Broadcasting of Nashville, Inc.*
10.4 Operating Agreement, dated December 29, 1989, between KLFY, L.P. and
Young Broadcasting of Louisiana, Inc.*
10.5 Operating Agreement between WATE, L.P. and Young Broadcasting of
Knoxville, Inc.*
10.6 Agreement, dated July 1, 1991, between Adam Young Inc. and Young
Broadcasting of Albany, Inc. (Agreement filed hereunder is
representative of five other substantially similar agreements. See
Schedule filed with this Exhibit)*
10.7 Affiliation Agreements, each dated October 10, 1994, between Young
Broadcasting of Albany, Inc. and ABC (for WTEN and WCDC)*
10.8 Affiliation Agreement, dated October 10, 1994, between WKRN, L.P. and
ABC*
10.9 Affiliation Agreement, dated September 19, 1994, between Young
Broadcasting of La Crosse, Inc. and CBS*
10.10 Affiliation Agreement, dated September 19, 1994, between KLFY, L.P. and
CBS*
10.11 Affiliation Agreement, dated May 17, 1995, between Winnebago Television
Corporation and ABC**
10.12 Affiliation Agreement, dated September 19, 1994, between Young
Broadcasting of Lansing, Inc. and CBS*
10.13 Affiliation Agreement, dated October 10, 1994, between Young
Broadcasting of Richmond, Inc. and ABC*
10.14 Affiliation Agreement, dated October 10, 1994, between WATE, L.P. and
ABC*
10.15 Affiliation Agreement, dated October 10, 1994, between Young
Broadcasting of Green Bay, Inc. and ABC*
10.16 Affiliation Agreement, dated February 3, 1995, between Broad Street
Television, L.P. and NBC**
10.17 Affiliation Agreement, dated April 3, 1996, between Young Broadcasting
of Sioux Falls, Inc. and CBS (KELO); Affiliation Agreements (satellite),
each dated April 3, 1996, between Young Broadcasting of Sioux Falls,
Inc. and CBS (KPLO and KDLO); and Affiliation Agreement, dated April 3,
1996, between Young Broadcasting of Rapid City, Inc. and CBS
(KCLO)******
10.18(a)Lease, dated March 29, 1990, between Lexreal Associates, as Landlord,
and the Company*
10.18(b)First Amendment to Lease, dated January 14, 1997****
10.19(a)Master Equipment Lease Agreement, dated May 31, 1990, between First
Chicago Leasing Corporation and Young Broadcasting of Albany, Inc.*
10.19(b)Lease Supplement No. 1, dated May 31, 1990*
10.19(c) Lease Supplement No. 2, dated August 24, 1990*
58
<PAGE>
10.19(d) Guaranty of the Company*
10.20(a) Master Equipment Lease Agreement, dated May 31, 1990, between First
Chicago Leasing Corporation and Young Broadcasting of Nashville, Inc.*
10.20(b) Supplement No. 1, dated May 31, 1990*
10.20(c) Supplement No. 2, dated August 24, 1990*
10.20(d) Guaranty of the Company*
10.21 Credit Agreement for the Senior Credit Facility********
10.22 Asset Purchase and Sale Agreement, dated as of July 31, 1995, between
the Company and Broad Street Television, L.P. (schedules omitted;
Registrant agrees to furnish supplementally a copy of any schedule to
the Commission upon request)**
10.23 Asset Purchase and Sale Agreement, dated as of January 11, 1996,
between the Company and Midcontinent Television of South Dakota, Inc.
(schedules omitted; Registrant agrees to furnish supplementally a copy
of any schedule to the Commission upon request)*******
10.24 Acquisition Agreement, dated as of May 10, 1996, among the Company,
KCAL Broadcasting, Inc., KCAL-TV, Inc. and Disney Enterprises, Inc.
(schedules omitted; Registrant agrees to furnish supplementally a copy
of any schedule to the Commission upon request)******
10.25 Agreement and Plan of Merger, dated as of February 5, 1998, among the
Company, AYI Acquisition Corporation, and Adam Young Inc. and its
shareholders********
10.26 Subscription Agreement, dated October 10, 1994, between ABC and the
Company with the form of Warrant to be issued to ABC and the form of
Registration Rights Agreement attached thereto*
10.27 Indenture, dated November 14, 1994, among the Company, the Subsidiary
Guarantors and The First National Bank of Boston, as Trustee, relating
to the November 1994 Notes*
10.28 Indenture, dated June 1, 1995, among the Company, the Subsidiary
Guarantors and The First National Bank of Boston, as Trustee, relating
to the June 1995 Notes**
10.29 Indenture, dated January 1, 1996, among the Company, the Subsidiary
Guarantors and State Street Bank and Trust Company, as Trustee,
relating to the January 1996 Notes*******
10.30 Indenture, dated June 15, 1997, among the Company, the Subsidiary
Guarantors and First Union National Bank, as Trustee, relating to the
June 1997 Notes***
10.31 Young Broadcasting Inc. 1995 Stock Option Plan*****
10.32 Purchase Agreement, dated June 6, 1995, among the Company, the
Subsidiary Guarantors and BT Securities Corporation and J.P. Morgan
Securities Inc.**
10.33 Registration Rights Agreement, dated as of June 12, 1995, among the
Company, the Subsidiary Guarantors and BT Securities Corporation and
J.P. Morgan Securities Inc.**
10.34 Purchase Agreement, dated January 6, 1996, among the Company, the
Subsidiary Guarantors and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and J.P. Morgan Securities Inc.*******
10.35 Registration Rights Agreement, dated as of June 12, 1995, among the
Company, the Subsidiary Guarantors and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and J.P. Morgan Securities Inc.*******
10.36 Purchase Agreement, dated June 16, 1997, among the Company, the
Subsidiary Guarantors and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ***
10.37 Registration Rights Agreement, dated June 23, 1997, among the Company,
the Subsidiary Guarantors and Merrill Lynch, Pierce, Fenner & Smith
Incorporated***
11.1 Statement re computation of per share earnings
18.1 Letter of Ernst & Young LLP regarding change in accounting principles*
59
<PAGE>
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
- --------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-
1, Registration No. 33-83336, under the Securities Act of 1933 and
incorporated herein by reference.
** Filed as an Exhibit to the Company's Registration Statement on Form S-
4, Registration No. 33-94192, under the Securities Act of 1933 and
incorporated herein by reference.
*** Filed as an Exhibit to the Company's Registration Statement on Form S-
4, Registration No. 333-31429, under the Securities Act of 1933 and
incorporated herein by reference.
**** Filed as an Exhibit to the Company's Annual Report Form 10-K for the
fiscal year ended December 31, 1996 under the Securities Exchange Act
of 1934 and incorporated herein by reference.
***** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1995 under the Securities Exchange
Act of 1934 and incorporated herein by reference.
****** Filed as an Exhibit to the Company's Registration Statement on Form S-
3, Registration No. 333-06241, under the Securities Act of 1933 and
incorporated herein by reference.
******* Filed as an Exhibit to the Company's Registration Statement on Form S-
4, Registration No. 333-2466, under the Securities Act of 1933 and
incorporated herein by reference.
******** Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 under the Securities Exchange
Act of 1934 and incorporated herein by reference.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
YOUNG BROADCASTING INC.
Date: March 15, 1999 By /s/ Vincent J. Young
-------------------------------
Vincent J. Young
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Vincent J. Young
- --------------------
Vincent J. Young Chairman and Director March 15, 1999
(principal executive officer)
/s/ Adam Young
- --------------------
Adam Young Treasurer and Director March 15, 1999
/s/ James A. Morgan
- --------------------
James A. Morgan Executive Vice President, March 15, 1999
Chief Financial Officer
(principal financial officer and
principal accounting officer) and
Director
/s/ Ronald J. Kwasnick
- ----------------------
Ronald J. Kwasnick President and Director March 15, 1999
/s/ Bernard F. Curry
- -----------------------
Bernard F. Curry Director March 15, 1999
/s/ Alfred J. Hickey, Jr.
- ------------------------
Alfred J. Hickey, Jr. Director March 15, 1999
/s/ Leif Lomo
- -------------------------
Leif Lomo Director March 15, 1999
/s/ Robert L. Winikoff
- ----------------------
Robert L. Winikoff Director March 15, 1999
/s/ David C. Lee
- ----------------
David C. Lee Director March 15, 1999
61
<PAGE>
EXHIBIT 11
YOUNG BROADCASTING INC. AND SUBSIDIARIES
RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------
DEC. 31, DEC. 31, DEC. 31,
1996 1997 1998
----------------------------------------------
<S> <C> <C> <C>
SHARES OF COMMON STOCK OUTSTANDING FOR THE ENTIRE
PERIOD.......................................................................... 10,548,181 14,230,357 13,847,844
ISSUANCE OF 27,685, 53,487 and 22,169 SHARES OF COMMON STOCK
TO THE COMPANY'S DEFINED CONTRIBUTION PLAN IN 1996, 1997
AND 1998, RESPECTIVELY.......................................................... 27,382 39,798 11,473
ISSUANCE OF 15,874, 23,000 and 16,750 SHARES OF COMMON STOCK
UPON EXERCISE OF OPTIONS IN 1996, 1997 AND 1998,
RESPECTIVELY.................................................................... 10,398 10,304 9,095
ISSUANCE OF 526,757 SHARES OF COMMON STOCK FOR THE
MERGER OF ADAM YOUNG INC........................................................ - - 474,803
RETIREMENT OF 50,450 SHARES OF COMMON STOCK FOR THE
MERGER OF ADMAN YOUNG INC...................................................... - - (45,474)
REPURCHASE OF 459,000 AND 552,800 SHARES OF COMMON STOCK UNDER BUYBACK PROGRAM
IN 1997 AND 1998, RESPECTIVELY................................................ - (290,490) (150,219)
REPURCHASE OF 111,383 SHARES OF COMMON STOCK FROM J.P.
MORGAN CAPITAL CORPORATION IN 1996............................................ (110,773) - -
ISSUANCE OF 3,750,000 PUBLICLY OFFERED STOCK................................. 904,110 - -
---------- ----------- ----------
WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING..................................................................... 11,379,298 13,989,969 14,147,522
DILUTIVE EFFECT OF 1,167,851 OPTIONS AND 750,000 WARRANTS IN
1996 AND 1,925,877 OPTIONS IN 1998 EXPECTED TO BE EXERCISED
UNDER THE TREASURY STOCK METHOD USING THE WEIGHTED
AVERAGE MARKET PRICE OF THE COMPANY'S SHARES OF
COMMON STOCK................................................................... 403,824 - 612,932
---------- ----------- ----------
TOTAL DILUTIVE WEIGHTED AVERAGE SHARES OF COMMON
STOCK FOR THE PERIOD........................................................... 11,783,122 13,989,969 14,760,454
---------- ----------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........................................ $ 905,299 $ (1,106,269) $ 3,999,029
=========== ============= ===========
NET INCOME (LOSS).............................................................. $ 905,299 $(10,349,397) $ 3,999,029
=========== ============= ===========
INCOME (LOSS) PER COMMON SHARE :
BASIC
BEFORE EXTRAORDINARY ITEM ................................................. $ 0.08 $ (0.08) $ 0.28
=========== ============= ===========
NET INCOME (LOSS).............................................................. $ 0.08 $ (0.74) $ 0.28
=========== ============= ===========
DILUTED
BEFORE EXTRAORDINARY ITEM.................................................... $ 0.08 $ (0.08) $ 0.27
=========== ============= ===========
NET INCOME (LOSS)............................................................. $ 0.08 $ (0.74) $ 0.27
=========== ============= =========== .
</TABLE>
62
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
YOUNG BROADCASTING OF LOUISIANA, INC.
YOUNG BROADCASTING OF LANSING, INC.
YOUNG BROADCASTING OF LA CROSSE, INC.
YOUNG BROADCASTING OF ALBANY, INC.
YOUNG BROADCASTING OF NASHVILLE, INC.
WINNEBAGO TELEVISION CORPORATION
YBT, INC.
LAT, INC.
YOUNG BROADCASTING OF GREEN BAY, INC.
YOUNG BROADCASTING OF KNOXVILLE, INC.
YOUNG BROADCASTING OF RICHMOND, INC.
YBK, INC.
YOUNG BROADCASTING OF DAVENPORT, INC.
YOUNG BROADCASTING OF SIOUX FALLS, INC.
YOUNG BROADCASTING OF RAPID CITY, INC.
YOUNG BROADCASTING OF LOS ANGELES, INC.
FIDELITY TELEVISION, INC.
WKRN, L.P.
KLFY, L.P.
WATE, L.P.
ADAM YOUNG INC.
63
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 333-26997) pertaining to the Young Broadcasting Inc. 1995 Stock Option
Plan and 401(k) Plan of our report dated February 1, 1999, with respect to the
consolidated financial statements schedule included in this Form 10-K of Young
Broadcasting Inc.
ERNST & YOUNG LLP
New York, New York
March 15, 1999
64
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 663
<SECURITIES> 0
<RECEIVABLES> 53836
<ALLOWANCES> 2012
<INVENTORY> 0
<CURRENT-ASSETS> 81125
<PP&E> 219494
<DEPRECIATION> 122757
<TOTAL-ASSETS> 825668
<CURRENT-LIABILITIES> 48338
<BONDS> 570000
0
0
<COMMON> 14
<OTHER-SE> 46865
<TOTAL-LIABILITY-AND-EQUITY> 825668
<SALES> 0
<TOTAL-REVENUES> 277052
<CGS> 0
<TOTAL-COSTS> 209648
<OTHER-EXPENSES> 1053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62352
<INCOME-PRETAX> 3999
<INCOME-TAX> 0
<INCOME-CONTINUING> 3999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3999
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
</TABLE>
