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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to_______________
Commission File Number: 333-54003-06 Commission File Number:000-25206
LIN HOLDINGS CORP. LIN TELEVISION CORPORATION
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(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
DELAWARE DELAWARE
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(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
75-2733097 13-3581627
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(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
ONE RICHMOND SQUARE, SUITE 230E, PROVIDENCE, RHODE ISLAND 02906
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(401) 454-2880
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports 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. [X] Yes [ ] No
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. [X]
As of March 1, 1999, 1000 shares of common stock, par value $0.01 per share, of
LIN Holdings Corp. were outstanding. As of such date, there was no public market
for such common stock.
As of March 1, 1999, 1000 shares of common stock, par value $0.01 per share, of
LIN Television Corporation were outstanding. As of such date, there was no
public market for such common stock.
DOCUMENTS INCORPORATED BY REFERENCE
------------------------------------------
No documents are incorporated by reference
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TABLE OF CONTENTS
Page No.
--------
Part I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 23
Item 3. Legal Proceedings............................................. 23
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters....................................... 24
Item 6. Selected Financial Data....................................... 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 26
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk ............................................... 34
Item 8. Financial Statements and Supplementary Data................... 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 87
PART III
Item 10. Directors and Executive Officers of the Registrant............ 87
Item 11. Executive Compensation........................................ 90
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 94
Item 13. Certain Relationships and Related Transactions................ 94
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 96
Schedule 1. LIN Holdings Corp. Condensed Financial Information of the
Registrant................................................. F1
Schedule 2. LIN Holdings Corp. Valuation and Qualifying Accounts.......... F5
<PAGE> 3
PART I
ITEM 1: BUSINESS
GENERAL
LIN Holdings Corp. ("LIN Holdings") and its subsidiaries, including LIN
Television Corporation ("LIN Television"), (and together with its subsidiaries,
the "Company"), have been engaged in commercial television broadcasting since
1966. LIN Holdings, a Delaware corporation incorporated in July of 1997, is a
holding company which conducts all of its operations through its subsidiaries.
LIN Television is a Delaware corporation incorporated in June of 1990. The
principal executive offices of both companies are located at One Richmond
Square, Suite 230E, Providence, Rhode Island, 02906 and the telephone number for
each is (401) 454-2880. LIN Holdings is an indirect wholly-owned subsidiary of
Ranger Equity Holdings Corporation ("Ranger"), which is a holding company
controlled by Hicks, Muse, Tate and Furst Incorporated ("Hicks, Muse").
The Company is a television station group operator in the United States
that owns and operates seven network-affiliated television stations and has an
agreement to purchase an eighth (WOOD-TV). Additionally, the Company has local
marketing agreements ("LMAs"), under which it programs four other stations in
the markets in which it operates. The Company has agreements to dispose of one
LMA (KXTX-TV), and to acquire another (WOTV-TV). An LMA is a programming
agreement between two separately owned television stations serving a common
service area, under which the licensee of one station provides substantial
portions of the broadcast programming for airing on the other licensee's
station, subject to ultimate editorial and other controls being exercised by the
later licensee, and sells advertising time during those programming segments.
Seven of the Company's stations are in the top 50 of the November 1998
designated market area ("DMA") rankings of the Nielsen Station Index. The
Nielsen rankings rank geographically defined television markets in the United
States by size according to various factors based upon actual or potential
audience. The Company's top 50 DMAs include Indianapolis, Indiana; New
Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia;
and Dallas-Fort Worth, Texas. These stations have an aggregate United States
household reach of approximately 6.3%.
The Company's television station portfolio (the "Stations") is well
diversified in terms of network affiliations, geographic coverage, net revenues
and cash flow. The Company owns and operates, or has agreements to purchase,
three CBS affiliates, three NBC affiliates and two ABC affiliates (collectively,
the "LIN Core Stations"). The Company also programs four additional
network-affiliated television stations pursuant to LMAs (the "LIN LMA
Stations"). Additionally, the Company holds an approximate 20% equity interest
in a joint venture with NBC (the "Joint Venture"). The Joint Venture consists of
KXAS-TV, an NBC affiliate station in Dallas-Fort Worth, and KNSD-TV, an NBC
affiliate in San Diego, California. NBC operates the stations owned by the Joint
Venture pursuant to a management agreement. The Company is also the owner and
operator of 21 low-power broadcast stations.
The following table provides information regarding the station and
other programming outlets owned and / or programmed, or under agreement to be
acquired or disposed of, by the Company including the stations owned by the
Joint Venture as of December 31, 1998.
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TELEVISION STATIONS
<TABLE>
<CAPTION>
FCC No. of
Licence Station DMA % of Commercial
Expiration rank TVHH (in DMA Stations in
Market Status Channel Date Network Affiliation in DMA(5) 000s)(6) TVHH(10) DMA (7)
- -------------------------- ------ ------- ---------- --------------------- --------- --------- -------- -----------
Expiration
Network Date(9) VHF UHF
------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Indianapolis, IN
WISH-TV O&O(1) 8 (VHF) 8/1/05 CBS 11/15/2004 25 955,800 0.98% 4 7
WIIH-LP (Satellite) O&O 11 (VHF) 8/1/05 CBS
Local Weather Station O&O Cable n/a
New Haven-Hartford, CT
WTNH-TV O&O 8 (VHF) 4/1/99 ABC 9/4/2005 27 909,930 0.93% 2 5
WBNE-TV LMA(2) 59 (UHF) 4/1/99 WB Note 11
Norfolk-Portsmouth, VA
WAVY-TV O&O 10 (VHF) 10/1/04 NBC 12/31/2010 40 643,810 0.66% 3 4
WVBT-TV LMA 43 (UHF) 10/1/04 FOX 8/31/2008
Buffalo, NY
WIVB-TV O&O 4 (VHF) 6/1/99 CBS 7/31/1999 42 627,020 0.64% 3 2
Austin, TX
KXAN-TV O&O 36 (UHF) 8/1/06 NBC 12/31/2010 60 470,970 0.48% 1 4
KXAM-TV (Satellite)(8) O&O 14 (UHF) 8/1/06 NBC
KNVA-TV LMA 54 (UHF) 8/1/06 WB Note 11
Low Power Television
Station(4) O&O Various IND(3)
Local Weather Station O&O Cable n/a
Decatur-Champaign, IL
WAND-TV O&O 17 (UHF) 12/1/05 ABC 12/31/2005 82 335,130 0.34% 1 5
Local Weather Station O&O Cable n/a
Fort Wayne, IN
WANE-TV O&O 15 (UHF) 8/1/05 CBS 12/31/2005 103 246,470 0.25% 4
Local Weather Station O&O Cable n/a
- ----------------------------------------------------------------------------------------------------------------------------------
Pending Disposition
- ----------------------------------------------------------------------------------------------------------------------------------
Dallas-Fort Worth, TX
KXTX-TV LMA 39 (UHF) 8/1/06 IND n/a 7 1,959,680 2.00% 4 9
- ----------------------------------------------------------------------------------------------------------------------------------
Pending Acquisition
- ----------------------------------------------------------------------------------------------------------------------------------
Grand Rapids-Kalamazoo-Battle
Creek, MI
WOOD-TV CS 8 (VHF) 10/1/05 NBC 12/31/2010 38 666,860 0.68% 3 5
WOTV-TV CS 41 (UHF) 10/1/05 AB 9/4/2005
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NBC Joint Venture
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Dallas-Fort Worth, TX
KXAS-TV JV 8 (VHF) NBC 7 1,959,680 2.00% 4 9
San Diego, CA
KNSD-TV JV 26 (UHF) NBC 26 945,170 0.96% 2 4
</TABLE>
1) "O&O" refers to stations owned and operated by LIN Television.
2) "LMA" refers to a station to which the Company provides services under a
local market agreement.
3) "IND" refers to stations without any network affiliation.
4) Low Power Television Stations ("LPTVs") and satellite broadcasting
facilities provide simultaneous broadcasting of the network programming of
the station serving the same market, unless a different network affiliation
for the LPTV is indicated.
5) Rankings are based on the relative size of a station's market among the 210
generally recognized television markets in the United States. Source:
Nielsen Station Index DMA Market Rankings, November, 1998, A.C. Neilson
Company.
6) Estimated Television Households ("TVHH") in each station's DMA market.
Source: Nielsen Station Index DMA Market Rankings, November, 1998, A.C.
Neilson Company.
7) The number of stations in a market excludes LPTVs and satellite
broadcasting facilities.
8) Station KXAM-TV, Channel 14 in Llano, Texas, is operated as a satellite
station of KXAN-TV to increase audience share.
9) Network affiliation contracts are generally renewable by their terms for
successive periods (unless notice of termination is provided in advance of
its expiration date).
10) There are approximately 97,957,240 TVHH's in the top 210 DMA defined
television markets as of 1998. Source: Nielsen Station Index DMA Market
Rankings, November, 1998, A.C. Neilson Company.
11) The term of the WB Television Network affiliation agreement with WBNE and
KNVA is open-ended with a 60 day notice of termination clause to either
party.
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COMPLETED TRANSACTIONS
Hicks, Muse, Tate and Furst Acquisition. LIN Holdings and LIN
Acquisition Corporation, two newly formed affiliates of Hicks Muse, entered into
an Agreement and Plan of Merger with LIN Television on August 12, 1997 (as
amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions
of, the Merger Agreement, LIN Holdings acquired LIN Television (the
"Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned
subsidiary, with and into LIN Television (the "Merger"), with LIN Television
surviving the merger and becoming a direct, wholly-owned subsidiary of LIN
Holdings. The total purchase price for the common equity of LIN Television was
approximately $1.7 billion. In addition, the Company refinanced $260.2 million
of LIN Television's indebtedness and incurred acquisition costs of approximately
$32.2 million.
NBC Joint Venture. In connection with the Acquisition, LIN Television
and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV,
formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly
NBC's San Diego station. A wholly-owned subsidiary of NBC is the general partner
of the Joint Venture (the "NBC General Partner") and NBC operates the stations
owned by the Joint Venture. The NBC General Partner holds an approximate 80%
equity interest and LIN Television holds an approximate 20% equity interest in
the Joint Venture (see Note 5 of Notes to Consolidated Financial Statements).
General Electric Capital Corporation ("GECC") provided debt financing for the
Joint Venture in the form of an $815.5 million 25-year non-amortizing senior
secured note bearing an initial interest rate of 8.0% per annum (the "GECC
Note"). LIN Television expects that the interest payments on the GECC Note will
be serviced solely by the cash flow of the Joint Venture.
PENDING TRANSACTIONS
LIN Merger Termination. On July 7, 1998, Chancellor Media Corporation
("Chancellor") entered into a merger agreement (the "Chancellor Merger
Agreement") with Ranger to acquire Ranger in a stock for stock transaction (the
"Chancellor Merger"). On March 14, 1999, the Boards of Directors of Chancellor
and Ranger, agreed to terminate the Chancellor Merger Agreement. Additionally,
Chancellor's Board of Directors approved the assignment of the agreements to
acquire Petry Media Corporation, a leading television representation firm, and
Pegasus Broadcasting of San Juan, L.L.C., a television broadcasting company that
owns a television station in Puerto Rico, to the Company. The assignment of the
agreements relating to the purchase of Petry Media Corporation and Pegasus
Broadcasting are subject to negotiation of definitive documentation, third-party
approval and various other conditions, including governmental approvals, and,
accordingly, there can be no assurance that such transactions will be completed
by the Company.
WOOD and WOTV. On August 12, 1997, LIN Television signed an asset
purchase agreement with AT&T Corporation ("AT&T") for the assets of WOOD-TV and
the LMA rights related to WOTV-TV (collectively, the "Grand Rapids Stations"),
both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek
market (the "Grand Rapids Acquisition"). LIN Television currently provides
services to the Grand Rapids Stations pursuant to a consulting agreement with
AT&T. The total purchase price for the Grand Rapids Acquisition will be
approximately $125.5 million in cash, plus accretion of 8.0% which commenced on
January 1, 1998. The Grand Rapids Acquisition is expected to be funded by
approximately $125.0 million of additional borrowings under the Senior Credit
Facilities. The sale is subject to and awaiting approval of the Federal
Communication Commission ("FCC").
KXTX-TV Disposition. On August 1, 1998, LIN Television of Texas, L.P.,
a subsidiary of LIN Television ("LIN Texas"), and Southwest Sports Group, Inc.
("SSG"), a Delaware corporation and an entity in which a partner of Hicks Muse
has a substantial economic interest, entered into an Asset Purchase Agreement
(the "SSG Agreement") pursuant to which LIN Texas will assign its purchase
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option and LMA rights on KXTX-TV and sell certain assets and liabilities of
KXTX-TV to SSG. In exchange, LIN Texas will receive 500,000 shares of SSG's
Series A Convertible Preferred Stock, par value $100.00 per share ("SSG
Preferred Stock"). Following the completion of the transactions contemplated by
the SSG Agreement, LIN Texas will be entitled to receive dividends (which accrue
from and after January 1, 1999) at the per annum rate of 6% of par value prior
to the payment by SSG of any dividend in respect of its common stock or any
other junior securities.
At the option of SSG, dividends will be payable either in kind or in
cash. LIN Texas will have the right, upon the earlier of (i) the third
anniversary of the issuance of the SSG Preferred Stock and (ii) an initial
public offering of SSG common stock, to convert its shares of SSG Preferred
Stock into shares of SSG common stock at a conversion rate equal to the par
value per share of the SSG Preferred Stock (plus accrued and unpaid dividends
thereon) divided by the fair market value per share of the SSG common stock. SSG
will have the right, at its sole option, to redeem the SSG Preferred Stock at
par value (plus accrued and unpaid dividends thereon) at any time. The Company
does not expect to realize a significant gain or loss as a result of this
transaction.
Subject to the terms of the SSG Agreement and the satisfaction of
certain conditions, including the receipt of National Hockey League and Major
League Baseball approvals and SSG's consummation of certain other business
acquisitions, it is expected that the sale of KXTX-TV will be consummated by the
end of second quarter of 1999.
Also, on August 1, 1998, LIN Texas and Southwest Sports Television Inc.
("SST"), an affiliate of SSG, entered into a Sub-Programming Agreement pursuant
to which SST renders certain services with respect to KXTX-TV in exchange for a
management fee equal to the cash receipts of the station less operating and
other expenses. For 1998, the management fee expense was $8.0 million, $4.2
million of which remained payable as of December 31, 1998.
Affiliation change of WVBT-TV. LIN Television's LMA affiliate in
Virginia Beach, Virginia, WVBT-TV, switched its network affiliation from the WB
Network to Fox effective September, 1998.
FINANCING TRANSACTIONS
- - On March 3, 1998, the Company entered into a credit agreement (the
"Credit Agreement") with the Chase Manhattan Bank, as administrative
agent (the "Agent"), and the lenders named therein. Under the Credit
Agreement, the Company established a $295 million term loan facility, a
$50 million revolving facility, and a $225 million incremental term
loan (collectively, the "Senior Credit Facilities").
- - On March 3, 1998, LIN Television issued $300 million aggregate
principal amount of 8 3/8% Senior Subordinated Notes due 2008 (the
"Senior Subordinated Notes") for net proceeds of $290.3 million. The
net proceeds were used to finance a portion of the Acquisition.
- - On March 3, 1998, LIN Holdings issued $325 million aggregate principal
amount of 10% Senior Discount Notes due 2008 (the "Senior Discount
Notes" and together with the Senior Subordinated Notes, the "Notes")
for net proceeds of $192.6 million. The net proceeds were used to
finance a portion of the Acquisition.
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COMPANY STRATEGY
The Company's business strategy is to maximize its Broadcast Cash Flow,
which is defined as operating income plus corporate expenses, depreciation and
amortization, including both tangible and intangible assets and program rights
and other non-cash items, less payments for program rights ("BCF"), through both
revenue growth and the implementation of effective cost controls. To achieve
these goals, the Company seeks, among other things, to:
Maximize Revenue Shares. From 1993 to 1998, the Company increased its
broadcast television advertising revenue market share from 22.8% to 25.9%,
assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993, by
targeting audiences with favorable demographic profiles, creating auxiliary
revenue streams and cultivating strong network affiliations.
The Company attempts to maximize each station's revenue share through a
quarterly "entitlement review process." This process involves the benchmarking
of each station's advertising revenues against an index which weighs various
demographic attributes according to their relative advertising revenue value. As
a result of the entitlement review process, the Company's revenue shares
typically outperform its audience shares.
The Company's revenue shares also benefit from long-term affiliations
with its three core networks--CBS, NBC and ABC--which provide the Company's
television stations affiliated with these networks with competitive programming,
including coverage of political events and high profile sporting events such as
the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company
also has stations affiliated with Fox and Warner Brothers ("WB"), which further
enhances its ability to grow its revenue shares through access to their
competitive programming.
Emphasize Leading Local News. The LIN Core Stations are ranked number
one or two in late news in all but the Company's smallest market. Management
believes that a successful news operation is critical to the success of a
television station because news audiences generally have the best demographic
profiles from an advertising sales perspective. In addition, news programming:
- - enables the Company to purchase less syndicated programming and thereby
maintain tight control over programming costs;
- - serves as a strong lead-in to other programming; and
- - fosters a high profile in the local community, which is critical to
maximizing local advertising sales.
The Company has increased the hours of news programming produced per
week from 81 hours in 1989 to 232 hours in 1998 on a pro forma basis.
Execute a Multi-Channel Strategy. The Company's management was one of
the pioneers of the "multi-channel strategy," which involves the combination of
an owned and operated television station with an LMA station and/or a Local
Weather Station in the same market. Management has pursued this strategy in all
but one of the Company's markets. Execution of the multi-channel strategy has
been a factor in the Company's ability to generate incremental cash flow. The
advantages of the multi-channel strategy are:
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\
- - the ability to capitalize on management's expertise;
- - additional advertising inventory in each market;
- - greater programming flexibility;
- - enhanced ability to leverage fixed operating costs over a larger revenue
base;
- - improved negotiating positions with respect to suppliers of syndicated
programming, advertisers and the networks;
- - increased share of actual viewers;
- - the opportunity to affiliate with the emerging networks; and
- - enhanced opportunities for cross promotion.
Control Costs. In addition to concentrating on maximizing advertising
revenues in its local markets, management focuses on controlling costs to
maximize BCF. In many markets, the Company operates with fewer personnel than
its competitors. In addition, management typically buys syndicated programming
on a company-wide basis and performs detailed profitability analyses for all
programming purchases. As a result, management believes that the Company's
margins are among the highest in the industry for stations in markets of
comparable size.
Pursue Selective Acquisitions. The Company intends to pursue selective
acquisitions of television stations with the goal of improving their operating
performance by applying management's business strategy. Targeted stations
generally will share many of the following characteristics:
- - attractive acquisition terms;
- - opportunities to implement effective cost controls and to be accretive on
an after-tax cash flow basis;
- - opportunities for increased audience share through improved newscasts and
programming; and
- - market locations that are projected to have attractive growth in
advertising revenues. The Company intends to primarily target
network-affiliated stations located in the 50 largest DMAs and target
stations that typically have established audiences for their news, sports
and entertainment programming.
Invest in Digital Technology. Management believes that the Company,
having recently initiated digital operations in Indianapolis and New Haven, is
well positioned for the transition to digital broadcasting. The Company is among
the first television broadcasters in the United States to transmit digital
signals. The Company has already invested $15.8 million to fully prepare its
towers and transmitter buildings for the transition, and estimates that an
additional $40 million will be required over the next five to seven years for
other necessary capital expenditures such as the purchase of antennae,
transmitters, studio equipment and news gathering equipment. In accordance with
FCC regulations, all
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station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required
to transmit a digital signal by May 1, 1999. Affiliates of those networks in
DMAs ranked eleven through thirty will be required to transmit a digital signal
by November 1, 1999. All remaining commercial broadcasters will be required to
transmit a digital signal by May 1, 2002.
INDUSTRY OVERVIEW
Broadcasting Revenues. Local television stations derive revenues from
the sale of advertising time for spot advertisements, which usually vary from 10
seconds to 60 seconds in length, and from the sale of program sponsorships to
national and local advertisers. Advertising contracts are generally short in
duration and may usually be canceled upon two weeks notice. Each of the
Company's television stations is represented by a national firm for the sale of
spot advertising to national customers, but each station also has local sales
personnel covering the service area in which it is located. National
representatives are compensated by a commission based on net advertising
revenues from national customers.
The following table shows the approximate percentage of the Company's
net television broadcasting revenues by source for each of the past three years:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Local Times Sales .................................. 46% 47% 47%
National Times Sales ............................... 39% 41% 42%
Network Compensation ............................... 5% 6% 6%
Other .............................................. 10% 6% 5%
</TABLE>
Networks. The majority of commercial television stations in the United
States are affiliated with one of the major national networks: ABC, NBC, CBS,
and Fox. Stations that operate without network affiliations are commonly
referred to as "independent" stations. The amount of programming each network
offers varies. ABC, NBC and CBS offer approximately 12 hours of programming per
day. Fox presently provides its affiliates with approximately 47 hours of
programming per week. WB and United-Paramount Network ("UPN") have each launched
new television networks and are currently offering programming on a limited
basis. The Company is unable to predict the effect, if any, that these or any
other new networks, or the expansion of programming provided by the Fox, UPN, or
WB networks, would have on the future results of the Company's operations.
Network-affiliated television broadcast stations generally operate
under affiliation agreements that provide the affiliated station with the right
to broadcast all programs transmitted by the network with which the station is
affiliated. The major networks typically negotiate the right to sell a majority
of the advertising time during network broadcasts. The network also pays the
affiliated station a network compensation fee for much of the network
programming that the station broadcasts. Generally, the fees paid by the
networks vary according to the type of programming and the time of day the
programming is broadcast.
The networks, pursuant to affiliation agreements, supply a significant
portion of the Company's daily programming. During such network time periods,
the Stations are dependent on the performance of the network programs in
attracting viewers. During time periods in which programming is not supplied by
the networks, the Stations broadcast their own or syndicated non-network
programs, as well as news, sports, public affairs and other entertainment
programming.
The Company believes that its network affiliations provide the Stations
with competitive programming at a lower cost than is otherwise available. Under
the network affiliation agreements,
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certain advertising time during network programs is available to the Stations
for sale to national and local advertisers. The programming strength of its
network may affect a network-affiliated Station's competitive position.
Nonetheless, the Company believes that local programming, particularly local
news coverage, and community involvement and promotion can augment network
programming to improve a Station's audience share and financial performance. A
network's termination of, or refusal to renew, one or more of the network
affiliation agreements could have a material adverse effect on the Company
depending on which Stations were affected and whether and upon the terms that
other network affiliations may be available in the Station's market.
Local Marketing Agreements. Over the past few years, the Company has
increased its market penetration and broadened its demographics by developing
LMA stations. As start-up stations, the Company's LMA stations historically have
generated revenues but produced negative BCF. However, the Company's LMA
stations contributed $9.2 million to the Company's BCF in 1998.
Stand-alone independent UHF stations often do not have the management
expertise or the operating efficiencies available to multiple-station group
broadcasters such as the Company. Accordingly, these stand-alone UHF stations
often operate at minimal profit or at a loss. In four of its markets, the
Company has entered into LMAs with the owners of stand-alone UHF stations, each
of which is for a ten year period. In addition to providing the Company with an
additional revenue stream, the Company's LMA strategy is intended to permit
stations that otherwise might "go dark" or operate marginally to add local news
and public affairs and contribute to diversity in their respective markets.
Under its LMAs the Company provides marketing services and programming
to stations KXTX-TV, Dallas-Fort Worth, Texas, KNVA-TV, Austin, Texas, WBNE-TV,
New Haven-Hartford, Connecticut, and WVBT-TV, Norfolk-Portsmouth, Virginia. The
Company has also entered into option and put agreements that would enable or
require the Company to purchase such stations under certain conditions,
including a change by the FCC in its "duopoly" rules to permit such
acquisitions. If the FCC's rules are not amended to permit the Company to own
the license, the Company may be required to make alternative arrangements. See
"--Licensing and Regulation." The Company cannot predict whether it will be able
to make such arrangements or whether those arrangements will be financially
advantageous. The Company intends to seek additional LMA opportunities in the
future.
Under its LMAs, the Company is required to pay fixed periodic fees and
incur programming and operating costs relating to its LMA stations, but retains
all advertising revenues. The Company believes that it can increase the
likelihood of financial viability of each station served pursuant to an LMA by
using the Company's negotiating expertise, operating efficiencies, and an
experienced and skilled management team, which provides programming and
marketing support to the LMA station. The Company also benefits from the
cross-marketing of programming and the ability to time-shift certain
programming, for example, to rebroadcast a local news program at an earlier or
later time to appeal to additional viewers.
In accordance with FCC rules, regulations and policies, all of the
Company's LMAs allow preemptions of the Company's programming by the
owner-operator and FCC licensee of each station with which the Company has an
LMA. Accordingly, the Company cannot be assured that it will be able to air all
of the programming expected to be aired on those stations with which it has LMAs
or that the Company will receive the anticipated advertising revenue from the
sale of advertising spots in such programming. Although the Company believes
that the terms and conditions of each of its LMAs will enable the Company to air
its programming and utilize the programming and other non-broadcast license
assets acquired for use on the LMA stations, there can be no assurance that
early terminations of the LMAs or unanticipated terminations of all or a
significant portion of the programming by the owner-
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operator and FCC licensee will not occur. An early termination of one of the
Company's LMAs, or repeated and material preemptions of programming thereunder,
could have a material adverse affect on the Company's operations.
Low-Power Television Stations ("LPTVs"). The Company owns and operates,
and is currently constructing, LPTVs in several of its markets. LPTVs broadcast
at a lower transmitting power than other stations and, accordingly, their
over-the-air signals cover a much smaller geographic area than the signals of
other stations. LPTVs are secondary services which, under FCC rules, must
protect full power television stations in their markets from interference and
which may not receive rights to convert to digital broadcast in the future. By
operating a network of multiple LPTVs in one market, the Company may also be
able to achieve over-the-air signal coverage of all, or nearly all, of certain
of the television markets served by the Stations. The Company owns and operates
an LPTV network in its Austin, Texas, Norfolk-Portsmouth, Virginia, and
Indianapolis, Indiana markets. The advent of digital television has resulted in
the "displacement" and possible loss or reduction in service area of some of the
Company's LPTVs. See "--Licensing and Regulation--Advanced Television
Technology."
Local Weather Station. In 1994, the Company launched the Local Weather
Station, a programming service ("LWS"), which provides either Doppler radar or
local travel and aviation forecasts, weather trends and features. LWS is offered
in all of the Company's television markets, except New Haven-Hartford,
Connecticut and Buffalo, New York, over local cable systems. The Company
receives monthly payments from certain contracting cable systems based on the
number of subscribers to such cable systems, as well as a share of each cable
system's advertising revenues, if any, generated by LWS.
COMPETITION
Competition in the television industry is intense and takes place on
several levels: competition for audience, competition for programming (including
news) and competition for advertisers. Factors that are material to a television
station's competitive position include network affiliation, quality of
programming, 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 ("FTC"), any of which could have a material
adverse effect on the Company's business and operations.
Audience. Stations compete for audience on the basis of program
popularity, which has a direct effect on advertising rates. The development of
methods of television transmission other than over-the-air broadcasting and, in
particular, the growth of cable television have significantly altered
competition for audience in the television broadcasting industry. 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 broadcasting
stations for a share of the local news audience. Recently, however, certain
cable operators have elected to compete for such audiences.
Other sources of audience competition include home entertainment
systems (including videocassette recorder and playback systems, digital video
discs and television game devices), wireless cable, satellite master antenna
television systems, LPTVs, low-power satellite-to-home video distribution
services, telephone company video systems, computer on-line services and other
entertainment and advertising media. The Stations also face competition from
high-powered direct broadcast satellite
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services that can transmit programming directly to homes equipped with special
receiving devices. Several direct broadcast satellite ("DBS") companies provide
nationwide service.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now in use with DBS and
in development for cable and "wireless cable," are expected to permit greater
numbers of channels to be carried with existing bandwidth. 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 expanded programming to highly targeted audiences. A
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 specific audiences
is expected to alter the competitive dynamics for advertising expenditures and
could have a material adverse effect on the Company's ability to generate
revenues.
Programming. Competition for programming involves negotiating with
national program distributors or syndicators that sell first-run and rerun
programming. The Stations compete against in-market television broadcasting
station competitors for exclusive access to off-network reruns (such as Friends)
and first-run products (such as Wheel of Fortune) in their respective markets.
There is no assurance that the Company will not be exposed to volatile or
increased programming costs that may adversely affect the Company's operating
results. Further, because syndicated programs are generally purchased well in
advance of being broadcast, the Company may not accurately predict how a program
will perform. The Company minimizes this risk by generally limiting its
commitments for unproven syndicated non-network programming to short time
periods. Syndicated programs may be purchased for cash, for cash and barter, or
for barter only. Under a barter arrangement, a national program syndicator
receives advertising time in exchange for the programming it supplies, and the
station pays a reduced cash fee or no fee for such programming. Cable systems
generally do not compete with local stations for programming, although various
national cable networks have acquired programs that would have otherwise been
offered to local television broadcasting stations. Competition also occurs for
exclusive news stories and features and local sports programming.
Advertising. Television broadcasting stations compete for advertising
revenues with other stations in their respective markets, as well as with other
advertising media, such as newspapers, radio, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail and local cable
systems. Competition for advertising dollars in the broadcasting industry occurs
primarily in individual markets. Generally, a television broadcasting station in
one market does not compete with stations in other markets.
In January 1995, WB and UPN launched new broadcast networks that have
subsequently entered into affiliation agreements with formerly independent
television stations. The amount of programming supplied by WB and UPN to their
affiliates is limited, but both WB and UPN have announced their intentions to
expand their programming over time to seven nights per week. In certain of the
Company's markets (e.g., New Haven, Austin), the Company has obtained the WB
affiliation for its LMA stations. Other attempts to establish new networks may
also be undertaken in the future. The Company cannot predict the impact of the
development of these new or other networks, such as Pax Net, on the Company's
business.
The television broadcasting industry is undergoing a period of
consolidation and significant change. Many of the Company's current and
potential competitors have significantly greater financial, marketing,
programming and broadcasting resources than the Company. The Company, however,
believes that its local news programming, network affiliations and management of
its sales resources
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have to date enabled it to compete effectively in its
markets. Nonetheless, there is no assurance that the Company's strategy will
continue to be effective or that the introduction of new competitors for
television audiences will not have a material adverse effect on the Company's
financial condition and results of operations.
LICENSING AND REGULATION
The following is a brief discussion of certain provisions of the
Communications Act of 1934, as amended (the "Communications Act"), and of FCC
regulations and policies that affect the business operations of television
broadcasting stations. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC, on which this discussion is
based, for further information concerning the nature and extent of FCC
regulation of television broadcasting stations.
FCC Regulation. The ownership, operation and sale of television
stations, are subject to the jurisdiction of the FCC by authority granted it
under the Communications Act. Matters subject to FCC oversight include, but are
not limited to:
- - the assignment of frequency bands of broadcast television;
- - the approval of a television station's frequency, location and operating
power;
- - the issuance, renewal, revocation or modification of a television station's
FCC license;
- - the approval of changes in the ownership or control of a television
station's licensee;
- - the regulation of equipment used by television stations; and
- - the adoption and implementation of regulations and policies concerning the
ownership and operation of television stations.
The FCC has the power to impose penalties, including fines or license
revocations, upon a licensee of a television station for violations of the FCC's
rules and regulations.
License Renewal, Assignments and Transfers. Television broadcast
licenses are granted for a maximum term of eight years (five years prior to
1996) and are subject to renewal upon application to the FCC. The FCC prohibits
the assignment of a license or the transfer of control of a broadcasting
licensee without prior FCC approval. In determining whether to grant or renew a
broadcasting license, the FCC considers a number of factors pertaining to the
applicant, including compliance with a variety of ownership limitations and
compliance with character and technical standards. During certain limited
periods when a renewal application is pending, petitions to deny a license
renewal may be filed by interested parties, including members of the public.
Such petitions may raise various issues before the FCC. The FCC is required to
hold evidentiary, trial-type hearings on renewal applications if a petition to
deny renewal of such license raises a "substantial and material question of
fact" as to whether the grant of the renewal application would be inconsistent
with public interest, convenience and necessity. The FCC must grant the renewal
application if, after notice and opportunity for a hearing, it finds that the
incumbent has served the public interest and has not committed any serious
violation of FCC requirements. If the incumbent fails to meet that standard, and
if it does not show other mitigating factors warranting a lesser sanction, the
FCC has authority to deny the renewal application and consider a competing
application.
Multiple and Cross-Ownership Rules. On a national level, the FCC rules
generally prevent an entity or individual from having an attributable interest
in television stations with an aggregate audience reach in excess of 35% of all
U.S. households. On a local level, the "duopoly" rule prohibits or restricts
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attributable interests in two or more television stations with overlapping
service areas and the "one-to-a-market" rule restricts such interests in
television and radio stations serving the same market. The FCC has initiated a
rulemaking looking towards relaxation of both rules. Additional cross-ownership
restrictions generally prohibit broadcast/daily newspaper or television/cable
combinations in the same market.
The FCC generally applies its ownership limits only to "attributable"
interests held by an individual, corporation, partnership or other association.
In the case of corporations holding broadcast licenses, the interest of
officers, directors and those who, directly or indirectly, have the right to
vote 5% or more of the corporation's voting stock (or 10% or more of such stock
in the case of insurance companies, mutual funds, bank trust departments and
certain other passive investors that are holding stock for investment purposes
only) are generally deemed to be attributable, as are positions as an officer or
director of a corporate parent of a broadcast licensee. The FCC is considering
proposals increasing to amend the ownership attribution rules including the
general "attributable interest" threshold to 10% of the outstanding voting stock
of a broadcast licensee and increasing the threshold for passive institutional
investors to 20%.
The FCC recently relaxed its national television station multiple
ownership rules. Specifically, a single entity may hold "attributable interests"
in an unlimited number of U.S. television stations provided that those stations
operate in markets containing cumulatively no more than 35% of the television
homes in the U.S. For this purpose, only 50% of the television households in a
market are counted towards the 35% national restriction if the owned station is
a UHF station. An FCC rulemaking is under way to address how to measure audience
reach, including the "UHF discount," as part of the FCC's biennial review of the
broadcast rules mandated by the Telecom Act. The television homes that the
Stations reach is well below the 35% national limit. Recently, several entities
have proposed to the FCC that the 35% national audience limit be increased to
50% of the television homes in the U.S.
Hicks, Muse and five of the Company's directors, Thomas O. Hicks,
Michael J. Levitt , John R. Muse, Eric C. Neuman and John H. Massey have
attributable interests in Chancellor Media Corporation, Capstar Broadcasting
Corporation and Sunrise Broadcasting, Inc. (collectively, the "Hicks, Muse
Companies"), which own or propose to acquire a number of radio and television
stations in more than 100 radio and television markets. Any new acquisition by
the Company or any of the Hicks Muse Companies which would result in a Company's
station and a radio or television station owned by any of these companies
providing service to a common area, as defined by the FCC rules, will require a
waiver of the duopoly or one-to-a-market rules and there can be no assurance
that such a waiver will be granted. In addition, the Company and the Hicks, Muse
Companies already have overlapping ownership interests in several markets,
including Hartford-New Haven, Indianapolis and Austin, which were permitted by
the FCC under temporary waivers subject to revision or recision as a result of
any changes in the one-to-a-market rule adopted in the commission's ownership
rulemaking. Similarly, the WOOD-TV acquisition will require a waiver of the
one-to-a-market rule or a change in the rule to permit common ownership of
WOOD-TV and several radio stations licensed to Chancellor and Capstar
Broadcasting Corporation in the Cedar Rapids and Battle Creek, Michigan,
markets. There is no assurance that the FCC will adopt a rule which will permit
continued common ownership of these existing facilities or which will permit the
Company and the Hicks, Muse Companies to consummate the WOOD-TV or other future
transactions.
Because of these multiple and cross-ownership rules, a purchaser of the
Company's common stock who acquires an attributable interest in the Company may
violate the FCC's rules if that purchaser also has an attributable interest in
other television or radio stations, or in daily newspapers or cable systems,
depending on the number and location of those radio or television stations or
daily newspapers or cable
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systems. Such a purchaser also may be restricted in the companies in which it
may invest to the extent that those investments give rise to an attributable
interest. If an attributable stockholder of the Company violates any of these
ownership rules or if a proposed acquisition by the Company would cause such a
violation, the Company may be unable to obtain from the FCC one or more
authorizations needed to conduct its television station business and may be
unable to obtain FCC consents for certain future acquisitions.
The FCC also is currently considering revising its policy regarding
television LMAs. Accordingly, it is unclear whether the Company will be able to
program stations under its existing LMAs for the remainder of their current
terms, extend these agreements, or enter into new LMAs in other markets in which
the Company owns and operates television stations. The material LMA issues
facing the Company as a result of the pending rulemaking proceedings are as
follows:
- - the extent to which the FCC may restrict LMAs or make them attributable
ownership interests is unclear;
- - the FCC could make LMAs fully attributable ownership interests, and thus
prohibited, with the exception of waivers for stations meeting specified
criteria;
- - "grandfathered" LMAs could be limited to the current terms of their
agreement or even shorter periods, and renewal and transfer rights could be
eliminated, including the elimination of "grandfather" status on such LMAs
as a result of the consummation of a merger or other business combination;
- - the FCC could require the Company to modify its LMAs in ways which impair
their viability; and
- - If the FCC were to find that the owner/licensee of one of the Company's LMA
stations failed to maintain control over its operations, the owner/licensee
of the LMA station and/or the Company could be sanctioned.
The Company's LMAs all involve UHF stations which were either start-up
stations or were failing financially and would appear to qualify for conversion
to ownership under the proposed standards. Nevertheless, it is possible that the
FCC could deny LIN Television the ability to convert its LMAs to full ownership
or require LIN Television to modify its LMAs in ways which impair their
viability. LIN Television is unable to predict the ultimate outcome of possible
changes to these FCC rules and the impact such FCC rules may have on its
broadcasting operations.
Alien Ownership. Under the Communications Act, broadcast licenses may
not be granted to or held by any corporation having more than one-fifth of its
capital stock owned of record or voted by non-U.S. citizens (including a
non-U.S. corporation), foreign governments or their representatives
(collectively, "Aliens") or having an Alien as an officer or director. The
Communications Act also prohibits a corporation, without an FCC public interest
finding, from holding a broadcast license if that corporation is controlled,
directly or indirectly, by another corporation, any officer of which is an
Alien, or more than one-fourth of the directors of which are Aliens, or more
than one-fourth of the capital stock of which is owned of record or voted by
Aliens, unless the FCC finds that such ownership would be in the public
interest. The FCC has issued interpretations of existing law under which these
restrictions in modified form apply to other forms of business organizations,
including general and limited partnerships. As a result of these provisions, the
Company, which serves as a holding company for its various television station
licensee subsidiaries, cannot have more than 25% of its capital stock owned of
record or voted by Aliens, cannot have an officer who is an Alien and cannot
have more than one-fourth of the
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Company's Board of Directors consisting of Aliens. The Certificate of
Incorporation and By-Laws provide for certain stock transfer legends and
procedures designed to prevent a violation of these requirements.
Programming and Operation. The Communications Act requires broadcasters
to serve the "public interest." Since the late 1970s, the FCC gradually has
relaxed or eliminated many of the more formalized procedures it had developed to
promote the broadcast of certain types of programming responsive to the needs of
a station's community of license. Broadcast station licensees continue, however,
to be required to present programming that is responsive to community problems,
needs and interests and to maintain certain records demonstrating such
responsiveness. Complaints from viewers concerning a station's programming may
be considered by the FCC when it evaluates license renewal applications,
although such complaints may be filed, and generally may be considered by the
FCC, at any time. Stations also must follow various rules promulgated under the
Communications Act that regulate, among other things, children's television
programming, political advertising, sponsorship identifications, contest and
lottery advertising, obscene and indecent broadcasts, programming rating
guidelines and technical operations, including limits on radio frequency
radiation.
Restrictions on Broadcast Advertising. The advertising of cigarettes on
broadcast stations has been banned for many years. The broadcast advertising of
smokeless tobacco products has more recently been banned by Congress. Certain
Congressional committees have examined legislative proposals to eliminate or
severely restrict the advertising of beer and wine. The Company cannot predict
whether any or all of the present proposals will be enacted into law and, if so,
what the final form of such law might be. The elimination of all beer and wine
advertising could have a material adverse effect on the Stations' revenues and
operating profits as well as the revenues and operating profits of other
stations that carry beer and wine advertising. In recent years, some television
stations have begun airing hard liquor advertising. In the past, this group of
advertisers had a self-imposed ban on TV advertising. None of the Company's
Stations have aired this type of advertising. The Company cannot predict the
effect, if any, that the airing of these advertisements on competing stations
will have on the Company's operating results.
Cable "Must-Carry" or "Retransmission Consent" Rights. The 1992 Cable
Act, enacted in October 1992, requires television broadcasters to make an
election to exercise either certain "must-carry" or "retransmission consent"
rights in connection with their carriage by cable television systems in the
station's local market. If a broadcaster chooses to exercise its must-carry
rights, it may demand carriage on a specified channel on cable systems within
its DMA. Must-carry rights are not absolute, and their exercise is dependent on
variables such as the number of activated channels on, and the location and size
of, the cable system, and the amount of duplicative programming on a broadcast
station. Under certain circumstances, a cable system may decline to carry a
given station. If a broadcaster chooses to exercise its retransmission consent
rights, it may prohibit cable systems from carrying its signal, or permit
carriage under a negotiated compensation arrangement. Generally, the Stations
have negotiated retransmission consent agreements with cable television systems
in their markets, with terms generally ranging from three to ten years, which
provide for carriage of the Station's signal and the Local Weather Station. The
licensees of the LMAs generally have opted for must-carry status.
Network Affiliate Issues. Several FCC rules impose restrictions on
network affiliation agreements. Among other things, those rules prohibit a
television station from entering into any affiliation agreement that:
- - requires the station to clear time for network programming that the station
had previously scheduled for other use; or
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- - precludes the preemption of any network programs that the station believes
is unsuitable for its audience and the substitution of network programming
that it believes is of greater local or national importance (the "right to
reject rule").
The FCC is currently reviewing several of these rules governing the
relationship between broadcast television networks and their affiliates.
Specifically, the FCC is reviewing the following four rules:
- - the "right to reject rule;"
- - the "time option rule," which prohibits arrangements whereby a network
reserves an option to use specified amounts of an affiliate's broadcast
time;
- - the "exclusive affiliation rule," which prohibits arrangements that forbid
an affiliate from broadcasting the programming of another network; and
- - the "network territorial exclusivity rule," which prescribes arrangements
whereby a network affiliate may prevent other stations in its community
from broadcasting programming the affiliate rejects, and arrangements that
inhibit the ability of stations outside of the affiliate's community to
broadcast network programming.
Advanced Television Technology. At present, U.S. television stations
broadcast signals using the "NTSC" system, an analog transmission system named
for the National Television Systems Committee, an industry group established in
1940 to develop the first U.S. television technical broadcast standards. The FCC
in late 1996 approved a new digital television ("DTV") technical standard to be
used by television broadcasters, television set manufacturers, the computer
industry and the motion picture industry. This DTV standard will allow the
simultaneous transmission of multiple streams of video programming and data on
the bandwidth presently used by a single normal analog channel. It will be
possible to broadcast one "high definition" channel ("HDTV") with visual and
sound quality superior to present-day television or several "standard
definition" channels ("SDTV") with digital sound and pictures of a quality
slightly better than present television; to provide interactive data services,
including visual or audio transmission; or to provide some combination of these
possibilities on the multiple channels allowed by DTV. The FCC has already
allotted to every existing television broadcaster one additional channel to be
used for DTV during the transition between present-day analog television and DTV
and has established a timetable by which every current station must initiate DTV
operations. Broadcasters will not be required to pay for this new DTV channel,
but will be required to relinquish their present analog channels when the
transition to DTV is complete. Implementation of DTV will impose additional
costs on television stations providing the new service due to increased
equipment costs. The Company has already invested $15.8 million to fully prepare
its towers and transmitter buildings for the transition and estimates that an
additional $40 million will be required over the next five to seven years for
other necessary capital expenditures such as the purchase of antennae,
transmitters, studio equipment and news gathering equipment. The conversion of a
station's equipment enabling it, for example, to produce and transmit digital
programming will require that consumers purchase new receivers (television sets)
for digital signals or, if available by that time, adapters for their existing
receivers. In accordance with FCC regulations, all station affiliates of ABC,
CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital
signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven
through thirty will be required to transmit a digital signal by November 1,
1999. All remaining commercial broadcasters will be required to transmit a
digital signal by May 1, 2002.
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The FCC presently plans for the DTV transition period to end by 2006.
At that time, broadcasters will be required to discontinue analog operations and
to return their present channels to the FCC. The FCC has already begun issuing
construction permits to build DTV stations. The FCC has recently issued
regulations with respect to DTV allocations and interference criteria which are
not yet final, and other aspects of the DTV regulatory framework have not yet
been established. The FCC is expected to apply to DTV certain of the rules
applicable to analogous services in other contexts, including certain rules that
require broadcasters to serve the public interest and may seek to impose
additional programming or other requirements on DTV service. The Telecom Act
requires the FCC to impose fees upon broadcasters if they choose to use the DTV
channel to provide paid subscription services to the public and the FCC recently
determined that broadcasters should pay a fee of 5% of gross revenues received
for subscription services on their DTV channels. The FCC has also recently
initiated a rulemaking proceeding to determine whether and to what extent cable
systems will be required to carry broadcast DTV signals.
In some cases, conversion to DTV operations may reduce a station's
geographical coverage area. In addition, the FCC's current implementation plan
would maintain the secondary status of low-power stations in connection with its
allotment of DTV channels. The DTV channel allotment will result in displacement
of a substantial number of existing low-power stations, particularly in major
television markets. Accordingly, the Company's low-power broadcast stations may
be materially adversely affected. The Company has already filed and received FCC
approval of displacement applications new channel allotments for virtually all
of its low-power stations, which will be at least partially displaced by DTV
channels.
In addition, it is not yet clear:
- - when and to what extent DTV or other digital technology will become
available through the various media;
- - whether and how television broadcast stations will be able to avail
themselves of or profit by the transition to DTV;
- - how channel, tower height and power assignments will be configured so as to
allow that transition;
- - the extent of any potential interference to and from analog channels;
- - whether viewing audiences will make choices among services upon the basis
of such differences;
- - whether and how quickly the viewing public will embrace the cost of new
digital television sets and monitors;
- - to what extent the DTV standard will be compatible with the digital
standards adopted by cable and other multi-channel video programming
services;
- - whether cable systems will be required to carry DTV signals or, in the
absence of such mandate, broadcasters will succeed in negotiating voluntary
cable carriage arrangements; or
- - whether significant additional expensive equipment will be required for
television stations to provide digital service, including HDTV and
supplemental or ancillary data transmission services.
Pursuant to the Telecom Act, the FCC must conduct a ten-year evaluation
regarding public interest in advanced television, alternative uses for the
spectrum and reduction of the amount of spectrum each licensee utilizes. Many
segments of the industry are also intensely studying these advanced
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technologies. There can be no assurances as to the answers to these questions or
the nature of future FCC regulations.
Direct Broadcast Satellite Systems. There are currently in operation
several DBS systems that serve the United States, and it is anticipated that
additional systems will become operational over the next several years. DBS
systems provide programming on a subscription basis to those who have purchased
and installed a satellite signal receiving dish and associated decoder
equipment. DBS systems claim to provide visual picture quality comparable to
that found in movie theaters and aural quality comparable to digital audio
compact discs. In the future, competition from DBS systems could have a material
adverse effect on the financial condition and results of operations of the
Company.
In 1988, Congress passed the Satellite Home Viewer Act ("SHVA"), which
grants DBS operators the right to provide for a fee established by the Copyright
Office, network television signals to "unserved households." To be an unserved
household with respect to a particular network, the household must not be able
to receive, using a conventional rooftop antenna, the television signal of the
network's local affiliate at a specified intensity. Recently, litigation has
arisen in federal district courts in Florida, North Carolina, Colorado, and
Texas concerning the definition of an unserved household under the SHVA, and two
of these district courts have so far continued a definition of unserved
household that would result in the discontinuation of satellite service to a
substantial number of current subscribers. The broadcast industry and DirecTV,
the largest DBS provider, recently announced an agreement which would limit
continued service to ineligible households for several more months but would
require complete compliance with the law by the end of 1999. The FCC recently
made minor modification to the signal intensity standard but did not materially
expand the number of eligible households. Legislation is currently pending in
Congress to amend SHVA in a manner that would affect the right of DBS providers
to transmit network signals, and it is possible that such legislation will be
enacted in 1999. It is impossible to predict what the results of these judicial,
regulatory, and legislative efforts will be, or what affect they will have on
the Company's television broadcasting business.
Recent Development, Proposed Legislation and Regulation. 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 that could
affect, directly or indirectly, the operation and ownership of the Company's
broadcast properties. In addition to the changes and proposed changed noted
above, these matters include, for example, additional spectrum use fees,
political advertising rates, potential restrictions on the advertising of
certain products like hard liquor, beer and wine, and revised rules and policies
governing equal employment opportunity. Other matters that could affect the
Company's broadcast properties include technological innovations and development
generally affecting competition in the mass communications industry.
The foregoing does not purport to be a complete summary of all the
provisions of the Communications Act, the Telecom Act, or of the regulations and
policies of the FCC under either act. 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. Management is unable
at this time to predict the outcome of any of the pending FCC rulemaking
proceedings referenced above, the outcome of any reconsideration or appellate
proceedings concerning any changes in FCC rules or policies noted above, the
possible outcome of any proposed or pending Congressional legislation, or the
impact of any of those changes on the Company's broadcast operations.
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EMPLOYEES:
As of December 31, 1998, the Company employed 1,036 full-time and 68
part-time employees in its broadcasting offices. Of these employees, 188 were
represented by unions. The Company believes that its employee relations are
generally good.
RISKS ASSOCIATED WITH BUSINESS ACTIVITIES
Potential Negative Consequences of Substantial Indebtedness. As of
December 31, 1998, LIN Holdings had $683.6 million of consolidated indebtedness
and $533.9 million of consolidated common stockholders' equity, and LIN
Television had $467 million of consolidated indebtedness and $732.5 million of
consolidated common stockholder's equity. Both LIN Holdings and LIN Television
are substantially leveraged.
The level of indebtedness of LIN Holdings and LIN Television could have
several negative consequences to holders of the Notes (collectively, the
"Notes"), including, but not limited to, the following:
- - a substantial portion of the Company's cash flow from operations will
be dedicated to the payment of principal of, premium (if any) and
interest on their respective indebtedness, thereby reducing the funds
available for operations, distributions to LIN Holdings for payments
with respect to the Senior Discount Notes, future business
opportunities and other purposes and increasing the vulnerability of
LIN Holdings and LIN Television to adverse general economic and
industry conditions;
- - the ability of the Company to obtain additional financing in the future
may be limited;
- - certain of the Company's borrowings (including, without limitation,
amounts borrowed under the Senior Credit Facilities) will be at
variable rates of interest, which will expose the Company to increases
in interest rates;
- - all of the indebtedness incurred in connection with the Senior Credit
Facilities will be secured and is scheduled to become due prior to the
time the principal payments on the Notes are scheduled to become due;
and
- - the mandatory principal redemption amount (as defined in the indenture
governing the Senior Discount Notes) of the Senior Discount Notes will
become due and payable in a lump sum on March 1, 2003.
LIN Holdings' and LIN Television's respective abilities to make
scheduled payments of the principal of, or to pay interest on, or to refinance
their respective indebtedness will depend on the future performance of the
Company and its subsidiaries, which to a certain extent will be subject to
economic, financial, regulatory, competitive and other factors beyond the
Company's control. Based upon the Company's current operations and anticipated
growth, management believes that future cash flow from operations, together with
the Company's available borrowings under the Senior Credit Facilities, will be
adequate to meet LIN Holdings' and LIN Television's respective anticipated
requirements for capital expenditures, interest payments and scheduled principal
payments. See "Item 7. Management's
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<PAGE> 21
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." There can be no assurance that the Company's
business will continue to generate sufficient cash flow from operations in the
future to service the Company's respective indebtedness and make necessary
capital expenditures. If unable to do so, the Company may be required to
refinance all or a portion of its respective indebtedness, including the Notes,
to sell assets or to obtain additional financing. There can be no assurance that
any such refinancing would be possible, that any assets could be sold (or, if
sold, of the timing of such sales and the amount of proceeds realized therefrom)
or that additional financing could be obtained.
Restrictions Imposed on the Company by Terms of Indebtedness. The
credit agreement governing the Senior Credit Facilities and the indentures
governing the Notes contain covenants that restrict LIN Holdings' and LIN
Television's respective abilities to:
- - incur indebtedness;
- - pay dividends;
- - create liens;
- - sell assets;
- - engage in certain mergers and acquisitions; and
- - refinance indebtedness.
The credit agreement governing the Senior Credit Facilities requires LIN
Television to maintain certain financial ratios. If LIN Holdings or LIN
Television fails to comply with the various covenants contained in the credit
agreement governing the Senior Credit Facilities or the indentures governing the
Notes, as applicable, it would be in default thereunder, and in any such case,
the maturity of substantially all of its long-term indebtedness could be
accelerated. A default under either of the indentures would also constitute an
event of default under the credit agreement. If LIN Television were unable to
repay amounts outstanding under the credit agreement, the lenders thereunder
could proceed against the collateral granted to them to secure the indebtedness.
If the amounts outstanding under the credit agreement were accelerated, there
can be no assurance that the assets of LIN Television and its subsidiaries would
be sufficient to repay the amount in full.
Structural Subordination of LIN Holdings. LIN Holdings is a holding
company which conducts all of its operations through its subsidiaries and whose
only material asset is the capital stock of LIN Television. Consequently, LIN
Holdings depends on distributions from LIN Television to meet its debt service
obligations. Because of the substantial leverage of LIN Television, and the
dependence of LIN Holdings upon the operating performance of LIN Television to
generate distributions to LIN Holdings, there can be no assurance that LIN
Holdings will have adequate funds to fulfill its obligations in respect of the
Senior Discount Notes when due. In addition, the credit agreement governing the
Senior Credit Facilities, the indenture governing the Senior Subordinated Notes
and applicable federal and state law impose restrictions on the payment of
dividends and the making of loans by LIN Television to LIN Holdings. As a result
of the foregoing restrictions, LIN Holdings may be unable to gain access to the
cash flow or assets of LIN Television in amounts sufficient to pay the mandatory
principal redemption
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<PAGE> 22
amount when due on March 1, 2003, and cash interest on the Senior Discount Notes
on and after March 1, 2003, the date on which cash interest thereon first
becomes payable, and principal of the Senior Discount Notes when due. In such
event, LIN Holdings may be required to
- - refinance the Senior Discount Notes;
- - seek additional debt or equity financing;
- - cause LIN Television to refinance all or a portion of LIN Television's
indebtedness with indebtedness containing covenants allowing LIN
Holdings to gain access to LIN Television's cash flow or assets;
- - cause LIN Television to obtain modifications of the covenants
restricting LIN Holdings' access to cash flow or assets of LIN
Television contained in LIN Television's financing documents
(including, without limitation, the credit agreement and the indenture
governing the Senior Subordinated Notes); or
- - pursue a combination of the foregoing actions.
No assurance can be given that any of the foregoing measures could be
accomplished.
Control of the Company. Thomas O. Hicks and affiliates of Hicks Muse
indirectly control a majority of the common stock of LIN Holdings. Thomas O.
Hicks is the controlling stockholder of Hicks Muse and serves as its Chairman of
the Board. Accordingly, Thomas O. Hicks has a great deal of influence over the
management and policies of the Company and all matters submitted to a vote of
the holders of common stock of the Company, including the election of all
members of the Board of Directors of the Company. The interests of Hicks Muse
and its affiliates may differ from the interests of holders of the Notes.
If an event of default occurs under the GECC Note, and GECC is unable
to collect all obligations owed to it after exhausting all commercially
reasonable remedies against the Joint Venture (including during the pendency of
any bankruptcy involving the Joint Venture), GECC may proceed against Ranger
Equity Holdings B Corp., one of LIN Holdings' two corporate parents and the
guarantor of the GECC Note ("Ranger B"), to collect any deficiency. If Ranger B
does not otherwise satisfy its obligations under the guaranty, GECC could
attempt to claim all or a portion of the common stock of LIN Holdings owned by
Ranger B (approximately 63% of the outstanding common stock of LIN Holdings)
through an insolvency proceeding or otherwise. If such an event were to occur,
GECC could obtain control of LIN Holdings and, as a result, the Company.
Potential Conflicts of Interest as a Result of Cross-Ownership. Each of
Thomas O. Hicks, John R. Muse, Michael J. Levitt and Eric C. Neuman, all members
of the Board of Directors of LIN Holdings and LIN Television, is a shareholder,
director, principal, managing director or executive officer of some or all of
the Hicks Muse Companies. Each of these companies is in the business of making
significant investments in the broadcasting business and may compete with the
Company for advertising revenues and broadcast related businesses that would be
complementary to the business of the Company. As a result of this
cross-ownership of various broadcasting businesses and future ownership of
television and radio broadcast stations by affiliates of Hicks Muse, regulatory
and other restrictions may prevent the
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<PAGE> 23
Company from acquiring television stations in markets where the Hicks Muse
Companies or other affiliates of Hicks Muse own or operate broadcasting
businesses (see "--Licensing and Regulation--Competitor-Multiple-and
Cross-Ownership Rules"). In addition, Hicks Muse and its affiliates may from
time to time identify, pursue and consummate acquisitions of television stations
or other broadcast related businesses that may be complementary to the business
of the Company and, therefore, such acquisition opportunities may not be
available to the Company.
Growth Through Acquisitions; Future Capital Requirements. The Company
intends to pursue selective acquisitions of television stations with the goal of
improving their operating performance by applying management's business
strategy. Inherent in any future acquisitions are certain risks such as
increasing leverage and debt service requirements and combining company cultures
and facilities which could have a material adverse effect on the Company's
operating results, particularly during the period immediately following such
acquisitions. Additional debt or equity capital may be required to complete
future acquisitions, and there can be no assurance the Company will be able to
raise the required capital. Moreover, there can be no assurances that with
respect to any acquired station, the Company will be able to successfully
implement effective cost controls, increase advertising revenues or increase its
audience share.
Dependence on Certain External Factors. The Company's operating results
are primarily dependent on advertising revenues which, in turn, depend on
national and local economic conditions, coverage of political events and high
profile sporting events (e.g., the Olympics, Super Bowl and NCAA Men's
Basketball Tournament), the relative popularity of the Company's programming
(which in many cases, is dependent on the relative popularity of the relevant
affiliate's programming), the demographic characteristics of the Company's
markets, the activities of competitors and other factors which are outside the
Company's control. The television industry is cyclical in nature, and the
Company's revenues could be adversely affected by a future local, regional or
national recession.
Reliance on Syndicated Programming. The Company's most significant
operating cost is syndicated programming. There can be no assurance that the
Company will not be exposed in the future to increased syndicated programming
costs which may adversely affect the Company's operating results. Acquisition of
program rights are often made two or three years in advance, making it difficult
to accurately predict how a program will perform. In some instances, programs
must be replaced before their costs have been fully amortized, resulting in
write-offs that increase station operating costs.
Non-Renewal or Termination of Affiliation Agreements. The non-renewal
or termination of a network affiliation agreement could have a material adverse
effect on the Company's operations. Three of the Company's owned and operated
stations are affiliated with CBS, two with NBC, and two with ABC. Each of these
networks generally provides these stations with up to 22 hours of prime time
programming per week. In return, the stations broadcast network-inserted
commercials during such programming and receive cash network compensation.
Although network affiliates generally have achieved higher ratings than
unaffiliated independent stations in the same market, there can be no assurance
as to the future success of each network's programming or the continuation of
such programming. The Company's network affiliation agreements are subject to
termination by such networks under certain circumstances. The Company believes
that it enjoys a good relationship with each of CBS, NBC and ABC, as well as the
other networks with which it has affiliation agreements. However, there can be
no assurance that such affiliation agreements will remain in place or that each
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<PAGE> 24
network will continue to provide programming or compensation to affiliates on
the same basis as it currently provides programming or compensation.
Certain of the networks with which the Company's stations are
affiliated have floated proposals that would either reduce, or in some cases,
eliminate over time, network affiliation compensation paid to the Company or
materially modify the terms of the Company's existing affiliation agreements in
exchange for enhanced programming or other investment opportunities. The Company
cannot predict whether it will be able to reach agreement with its networks as
to the modification of its existing affiliation agreements or whether such
modifications would be materially financially disadvantageous to the Company.
Competition for Advertising Revenues and Audience Ratings. The
television broadcasting industry is a highly competitive business and is
undergoing a period of consolidation and significant change. Many of the
Company's current and potential competitors have greater financial, marketing,
programming and broadcasting resources than the Company. Technological
innovation and the resulting proliferation of programming alternatives, such as
cable television, wireless cable, satellite-to-home distribution services,
pay-per-view and home video and entertainment systems, have fractionalized
television viewing audiences and have subjected free over-the-air television
broadcast stations to new types of competition. In addition, as a result of the
Telecom Act, the legislative ban on telephone cable ownership has been repealed
and telephone companies are now permitted to seek FCC approval to provide video
services to homes under specified circumstances. Consequently, the Company may
not be able to maintain or increase its current audience ratings or advertising
revenues.
Potential Effects of Television Broadcasting Regulation on License
Renewals and Ownership. The broadcasting industry is subject to regulation by
various governmental agencies. In particular, under the Communications Act, the
FCC licenses television stations and extensively regulates their ownership and
operation. The Company depends on its ability to hold television broadcast
licenses from the FCC, which are ordinarily issued for maximum terms of eight
years and are renewable. Although it is rare for the FCC to deny a license
renewal application, there can be no assurance that the Company's television
broadcasting licenses or the licenses owned by the owner-operators of the
stations currently programmed by the Company under LMAs will be renewed or that
if renewed the renewals will not include restrictive conditions or
qualifications. In addition, limitations on the ownership of radio stations
under the FCC's current rules, or under revised rules being considered by the
FCC, could restrict the ability of the Company to consummate future transactions
in certain circumstances and could require that some television stations be
sold. See "--Licensing and Regulation."
Dependence on Key Personnel. The Company believes that its success is
dependent upon its ability to attract and retain skilled managers and other
personnel, including its present officers and general managers. The loss of the
services of Gary R. Chapman, the President and Chief Executive Officer of LIN
Holdings and LIN Television, could have a material adverse effect on the
operations of the Company. Mr. Chapman's current employment agreement with LIN
Television expires on December 31, 1999.
Do Not Place Undue Reliance on Forward-Looking Statements. This Annual
Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "anticipate," "believe," "expect," "plan,"
"intend," "estimate," "project," "foresee," "will," "could," "may" and similar
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<PAGE> 25
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Annual Report on Form
10-K, including those regarding the Company's financial position, business
strategy, projected costs and objectives of management for future operations are
forward-looking statements. The matters discussed in this Risks Associated with
Business Activities section and other factors noted throughout this Annual
Report on Form 10-K are cautionary statements identifying factors with respect
to any such forward-looking statements that could cause actual results to differ
materially from those in such forward-looking statements. All forward-looking
statements contained herein are expressly qualified in their entirety by such
cautionary statements. You are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date on which this Annual
Report on Form 10-K is filed.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Providence, Rhode
Island. Each of the Stations has facilities consisting of offices, studios,
sales offices and transmitter and tower sites. Transmitter and tower sites are
located to provide coverage of each Station's market. The Company owns the
offices where its Stations are located and owns the property where its towers
and primary transmitters are located. The Company leases the remaining
properties, consisting primarily of sales office locations and microwave
transmitter sites. While none of the properties owned or leased by the Company
is individually material to the Company's operations, if the Company were
required to relocate any of its towers, the cost could be significant because
the number of sites in any geographic area that permit a tower of reasonable
height to provide good coverage of the market is limited, and zoning and other
land use restrictions, as well as Federal Aviation Administration regulations,
limit the number of alternative sites or increase the cost of acquiring them for
tower siting.
See Note 13, "Commitments & Contingencies" in Notes to Consolidated
Financial Statements for information concerning the Company's obligations under
all operating leases as of December 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
LIN Television was named as a defendant in four lawsuits regarding the
then proposed merger of LIN Television with LIN Holdings Corp. The plaintiffs in
each of these actions have agreed to an indefinite extension of time for each of
the defendants served to respond to the respective complaints. No discovery has
taken place.
In Addition, the Company is involved in various claims and lawsuits
which are generally incidental to its business. The Company is vigorously
contesting all of these matters and believes that their ultimate resolution will
not have a material adverse effect in its consolidated financial position or
results of operations.
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<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders for the quarter
ended December 31, 1998.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The common stock of LIN Holdings and LIN Television has not been
registered under the Securities Act of 1933 or the Securities Exchange Act of
1934 and is not listed on any national securities exchange. As of December 31,
1998, there was no established public trading market for the common stock of LIN
Holdings or LIN Television. All of the outstanding common stock of LIN Holdings
is held by Ranger Equity Holdings A Corp. and Ranger Equity Holdings B Corp.,
which are wholly owned subsidiaries of Ranger Equity Holdings Corporation. All
of the outstanding common stock of LIN Television is held by LIN Holdings.
Neither LIN Holdings nor LIN Television have declared or paid dividends
on their common stock for 1998 or 1997.
LIN Holdings is a holding company with no significant assets other than
the capital stock of its direct and indirect subsidiaries. Consequently, the
sole source of cash for LIN Holdings from which to make dividend payments will
be dividends distributed or other payments made to it by its operating
subsidiaries. The right of LIN Holdings to participate in any distribution of
earnings or assets of its subsidiaries is subject to the prior claims of
creditors of its subsidiaries. The Senior Credit Facilities, the Senior
Subordinated Notes and the Senior Discount Notes contain certain covenants that
restrict or prohibit the Company's ability to pay dividends and make other
distributions.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial and operating data
of the Company and the Predecessor as of and for each of the five years in the
period ended December 31, 1998. The selected financial data as of December 31,
1998, and for the period from March 3, 1998 to December 31, 1998, was derived
from the historical financial statements of LIN Holdings Corp. for such periods
that were audited by PricewaterhouseCoopers LLP, independent auditors, whose
report appears elsewhere in this filing. The selected financial data for the
period from January 1, 1998 to March 2, 1998, was derived from the historical
financial statements of LIN Television Corporation (the "Predecessor") for such
periods that were audited by PricewaterhouseCoopers LLP, independent auditors,
whose report appears elsewhere in this filing. The selected financial data as of
December 31, 1997, 1996, 1995 and 1994, and for the years ended December 31,
1997, 1996, 1995 and 1994, was derived from the historical financial statements
of the Predecessor for such periods that were audited by Ernst & Young LLP,
independent auditors, whose report appears elsewhere in this filing. The
selected financial data should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements of the Company, and the notes
thereto, presented elsewhere in this filing. Because of the revaluation of the
assets and liabilities and the related impact to the balance sheet and statement
of operations, the financial statements of the predecessor for the periods prior
to March 3, 1998, are not directly comparable to those of the Company subsequent
to that date. Also set forth below is certain unaudited pro forma financial
information for the year ended December 31, 1998. The unaudited pro forma
financial information is presented as if the Acquisition of LIN Holdings Corp.
and LIN Television Corporation had occurred January 1, 1998, and the Joint
Venture had been formed on that same date.
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<PAGE> 27
The unaudited pro forma financial information adjusts for additional
depreciation, amortization of intangibles related to the purchase price
allocations, additional interest, and additional provisions for income taxes
related to the adjustments described above. The unaudited pro forma information
is not necessarily indicative of the results of operations that would have been
reported if the Acquisition and formation of the Joint Venture had taken place
on January 1, 1998, nor is it indicative of the Company's future operating
results.
Broadcast Cash Flow, which is commonly used as a measure of performance
of broadcast companies, is defined as operating income plus corporate expenses,
depreciation and amortization, including both tangible and intangible assets and
program rights and other non-cash items, less cash payments for program rights.
Cash program payments represent cash payments for current program payables, and
do not necessarily correspond to program usage. BCF does not purport to
represent cash provided by operating activities, as reflected in the Company's
consolidated statements of cash flows, 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.
<TABLE>
<CAPTION>
(in thousands)
Company Holdings Predecessor
March 3 - March 3 - January 1- Predecessor
December 31, December 31, March 2, Year ended December 31,
---------- ----------- ----------- ----------------------------------------------
1998 1998 1998 1997 1996 1995 1994
---------- ----------- ----------- ------- ------ ------ ------
<S> <C> (2) <C> (3) <C> <C> <C> <C> <C>
Consolidated Statements
of Operations data:
Net revenues ..................... $ 189,536 $ -- $ 43,804 $291,519 $273,367 $217,247 $150,523
Operating income ................. 27,482 -- 12,492 107,455 99,160 85,028 64,069
Income (loss) before
extraordinary loss(1) ......... (27,259) (17,999) (2,744) 48,107 46,461 38,030 31,185
Net income loss .................. (27,259) (11,699) (2,744) 48,107 46,461 38,030 28,260
Consolidated Balance Sheets
data, as of December 31;
Cash and cash equivalents ........ $ 41,349 $ -- $ 8,046 $ 27,952 $ 18,025 $ 17,907
Total assets ..................... 1,800,890 762,989 569,326 595,944 587,256 423,964
Long term debt ................... 683,580 216,565 260,000 350,000 387,000 295,000
Total stockholders' equity ....... 532,409 546,424 192,565 138,448 86,434 40,160
Other data:
Broadcast cash flow: ............. $ 88,553 $ -- $ 17,104 $145,471 $130,399 $106,749 $ 77,203
<CAPTION>
Company
Year ended
December 31,
1998
------------
<S> <C>
Pro Forma unaudited data:
Net revenues.................................................... $220,105
Operating income................................................ 29,019
Net (loss)...................................................... (37,670)
Other Pro Forma unaudited data:
Broadcast cash flow ............................................ $ 97,846
</TABLE>
(1) In 1994, the Predecessor recorded a $4.5 million write-off of unamortized
bank fees and expenses related to its previous credit facility. This
write-off has been reflected as an extraordinary loss on extinguishment of
debt, net of an income tax benefit of $1.6 million, in the Predecessor's
financial statements.
(2) This information presents the results and position of LIN Television on a
consolidated basis.
(3) This information presents the results and position of LIN Holdings on a
stand-alone basis.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL FACTORS AFFECTING THE COMPANY'S BUSINESS
The operating results of the Company depend primarily on advertising
revenues, which in turn depend on the economic conditions of the markets in
which the Company operates, the demographic makeup of those markets and the
marketing strategy and efforts of the Company's Stations in those markets. The
Company experiences quarterly fluctuations in operating results, generally
reporting its highest revenues during the fourth quarter each year due to
advertisers' anticipation of higher consumer spending during the holiday season.
The Company also experiences annual fluctuations in operating results due
substantially to political spending in major election years, such as 1998 and
1996. The Olympic Games also cause cyclical fluctuations in the Company's
operating results, the size of such fluctuations depending on which network is
televising the Olympic Games and which of the Company's Stations are affiliated
with that network. The Company also depends on automotive-related advertising.
Approximately 24% of the Company's gross advertising revenues for the years
ended December 31, 1998, 1997 and 1996 consisted of automotive advertising. A
significant decrease in such advertising could have a material adverse affect on
the Company's operating results. For other factors that may affect the Company's
business, see "Item 1. Business--Risks Associated with Business Activities."
RESULTS OF OPERATIONS -COMBINED YEAR ENDED DECEMBER 31, 1998 COMPARED TO
PREDECESSOR YEAR ENDED DECEMBER 31, 1997
Set forth below are the significant factors that contributed to the
operating results of the Company and its Predecessor for the twelve months ended
December 31, 1998 and 1997. The combined results for the year ended December
31, 1998, aggregate the Predecessors results for the period from January 1,
1998 to March 2, 1998, and the Company's results for the period from March 3,
1998 to December 31, 1998. The Company's results of operations from period to
period are not historically comparable because of the impact of various
acquisitions and dispositions that the Company has completed. Pro forma
comparisons, assuming that the Acquisition and the formation of the Joint
Venture with NBC had occurred on January 1, 1997, have been included where
appropriate. The results of operations of LIN Holdings on a stand-alone basis
prior to March 3, 1998 are immaterial in comparison to the Predecessor or the
results of operations of the Company after March 3, 1998, and are not separately
described.
Net Revenues
Total net revenues consist primarily of national and local time sales,
net of sales adjustments and agency commissions, network compensation, barter
revenues, revenues from the production of local commercials and sports
programming, tower rental revenues, Local Weather Station revenues, and cable
retransmission revenue. Total net revenues for the twelve months ended December
31, 1998, decreased approximately 20% to $233.3 million, compared to $291.5
million in 1997. The decreases were primarily due to the contribution of KXAS-TV
to the Joint Venture in connection with the Acquisition on March 3, 1998, offset
in part by the recognition of approximately $1.9 million in insurance proceeds
related to the KXTX-TV tower loss. On a pro forma basis, net revenues for the
twelve months increased 12% to $220.1 million compared to $196.1 million in
1997.
Approximately 85% of the Company's total net revenues for the twelve
months ended December 31, 1998 was derived from net advertising time sales
compared to 87% in 1997. Net advertising revenues for the twelve months ended
December 31, 1998, decreased 22% compared to 1997, primarily due to the
contribution of KXAS-TV to the Joint Venture in connection with the Acquisition
on March 3, 1998. On a pro forma basis, for the twelve months ended December 31,
1998, 85% of the Company's total net revenues were derived from net advertising
time sales. Pro forma advertising revenue for the twelve months ended December
31, 1998, increased approximately 12% to $188.1 million when
26
<PAGE> 29
compared to $168.7 million in 1997. The increase was due primarily to the
continued improvement of the local economy in the markets in which WTNH-TV and
KXAN-TV operate, and to the net advertising growth at the LMA stations.
Additionally, the Company's CBS affiliated stations net advertising revenues
include incremental revenues from broadcasting the 1998 Winter Olympics.
Network revenue represents amounts paid to the Company for broadcasting
network programming provided by CBS, NBC, and ABC. Network revenue for the
twelve months ended December 31, 1998, decreased 33% to $11.8 million compared
to $17.6 million in 1997. The decrease was primarily due to the contribution of
KXAS-TV to the Joint Venture in connection with the Acquisition on March 3,
1998. On a pro forma basis, network revenue for the twelve months ended December
31, 1998, decreased 2% to $10.1 million compared with $10.3 million in 1997.
Revenues from the Local Weather Station increased $1.0 million for the
twelve months ended December 31, 1998, when compared to 1997. The Company
provides Local Weather Station to cable operators in all of its markets except
New Haven-Hartford and Buffalo. On both a historical and pro forma basis Local
Weather Station income increased for the twelve month period as a result of the
retroactive recognition of revenue from a cable operator in several of the
Company's markets in the second quarter of 1998.
Operating Expenses
Direct operating expenses, consisting primarily of news, engineering,
programming and music licensing costs, decreased 15% to $59.9 million for the
twelve months ended December 31, 1998, compared to $70.7 million in 1997. The
decrease was primarily due to the contribution of KXAS-TV to the Joint Venture
in connection with the Acquisition on March 3, 1998. On a pro forma basis,
direct operating expenses for the twelve months ended December 31, 1998
increased 2% to $57.7 million compared to $56.4 million in 1997.
SG&A expenses consist primarily of employee salaries and sales
commissions, advertising and promotion expenses, and other expenses such as
rent, utilities, insurance and other employee benefit costs. SG&A expenses
decreased 15% to $53.9 million for the twelve months ended December 31, 1998
compared to $63.5 million in 1997. The decrease was primarily due to the
contribution of KXAS-TV to the Joint Venture in connection with the Acquisition
on March 3, 1998. On a pro forma basis, SG&A expenses for the twelve months
ended December 31, 1998, increased 2% to $50.9 million compared to $49.7 million
in 1997.
Total corporate expenses, which are comprised of costs associated with
the centralized management of the Company's stations, increased $1.5 million for
the twelve months ended December 31, 1998, compared to 1997. The increase was
due primarily to fees paid to Hicks Muse pursuant to the Monitoring and
Oversight Agreement. Corporate expenses increased for the same reason on a pro
forma basis when compared to the same period last year.
Amortization of program rights reflects the expenses related to the
acquisition of syndicated programming, features and specials. Amortization of
program rights decreased 13% to $13.5 million for the twelve months ended
December 31, 1998, compared to $15.6 million for 1997. The decrease was
primarily due to the contribution of KXAS-TV to the Joint Venture in connection
with the Acquisition on March 3, 1998. On a pro forma basis, amortization of
program rights for the twelve months ended December 31, 1998, decreased 4% to
$13.1 million compared to $13.6 million in 1997. This decrease was due primarily
to a change in the syndicated/barter programming mix at WTNH-TV and syndicated
film write-downs at stations WAND-TV and WBNE-TV.
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<PAGE> 30
Depreciation and amortization of intangible assets increased $25.0
million for the twelve months ended December 31, 1998, compared to 1997,
primarily as a result of the Acquisition on March 3, 1998. The excess of the
purchase price over the estimated fair market value of the net tangible assets
acquired was allocated to intangible assets, primarily FCC licenses and network
affiliations, and goodwill. On a pro forma basis, depreciation and amortization
of intangible assets remained relatively flat when compared to the prior year.
Operating Income
For the reasons discussed above, the Company's operating income
decreased $67.5 million for the twelve months ended December 31, 1998, compared
to 1997. On a pro forma basis, operating income increased $14.6 million to $27.5
million for the twelve months ended December 31, 1998, compared to $12.9 million
in 1997.
LIN Television's interest expense increased approximately $17.0
million for the twelve months ended December 31, 1998, compared to 1997. The
increase was a result of the new borrowings under the Senior Credit Facilities
and the issuance of the Senior Subordinated Notes in connection with the
Acquisition. In addition, LIN Holdings incurred $18.0 million of non-cash
interest expense for the period from March 3, 1998 through December 31, 1998,
due to the issuance of its Senior Discount Notes.
During the first quarter of 1998, the Company incurred financial, legal
advisory and regulatory filing fees in connection with the Acquisition of
approximately $8.6 million. These costs are reflected on the Predecessor's
Consolidated Statement of Operations as merger expense.
The Company's provision for income taxes decreased approximately $30.5
million for the twelve months ended December 31, 1998, compared to 1997. The
decrease was due to net operating losses resulting from increased interest
expense, offset by the change in the Company's effective annual tax rate as a
result of a substantial increase in non-deductible amortization relating to
intangible assets.
RESULTS OF OPERATIONS -PREDECESSOR YEAR ENDED DECEMBER 31, 1997 COMPARED TO
PREDECESSOR YEAR ENDED DECEMBER 31, 1996
Set forth below are the significant factors that contributed to the
operating results of the Predecessor for the twelve months ended December 31,
1997 and 1996.
Net Revenues
Total net revenues consist primarily of national and local time sales,
net of sales adjustments and agency commissions, network compensation, barter
revenues, revenues from the production of local commercials and sports
programming, tower rental revenues, Local Weather Station revenues, and cable
retransmission income. Total net revenues increased 7% for the year ended
December 31, 1997, compared to 1996. Nearly 87% of the Predecessor's total net
revenues for 1997 were derived from net national and net local advertising time
sales.
The operation of the LMAs accounted for $3.7 million of the net
national and net local advertising revenue increase for the year ended December
31, 1997. The continued ratings strength of the NBC affiliate stations accounted
for $4.1 million of the net national and net local advertising revenue increase
for the year ended December 31, 1997. The Stations' advertising revenue increase
for 1997 was also attributable to local advertising revenue growth of $2.5
million at WTNH-TV due to the continued improvement in the New Haven-Hartford,
Connecticut local economy.
The Predecessor's network revenue represents amounts paid to the
Predecessor for broadcasting network programming by three of the national
networks affiliated with the Predecessor's stations. Network revenue remained
relatively flat from year to year.
28
<PAGE> 31
Other broadcast income increased $5.8 million for the year ended
December 31, 1997, due substantially to the sale of broadcast rights and
production services to outside parties. Increased revenues from the Local
Weather Station also contributed to the increase in other broadcast income. The
Predecessor provides the Local Weather Station to cable operators in all of its
markets except New Haven-Hartford and Buffalo.
Operating Expenses
Direct operating expenses, consisting primarily of news, engineering,
programming and music licensing costs, increased $1.8 million for the year ended
December 31, 1997 over 1996. Due to the Predecessor's continued emphasis on
increasing news programming on the Stations, direct operating expenses at
stations KXAN-TV and KXAS-TV increased $1.1 million for the expansion of news
coverage in those markets. News costs also increased as a result of operational
expenses associated with the acquisition of a helicopter for station WISH-TV.
SG&A expenses consist primarily of employee salaries and sales
commissions, advertising and promotion expenses, and other expenses such as
rent, utilities, insurance and other employee benefit costs. SG&A expenses
increased $3.5 million for the year ended December 31, 1997, compared with 1996,
due to increased sales compensation resulting from the increase in local
revenue. The increase was also due to higher promotional expenditures at
stations in the Dallas-Fort Worth market aimed at strengthening the
Predecessor's position in its largest market.
Corporate expenses, which are comprised of costs associated with the
centralized management of the Stations, remained relatively flat for the year
ended December 31, 1997, compared with 1996.
Amortization of program rights reflects the expenses related to the
acquisition of syndicated programming, features and specials. Amortization of
program rights for the year ended December 31, 1997, increased $1.1 million as a
result of new program purchases at WTNH-TV coupled with program write-offs at
KNVA-TV and WBNE-TV.
Depreciation and amortization of intangible assets increased $1.0
million for the year ended December 31, 1997, compared to 1996. This increase is
primarily related to an increase in depreciation expense resulting from capital
expenditures aimed at maintaining a high quality on-air product at each of the
Predecessor's stations and, to a lesser extent, to a full year of depreciation
for the production facility.
The Predecessor began, in 1995, to construct new facilities and
purchase new broadcast equipment to prepare for the Advanced Television
transition. During the second quarter of 1997, the Predecessor disposed of
towers and other broadcast equipment that could no longer be used with the new
technology. The net book loss on this equipment of $2.7 million is reflected on
the Predecessor's Consolidated Statement of Operations as tower write-offs.
Operating Income:
For the reasons discussed above, the Predecessor reported an increase
in operating income of $8.3 million for the year ended December 31, 1997,
compared to 1996.
Interest expense, comprised primarily of interest payable on funds
borrowed under the Predecessor's bank credit facility, decreased approximately
20% for the year ended December 31, 1997, compared with 1996. The decrease was
the result of the renegotiated terms of the Predecessor's bank credit facility
and a reduction in the principal outstanding.
During the last half of 1997, the Predecessor incurred financial,
legal, advisory and regulatory filing fees in connection to the Acquisition.
These expenses of $7.2 million are reflected on the Predecessor's Consolidated
Statements of Operations as merger expense.
29
<PAGE> 32
The Predecessor's provision for income taxes increased 16% for the year
ended December 31, 1997, compared to 1996, due to higher taxable income and an
increase in the Predecessor's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
It is the Company's policy to carefully monitor the state of its
business, cash requirements and capital structure. From time to time, the
Company may enter into transactions pursuant to which debt is extinguished,
including sales of assets or equity, joint ventures, reorganizations or
recapitalizations. There can be no assurance that any such transactions will be
undertaken or, if undertaken, will be favorable to stockholders.
The Company's principal source of funds is its operations and its
Senior Credit Facilities. Net cash provided by operating activities for the
twelve months ended December 31, 1998, totaled $73.7 million compared to $81.7
million in 1997. The decrease is primarily due to the contribution of KXAS-TV to
the Joint Venture in connection with the Acquisition on March 3, 1998, offset
partially by a reduction in the amounts paid for interest and income taxes. Net
cash used in investing activities was $1,755.3 million for the twelve months
ended December 31, 1998, compared to $15.1 million for the same period in 1997,
primarily as a result of the acquisition of LIN Television in March 1998. Net
cash provided by financing activities for the period ended December 31, 1998 was
$1,731.0 million compared to $86.5 million of cash used in financing activities
in 1997. This fluctuation is due primarily to the issuance of the Senior
Subordinated Notes, the issuance of the Senior Discount Notes, the proceeds from
the GECC Note and the equity contribution by Hicks Muse in connection with the
Acquisition, partially offset by the principal payment of $260.0 million to
retire the old debt.
The Company presently has indebtedness outstanding of $167.7 million
under the Senior Credit Facilities. The total cash financing required to
consummate the Grand Rapids Acquisition is expected to be approximately $125.5
million and will be primarily funded by additional Tranche A term loans under
the Senior Credit Facilities. In addition to debt service requirements under the
Senior Credit Facilities, the Company began making interest payments on its
Senior Subordinated Notes on September 1, 1998. Such interest payments are
required to be made semi-annually thereafter. The Senior Discount Notes do not
require cash interest payments to be made until after March 1, 2003. Thereafter,
cash interest will accrue at a rate of 10% per annum and will be payable
semi-annually in arrears commencing September 1, 2003. Interest payments on the
Notes and interest payments, and amortization with respect to the Senior Credit
Facilities represent significant liquidity requirements for the Company. The
Senior Subordinated Notes funded in connection with the Acquisition will require
annual interest payments of approximately $25.1 million. Beginning September 1,
2003, annual interest payments of approximately $32.5 million will be required
to be paid under the Senior Discount Notes. The Company must remain in
compliance with a series of financial covenants under the Senior Credit
Facilities and the Notes. As of December 31, 1998, the Company was in compliance
with all covenants. Assuming continued compliance with these financial
covenants, the Company has available credit of approximately $175.0 million
under the Senior Credit Facilities.
The Company's capital expenditures primarily include purchases of
broadcasting equipment, studio equipment, vehicles and office equipment to
improve the efficiency and quality of television broadcasting operations. The
Company's capital expenditures for the year ended December 31, 1998, were $22.7
million compared to $20.6 million for the same period in 1997. The Company has
invested approximately $15.8 million to fully prepare its towers and transmitter
buildings for the upcoming digital transition. The Company expects to spend
approximately $23.0 million annually on capital expenditures in 1999 and in
2000. After 1999, an additional $21.0 million will be required through 2002 to
complete
30
<PAGE> 33
the transition to digital broadcasting. The Company anticipates that it will be
able to meet its capital expenditure requirements with internally generated
funds and borrowings under the Senior Credit Facilities.
Scheduled principal payments under the Credit Agreement commenced on
December 31, 1998 and are payable quarterly until March 31, 2007. Scheduled
interest payments on the Senior Subordinated Notes commenced on September 1,
1998 and are payable semi-annually. Scheduled interest payments on the Senior
Discount Notes are also payable semi-monthly and will commence September l,
2003. The Company has made all scheduled interest and principal payments within
the terms and conditions of the Credit Agreement and the Senior Subordinated
Notes indenture. The Company currently has cash balances to make the upcoming
March 31, l999 interest payment on the Senior Subordinated Notes. Management
believes, based on current operations and projected growth, that its cash flow
from operations, together with borrowings available under its senior credit
facilities, will be sufficient to meet its future requirements for working
capital, capital expenditures, interest payments and scheduled principal
payments.
Based on the current level of operations and anticipated future growth
(both internally generated as well as through acquisitions), the Company
believes that its cash flows from operations, together with borrowings under the
Senior Credit Facilities, will be sufficient to meet its anticipated
requirements for working capital, capital expenditures, interest payments and
scheduled principal payments.
The Company's future operating performance and ability to service or
refinance the Notes and to extend or refinance the Senior Credit Facilities will
be subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.
The Notes and the Senior Credit Facilities impose certain restrictions
on the Company's ability to make capital expenditures and limit the Company's
ability to incur additional indebtedness. Such restrictions could limit the
Company's ability to respond to market conditions, to provide for unanticipated
capital investments or to take advantage of business or acquisition
opportunities. The covenants contained in the credit agreement and the
Indentures governing the Notes also, among other things, limit the ability of
the Company to dispose of assets, repay indebtedness or amend other debt
instruments, pay distributions, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances and make
acquisitions.
LIN Holdings is a holding company whose only material asset is the
capital stock of LIN Television. LIN Holdings does not have any business other
than in connection with its ownership of the capital stock of LIN Television and
the performance of its obligations with respect to the Senior Discount Notes and
the Senior Credit Facilities, and will depend on distributions from LIN
Television to meet its debt service obligations, including, without limitation,
interest and principal obligations with respect to the Senior Discount Notes.
Because of the substantial leverage of LIN Television, and the dependence of LIN
Holdings upon the operating performance of LIN Television to generate
distributions to LIN Holdings with respect to LIN Television's common stock,
there can be no assurance that LIN Holdings will have adequate funds to fulfill
its obligations with respect to the Senior Discount Notes. In addition, the
credit agreement governing the Senior Credit Facilities, the indenture governing
the Senior Subordinated Notes and applicable federal and state law will impose
restrictions on the payment of dividends and the making of loans by LIN
Television to LIN Holdings.
Accordingly, LIN Holdings' only source of cash to pay interest on the
principal of the Senior Discount Notes is distributions with respect to its
ownership interest in LIN Television and its subsidiaries from the net earnings
and the cash flows generated by LIN Television and its subsidiaries.
31
<PAGE> 34
Prior to March 1, 2003, LIN Holdings' interest expense on the Senior Discount
Notes will consist solely of non-cash accretion of principal interest and the
Senior Discount Notes will not require cash interest payments. On March 1, 2003,
LIN Holdings will be required to pay the mandatory principal redemption amount,
as defined in the indenture governing the Senior Discount Notes. After such
time, the Senior Discount Notes will require annual cash interest payments of
$32.5 million. In addition, the Notes mature on March 1, 2008.
GECC provided debt financing for the Joint Venture in the form of an
$815.5 million 25-year non-amortizing senior secured note bearing an initial
interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the
interest payments on the GECC Note will be serviced solely by the cash flows of
the Joint Venture. The GECC Note was issued by LIN Television of Texas, L.P.,
LIN Television's indirect wholly owned partnership ("LIN Texas"), which
distributed the proceeds to LIN Television to finance a portion of the cost of
the Acquisition. The obligations to GECC under the GECC Note were assumed by the
Joint Venture and LIN Texas was simultaneously released from all obligations
under the GECC Note. The GECC Note is not an obligation of LIN Holdings, LIN
Television, or any of their respective subsidiaries and is recourse only to the
Joint Venture, LIN Television's equity interests therein and Ranger, pursuant to
a guarantee. In connection with the formation of the Joint Venture, LIN
Television received an option (exercisable through December 31, 1999) to
purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Ranger B owns 63% of
LIN Holdings. If the Joint Venture were unable to pay principal or interest on
the GECC Note and GECC could not otherwise get its money back from the Joint
Venture, GECC could require Ranger B to pay the shortfall of any outstanding
amounts under the GECC Note. If this happened, the Company could experience
material adverse consequences, including:
- - since Ranger B has no assets other than its 63% ownership of LIN Holdings,
GECC could sell the stock of LIN Holdings to satisfy outstanding amounts
under the GECC Note;
- - if more than 50% of the ownership of LIN Holdings had to be sold to satisfy
the GECC Note, it could cause an acceleration of the Senior Credit
Facilities Notes; and
- - if the GECC Note is prepaid because of an acceleration on default or
otherwise, the Company may incur a substantial tax liability.
The Joint Venture is approximately 80% owned by NBC, and NBC controls the
operations of the stations through a management contract. Therefore, the
operation and profitability of those stations, the amount of cash to be received
in the future as distributions on the approximately 20% interest, and the
likelihood of a default under the GECC Note are primarily within NBC's control.
YEAR 2000 ISSUE
Some of Company's older computer programs were written using two digits
rather than four digits to define the applicable year. As a result, those
computer programs have time-sensitive software that recognizes a date using "00"
as the year 1900 rather than the year 2000. This could cause system failures or
miscalculations in the next millennium, causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company recognizes the importance of the Year 2000 issue and is
taking a proactive approach intended to facilitate an appropriate transition
into the Year 2000. The Company has implemented a project team utilizing both
internal and external resources to develop its Year 2000 initiative, which may,
as necessary, involve upgrading or replacing affected computer systems, software
and equipment with embedded chips, and preparing contingency and disaster
recovery plans.
32
<PAGE> 35
A Company-wide assessment of systems and operations has identified
information technology and non-information technology systems (including
equipment with embedded chips) that do not properly recognize dates after
December 31, 1999. The project team has developed a plan to assess, remediate,
test and, sufficiently in advance of the Year 2000, ascertain that the systems
of the Company that are critical to the Company's operations will properly
recognize such dates after December 31, 1999. Areas of concern that are being
addressed include possible service interruptions in satellite feeds providing
news, weather and syndicated shows for broadcast; potential failure of equipment
with embedded chips including master clocks, studio equipment, master control
automation systems and transmission equipment, and telephone, security and
environmental control systems.
The Company will incur capital expenditures and internal staff costs
related to this initiative. Total incremental expenses, including depreciation
and amortization, of bringing current systems into compliance, writing off
existing non-compliant systems and capital replacements, have not had a material
impact on the Company's financial condition to date and are not at present,
based on known facts, expected to have a future material impact on the Company's
financial condition. The Company estimates the total potential remediation costs
to be approximately $2.4 million, and that approximately $2.1 million has been
incurred to date. The Company estimates that if current planned software
upgrades with certain non-information technology systems are not implemented
prior to January 1, 2000, the cost to the Company would be as much as $500,000
per year.
The Company has developed, in the ordinary course of business, a
contingency plan to address system failures that are critical to conduct its
business. Such plans include the increase in personnel needed to operate the
systems that would ordinarily be operated by computer. The Company believes that
its contingency plans would adequately address any potential Year 2000 related
system failures.
The Company has initiated a formal communication program with its
significant vendors to determine the extent to which the Company is vulnerable
to those third parties who fail to remediate their own Year 2000 non-compliance.
Based on the information currently available, the Company is not aware of any
likely third party Year 2000 non-compliance by the Company or its vendors or
customers that will materially affect the Company's business operations;
however, the Company does not control the systems of other companies, and cannot
assure that such systems will be timely converted and, if not converted, would
not have an adverse effect on the Company's business operations. Furthermore, no
assurance can be given at this time that any or all of the Company's systems are
or will be Year 2000 compliant, or that the ultimate costs required to address
the Year 2000 issue or the impact of any failure to achieve substantial Year
2000 compliance by the Company, its vendors or customers will not have a
material adverse effect on the Company's financial condition.
INFLATION
The Company believes that its businesses are affected by inflation to
an extent no greater than other businesses generally.
RECENTLY-ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," effective for years beginning after December 15, 1997.
SFAS 130 requires that a company report items of other comprehensive income
either below the total for net income in the income statement, or in a statement
of changes in equity, and to disclose the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. As the
33
<PAGE> 36
Company has no items of other comprehensive income, the adoption of SFAS 130 has
no impact on the reported results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for years beginning after
December 15, 1997. SFAS 131 requires that a public company report financial and
descriptive information about its reportable operating segments pursuant to
criteria that differ from current accounting practice. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The financial information to be reported includes segment profit or
loss, certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general purpose financial statements. SFAS 131
also requires information about revenues from products or services, countries
where the company has operations or assets and major customers. Management
believes that the Company has only one operating segment, and so the adoption of
SFAS 131 has a limited impact on the consolidated financial statements.
In April 1998, Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of
Start-Up Activities," effective for fiscal years beginning after December 15,
1998. This SOP provides guidance on the financial reporting of start-up costs
and organization costs. It requires that costs of start-up activities and
organization costs be expensed as incurred. Initial application of SOP 98-5
should be reported as the cumulative effect of a change in accounting principle,
as described in Accounting Principles Board (APB) Opinion No. 20, "Accounting
Changes". When adopting this SOP, entities are not required to report the pro
forma effects of retroactive application. Management does not believe the
implementation of SOP 98-5 will have a material impact on its consolidated
financial statements.
Effective December 31, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." The
provisions of SFAS No. 132 revise employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after
September 15, 1999. SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet at fair value. If certain
conditions are met, a derivative may be specifically designated as a fair value
hedge, a cash flow hedge, or a foreign currency hedge. A specific accounting
treatment applies to each type of hedge. Management does not believe the
implementation of SFAS 133 will have a material impact on its consolidated
financial results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
THIS SPACE INTENTIONALLY LEFT BLANK
34
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
LIN Holdings Corp.
Reports of Independent Public Accountants.............................. 36-38
Consolidated Balance Sheets........................................... 39
Consolidated Statements of Operations................................. 40
Consolidated Statements of Stockholders' Equity....................... 41
Consolidated Statements of Cash Flows................................. 42
Notes to Consolidated Financial Statements............................ 43-61
LIN TELEVISION CORPORATION
Reports of Independent Public Accountants............................. 62-64
Consolidated Balance Sheets........................................... 65
Consolidated Statements of Operations................................. 66
Consolidated Statements of Stockholders' Equity....................... 67
Consolidated Statements of Cash Flows................................. 68
Notes to Consolidated Financial Statements............................ 69-86
35
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of LIN Holdings Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
LIN Holdings Corp. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the period from March 3,
1998 (date of the Acquisition) to December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
accompanying financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audit. We conducted
our audits of these financial statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 17, 1999, except
as to the information presented
under LIN Merger Termination
in Note 4 for which the
date is March 14, 1999
36
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of LIN Television Corporation.
In our opinion, the accompanying consolidated statements of operations
and of cash flows present fairly, in all material respects, the results of
operations and cash flows of LIN Television Corporation and its subsidiaries
(the "Predecessor") for the period from January 1, 1998 to March 2, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the accompanying financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 17, 1999, except
as to the information presented
under LIN Merger Termination
in Note 4 for which the
date is March 14, 1999
37
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LIN TELEVISION CORPORATION
We have audited the accompanying consolidated balance sheets of LIN Television
Corporation as of December 31, 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LIN
Television Corporation at December 31, 1997, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Fort Worth, Texas
January 19, 1998,
except for Note 2,
as to which the
date is March 3, 1998
38
<PAGE> 41
LIN HOLDINGS CORP.
Consolidated Balance Sheets
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
LIN Holdings Predecessor
---------------------------- -----------
December 31, December 31, December 31,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,349 $-- $ 8,046
Accounts receivable, less allowance for
doubtful accounts (1998 - $1,880;
1997(predecessor) - $2,197) 40,917 -- 57,645
Program rights 9,671 -- 9,916
Other current assets 916 1 1,865
---------- --- --------
Total current assets 92,853 1 77,472
Property and equipment, net 131,758 -- 107,593
Deferred financing costs 46,821 -- 5,420
Investment in joint venture 70,692 -- 473
Investment in SSDB 7,125 -- --
Intangible assets, net 1,444,600 -- 369,588
Program rights and other noncurrent assets 7,041 -- 8,780
---------- --- --------
Total assets $1,800,890 $ 1 $569,326
========== === ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,917 $-- $ 7,553
Program obligations 9,990 -- 11,320
Accrued income taxes 3,735 -- 3,444
Current portion of long-term debt 15,063 -- --
Accrued interest expense 9,154 -- 265
KXTX Management fee payable 4,175 -- --
Other accruals 18,548 -- 20,624
---------- --- --------
Total current liabilities 69,582 -- 43,206
Long-term debt, excluding current portion 668,517 -- 260,000
Deferred income taxes 519,207 -- 65,248
Other noncurrent liabilities 11,175 -- 8,307
---------- --- --------
Total liabilities 1,268,481 -- 376,761
---------- --- --------
Commitments and Contingencies (Notes 8,13 and 14)
Stockholders' equity:
Preferred stock, $0.01 par value: Authorized
shares - (1998 - none, 1997 - none, 1997
(predecessor) - 15,000,000) ; issued and
outstanding shares - none
Common stock, $0.01 par value: Authorized
shares - (1998 - 1,000, 1997 - 1,000, 1997
(predecessor) - 90,000,000); issued and outstanding
shares - (1998 - 1,000, 1997 - 1,000, 1997
(predecessor) - 29,857,000) -- -- 299
Treasury stock (79 shares at cost) -- -- (3)
Additional paid-in capital 559,668 1 283,177
Accumulated deficit (27,259) - (90,908)
---------- --- --------
Total stockholders' equity 532,409 1 192,565
---------- --- --------
Total liabilities and stockholders' equity $1,800,890 $ 1 $569,326
========== === ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
39
<PAGE> 42
LIN HOLDINGS CORP.
Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
LIN Holdings Predecessor Predecessor Predecessor
------------ ----------- ----------- ------------
March 3 - January 1 - Year ended Year ended
December 31, March 2, December 31, December 31,
1998 1998 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
NET REVENUES $189,536 $43,804 $291,519 $273,367
Operating costs and expenses:
Direct operating 48,812 11,117 70,746 68,954
Selling, general and administrative 42,168 11,701 63,473 59,974
Corporate 7,130 1,170 6,763 6,998
KXTX management fee 8,033 -- -- --
Amortization of program rights 10,712 2,743 15,596 14,464
Depreciation and amortization of
intangible assets 45,199 4,581 24,789 23,817
Tower write-offs -- -- 2,697 --
-------- ------- -------- --------
TOTAL OPERATING COSTS AND EXPENSES 162,054 31,312 184,064 174,207
-------- ------- -------- --------
OPERATING INCOME 27,482 12,492 107,455 99,160
Other (income) expense:
Interest expense 53,576 2,764 21,340 26,582
Investment income (1,220) (98) (1,332) (1,354)
Loss on investment in joint venture 6,037 244 1,532 995
Merger expense -- 8,616 7,206 --
-------- ------- -------- --------
TOTAL OTHER EXPENSE 58,393 11,526 28,746 26,223
-------- ------- -------- --------
Income (loss) before provision for (benefit
from) income taxes (30,911) 966 78,709 72,937
Provision for (benefit from) income taxes (3,652) 3,710 30,602 26,476
-------- ------- -------- --------
NET INCOME (LOSS) $(27,259) $(2,744) $ 48,107 $ 46,461
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
40
<PAGE> 43
LIN HOLDINGS CORP.
Consolidated Statements of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Treasury Paid-in Accumulated Stockholders'
Shares Amount Stock Capital Deficit Equity
------- ----- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (predecessor) 29,489 $ 295 $ -- $ 271,446 $(185,307) $ 86,434
Net income -- -- -- -- 46,461 46,461
Proceeds from exercises of stock options
and issuance of Employee Stock
Purchase Plan shares 228 2 -- 4,800 -- 4,802
Tax benefit from exercises of stock options -- -- -- 751 -- 751
------- ----- ----- --------- --------- ---------
Balance at December 31, 1996 (predecessor) 29,717 297 -- 276,997 (138,846) 138,448
Net income -- -- -- -- 48,107 48,107
Proceeds from exercises of stock options
and issuance of Employee Stock
Purchase Plan shares 140 2 -- 3,633 -- 3,635
Treasury stock purchases -- -- (816) -- -- (816)
Treasury stock reissuances -- -- 813 -- (169) 644
Tax benefit from exercises of stock options -- -- -- 2,547 -- 2,547
------- ----- ----- --------- --------- ---------
Balance at December 31, 1997 (predecessor) 29,857 299 (3) 283,177 (90,908) 192,565
Net loss -- -- -- -- (2,744) (2,744)
Proceeds from exercises of stock options
and issuance of Employee Stock
Purchase Plan shares 29 -- -- 1,071 -- 1,071
Tax benefit from exercises of stock options -- -- -- 10,714 -- 10,714
------- ----- ----- --------- --------- ---------
Balance at March 2, 1998 (predecessor) 29,886 299 (3) 294,962 (93,652) 201,606
Acquisition of LIN Television Corporation
and contribution of KXAS-TV to
joint venture (29,886) (299) 3 (294,962) 93,652 (201,606)
Proceeds from issuance of Common Stock 1 -- -- 558,123 -- 558,123
Net loss -- -- -- -- (27,259) (27,259)
Proceeds from capital contributions -- -- -- 1,000 -- 1,000
Payments on exercise of phantom stock units -- -- -- (95) -- (95)
Tax benefit from exercises of stock options -- -- -- 640 -- 640
------- ----- ----- --------- --------- ---------
Balance at December 31, 1998 1 $ -- $ -- $ 559,668 $ (27,259) $ 532,409
======= ===== ===== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
41
<PAGE> 44
LIN HOLDINGS CORP.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
LIN Holdings Predecessor Predecessor Predecessor
----------- ----------- ------------ ------------
March 3 - January 1 - Year ended Year ended
December 31 March 2 December 31, December 31,
1998 1998 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (27,259) $ (2,744) $ 48,107 $ 46,461
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization (includes amortization of
financing costs and note discounts) 66,563 4,714 25,688 24,818
Amortization of program rights 10,712 2,743 15,596 14,464
Tax benefit from exercises of stock options 640 10,714 2,547 751
Deferred income taxes (4,792) 1,907 54 3,127
Net loss (gain) on disposition of assets (49) 19 3,067 (158)
Program payments (10,497) (4,157) (13,179) (15,536)
Loss on investment in joint venture 6,037 244 1,532 995
Provision for doubtful accounts (108) 98 237 (4)
Changes in operating assets and liabilities, net of
acquisitions and disposals:
Accounts receivable (7,836) 7,695 (5,216) (1,930)
Program rights, net of program obligations 436 (45) 4 (42)
Other assets 20,163 (19,102) (3,980) 3,556
Accounts payable 1,209 1,187 178 (2,485)
Accrued income taxes 366 1,777 926 (5,943)
Accrued interest expense 9,154 74 (166) (3,286)
KXTX Management fee payable 4,175 -- -- --
Other accruals (3,623) 3,292 6,296 6,011
----------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 65,291 8,416 81,691 70,799
----------- -------- -------- --------
Investing activities:
Capital expenditures (21,498) (1,221) (20,605) (27,557)
Investment in Special Services Delaware B (7,125) -- -- --
Proceeds from asset dispositions 64 3 7,045 693
Investment in joint venture (250) (250) (1,500) (1,000)
Acquisition of LIN Television Corporation (1,724,281) -- -- --
Local Marketing Agreement expenditures (775) -- -- --
----------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,753,865) (1,468) (15,060) (27,864)
----------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and sale of
Employee Stock Purchase Plan shares -- 1,071 4,279 4,802
Treasury stock purchases -- -- (816) --
Principal payments on long-term debt (262,323) -- (90,000) (37,000)
Proceeds from long-term debt 668,929 -- -- --
Proceeds from GECC Note 815,500 -- -- --
Loan fees incurred on long-term debt (51,211) -- -- (810)
Proceeds from sale of Common Stock 558,123 -- -- --
Proceeds from capital contributions 1,000 -- -- --
Payments on exercise of phantom stock units (95) -- -- --
----------- -------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,729,923 1,071 (86,537) (33,008)
----------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 41,349 8,019 (19,906) 9,927
Cash and cash equivalents at the beginning of the period -- 8,046 27,952 18,025
----------- -------- -------- --------
Cash and cash equivalents at the end of the period $ 41,349 $ 16,065 $ 8,046 $ 27,952
=========== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 23,059 $ 2,895 $ 20,608 $ 28,866
Income taxes $ 1,075 $ 46 $ 26,092 $ 25,285
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE> 45
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
LIN Holdings Corp ("LIN Holdings"), together with its subsidiaries
including LIN Television Corporation ("LIN Television" the predecessor business
prior to the acquisition (see Note 3)), (together, the "Company"), is a
television station group operator in the United States that owns and operates
seven network-affiliated television stations and has an agreement to purchase an
eighth (WOOD-TV). Additionally, the Company has local marketing agreements
("LMAs"), under which it programs four other stations in the markets in which it
operates. The Company has agreements to dispose of one LMA (KXTX-TV), and to
acquire another (WOTV-TV). An LMA is a programming agreement between two
separately owned television stations serving a common service area, under which
the licensee of one station provides substantial portions of the broadcast
programming for airing on the other licensee's station, subject to ultimate
editorial and other controls being exercised by the later licensee, and sells
advertising time during those programming segments.
The Company owns and operates, or has agreements to purchase, three CBS
affiliates, three NBC affiliates and two ABC affiliates. The Company also
programs four additional network-affiliated television stations pursuant to
LMAs. Additionally, an indirect subsidiary of the Company holds an approximate
20% equity interest in a joint venture with NBC ("the Joint Venture"). The Joint
Venture consists of KXAS-TV, an NBC affiliate station in Dallas-Fort Worth, and
KNSD-TV, an NBC affiliate in San Diego, California. NBC operates the stations
owned by the Joint Venture pursuant to a management agreement. The Company is
also the owner and operator of 21 low-power broadcast stations.
LIN Holdings was formed on July 18, 1997. On March 3, 1998, LIN
Holdings, through its wholly-owned subsidiary LIN Acquisition Company, acquired
LIN Television Corporation.
All of the Company's direct and indirect consolidated subsidiaries
fully and unconditionally guarantee the Company's Senior Subordinated Notes (see
Note 8) on a joint and several basis.
The Company conducts its business through its subsidiaries and has no
operations or significant assets other than its investment in its subsidiaries.
Accordingly, no separate or additional financial information about the
subsidiares is provided.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of LIN Holdings and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated. The
Company conducts its business through its subsidiaries, and has no operations
or assets other than its investments in its subsidiaries. Accordingly, no
separate or additional financial information about the subsidiaries is provided.
43
<PAGE> 46
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates:
The management of the Company is required, in certain instances, to use
estimates and assumptions that affect the amounts reported in the financial
statements, and the notes thereto, in order to conform with generally accepted
accounting principles. The Company's actual results could differ from these
estimates.
Cash and Cash Equivalents:
Cash equivalents consist of highly liquid, short-term investments which
have an original maturity of three months or less when purchased. The Company's
excess cash is invested primarily in commercial paper.
Property and Equipment:
Property and equipment is recorded at cost and is depreciated by the
straight-line method over the estimated useful lives of the assets, generally 20
to 30 years for buildings and fixtures, and 3 to 15 years for broadcast and
other equipment. The Company recorded depreciation expense in the amount of $2.3
million for the period from January 1, 1998 to March 2, 1998, $14.5 million for
the period from March 3, 1998 to December 31, 1998, $12.3 million in 1997, and
$8.2 million in 1996.
Revenue Recognition:
Broadcast revenue is recognized during the period in which the
advertising is aired. Barter revenue is recognized based on the estimated fair
value of the product or service rendered.
Advertising Expense:
The cost of advertising is expensed as incurred. The Company incurred
advertising costs in the amount of $1.7 million for the period from January 1,
1998 to March 2, 1998, $3.1 million for the period from March 3, 1998 to
December 31, 1998, $5.6 million in 1997, and $4.8 million in 1996.
Intangible Assets:
Intangible assets include FCC licenses, network affiliations and
goodwill, all of which are being amortized over a period of 40 years. The
Company periodically evaluates the net realizable value of long-lived assets,
including tangible and intangible assets, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. An impairment in the carrying value of an asset
is recognized when the expected future operating cash flows derived from the
asset are less than its carrying value.
Program Rights:
Program rights are recorded as assets when the license period begins
and the programs are available for broadcasting. Costs incurred in connection
with the purchase of programs to be broadcast within one year are classified as
current assets, while costs of those programs to be broadcast subsequently are
considered non-current. The program costs are charged to expenses over their
estimated broadcast periods using the straight-line method. Program obligations
are classified as current or noncurrent in accordance with the payment terms of
the license agreement.
44
<PAGE> 47
Income Taxes:
Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using current statutory rates. A valuation allowance is applied
against net deferred tax assets if, based on the weighted available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and trade receivables. Concentration of credit risk with respect to cash and
cash equivalents is limited, as the Company maintains its primary banking
relationships with only large nationally recognized institutions. Credit risk
with respect to trade receivables is limited, as the trade receivables are
primarily from advertising revenues generated from a large diversified group of
local and nationally recognized advertisers. The Company does not require
collateral or other security against trade receivable balances; however, it does
maintain reserves for potential credit losses and such losses have been within
management's expectations for all years presented. The carrying values of cash
and cash equivalents and accounts receivable approximate fair value.
Reclassification:
Certain reclassifications have been made to the prior period financial
statements to conform to the current period financial statement presentation.
NOTE 3 - BUSINESS COMBINATIONS:
LIN Holdings and LIN Acquisition Company, both affiliates of Hicks,
Muse, Tate & Furst Incorporated ("Hicks Muse"), entered into an Agreement and
Plan of Merger with LIN Television on August 12, 1997 (as amended, the "Merger
Agreement"). Pursuant to, and upon the terms and conditions of, the Merger
Agreement, LIN Holdings acquired LIN Television (the "Acquisition") on March 3,
1998 by merging LIN Acquisition Company, its wholly-owned subsidiary, with
and into LIN Television (the "Merger"), with LIN Television surviving the merger
and becoming a direct, wholly-owned subsidiary of LIN Holdings. The total
purchase price for the common equity of LIN Television was approximately $1.7
billion. In addition, the Company refinanced $260.2 million of LIN Television's
indebtedness and incurred acquisition costs of approximately $32.2 million.
The Acquisition was funded by:
(i) $6.9 million of excess cash on the LIN Television balance
sheet;
(ii) $50.0 million aggregate principal amount of senior secured
Tranche A term loans ("Tranche A Term Loans");
(iii) $120.0 million aggregate principal of senior secured Tranche B
term loans ("Tranche B Term Loans");
(iv) $299.3 million of gross proceeds from the issuance of $300.0
million aggregate principal amount of 8 3/8% senior
subordinated notes due 2008 ("Senior Subordinated Notes");
(v) $199.6 million of gross proceeds from the issuance by Holdings
of $325.0 million aggregate principal amount at maturity of
10% senior discount notes due 2008 ("Senior Discount Notes"),
which proceeds were contributed by LIN Holdings to the common
equity of the LIN Television;
45
<PAGE> 48
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(vi) $815.5 million of proceeds of the GECC Note; and
(vii) $558.1 million of common equity provided by affiliates of
Hicks Muse, management and other co-investors to the equity of
the corporate parents of LIN Holdings, which in turn, through
LIN Holdings, contributed such amount to the common equity of
the LIN Television (collectively, the "Financings").
The Senior Subordinated Notes and the Senior Discount Notes were
subsequently registered with the Securities and Exchange Commission (the "SEC").
In connection with the Acquisition, LIN Television and NBC formed a
television station joint venture. The Joint Venture consists of KXAS-TV,
formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly
NBC's San Diego station. A wholly-owned subsidiary of NBC is the general partner
of the Joint Venture (the "NBC General Partner") and NBC operates the stations
owned by the Joint Venture. The NBC General Partner holds an approximate 80%
equity interest and the Company holds an approximate 20% equity interest in the
Joint Venture (see Note 5). General Electric Capital Corporation ("GECC")
provided debt financing for the Joint Venture in the form of an $815.5 million
25-year non-amortizing senior secured note bearing an initial interest rate of
8.0% per annum (the "GECC Note"). The Company expects that the interest payments
on the GECC Note will be serviced solely by the cash flows of the Joint Venture.
The GECC Note was issued by LIN Television of Texas, L.P., the
Company's indirect wholly- owned partnership ("LIN Texas"), which distributed
the proceeds to the Company to finance a portion of the cost of the Acquisition.
The obligations to GECC under the GECC Note were assumed by the Joint Venture
and LIN Texas was simultaneously released from all obligations under the GECC
Note. The GECC Note is not an obligation of the Company or any of its respective
subsidiaries, and has recourse only to the Joint Venture, the Company's equity
interest therein and to one of LIN Holdings' two corporate parents pursuant to a
guarantee.
In connection with the formation of the Joint Venture, the Company
received an extension of its NBC network affiliation agreements (for stations
WAVY-TV, KXAN-TV and WOOD-TV) to 2010 and the option (exercisable through
December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham,
Alabama.
The Acquisition was accounted for as a purchase and accordingly, the
purchase price has been allocated to the assets and liabilities acquired based
upon their fair values at the date of acquisition. The excess of purchase price
over the fair value of net tangible assets acquired is allocated to intangible
assets, primarily to FCC licenses, network affiliations and goodwill. The
results of operations associated with the acquired assets and liabilities have
been included in the accompanying statements from the date of acquisition on
March 3, 1998 through December 31, 1998.
46
<PAGE> 49
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Acquisition is summarized as follows:
Assets acquired and liabilities assumed (in thousands)
<TABLE>
<S> <C>
Working capital, including cash of $9,185.......................... $ 23,646
Property and equipment............................................. 124,752
Other noncurrent assets............................................ 81,114
Intangible assets.................................................. 1,472,304
Deferred tax liability............................................. (523,549)
Other noncurrent liabilities....................................... (1,908)
----------
Total acquisition.................................................. $1,176,359
==========
</TABLE>
The following summarizes unaudited pro forma consolidated results of
operations for the year ended December 31, 1998, as if the Acquisition and the
Joint Venture had taken place on January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
-----------
<S> <C>
Net Revenue ....................................................... $220,105
Operating Income .................................................. 27,519
Net Loss .......................................................... (39,170)
</TABLE>
The pro forma results do not necessarily represent results that would
have occurred if the Acquisition and Joint Venture had taken place on the date
indicated nor are they necessarily indicative of the results of future
operations.
In 1999, the Company expects to acquire from AT&T Corporation ("AT&T")
the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, the
"Grand Rapids Stations"), both of which stations are located in the Grand
Rapids-Kalamazoo-Battle Creek market (the "Grand Rapids Acquisition"). The
Company currently provides services to the Grand Rapids Stations pursuant to a
consulting agreement with AT&T. The total purchase price for the Grand Rapids
Acquisition will be approximately $125.5 million, plus accretion of 8.0% per
annum which commenced on January 1, 1998. The Grand Rapids Acquisition is
expected to be funded by $125.0 million of additional Tranche A Term Loans. For
the fiscal year ended December 31, 1998, the Grand Rapids Stations generated net
revenues and operating income of $32.2 million and $12.9 million, respectively.
The historical and pro forma financial information provided elsewhere does not
give effect to the Grand Rapids Acquisition.
NOTE 4 - BUSINESS DEVELOPMENTS:
LIN MERGER TERMINATION:
On July 7, 1998, Chancellor Media Corporation ("Chancellor"), a company
in which Hicks Muse has an interest, entered into a merger agreement (the
"Chancellor Merger Agreement") with Ranger Equity Holdings Corporation
("Ranger") to acquire Ranger in a stock for stock transaction (the "Chancellor
Merger"). On March 14, 1999, the Boards of Directors of Chancellor and Ranger,
agreed to terminate the Chancellor Merger Agreement. Additionally, Chancellor's
Board of Directors approved the assignment of the agreements to acquire Petry
Media Corporation, a leading television representation firm, and Pegasus
Broadcasting of San Juan, L.L.C., a television broadcasting company that owns a
television station in Puerto Rico, to the Company. The assignment of the
agreements relating to the purchase of Petry Media Corporation and Pegasus
47
<PAGE> 50
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Broadcasting are subject to negotiation of definitive documentation, third-party
approval and various other conditions, including governmental approvals, and,
accordingly, there can be no assurance that such transactions will be completed
by the Company.
Sale of KXTX:
On August 1, 1998, LIN Television of Texas, L.P. and Southwest Sports
Group, Inc. ("SSG"), a Delaware corporation and an entity in which a partner of
Hicks Muse has a substantial economic interest, entered into an Asset Purchase
Agreement (the "SSG Agreement") pursuant to which LIN Texas will assign the
purchase option on and sell the assets of KXTX-TV to SSG. In exchange, LIN Texas
will receive 500,000 shares of SSG's Series A Convertible Preferred Stock, par
value $100.00 per share ("SSG Preferred Stock"). Following the completion of the
transactions contemplated by the SSG Agreement, LIN Texas will be entitled to
receive dividends at the per annum rate of 6% of par value prior to the payment
by SSG of any dividend in respect of its common stock ("SSG Common Stock") or
any other junior securities. At the option of SSG, dividends will be payable
either in kind or in cash. LIN Texas will have the right, upon the earlier of
(i) the third anniversary of the issuance of the SSG Preferred Stock and (ii) an
initial public offering of SSG Common Stock, to convert its shares of SSG
Preferred Stock into shares of SSG Common Stock at a conversion rate equal to
the par value per share of the SSG Preferred Stock ( plus accrued and unpaid
dividends thereon) divided by the fair market value per share of the SSG Common
Stock. SSG will have the right, at its sole option, to redeem the SSG Preferred
Stock at par value (plus accrued and unpaid dividends thereon) at any time.
Subject to the terms of the SSG Agreement and the satisfaction of
certain conditions, including the receipt of National Hockey League and Major
League Baseball approvals and SSG's consummation of certain other business
acquisitions, it is expected that the purchase option assignment and sale of
KXTX-TV will be consummated by the end of the third quarter of 1999.
Also, on August 1, 1998, LIN Texas and Southwest Sports Television Inc.
("SST"), an affiliate of SSG, entered into a Sub-Programming Agreement pursuant
to which SST renders certain services with respect to KXTX-TV in exchange for a
management fee equal to the cash receipts of the station less operating and
other expenses. For the year ended December 31, 1998, total management fee
expense was $8.0 million, $4.2 million of which remained payable as of December
31, 1998.
48
<PAGE> 51
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENTS:
Joint Venture with NBC:
The Company owns a 20% interest in a Joint Venture with NBC (see Note
3) and accounts for its interest using the equity method, as the Company does
not have a controlling interest. The following presents the summarized financial
information of the Joint Venture (in thousands):
<TABLE>
<CAPTION>
For the Period
from March 3
through
December 31, 1998
-----------------
<S> <C>
Net revenues................................................... 119,849
Operating income............................................... 28,438
Net loss ...................................................... $ (26,044)
<CAPTION>
As of December
31, 1998
--------------
<S> <C>
Current assets................................................. 2,507
Non-current assets............................................. 249,441
Current liabilities............................................ --
Non-current liabilities........................................ $816,050
</TABLE>
Investment in Special Services Delaware B, Inc.:
Special Services Delaware B, Inc. ("SSDB") owns and leases an aircraft
to Chancellor. In October 1998, the Company invested $7.1 million for 25% of the
capital stock of SSDB. Ranger Equity Holdings A Corp., a subsidiary of Ranger,
invested $21.4 million for the remaining 75% of the capital stock of SSDB.
The Company accounts for its interest in SSDB using the equity method,
as the Company does not have a controlling interest. The results of SSDB for the
period ended December 31, 1998 were immaterial.
NOTE 6- PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
Predecessor
1998 1997
-------- -----------
<S> <C> <C>
Land and Land Improvements .......................... $ 8,266 $ 10,550
Buildings and fixtures .............................. 29,789 39,977
Broadcasting and other equipment .................... 108,169 129,238
-------- --------
Total Property and Equipment ........................ 146,224 179,765
Less accumulated depreciation and amortization ...... (14,466) (72,172)
-------- --------
Net Property and Equipment .......................... $131,758 $107,593
======== ========
</TABLE>
49
<PAGE> 52
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INTANGIBLE ASSETS:
Intangible assets consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
Predecessor
1998 1997
---------- --------
<S> <C> <C>
FCC licenses and network affiliations .............. $ 807,029 $312,450
Goodwill ........................................... 668,272 128,043
---------- --------
1,475,301 440,493
Less accumulated amortization ...................... (30,701) (70,905)
---------- --------
$1,444,600 $369,588
========== ========
</TABLE>
NOTE 8- LONG-TERM DEBT:
Long-term debt consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
Predecessor
1998 1997
-------- -----------
<S> <C> <C>
Senior Credit Facilities ........................... $167,678 $260,000
$300,000 8 3/8% Senior Subordinated Notes
due 2008 (net of a discount of $663) ............ 299,337 --
$325,000 10% Senior Discount Notes
due 2008 (net of a discount of $108,435) ........ 216,565 --
-------- --------
Total debt ......................................... 683,580 260,000
Less current portion ............................... (15,063) --
-------- --------
Total long-term debt ............................... $668,517 $260,000
======== ========
</TABLE>
Interest rates associated with the Company's long-term debt are, at the
discretion of the Company, based on the prevailing prime rate or LIBOR rate plus
an applicable margin. Interest is fixed for a period ranging from one month to
12 months, depending on availability of the interest basis selected, except if
the Company selects a prime-based loan, in which case the interest rate will
fluctuate during the period as the prime rate fluctuates. Due to the frequent
repricing of the Senior Credit Facilities, the book value of the liability at
December 31, 1998 approximates market value.
Senior Credit Facilities:
On March 3, 1998, the Company entered into a credit agreement (the
"Credit Agreement") with the Chase Manhattan Bank, as administrative agent (the
"Agent"), and the lenders named therein. Under the Credit Agreement, the Company
established a $295 million term loan facility, a $50 million revolving facility,
and a $225 million incremental term loan facility (collectively, the "Senior
Credit Facilities"). Borrowings under the Senior Credit Facilities and part of
the proceeds from the 8 3/8% Senior Subordinated Notes were used to repay LIN
Television's existing debt.
Borrowings under the Senior Credit Facilities bear interest at a rate
based, at the option of the Company, on an adjusted London interbank offered
rate ("Adjusted LIBOR"), or the highest of the Agent's prime rates, certificate
of deposits rate plus 1.00%, or the Federal Funds effective rate plus 1/2 of
1.00% (the "Alternate Base Rate"), plus an incremental rate based on the
Company's financial
50
<PAGE> 53
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performance. As of December 31, 1998, the interest rates on the $50 million
Tranche A term loan and the $120 million Tranche B term loan were 6.88% and
7.38%, respectively, based on the Adjusted LIBOR. The weighted average interest
rate on outstanding borrowings was 7.42% and 6.40% at December 31, 1998,
respectively. The Company is required to pay quarterly commitment fees ranging
from 0.25% to 0.50%, based upon the Company's leverage ratio for that particular
quarter on the unused portion of the loan commitment, in addition to annual
agency and other administration fees.
The obligations of the Company under the Senior Credit Facilities are
unconditionally and irrevocably guaranteed, jointly and severally, by LIN
Holdings and by each existing and subsequently acquired or organized subsidiary
of the Company. In addition, substantially all of the assets of the Company and
its subsidiaries are pledged as collateral against the performance of these
obligations. Required principal repayments of amounts outstanding under the
Senior Credit Facilities commence on December 31, 1998. The Company's ability to
make additional borrowings under the Senior Credit Facilities is subject to
compliance with certain financial covenants and other conditions set forth in
the Credit Agreement.
The fair values of the Company's other long-term debt are estimated
based on quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities.
The carrying amounts and fair values of long-term debt at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Predecessor
(Thousands of dollars) December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Carrying amount ............................ $683,580 $260,000
Fair value ................................. 695,241 260,000
</TABLE>
Senior Subordinated Notes:
On March 3, 1998, LIN Television issued $300 million aggregate
principal amount of 8 3/8% Senior Subordinated Notes due 2008 in a private
placement for net proceeds of $290.3 million. Such Senior Subordinated Notes
were subsequently registered with the SEC pursuant to a Registration Statement
filed on August 12, 1998. The Senior Subordinated Notes are obligations of LIN
Television without collateral rights, subordinated in right of payment to all
existing and any future senior indebtedness of LIN Television. The Senior
Subordinated Notes are fully and unconditionally guaranteed, on a joint and
several basis, by all wholly-owned subsidiaries of LIN Television. Interest on
the Senior Subordinated Notes accrues at a rate of 8 3/8% per annum and is
payable in cash, semi-annually in arrears, commencing on September 1, 1998. The
effective interest rate of the Senior Subordinated Notes is 8.9% on an annual
basis.
Senior Discount Notes:
In connection with the Merger on March 3, 1998, LIN Holdings issued
$325 million aggregate principal amount at maturity of 10% Senior Discount Notes
due 2008 in a private placement. Such Senior Discount Notes were subsequently
registered with the SEC pursuant to a Registration Statement filed on August 12,
1998. The Senior Discount Notes were issued at a discount and generated net
proceeds of $192.6 million to LIN Holdings. The Senior Discount Notes are
unsecured senior
51
<PAGE> 54
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obligations of LIN Holdings, and are not guaranteed. Cash interest will not
accrue or be payable on the Senior Discount Notes prior to March 1, 2003.
Thereafter, cash interest will accrue at a rate of 10% per annum and will be
payable semi-annually in arrears commencing on September 1, 2003. The effective
interest rate of the Senior Discount Notes is 11.0% on an annual basis.
NOTE 9 - STOCKHOLDERS' EQUITY:
Common Stock:
LIN Holdings capital structure includes one class of common stock with
a par value of $.01 per share. All of LIN Holdings common stock is owned
indirectly by Ranger. The common equity of Ranger is owned by affiliates of
Hicks Muse, management and other co-investors.
Stock Option Plan:
The Company participates in the Ranger Equity Holdings Corporation 1998
Stock Option Plan (the "1998 Option Plan"). Pursuant to the 1998 Option Plan
nonqualified options have been granted to certain directors, officers and key
employees of the Company. Prior to March 2, 1998, nonqualified options in the
stock of LIN Television were granted to directors, officers and key employees of
the Company pursuant to the LIN Television Corporation 1994 Adjustment Stock
Incentive Plan, the Amended and Restated 1994 Stock Incentive Plan and the 1994
Nonemployee Director Stock Incentive Plan, each of which were terminated, and
all options granted under each were exercised or cancelled on March 2, 1998.
Options granted pursuant to the 1998 Option Plan are generally not
exercisable until one year after grant, have vesting terms of four to five years
and expire ten years from the date of grant.
The Company has adopted the disclosure requirements of SFAS No. 123
"Accounting for Stock-Based Compensation" and, as permitted under SFAS No. 123,
applies Accounting Principles Board Opinion ("APB") No. 25 and related
interpretations in accounting for its plans. No compensation expense was
recorded under APB No. 25 for the periods from January 1, 1998 to March 2,
1998, and March 3, 1998 to December 31, 1998, and for the years ended December
31, 1997 and 1996. Pro forma information regarding net income is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1997 and 1996: risk-free interest rates of 5.92% and
5.48% for 1997 and 1996, respectively; volatility factors of the expected price
of the Company's Common Stock of 0.30; and a weighted-average expected life of
the options of seven years. The fair value of options granted in 1998 is deemed
to be immaterial. If the Company had elected to adopt the optional recognition
provisions of SFAS No. 123 for its stock option plans, net income (loss) would
have been changed to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------
March 3 - Predecessor
December 31, January 1 - Predecessor Predecessor
1998 March 2, 1998 1997 1996
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Pro forma net income (loss) .... $(27,259) $(2,744) $45,532 $43,611
</TABLE>
A summary of the Company's stock option activity and related information for the
period from January 1 to March 2, 1998, and the years ended December 31, 1997
and 1996 is as follows:
52
<PAGE> 55
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
January 1 -
March 2, 1998 1997 1996
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding beginning of period ......... 2,372,433 $26.75 1,859,798 $26.75 1,621,305 $24.43
Granted ......................................... -- -- 662,400 41.08 581,311 30.44
Exercised ....................................... -- -- (120,995) 23.32 (179,604) 18.61
Acquisition of LIN Television ................... (2,372,433) 26.75 -- -- -- --
Canceled or expired ............................. -- -- (28,770) 22.28 (163,214) 25.93
---------- --------- ---------
Options outstanding end of period ............... -- -- 2,372,433 31.02 1,859,798 26.75
========== ========= =========
Exercisable at end of period .................... -- $ -- 1,013,187 $25.96 722,833 $23.44
Weighted-average fair value of
options granted during the period ............ -- $ -- -- $18.61 -- $13.49
</TABLE>
As of December 31, 1997 and 1996, 1,681,867 and 1,328,266 options were available
for grant under the Predecessors's option plans, respectively.
During the period from March 3, 1998 to December 31, 1998, 50,901,375
options and phantom stock units underlying the stock of Ranger were granted to
employees and directors of LIN Television. These options and phantom units have
a weighted average exercise price of $0.61. As of December 31, 1998, 100,000 of
these options and phantom units were exercisable.
NOTE 10 - INCOME TAXES:
Subsequent to the Merger, the Company and its subsidiaries will be included
in the consolidated federal income tax return filed by Ranger. Pursuant to the
tax-sharing agreement between the Company and Ranger, tax liabilities and
benefits were determined as if Ranger and the Company were each separate and
independent entities. As of December 31, 1998, no amounts were due to or
receivable from the Company under the tax sharing agreement.
Provision for (benefit from) income taxes included in the accompanying
consolidated statements of operations consisted of the following:
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1-
December 31 March 2 Predecessor Predecessor
1998 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal .................... $ -- $1,740 $29,325 $22,439
State ...................... 1,140 63 1,223 910
------- ------ ------- -------
$ 1,140 $1,803 $30,548 $23,349
Deferred:
Federal .................... $(4,197) $1,815 $ 210 $ 3,258
State ...................... (595) 92 (156) (131)
------- ------ ------- -------
(4,792) 1,907 54 3,127
------- ------ ------- -------
$(3,652) $3,710 $30,602 $26,476
======= ====== ======= =======
</TABLE>
53
<PAGE> 56
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the amount that would be provided by applying the
35% federal statutory rate to income (loss) before provision for (benefit from)
income taxes to the actual provision for (benefit from) income taxes:
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1-
December 31 March 2 Predecessor Predecessor
1998 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provision (benefit) assuming federal statutory rate ........ $(10,693) $ 338 $27,548 $25,528
State taxes, net of federal tax benefit .................... 354 41 846 962
Amortization ............................................... 5,431 180 1,077 1,077
Merger expenses ............................................ -- 3,017 -- --
Other ...................................................... 1,256 134 1,131 (1,091)
-------- ------ ------- -------
$ (3,652) $3,710 $30,602 $26,476
======== ====== ======= =======
</TABLE>
Deferred taxes are determined based on the estimated future tax effects
of differences between the financial statement and the tax basis of assets and
liabilities given the provisions of enacted tax laws.
The components of the deferred tax liability are as follows at December 31:
<TABLE>
<CAPTION>
Predecessor
1998 1997
-------- -----------
<S> <C> <C>
Intangible assets .................................. $502,898 $52,957
Property and equipment ............................. 21,924 14,389
Other .............................................. (5,615) (2,098)
-------- -------
$519,207 $65,248
======== =======
</TABLE>
At December 31, 1998, the Company had a federal net operating loss
carryforward of approximately $3.5 million expiring in 2018.
NOTE 11 - RELATED-PARTY TRANSACTIONS:
In connection with the Acquisition (see Note 3), LIN Holdings and LIN
Television (collectively, the "Clients") entered into a ten-year agreement (the
"Monitoring and Oversight Agreement") with Hicks, Muse & Co. Partners, L.P.,
("Hicks Muse Partners"), an affiliate of Hicks Muse, pursuant to which the
Clients agreed to pay Hicks Muse Partners an annual fee (payable quarterly) for
oversight and monitoring services to the Clients. The aggregate annual fee is
adjustable on January 1 of each calendar year to an amount equal to 1.0% of the
budgeted consolidated annual earnings before interest, tax, depreciation and
amortization ("EBITDA") of LIN Holdings and its subsidiaries for the then
current fiscal year. Upon the acquisition by LIN Holdings and its subsidiaries
of another entity or business, the fee shall be adjusted prospectively in the
same manner using the pro forma consolidated annual EBITDA of LIN Holdings and
it subsidiaries. In no event shall the annual fee be less than $1,000,000. Hicks
Muse Partners is also entitled to reimbursement for any expenses incurred by it
in connection with rendering services allocable to LIN Holdings and LIN
Television. The fee for the period from March 3, 1998 to December 31, 1998 was
$833,000.
The Clients, jointly and severally, have agreed to indemnify Hicks Muse
Partners, its affiliates, and their respective directors, officers, controlling
persons, agents and employees from and against all claims, liabilities, losses,
damages, expenses and fees related to or arising out of or in connection with
the services rendered by Hicks Muse Partners under the Monitoring and Oversight
Agreement and not resulting primarily from the bad faith, gross negligence, or
willful misconduct of Hicks Muse Partners. The Monitoring and Oversight
Agreement makes available the resources of Hicks Muse Partners concerning a
variety of financial and operational matters. LIN Holdings and LIN Television do
not believe that the services that have been and will continue to be provided to
them by Hicks Muse Partners could otherwise be obtained by them without the
addition of personnel or the engagement of outside professional advisors.
54
<PAGE> 57
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Acquisition, the Clients also entered into a
ten-year agreement (the "Financial Advisory Agreement") with Hicks Muse
Partners, pursuant to which Hicks Muse Partners received a financial advisory
fee at the closing of the Acquisition as compensation for its services as
financial advisor to the Clients in connection with the Acquisition. Hicks Muse
Partners also is entitled to receive a fee equal to 1.5% of the "transaction
value" (as defined below) for each "subsequent transaction" (as defined below)
in which a Client is involved. The term "transaction value" means the total
value of the subsequent transaction including without limitation, the aggregate
amount of the funds required to complete the subsequent transaction (excluding
any fees payable pursuant to the Financial Advisory Agreement), including the
amount of any indebtedness, preferred stock or similar obligations assumed (or
remaining outstanding). The term "subsequent transaction" means any future
proposal for a tender offer, acquisition, sale, merger, exchange offer,
recapitalization, restructuring or other similar transaction directly involving
LIN Holdings or any of its subsidiaries, and any other person or entity.
In addition, the Clients, jointly and severally, have agreed to
indemnify Hicks Muse Partners, its affiliates, and their respective directors,
officers, controlling persons, agents and employees from and against all claims,
liabilities, losses, damages, expenses and fees related to or arising out of or
in connection with the services rendered by Hicks Muse Partners under the
Financial Advisory Agreement and not resulting primarily from the bad faith,
gross negligence, or willful misconduct of Hicks Muse Partners. The Financial
Advisory Agreement makes available the resources of Hicks Muse Partners
concerning a variety of financial and operation matters. LIN Holdings and LIN
Television do not believe that the services that will be provided by Hicks Muse
Partners could otherwise be obtained by them without the addition of personnel
or engagement of outside professional advisors.
The Company leases an aircraft to Chancellor pursuant to a lease agreement
that expires in October 1999 and which calls for monthly rent payments of
$60,000 to the Company. As of December 31, 1998, Chancellor owed the Company
approximately $60,000 with respect to this lease. In addition, Special Services
Delaware B, Inc. ("SSDB"), an indirect subsidiary of Ranger, and a company in
which the Company owns a 25% interest, leases a second aircraft to Chancellor
pursuant to a lease which expires in November 2003.
NOTE 12 - RETIREMENT PLANS:
The Company is the sponsor of the LIN Television Corporation Retirement
Plan and the Supplemental Benefits Retirement Plan (together the "Retirement
Plan"). The Retirement Plan is a noncontributory defined benefit retirement plan
covering employees of the Company who meet certain requirements, including
length of service and age. Pension benefits vest on completion of five years of
service and are computed, subject to certain adjustments, by multiplying 1.25%
of the employee's last three years' average annual compensation by the number of
years of credited service. The assets of the pension plan are invested primarily
in long-term fixed income securities, large and small cap U.S. equities, and
international equities. The Company's policy is to fund at least the minimum
requirement and is further based on legal requirements and tax considerations.
No funding was required for the Retirement Plan during 1998, 1997 and 1996.
The components of the net pension expense included in the financial
statements and information with respect to the change in benefit obligation,
change in plan assets, the funded status of the Retirement Plan and underlying
assumptions are as follows:
55
<PAGE> 58
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retirement Plan
(Amounts in Thousands, Except Percentages)
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in Benefit Obligation:
Benefit Obligation, Beginning of Year ................ $53,253 $ 52,440 $47,339
Service Cost .................................... 614 176 820
Interest Cost ................................... 3,044 600 3,398
Plan Amendments ................................. -- -- (496)
Actuarial Loss .................................. 5,298 296 2,875
Curtailments .................................... (682) --
Benefits Paid ................................... (1,479) (260) (1,496)
------- -------- -------
Benefit Obligation, End of Year ................. $60,048 $ 53,252 $52,440
======= ======== =======
Change in Plan Assets:
Fair Value of Plan Assets, Beginning of Year .... 61,686 $ 58,015 $50,631
Actual Return on Plan Assets .................... 3,758 3,931 8,880
Benefits Paid ................................... (1,479) (260) (1,496)
------- -------- -------
Fair Value of Plan Assets, End of Year .......... $63,965 $ 61,686 $58,015
======= ======== =======
Funded Status of the Plan ............................ 3,917 8,434 5,575
Unrecognized Actuarial Gain .......................... (7,039) (11,898) (8,913)
Unrecognized Prior Service Cost ...................... 228 988 1,124
Unrecognized Net Transaction Asset ................... (940) (1,201) (1,253)
------- -------- -------
Total Amount Recognized .............................. $(3,834) $ (3,677) $(3,467)
======= ======== =======
Accrued Benefit Liability ............................ $(3,834) $(3,677) $(3,467)
======= ======= =======
Assumptions as of period end:
Discount Rate ................................... 6.50% 7.00% 7.00%
Expected Return on Plan Assets .................. 8.25% 8.00% 8.00%
Rate of Compensation Increase ................... 5.00% 5.00% 5.00%
Health Care Cost Trend Rate ..................... n/a n/a n/a
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor Predecessor
1998 1998 1997 1996
------------ ----------- ----------- -----------
Net Periodic Cost:
<S> <C> <C> <C> <C>
Service Cost ......................................... $ 614 $ 176 $ 820 $ 787
Interest Cost ........................................ 3,044 600 3,398 3,233
Expected Return on Assets ............................ (3,318) (650) (3,655) (3,434)
Prior Service Cost Amortization ...................... 503 136 815 1,024
Transition Amount Recognized ......................... (261) (52) (313) (313)
Curtailment Gain ..................................... (426) -- -- --
------- ----- ------- -------
Net Periodic Benefit Cost ............................ $ 156 $ 210 $ 1,065 $ 1,297
======= ===== ======= =======
</TABLE>
56
<PAGE> 59
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Benefits Retirement Plan
(Amounts in Thousands, Except Percentages)
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in Benefit Obligation:
Benefit Obligation, Beginning of Year ................... $ 1,987 $ 1,801 $ 1,168
Service Cost ............................................ 118 34 143
Interest Cost ........................................... 93 22 113
Actuarial Loss .......................................... 204 130 377
Curtailments ............................................ (511) -- --
------- ------- -------
Benefit Obligation, End of Year ......................... $ 1,891 $ 1,987 $ 1,801
======= ======= =======
Funded Status of the Plan .................................... (1,891) (1,987) (1,801)
Unrecognized Actuarial Loss .................................. 468 785 665
Unrecognized Prior Service Cost .............................. 8 12 12
Unrecognized Net Transaction Asset ........................... (49) (62) (65)
------- ------- -------
Total Amount Recognized ...................................... $(1,464) $(1,252) $(1,189)
======= ======= =======
Accrued Benefit Liability .................................... $(1,464) $(1,252) $(1,189)
======= ======= =======
Assumptions as of period end:
Discount Rate ........................................... 6.50% 7.00% 7.00%
Expected Return on Plan Assets .......................... 8.25% 8.00% 8.00%
Rate of Compensation Increase ........................... 5.00% 5.00% 5.00%
Health Care Cost Trend Rate ............................. n/a n/a n/a
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor Predecessor
1998 1998 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Periodic Cost:
Service Cost ............................................ $118 $ 34 $143 $104
Interest Cost ........................................... 92 22 113 80
Expected Return on Assets ............................... -- -- -- 1
Prior Service Cost Amortization ......................... 3 -- 2 30
Actuarial Loss (Gain) Recognized ........................ 10 10 42 (16)
Transition Amount Recognized ............................ (14) (3) (16) --
Curtailment Loss ........................................ 3 -- -- --
---- ---- ---- ----
Net Periodic Benefit Cost ............................... $212 $ 63 $284 $199
==== ==== ==== ====
</TABLE>
57
<PAGE> 60
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS & CONTINGENCIES;
Commitments:
The Company leases land, buildings, vehicles and equipment under
noncancelable operating lease agreements that expire at various dates through
the year 2016. Commitments for noncancelable operating lease payments are as
follows (in thousands):
<TABLE>
<C> <C>
1999 ............................................................. $ 289
2000 ............................................................. 197
2001 ............................................................. 149
2002 ............................................................. 137
2003 ............................................................. 129
Thereafter ....................................................... 328
------
$1,229
======
</TABLE>
Rent expense included in the consolidated statements of operations was
$.1 million for the period from January 1, 1998 to March 2, 1998, $1.1 million
for the period from March 3, 1998 to December 31, 1998, and $1.2 million for the
years ended December 31, 1997 and 1996.
The Company has also entered into commitments for future syndicated
news, entertainment, and sports programming. Future payments associated with
these commitments are as follows (in thousands):
<TABLE>
<C> <C>
1999 ............................................................. $ 3,207
2000 ............................................................. 7,076
2001 ............................................................. 4,915
2002 ............................................................. 3,909
2003 ............................................................. 1,210
Thereafter ....................................................... 1,968
-------
$22,285
=======
</TABLE>
Contingencies:
On September 4, 1997, the Company announced that it had learned of four
lawsuits regarding the then proposed acquisition of LIN Television. The Company
and all of its then present directors are defendants in all of the lawsuits.
AT&T is a defendant in three of the lawsuits, and an AT&T affiliate and Hicks
Muse are defendants in one of the lawsuits. Each of the lawsuits was filed by a
purported shareholder of the Company seeking to represent a putative class of
all the Company's public stockholders. Three of the four lawsuits were filed in
the Delaware Court of Chancery, while the fourth lawsuit was filed in the New
York Supreme Court.
While the allegations of the complaints are not identical, all of the
lawsuits basically assert that the terms of the original merger agreement were
not in the best interests of the Company's public stockholders. All of the
complaints allege breach of fiduciary duty in approving the merger agreement.
Two of the complaints also allege breach of fiduciary duty in connection with
the proposed sale of the television station WOOD-TV by AT&T to Hicks Muse and
the amendment to a Private Market Value Guarantee Agreement that was entered
into simultaneously with the first merger agreement. The complaints seek the
preliminary and permanent enjoinment of the merger or alternatively seek damages
in an unspecified amount. The complaints have not been amended to reflect the
terms of the merger itself.
58
<PAGE> 61
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plaintiffs in each of the actions have agreed to an indefinite
extension of time for each of the defendants served to respond to the respective
complaints. No discovery has taken place.
In addition, the Company currently and from time to time is involved in
litigation incidental to the conduct of its business. In the opinion of the
Company's management, none of such litigation as of December 31, 1998, is likely
to have a material adverse effect on the Company's financial condition, results
of operations or cash flows.
NOTE 14 - LOCAL MARKETING AGREEMENTS;
The Company entered into LMAs with the owners of KXTX-TV in Dallas-Fort
Worth, Texas in June 1994, KNVA-TV in Austin, Texas in August 1994, WBNE-TV in
New Haven-Hartford, Connecticut in December 1994, and WVBT-TV in
Norfolk-Portsmouth, Virginia in December 1994. Under the LMAs, the Company is
required to pay fixed periodic fees and incur programming and operating costs
relating to the LMA stations, but retains all advertising revenues. All of the
LMAs have 10-year terms.
In connection with the KXTX-TV and KNVA-TV LMAs, the Company purchased
a 4.49% ownership interests in some of the licensees of the stations and entered
into option and put agreements that would enable or require the Company to
purchase the stations for a fixed amount under certain conditions, including a
change by the FCC in its "duopoly" rules to permit such acquisitions. The
aggregate purchase price for these interests and the purchase options was
approximately $1.6 million. The "duopoly" rules currently prevent the Company
from acquiring these LMA stations, thereby preventing the Company from directly
fulfilling its obligations under put options that such LMAs have with the
Company. Should future legislation amend the current single-market ownership
limits, the Company, at the option of the parties involved in the LMA contracts,
could be required to purchase certain of the LMA stations. Potential commitments
for fulfilling these put options totaled a maximum of $14.0 million, subject to
adjustments for monthly rental payments, at December 31, 1998.
Future minimum payments required under all four of these LMAs are as
follows (in thousands):
<TABLE>
<C> <C>
1999 ............................................................. $1,064
2000 ............................................................. 1,064
2001 ............................................................. 1,064
2002 ............................................................. 1,064
2003 ............................................................. 1,064
Thereafter ....................................................... 783
------
Total ............................................................ $6,103
======
</TABLE>
59
<PAGE> 62
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - UNAUDITED QUARTERLY DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998 - Combined Company/Predecessor
- ------------------
Net revenues $60,015 $61,777 $ 55,778 $55,770
Operating income 14,730 11,741 4,566 8,937
Net loss $(5,973) $(5,736) $(12,987) $(5,307)
1997 - Predecessor
- ------------------
Net revenues $61,662 $83,305 $ 71,911 $74,641
Operating income 17,117 30,468 25,129 34,741
Net income $ 7,137 $15,550 $ 9,935 $15,485
1996 - Predecessor
- ------------------
Net revenues $57,539 $75,576 $ 68,780 $71,472
Operating income 15,990 28,274 22,378 32,518
Net income $ 5,952 $13,841 $ 9,745 $16,923
- -------------------------------------------------------------------------------
</TABLE>
NOTE 16 - RECENT PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," effective for years beginning after December 15, 1997.
SFAS 130 requires that a company report items of other comprehensive income
either below the total for net income in the income statement, or in a statement
of changes in equity, and to disclose the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. As the Company has
no items of other comprehensive income in any period presented, the adoption of
SFAS 130 does not have an impact on these financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for years beginning after
December 15, 1997. SFAS 131 requires that a company report financial and
descriptive information about its reportable operating segments pursuant to
criteria that differ from current accounting practice. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The financial information to be reported includes segment profit or
loss, certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general-purpose financial statements. SFAS 131
also requires information about revenues from products or services, countries
where the company has operations or assets and major customers. Management
believes that the Company has only one operating segment, as defined in Note 1,
and so the adoption of SFAS 131 has a limited impact on the consolidated
financial statements.
Effective December 31, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits."
The provisions of SFAS No. 132 revise employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of these plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable.
In April 1998, Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of
Start-Up Activities,"effective for fiscal years
60
<PAGE> 63
LIN HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning after December 15, 1998. This SOP provides guidance on the financial
reporting of start-up costs and organization costs. It requires that costs of
start-up activities and organization costs be expensed as incurred. Initial
application of SOP 98-5 should be reported as the cumulative effect of a change
in accounting principle, as described in Accounting Principles Board (APB)
Opinion No. 20, "Accounting Changes". When adopting this SOP, entities are not
required to report the pro forma effects of retroactive application. Management
does not believe the implementation of SOP 98-5 will have a material impact on
its consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after
September 15, 1999. SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet at fair value. If certain
conditions are met, a derivative may be specifically designated as a fair value
hedge, a cash flow hedge, or a foreign currency hedge. A specific accounting
treatment applies to each type of hedge. Management does not believe the
implementation of SFAS 133 will have a material impact on its consolidated
financial results.
61
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of LIN Television Corporation.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
LIN Television Corporation and its subsidiaries at December 31, 1998, and the
results of their operations and cash flows for the period from March 3, 1998 to
December 31, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the accompanying financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 17, 1999, except
as to the information presented
under LIN Merger Termination
in Note 4 for which the
date is March 14, 1999
62
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of LIN Television Corporation.
In our opinion, the accompanying consolidated statements of operations
and of cash flows present fairly, in all material respects, the results of
operations and cash flows of LIN Television Corporation and its subsidiaries
(the "Predecessor") for the period from January 1, 1998 to March 2, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the accompanying financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 17, 1999, except
as to the information presented
under LIN Merger Termination
in Note 4 for which the
date is March 14, 1999
63
<PAGE> 66
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LIN TELEVISION CORPORATION
We have audited the accompanying consolidated balance sheets of LIN Television
Corporation as of December 31, 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan an perform our audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LIN
Television Corporation at December 31, 1997, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Fort Worth, Texas
January 19, 1998,
except for Note 2,
as to which the
date is March 3, 1998
64
<PAGE> 67
LIN TELEVISION CORPORATION
Consolidated Balance Sheet
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Company Predecessor
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,349 $ 8,046
Accounts receivable, less allowance for
doubtful accounts (1998 - $1,880; 1997
(predecessor) - $2,197) 40,917 57,645
Program rights 9,671 9,916
Other current assets 916 1,865
---------- --------
Total current assets 92,853 77,472
Property and equipment, net 131,758 107,593
Deferred financing costs 35,109 5,420
Investment in joint venture 70,692 473
Investment in SSDB 7,125 --
Intangible assets, net 1,444,600 369,588
Program rights and other noncurrent assets 7,041 8,780
---------- --------
TOTAL ASSETS $1,789,178 $569,326
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,917 $ 7,553
Program obligations 9,990 11,320
Accrued income taxes 10,035 3,444
Current portion of long-term debt 15,063 --
Accrued interest expense 9,154 265
KXTX Management fee payable 4,175 --
Other accruals 18,548 20,624
---------- --------
Total current liabilities 75,882 43,206
Long-term debt, excluding current portion 451,952 260,000
Deferred income taxes 519,207 65,248
Other noncurrent liabilities 11,175 8,307
---------- --------
Total liabilities 1,058,216 376,761
---------- --------
Commitments and Contingencies (Notes 8,13 and 14)
Stockholders' equity:
Preferred stock, $0.01 par value: Authorized
shares - (1998 - none, 1997 - none, 1997
(predecessor) - 15,000,000); issued and
outstanding shares - none
Common stock, $0.01 par value: Authorized
shares - (1998 - 1,000, 1997 - 1,000, 1997
(predecessor) - 90,000,000); issued and
outstanding shares - (1998 - 1,000, 1997 -
1,000, 1997 (predecessor) - 29,857,000) -- 299
Treasury stock (79 shares at cost) -- (3)
Additional paid-in capital 746,522 283,177
Accumulated deficit (15,560) (90,908)
---------- --------
Total stockholders' equity 730,962 192,565
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,789,178 $569,326
========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
65
<PAGE> 68
LIN TELEVISION CORPORATION
Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
Company Predecessor Predecessor Predecessor
----------- ---------- ----------- -----------
March 3 - January 1 - Year ended Year ended
December 31 March 2 December 31, December 31,
1998 1998 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $189,536 $43,804 $291,519 $273,367
Operating costs and expenses:
Direct operating 48,812 11,117 70,746 68,954
Selling, general and administrative 42,168 11,701 63,473 59,974
Corporate 7,130 1,170 6,763 6,998
KXTX management fee 8,033 -- -- --
Amortization of program rights 10,712 2,743 15,596 14,464
Depreciation and amortization of
intangible assets 45,199 4,581 24,789 23,817
Tower write-offs -- -- 2,697 --
-------- ------- -------- --------
TOTAL OPERATING COSTS AND EXPENSES 162,054 31,312 184,064 174,207
-------- ------- -------- --------
OPERATING INCOME 27,482 12,492 107,455 99,160
Other (income) expense:
Interest expense 35,577 2,764 21,340 26,582
Investment income (1,220) (98) (1,332) (1,354)
Loss on investment in joint venture 6,037 244 1,532 995
Merger expense -- 8,616 7,206 --
-------- ------- -------- --------
TOTAL OTHER EXPENSE 40,394 11,526 28,746 26,223
-------- ------- -------- --------
Income (loss) before provision for
income taxes (12,912) 966 78,709 72,937
Provision for income taxes 2,648 3,710 30,602 26,476
-------- ------- -------- --------
NET INCOME (LOSS) $(15,560) $(2,744) $ 48,107 $ 46,461
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
66
<PAGE> 69
LIN TELEVISION CORPORATION
Consolidated Statements of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------- Treasury Paid-in Accumulated Stockholders'
Shares Amount Stock Capital Deficit Equity
------- ------ -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (predecessor) 29,489 295 $ -- $ 271,446 $(185,307) $ 86,434
Net income -- -- -- -- 46,461 46,461
Proceeds from exercises of stock
options and issuance of
Employee Stock
Purchase Plan shares 228 2 -- 4,800 -- 4,802
Tax benefit from exercises of
stock options -- -- -- 751 -- 751
------- ---- ----- --------- --------- ---------
Balance at December 31, 1996 (predecessor) 29,717 297 -- 276,997 (138,846) 138,448
Net income -- -- -- -- 48,107 48,107
Proceeds from exercises of stock
options and issuance of
Employee Stock
Purchase Plan shares 140 2 -- 3,633 -- 3,635
Treasury stock purchases -- -- (816) -- -- (816)
Treasury stock reissuances -- -- 813 -- (169) 644
Tax benefit from exercises of
stock options -- -- -- 2,547 -- 2,547
------- ---- ----- --------- --------- ---------
Balance at December 31, 1997 (predecessor) 29,857 299 (3) 283,177 (90,908) 192,565
Net loss -- -- -- -- (2,744) (2,744)
Proceeds from exercises of stock options
and issuance of Employee Stock
Purchase Plan shares 29 -- -- 1,071 -- 1,071
Tax benefit from exercises of
stock options -- -- -- 10,714 -- 10,714
------- ---- ----- --------- --------- ---------
Balance at March 2, 1998 (predecessor) 29,886 299 (3) 294,962 (93,652) 201,606
Acquisition of LIN Television
Corporation and contribution of
KXAS-TV to joint venture (29,886) (299) 3 (294,962) 93,652 (201,606)
Equity contribution 1 -- -- 744,977 -- 744,977
Net loss -- -- -- -- (15,560) (15,560)
Proceeds from capital contributions -- -- -- 1,000 -- 1,000
Payments on exercises of phantom stock units -- -- -- (95) -- (95)
Tax benefit from exercises of
stock options -- -- -- 640 -- 640
------- ---- ----- --------- --------- ---------
Balance at December 31, 1998 1 $ -- $ -- $ 746,522 $ (15,560) $ 730,962
======= ===== ===== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
67
<PAGE> 70
LIN TELEVISION CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Company Predecessor Predecessor Predecessor
----------- ----------- ----------- ------------
March 3 - January 1 - Year ended Year ended
December 31, March 2, December 31, December 31,
1998 1998 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (15,560) $ (2,744) $ 48,107 $ 46,461
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization (includes amortization of
financing costs and note discounts) 48,564 4,714 25,688 24,818
Amortization of program rights 10,712 2,743 15,596 14,464
Tax benefit from exercises of stock options 640 10,714 2,547 751
Deferred income taxes (4,112) 1,907 54 3,127
Net loss (gain) on disposition of assets (49) 19 3,067 (158)
Program payments (10,497) (4,157) (13,179) (15,536)
Loss on Investment in joint venture 6,037 244 1,532 995
Provision for doubtful accounts (108) 98 237 (4)
Changes in operating assets and liabilities, net of
acquisitions and disposals:
Accounts receivable (7,836) 7,695 (5,216) (1,930)
Program rights, net of program obligations 436 (45) 4 (42)
Other assets 20,163 (19,102) (3,980) 3,556
Accounts payable 1,209 1,187 178 (2,485)
Accrued income taxes 6,666 1,777 926 (5,943)
Accrued interest expense 4,175 -- -- --
KXTX management fee payable 9,154 74 (166) (3,286)
Other accruals (4,303) 3,292 6,296 6,011
----------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 65,291 8,416 81,691 70,799
=========== ======== ======== ========
INVESTING ACTIVITIES:
Capital expenditures (21,498) (1,221) (20,605) (27,557)
Investment in Special Services Delaware B (7,125) -- -- --
Proceeds from asset dispositions 64 3 7,045 693
Investment in joint venture (250) (250) (1,500) (1,000)
Acquisition of LIN Television Corporation (1,724,281) -- -- --
Local Marketing Agreement expenditures (775) -- -- --
----------- -------- -------- --------
Net cash used in investing activities (1,753,865) (1,468) (15,060) (27,864)
=========== ======== ======== ========
FINANCIAL ACTIVITIES:
Proceeds from exercises of stock options and sale of
Employee Stock Purchase Plan shares -- 1,071 4,279 4,802
Treasury stock purchases -- -- (816) --
Principal payments on long-term debt (262,323) -- (90,000) (37,000)
Proceeds from GECC Note 815,500 -- -- --
Proceeds from long-term debt 469,298 -- -- --
Loan fees incurred on long-term debt (38,434) -- -- (810)
Equity contribution 744,977 -- -- --
Proceeds from capital contributions 1,000 -- -- --
Payments on exercises of phantom stock units (95) -- -- --
----------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,729,923 1,071 (86,537) (33,008)
=========== ======== ======== ========
Net increase (decrease) in cash and cash equivalents 41,349 8,019 (19,906) 9,927
Cash and cash equivalents at the beginning of the period -- 8,046 27,952 18,025
----------- -------- -------- --------
Cash and cash equivalents at the end of the period $ 41,349 $ 16,065 $ 8,046 $ 27,952
=========== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 23,059 $ 2,895 $ 20,608 $ 28,866
Income taxes $ 1,075 $ 46 $ 26,092 $ 25,285
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
68
<PAGE> 71
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
LIN Television Corporation., together with its subsidiaries (together,
the "Company"), is a television station group operator in the United States that
owns and operates seven network-affiliated television stations and has an
agreement to purchase an eighth (WOOD-TV). Additionally, the Company has local
marketing agreements ("LMAs"), under which it programs four other stations in
the markets in which it operates. The Company has agreements to dispose of one
LMA (KXTX-TV), and to acquire another (WOTV-TV). An LMA is a programming
agreement between two separately owned television stations serving a common
service area, under which the licensee of one station provides substantial
portions of the broadcast programming for airing on the other licensee's
station, subject to ultimate editorial and other controls being exercised by the
later licensee, and sells advertising time during those programming segments.
The Company owns and operates, or has agreements to purchase, three CBS
affiliates, three NBC affiliates and two ABC affiliates. The Company also
programs four additional network-affiliated television stations pursuant to
LMAs. Additionally, an indirect subsidiary of the Company holds an approximate
20% equity interest in a joint venture with NBC (the "Joint Venture"). The Joint
Venture consists of KXAS-TV, an NBC affiliate station in Dallas-Fort Worth, and
KNSD-TV, an NBC affiliate in San Diego, California. NBC operates the stations
owned by the Joint Venture pursuant to a management agreement. The Company is
also the owner and operator of 21 low-power broadcast stations.
LIN Holdings was formed on July 18, 1997. On March 3, 1998, LIN
Holdings, through its wholly-owned subsidiary LIN Acquisition Company, acquired
LIN Television Corporation (see Note 3), the predecessor business prior to the
Acquisition.
All of the Company's direct and indirect consolidated subsidiaries
fully and unconditionally guarantee the Company's Senior Subordinated Notes (see
Note 8) on a joint and several basis.
69
<PAGE> 72
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of LIN Television and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates:
The management of the Company is required, in certain instances, to use
estimates and assumptions that affect the amounts reported in the financial
statements, and the notes thereto, in order to conform with generally accepted
accounting principles. The Company's actual results could differ from these
estimates.
Cash and Cash Equivalents:
Cash equivalents consist of highly liquid, short-term investments which
have an original maturity of three months or less when purchased. The Company's
excess cash is invested primarily in commercial paper.
Property and Equipment:
Property and equipment is recorded at cost and is depreciated by the
straight-line method over the estimated useful lives of the assets, generally 20
to 30 years for buildings and fixtures, and 3 to 15 years for broadcast and
other equipment. The Company recorded depreciation expense in the amount of $2.3
million for the period from January 1, 1998 to March 2, 1998, $14.5 million for
the period from March 3, 1998 to December 31, 1998, $12.3 million in 1997, and
$8.2 million in 1996.
Revenue Recognition:
Broadcast revenue is recognized during the period in which the
advertising is aired. Barter revenue is recognized based on the estimated fair
value of the product or service received.
Advertising Expense:
The cost of advertising is expensed as incurred. The Company incurred
advertising costs in the amount of $1.7 million for the period from January 1,
1998 to March 2, 1998, $3.1 million for the period from March 3, 1998 to
December 31, 1998, $5.6 million in 1997, and $4.8 million in 1996.
Intangible Assets:
Intangible assets include FCC licenses, network affiliations and
goodwill, all of which are being amortized over a period of 40 years. The
Company periodically evaluates the net realizable value of long-lived assets,
including tangible and intangible assets, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. An impairment in the carrying value of an asset
is recognized when the expected future operating cash flows derived from the
assets are less than its carrying value.
Program Rights:
Program rights are recorded as assets when the license period begins
and the programs are available for broadcasting. Costs incurred in connection
with the purchase of programs to be broadcast within one year are classified as
current assets, while costs of those programs to be broadcast subsequently are
considered noncurrent. The program costs are charged to expenses over their
estimated broadcast periods using the straight-line method. Program obligations
are classified as current or noncurrent in accordance with the payment terms of
the license agreement.
70
<PAGE> 73
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes:
Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using current statutory rates. A valuation allowance is applied
against net deferred tax assets if, based on the weighted available evidence, it
is more likely than not that some or all of the deferred tax asses will not be
realized.
Concentrations of Credit Risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and trade receivables. Concentration of credit risk with respect to cash and
cash equivalents is limited, as the Company maintains its primary banking
relationships with only large nationally recognized institutions. Credit risk
with respect to trade receivables is limited, as the trade receivables are
primarily from advertising revenues generated from a large diversified group of
local and nationally recognized advertisers. The Company does not require
collateral or other security against trade receivable balances; however, it does
maintain reserves for potential credit losses and such losses have been within
management's expectations for all years presented. The carrying values of cash
and cash equivalents and accounts receivable approximate fair value.
Reclassification:
Certain reclassifications have been made to the prior period financial
statements to conform to the current period financial statement presentation.
NOTE 3 - COMBINATIONS:
LIN Holdings and LIN Acquisition Company, both affiliates of Hicks,
Muse, Tate & Furst Incorporated ("Hicks Muse"), entered into an Agreement and
Plan of Merger with LIN Television on August 12, 1997 (as amended, the "Merger
Agreement"). Pursuant to, and upon the terms and conditions of, the Merger
Agreement, LIN Holdings acquired LIN Television (the "Acquisition") on March 3,
1998 by merging LIN Acquisition Company, its wholly-owned subsidiary, with
and into LIN Television (the "Merger"), with LIN Television surviving the merger
and becoming a direct, wholly-owned subsidiary of LIN Holdings. The total
purchase price for the common equity of LIN Television was approximately $1.7
billion. In addition, the Company refinanced $260.2 million of the Predecessor's
indebtedness and incurred acquisition costs of approximately $32.2 million.
The Acquisition was funded by:
(i) $6.9 million of excess cash on the Predecessor balance sheet;
(ii) $50.0 million aggregate principal amount of senior secured
Tranche A term loans ("Tranche A Term Loans");
(iii) $120.0 million aggregate principal of senior secured Tranche B
term loans ("Tranche B Term Loans");
(iv) $299.3 million of gross proceeds from the issuance of $300.0
million aggregate principal amount of 8 3/8% senior
subordinated notes due 2008 ("Senior Subordinated Notes");
(v) $199.6 million of gross proceeds from the issuance by LIN
Holdings of $325.0 million aggregate principal amount at
maturity of 10% senior discount notes due 2008 ("Senior
Discount Notes"), which proceeds were contributed by LIN
Holdings to the common equity of the Company;
(vi) $815.5 million of proceeds of the GECC; and
(vii) $558.1 million of common equity provided by affiliates of
Hicks Muse, management and other co-investors to the equity of
the corporate parents of LIN Holdings, which in turn,
71
<PAGE> 74
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
through LIN Holdings, contributed such amount to the common
equity of the Company (collectively, the "Financings").
The Senior Subordinated Notes and the Senior Discount Notes were
subsequently registered with the Securities and Exchange Commission (the "SEC").
In connection with the Acquisition, LIN Television and NBC formed a
television station joint venture. The Joint Venture consists of KXAS-TV,
formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly
NBC's San Diego station. A wholly-owned subsidiary of NBC is the general partner
of the Joint Venture (the "NBC General Partner") and NBC operates the stations
owned by the Joint Venture. The NBC General Partner holds an approximate 80%
equity interest and the Company holds an approximate 20% equity interest in the
Joint Venture (see Note 5). General Electric Capital Corporation ("GECC")
provided debt financing for the Joint Venture in the form of an $815.5 million
25-year non-amortizing senior secured note bearing an initial interest rate of
8.0% per annum (the "GECC Note"). The Company expects that the interest payments
on the GECC Note will be serviced solely by the cash flows of the Joint Venture.
The GECC Note was issued by LIN Television of Texas, L.P., the
Company's indirect wholly- owned partnership ("LIN Texas"), which distributed
the proceeds to the Company to finance a portion of the cost of the Acquisition.
The obligations to GECC under the GECC Note were assumed by the Joint Venture
and LIN Texas was simultaneously released from all obligations under the GECC
Note. The GECC Note is not an obligation of the Company or any of its respective
subsidiaries, and has recourse only to the Joint Venture, the Company's equity
interest therein and to one of LIN Holdings' two corporate parents pursuant to a
guarantee.
In connection with the formation of the Joint Venture, the Company
received an extension of its NBC network affiliation agreements (for stations
WAVY-TV, KXAN-TV and WOOD-TV) to 2010 and the option (exercisable through
December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham,
Alabama.
The Acquisition was accounted for as a purchase and accordingly, the
purchase price has been allocated to the assets and liabilities acquired based
upon their fair values at the date of acquisition. The excess of purchase price
over the fair value of net tangible assets acquired is allocated to intangible
assets, primarily to FCC licenses, network affiliations and goodwill. The
results of operations associated with the acquired assets and liabilities have
been included in the accompanying statements from the date of acquisition on
March 3, 1998 through December 31, 1998.
The Acquisition is summarized as follows:
Assets acquired and liabilities assumed (in thousands)
<TABLE>
<S> <C>
Working capital, including cash of $9,185 ....................... $ 23,646
Property and equipment .......................................... 124,752
Other noncurrent assets ......................................... 81,114
Intangible assets ............................................... 1,472,304
Deferred tax liability .......................................... (523,549)
Other noncurrent liabilities .................................... (1,908)
----------
Total acquisition ............................................... $1,176,359
==========
</TABLE>
72
<PAGE> 75
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes unaudited pro forma consolidated results of
operations for the year ended December 31, 1998, as if the Acquisition and the
Joint Venture had taken place on January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
-----------
<S> <C>
Net Revenue .................................................... $220,105
Operating Income ............................................... 27,519
Net Loss ....................................................... (23,235)
</TABLE>
The pro forma results do not necessarily represent results that would
have occurred if the Acquisition and Joint Venture had taken place on the date
indicated nor are they necessarily indicative of the results of future
operations.
In 1999, the Company expects to acquire from AT&T Corporation ("AT&T")
the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, the
"Grand Rapids Stations"), both of which stations are located in the Grand
Rapids-Kalamazoo-Battle Creek market (the "Grand Rapids Acquisition"). The
Company currently provides services to the Grand Rapids Stations pursuant to a
consulting agreement with AT&T. The total purchase price for the Grand Rapids
Acquisition will be approximately $125.5 million, plus accretion of 8.0% per
annum which commenced on January 1, 1998. The Grand Rapids Acquisition is
expected to be funded by $125.0 million of additional Tranche A Term Loans. For
the fiscal year ended December 31, 1998, the Grand Rapids Stations generated net
revenues and operating income of $32.2 million and $12.9 million, respectively.
The historical and pro forma financial information provided elsewhere does not
give effect to the Grand Rapids Acquisition.
NOTE 4- BUSINESS DEVELOPMENTS:
LIN Merger Termination:
On July 7, 1998, Chancellor Media Corporation ("Chancellor"), a Company
in which Hicks Muse has an interest, entered into a merger agreement (the
"Chancellor Merger Agreement") with Ranger Equity Holdings Corporation
("Ranger") to acquire Ranger in a stock for stock transaction (the "Chancellor
Merger"). On March 14, 1999, the Boards of Directors of Chancellor and Ranger,
agreed to terminate the Chancellor Merger Agreement. Additionally, Chancellor's
Board of Directors approved the assignment of the agreements to acquire Petry
Media Corporation, a leading television representation firm, and Pegasus
Broadcasting of San Juan, L.L.C., a television broadcasting company that owns a
television station in Puerto Rico, to the Company. The assignment of the
agreements relating to the purchase of Petry Media Corporation and Pegasus
Broadcasting are subject to negotiation of definitive documentation, third-party
approval and various other conditions, including governmental approvals, and,
accordingly, there can be no assurance that such transactions will be completed
by the Company.
Sale of KXTX:
On August 1, 1998, LIN Television of Texas, L.P. and Southwest Sports
Group, Inc. ("SSG"), a Delaware corporation and an entity in which a partner of
Hicks Muse has a substantial economic interest, entered into an Asset Purchase
Agreement (the "SSG Agreement") pursuant to which LIN Texas will assign the
purchase option on and sell the assets of KXTX-TV to SSG. In exchange, LIN Texas
will receive 500,000 shares of SSG's Series A Convertible Preferred Stock, par
value $100.00 per share ("SSG Preferred Stock"). Following the completion of the
transactions contemplated by the SSG Agreement, LIN Texas will be entitled to
receive dividends at the per annum rate of 6% of par value prior to the payment
by SSG of any dividend in respect of its common stock ("SSG Common
73
<PAGE> 76
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock") or any other junior securities. At the option of SSG, dividends
will be payable either in kind or in cash. LIN Texas will have the right, upon
the earlier of (i) the third anniversary of the issuance of the SSG Preferred
Stock and (ii) an initial public offering of SSG Common Stock, to convert its
shares of SSG Preferred Stock into shares of SSG Common Stock at a conversion
rate equal to the par value per share of the SSG Preferred Stock ( plus accrued
and unpaid dividends thereon) divided by the fair market value per share of the
SSG Common Stock. SSG will have the right, at its sole option, to redeem the SSG
Preferred Stock at par value (plus accrued and unpaid dividends thereon) at any
time.
Subject to the terms of the SSG Agreement and the satisfaction of
certain conditions, including the receipt of National Hockey League and Major
League Baseball approvals and SSG's consummation of certain other business
acquisitions, it is expected that the purchase option assignment and sale of
KXTX-TV will be consummated by the end of the third quarter of 1999.
Also, on August 1, 1998, LIN Texas and Southwest Sports Television Inc.
("SST"), an affiliate of SSG, entered into a Sub-Programming Agreement pursuant
to which SST renders certain services with respect to KXTX-TV in exchange for a
management fee equal to the cash receipts of the station less operating and
other expenses. For the year ended December 31, 1998, the total management fee
expense was $8.0 million, $4.2 million of which remained payable as of December
31, 1998.
NOTE 5 - INVESTMENTS:
Joint Venture with NBC:
The Company owns a 20% interest in a Joint Venture with NBC (see Note 3) and
accounts for its interest using the equity method, as the Company does not have
a controlling interest. The following presents the summarized financial
information of the Joint Venture (in thousands):
<TABLE>
<CAPTION>
For the Period
from March 3
through
December 31, 1998
-----------------
<S> <C>
Net revenues................................................... 119,849
Operating income............................................... 28,438
Net loss ...................................................... $ (26,044)
<CAPTION>
As of December
31, 1998
--------------
<S> <C>
Current assets................................................. 2,507
Non-current assets............................................. 249,441
Current liabilities............................................ --
Non-current liabilities........................................ $816,050
</TABLE>
Investment in Special Services Delaware B, Inc.:
Special Services Delaware B, Inc. ("SSDB") owns and leases an aircraft
to Chancellor. In October 1998, the Company invested $7.1 million for 25% of the
capital stock of SSDB. Ranger Equity Holdings A Corp., a subsidiary of Ranger,
invested $21.4 million for the remaining 75% of the capital stock of SSDB.
The Company accounts for its interest in SSDB using the equity method,
as the Company does not have a controlling interest. The results of SSDB for the
period ended December 31, 1998 were immaterial.
74
<PAGE> 77
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
Predecessor
1998 1997
-------- -----------
<S> <C> <C>
Land and Land Improvements ............................ $ 8,266 $ 10,550
Buildings and fixtures................................. 29,789 39,977
Broadcasting and other equipment ...................... 108,169 129,238
-------- --------
Total Property and Equipment .......................... 146,224 179,765
Less accumulated depreciation and amortization ........ (14,466) (72,172)
-------- --------
Net Property and Equipment ............................ $131,758 $107,593
======== ========
</TABLE>
NOTE 7 - INTANGIBLE ASSETS:
Intangible assets consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
Predecessor
1998 1997
---------- --------
<S> <C> <C>
FCC licenses and network affiliations .............. $ 807,029 $312,450
Goodwill ........................................... 668,272 128,043
---------- --------
1,475,301 440,493
Less accumulated amortization ...................... (30,701) (70,905)
---------- --------
$1,444,600 $369,588
========== ========
</TABLE>
NOTE 8- LONG-TERM DEBT:
Long-term debt consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
Predecessor
1998 1997
-------- -----------
<S> <C> <C>
Senior Credit Facilities ........................... $167,678 $260,000
$300,000 8 3/8% Senior Subordinated Notes
due 2008 (net of a discount of $663) ............ 299,337 --
-------- --------
Total debt ......................................... $467,015 $260,000
Less current portion ............................... (15,063) --
-------- --------
Total long-term debt ............................... $451,952 $260,000
======== ========
</TABLE>
Interest rates associated with the Company's long-term debt are, at the
discretion of the Company, based on the prevailing prime rate or LIBOR rate plus
an applicable margin. Interest is fixed for a period ranging from one month to
12 months, depending on availability of the interest basis selected, except if
the Company selects a prime-based loan, in which case the interest rate will
fluctuate during the period as the prime rate fluctuates. Due to the frequent
repricing of the Senior Credit Facilities, the book value of the liability at
December 31, 1998 approximates market value.
75
<PAGE> 78
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the Company's other long-term debt is estimated
based on quoted market price for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturity.
The carrying amount and fair value of long-term debt at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Predecessor
(Thousands of dollars) December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Carrying amount ............................ $467,015 $260,000
Fair value ................................. 466,928 260,000
</TABLE>
Senior Credit Facilities:
On March 3, 1998, LIN Holdings and the Company entered into a credit
agreement (the "Credit Agreement") with the Chase Manhattan Bank, as
administrative agent (the "Agent"), and the lenders named therein. Under the
Credit Agreement, the Company established a $295 million term loan facility, a
$50 million revolving facility, and a $225 million incremental term loan
facility (collectively, the "Senior Credit Facilities"). Borrowings under the
Senior Credit Facilities and part of the proceeds from the 8 3/8% Senior
Subordinated Notes were used to repay LIN Television's existing debt.
Borrowings under the Senior Credit Facilities bear interest at a rate
based, at the option of the Company, on an adjusted London interbank offered
rate ("Adjusted LIBOR"), or the highest of the Agent's prime rates, certificate
of deposits rate plus 1.00%, or the Federal Funds effective rate plus 1/2 of
1.00% (the "Alternate Base Rate"), plus an incremental rate based on the
Company's financial performance. As of December 31, 1998, the interest rates on
the $50 million Tranche A term loan and the $120 million Tranche B term loan
were 6.88% and 7.38%, respectively, based on the Adjusted LIBOR. The weighted
average interest rate on outstanding borrowings was 7.42% and 6.40% at December
31, 1998, respectively. The Company is required to pay quarterly commitment fees
ranging from 0.25% to 0.50%, based upon the Company's leverage ratio for that
particular quarter on the unused portion of the loan commitment, in addition to
annual agency and other administration fees.
The obligations of the Company under the Senior Credit Facilities are
unconditionally and irrevocably guaranteed, jointly and severally, by LIN
Holdings and by each existing and subsequently acquired or organized subsidiary
of the Company. In addition, substantially all of the assets of the Company and
its subsidiaries are pledged as collateral against the performance of these
obligations. Required principal repayments of amounts outstanding under the
Senior Credit Facilities commenced on December 31, 1998. The Company's ability
to make additional borrowings under the Senior Credit Facilities is subject to
compliance with certain financial covenants and other conditions set forth in
the Credit Agreement.
Senior Subordinated Notes:
On March 3, 1998, the Company issued $300 million aggregate principal
amount of 8 3/8% Senior Subordinated Notes due 2008 in a private placement for
net proceeds of $290.3 million. Such Senior Subordinated Notes were subsequently
registered with the SEC pursuant to a Registration Statement filed on August 12,
1998. The Senior Subordinated Notes are obligations of the Company, without
collateral rights, subordinated in right of payment to all existing and any
future senior indebtedness of the Company. The Senior Subordinated Notes are
fully and unconditionally guaranteed, on a joint and several basis, by all
wholly-owned subsidiaries of the Company. Interest on the Senior
76
<PAGE> 79
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subordinated Notes accrues at a rate of 8 3/8% per annum and is payable in cash,
semi-annually in arrears, commencing on September 1, 1998. The effective
interest rate of the Senior Subordinated Notes is 8.9% on an annual basis.
NOTE 9 - STOCKHOLDERS' EQUITY:
Common Stock:
The Company's capital structure includes one class of common stock with
a par value of $.01 per share. All of the Company's common stock is owned
directly by LIN Holdings. The common equity of LIN Holdings is indirectly owned
by affiliates of Hicks Muse, management and other co-investors.
Stock Option Plan:
The Company participates in the Ranger Equity Holdings Corporation 1998
Stock Option Plan (the "1998 Option Plan"). Pursuant to the 1998 Option Plan
nonqualified options have been granted to certain directors, officers and key
employees of the Company. Prior to March 2, 1998, nonqualified options in the
common stock of LIN Television were granted to directors, officers and key
employees of the Company pursuant to the LIN Television Corporation 1994
Adjustment Stock Incentive Plan, the Amended and Restated 1994 Stock Incentive
Plan and the 1994 Nonemployee Director Stock Incentive plan, each of which were
terminated, and all options granted under each were exercised or cancelled on
March 2, 1998.
Options granted pursuant to the 1998 Option Plan are generally not
exercisable until one year after grant, have vesting terms of four to five years
and expire ten years from the date of grant.
The Company has adopted the disclosure requirements of SFAS No. 123
"Accounting for Stock-Based Compensation" and, as permitted under SFAS No. 123,
applies Accounting Principles Board Opinion ("APB") No. 25 and related
interpretations in accounting for its plans. No compensation expense was
recorded under APB No. 25 for the periods from January 1, 1998 to March 2, 1998,
and March 3, 1998 to December 31, 1998, and for the years ended December 31,
1997 and 1996. Pro forma information regarding net income is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1997 and 1996: risk-free interest rates of 5.92% and
5.48%, respectively; volatility factors of the expected price of the Company's
Common Stock of 0.30; and a weighted-average expected life of the options of
seven years. The fair value of options granted in 1998 is deemed to be
immaterial. If the Company had elected to adopt the optional recognition
provisions of SFAS No. 123 for its stock option plans, net income (loss) would
have been changed to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
------------------------------------------------------
March 3 - Predecessor
December 31, January 1 - Predecessor Predecessor
1998 March 2, 1998 1997 1996
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Pro forma net income (loss) $(15,560) $(2,744) $45,532 $43,611
</TABLE>
A summary of the Company's stock option activity and related information for the
period from January 1 to March 2, 1998 and the years ended December 31, 1997 and
1996 is as follows:
77
<PAGE> 80
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
January 1 -
March 2, 1998 1997 1996
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding beginning of period ......... 2,372,433 $26.75 1,859,798 $26.75 1,621,305 $24.43
Granted ......................................... -- -- 662,400 41.08 581,311 30.44
Exercised ....................................... -- -- (120,995) 23.32 (179,604) 18.61
Acquisition of LIN Television ................... (2,372,433) 26.75 -- -- -- --
Canceled or expired ............................. -- -- (28,770) 22.28 (163,214) 25.93
---------- --------- ---------
Options outstanding end of period ............... -- -- 2,372,433 31.02 1,859,798 26.75
========== ========= =========
Exercisable at end of period .................... -- $ -- 1,013,187 $25.96 722,833 $23.44
Weighted-average fair value of
options granted during the period ............ -- $ -- -- $18.61 -- $13.49
</TABLE>
As of December 31, 1997 and 1996, 1,681,867 and 1,328,266 options were
available for grant under the Predecessor's option plans, respectively.
During the period from March 3, 1998 to December 31, 1998, 50,901,375
options and phantom stock units underlying the stock of Ranger were granted to
employees and directors of LIN Television. These options and phantom units have
a weighted average exercise price of $0.61. As of December 31, 1998, 100,000 of
these options and phantom units were exercisable.
NOTE 10 - INCOME TAXES:
Subsequent to the Merger, the Company and its subsidiaries will be
included in the consolidated federal income tax return filed by Ranger. Pursuant
to the tax-sharing agreement between the Company and Ranger, tax liabilities and
benefits were determined as if Ranger, LIN Holdings and LIN Television were each
separate and independent entities. LIN Television owed LIN Holdings
approximately $5.6 million under the tax sharing agreement as of December 31,
1998.
Provision for income taxes included in the accompanying consolidated
statements of operations consisted of the following:
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1-
December 31 March 2 Predecessor Predecessor
1998 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal .................... $ 5,620 $1,740 $29,325 $22,439
State ...................... 1,140 63 1,223 910
------- ------ ------- -------
$ 6,760 $1,803 $30,548 $23,349
Deferred:
Federal .................... $(3,517) $1,815 $ 210 $ 3,258
State ...................... (595) 92 (156) (131)
------- ------ ------- -------
(4,112) 1,907 54 3,127
------- ------ ------- -------
$ 2,648 $3,710 $30,602 $26,476
======= ====== ======= =======
</TABLE>
78
<PAGE> 81
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the amount that would be provided by applying the
35% federal statutory rate to income (loss) before provision for income taxes to
the actual provision for income taxes:
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1-
December 31 March 2 Predecessor Predecessor
1998 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provision (benefit) assuming federal statutory rate ........ $(4,519) $ 338 $27,548 $25,528
State taxes, net of federal tax benefit .................... 354 41 846 962
Amortization ............................................... 5,431 180 1,077 1,077
Merger expenses ............................................ -- 3,017 -- --
Other ...................................................... 1,382 134 1,131 (1,091)
------- ------ ------- -------
$ 2,648 $3,710 $30,602 $26,476
======= ====== ======= =======
</TABLE>
Deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and the tax basis of the
assets and liabilities given the provisions of enacted tax laws.
The components of the deferred tax liability are as follows at December 31:
<TABLE>
<CAPTION>
Predecessor
1998 1997
-------- -----------
<S> <C> <C>
Intangible assets .................................. $502,898 $52,957
Property and equipment ............................. 21,924 14,389
Other .............................................. (5,615) (2,098)
-------- -------
$519,207 $65,248
======== =======
</TABLE>
NOTE 11 - RELATED-PARTY TRANSACTIONS:
In connection with the Acquisition (see Note 3), LIN Holdings and LIN
Television (collectively, the "Clients") entered into a ten-year agreement (the
"Monitoring and Oversight Agreement") with Hicks, Muse & Co. Partners, L.P.,
("Hicks Muse Partners"), an affiliate of Hicks Muse, pursuant to which the
Clients agreed to pay Hicks Muse Partners an annual fee (payable quarterly) for
oversight and monitoring services to the Clients. The aggregate annual fee is
adjustable on January 1 of each calendar year to an amount equal to 1.0% of the
budgeted consolidated annual earnings before interest, tax, depreciation and
amortization ("EBITDA") of LIN Holdings and its subsidiaries for the then
current fiscal year. Upon the acquisition by LIN Holdings and its subsidiaries
of another entity or business, the fee shall be adjusted prospectively in the
same manner using the pro forma consolidated annual EBITDA of LIN Holdings and
it subsidiaries. In no event shall the annual fee be less than $1,000,000. Hicks
Muse Partners is also entitled to reimbursement for any expenses incurred by it
in connection with rendering services allocable to LIN Holdings and LIN
Television. The fee for the period from March 3, 1998 to December 31, 1998 was
$833,000.
The Clients, jointly and severally, have agreed to indemnify Hicks Muse
Partners, its affiliates, and their respective directors, officers, controlling
persons, agents and employees from and against all claims, liabilities, losses,
damages, expenses and fees related to or arising out of or in connection with
the services rendered by Hicks Muse Partners under the Monitoring and Oversight
Agreement and not resulting primarily from the bad faith, gross negligence, or
willful misconduct of Hicks Muse Partners. The Monitoring and Oversight
Agreement makes available the resources of Hicks Muse Partners concerning a
variety of financial and operational matters. LIN Holdings and LIN Television do
not believe that the services that have been and will continue to be provided to
them by Hicks Muse Partners could otherwise be obtained by them without the
addition of personnel or the engagement of outside professional advisors.
79
<PAGE> 82
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Acquisition, the Clients also entered into a
ten-year agreement (the "Financial Advisory Agreement") with Hicks Muse
Partners, pursuant to which Hicks Muse Partners received a financial advisory
fee at the closing of the Acquisition as compensation for its services as
financial advisor to the Clients in connection with the Acquisition. Hicks Muse
Partners also is entitled to receive a fee equal to 1.5% of the "transaction
value" (as defined below) for each "subsequent transaction" (as defined below)
in which a Client is involved. The term "transaction value" means the total
value of the subsequent transaction including without limitation, the aggregate
amount of the funds required to complete the subsequent transaction (excluding
any fees payable pursuant to the Financial Advisory Agreement), including the
amount of any indebtedness, preferred stock or similar obligations assumed (or
remaining outstanding). The term "subsequent transaction" means any future
proposal for a tender offer, acquisition, sale, merger, exchange offer,
recapitalization, restructuring or other similar transaction directly involving
LIN Holdings or any of its subsidiaries, and any other person or entity.
In addition, the Clients, jointly and severally, have agreed to
indemnify Hicks Muse Partners, its affiliates, and their respective directors,
officers, controlling persons, agents and employees from and against all claims,
liabilities, losses, damages, expenses and fees related to or arising out of or
in connection with the services rendered by Hicks Muse Partners under the
Financial Advisory Agreement and not resulting primarily from the bad faith,
gross negligence, or willful misconduct of Hicks Muse Partners. The Financial
Advisory Agreement makes available the resources of Hicks Muse Partners
concerning a variety of financial and operation matters. LIN Holdings and LIN
Television do not believe that the services that will be provided by Hicks Muse
Partners could otherwise be obtained by them without the addition of personnel
or engagement of outside professional advisors.
The Company leases an aircraft to Chancellor pursuant to a lease
agreement that expires in October 1999 and which calls for monthly rent payments
of $60,000 to the Company. As of December 31, 1998, Chancellor owed the Company
approximately $60,000 with respect to this lease. In addition, Special Services
Delaware B, Inc. ("SSDB"), an indirect subsidiary of Ranger and a company in
which the Company owns a 25% interest, leases a second aircraft to Chancellor
pursuant to a lease which expires in November 2003.
NOTE 12 - RETIREMENT PLANS:
The Company is the sponsor of the LIN Television Corporation Retirement
Plan and the Supplemental Benefits Retirement Plan (together the "Retirement
Plan"). The Retirement Plan is a noncontributory defined benefit retirement plan
covering employees of the Company who meet certain requirements, including
length of service and age. Pension benefits vest on completion of five years of
service and are computed, subject to certain adjustments, by multiplying 1.25%
of the employee's last three years' average annual compensation by the number of
years of credited service. The assets of the pension plan are invested primarily
in long-term fixed income securities, large and small cap U.S. equities, and
international equities. The Company's policy is to fund at least the minimum
requirement and is further based on legal requirements and tax considerations.
No funding was required for the Retirement Plan during 1998, 1997 and 1996.
The components of the net pension expense included in the financial
statements and information with respect to the change in benefit obligation,
change in plan assets, the funded status of the Retirement Plan and underlying
assumptions are as follows:
80
<PAGE> 83
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retirement Plan
(Amounts in Thousands, Except Percentages)
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in Benefit Obligation:
Benefit Obligation, Beginning of Year ................ $53,253 $ 52,440 $47,339
Service Cost .................................... 614 176 820
Interest Cost ................................... 3,044 600 3,398
Plan Amendments ................................. -- -- (496)
Actuarial Loss .................................. 5,298 296 2,875
Curtailments .................................... (682) --
Benefits Paid ................................... (1,479) (260) (1,496)
------- -------- -------
Benefit Obligation, End of Year ................. $60,048 $ 53,252 $52,440
======= ======== =======
Change in Plan Assets:
Fair Value of Plan Assets, Beginning of Year .... 61,686 $ 58,015 $50,631
Actual Return on Plan Assets .................... 3,758 3,931 8,880
Benefits Paid ................................... (1,479) (260) (1,496)
------- -------- -------
Fair Value of Plan Assets, End of Year .......... $63,965 $ 61,686 $58,015
======= ======== =======
Funded Status of the Plan ............................ 3,917 8,434 5,575
Unrecognized Actuarial Gain .......................... (7,039) (11,898) (8,913)
Unrecognized Prior Service Cost ...................... 228 988 1,124
Unrecognized Net Transaction Asset ................... (940) (1,201) (1,253)
------- -------- -------
Total Amount Recognized .............................. $(3,834) $ (3,677) $(3,467)
======= ======== =======
Accrued Benefit Liability ............................ $(3,834) $ (3,677) $(3,467)
======= ======== =======
Assumptions as of period end:
Discount Rate ................................... 6.50% 7.00% 7.00%
Expected Return on Plan Assets .................. 8.25% 8.00% 8.00%
Rate of Compensation Increase ................... 5.00% 5.00% 5.00%
Health Care Cost Trend Rate ..................... n/a n/a n/a
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor Predecessor
1998 1998 1997 1996
----------- ----------- ----------- ----------
Net Periodic Cost:
<S> <C> <C> <C> <C>
Service Cost ......................................... $ 614 $ 176 $ 820 $ 787
Interest Cost ........................................ 3,044 600 3,398 3,233
Expected Return on Assets ............................ (3,318) (650) (3,655) (3,434)
Prior Service Cost Amortization ...................... 503 136 815 1,024
Transition Amount Recognized ......................... (261) (52) (313) (313)
Curtailment Gain ..................................... (426) -- -- --
------- ----- ------- -------
Net Periodic Benefit Cost ............................ $ 156 $ 210 $ 1,065 $ 1,297
======= ===== ======= =======
</TABLE>
81
<PAGE> 84
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Benefits Retirement Plan
(Amounts in Thousands, Except Percentages)
<TABLE>
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in Benefit Obligation:
Benefit Obligation, Beginning of Year ................... $ 1,987 $ 1,801 $ 1,168
Service Cost ............................................ 118 34 143
Interest Cost ........................................... 93 22 113
Actuarial Loss .......................................... 204 130 377
Curtailments (511) -- --
------- ------- -------
Benefit Obligation, End of Year ......................... $ 1,891 $ 1,987 $ 1,801
======= ======= =======
Funded Status of the Plan .................................... (1,891) (1,987) (1,801)
Unrecognized Actuarial Loss .................................. 468 785 665
Unrecognized Prior Service Cost .............................. 8 12 12
Unrecognized Net Transaction Asset ........................... (49) (62) (65)
------- ------- -------
Total Amount Recognized ...................................... $(1,464) $(1,252) $(1,189)
======= ======= =======
Accrued Benefit Liability .................................... $(1,464) $(1,252) $(1,189)
======= ======= =======
Assumptions as of period end:
Discount Rate ........................................... 6.50% 7.00% 7.00%
Expected Return on Plan Assets .......................... 8.25% 8.00% 8.00%
Rate of Compensation Increase ........................... 5.00% 5.00% 5.00%
Health Care Cost Trend Rate ............................. n/a n/a n/a
<CAPTION>
Predecessor
March 3 - January 1 -
December 31, March 2, Predecessor Predecessor
1998 1998 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Periodic Cost:
Service Cost ............................................ $118 $ 34 $143 $104
Interest Cost ........................................... 92 22 113 80
Expected Return on Assets ............................... -- -- -- 1
Prior Service Cost Amortization ......................... 3 -- 2 30
Actuarial Loss (Gain) Recognized ........................ 10 10 42 (16)
Transition Amount Recognized ............................ (14) (3) (16) --
Curtailment Loss ........................................ 3 -- -- --
---- ---- ---- ----
Net Periodic Benefit Cost ............................... $212 $ 63 $284 $199
==== ==== ==== ====
</TABLE>
82
<PAGE> 85
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS & CONTINGENCIES;
Commitments:
The Company leases land, buildings, vehicles and equipment under
noncancelable operating lease agreements that expire at various dates through
the year 2016. Commitments for noncancelable operating lease payments subsequent
to December 31, 1998 are as follows (in thousands):
<TABLE>
<C> <C>
1999 ............................................................. $ 289
2000 ............................................................. 197
2001 ............................................................. 149
2002 ............................................................. 137
2003 ............................................................. 129
Thereafter ....................................................... 328
------
$1,229
======
</TABLE>
Rent expense included in the consolidated statements of operations was
$.1 million for the period from January 1, 1998 to March 2, 1998, $1.1 million
for the period from March 3, 1998 to December 31, 1998 and $1.2 million for the
years ended December 31, 1997 and 1996.
The Company has also entered into commitments for future syndicated
news, entertainment, and sports programming. Future payments associated with
these commitments are as follows:
<TABLE>
<C> <C>
1999 ............................................................. $ 3,207
2000 ............................................................. 7,076
2001 ............................................................. 4,915
2002 ............................................................. 3,909
2003 ............................................................. 1,210
Thereafter ....................................................... 1,968
-------
$22,285
=======
</TABLE>
Contingencies:
On September 4, 1997, the Company announced that it had learned of four
lawsuits regarding the then proposed acquisition of LIN Television. The Company
and all of its then present directors are defendants in all of the lawsuits.
AT&T is a defendant in three of the lawsuits, and an AT&T affiliate and Hicks
Muse are defendants in one of the lawsuits. Each of the lawsuits was filed by a
purported shareholder of the Company seeking to represent a putative class of
all the Company's public stockholders. Three of the four lawsuits were filed in
Delaware Court of Chancery, while the fourth lawsuit was filed in New York
Supreme Court.
While the allegations of the complaints are not identical, all of the
lawsuits basically assert that the terms of the original merger agreement were
not in the best interests of the Company's public stockholders. All of the
complaints allege breach of fiduciary duty in approving the merger agreement.
Two of the complaints also allege breach of fiduciary duty in connection with
the proposed sale of the television station WOOD-TV by AT&T to Hicks Muse and
the amendment to a Private Market Value Guarantee Agreement that was entered
into simultaneously with the first merger agreement. The complaints seek the
preliminary and permanent enjoinment of the merger or alternatively seek damages
in an unspecified amount. The complaints have not been amended to reflect the
terms of the merger itself.
The plaintiffs in each of the actions have agreed to an indefinite
extension of time for each of the defendants served to respond to the respective
complaints. No discovery has taken place.
83
<PAGE> 86
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company currently and from time to time is involved in
litigation incidental to the conduct of its business. In the opinion of the
Company's management, none of such litigation as of December 31, 1998, is likely
to have a material adverse effect on the Company's financial condition, results
of operations or cash flows.
NOTE 14 - LOCAL MARKETING AGREEMENTS:
The Company entered into LMAs with the owners of KXTX-TV in Dallas-Fort
Worth, Texas in June 1994, KNVA-TV in Austin, Texas in August 1994, WBNE-TV in
New Haven-Hartford, Connecticut in December 1994, and WVBT-TV in
Norfolk-Portsmouth, Virginia in December 1994. Under the LMAs, the Company is
required to pay fixed periodic fees and incur programming and operating costs
relating to the LMA stations, but retains all advertising revenues. All of the
LMAs have 10-year terms.
In connection with the KXTX-TV and KNVA-TV LMAs, the Company purchased
a 4.49% ownership interests in some of the licensees of the stations and entered
into option and put agreements that would enable or require the Company to
purchase the stations for a fixed amount under certain conditions, including a
change by the FCC in its "duopoly" rules to permit such acquisitions. The
aggregate purchase price for these interests and the purchase options was
approximately $1.6 million. The "duopoly" rules currently prevent the Company
from acquiring these LMA stations, thereby preventing the Company from directly
fulfilling its obligations under put options that such LMAs have with the
Company. Should future legislation amend the current single-market ownership
limits, the Company, at the option of the parties involved in the LMA contracts,
could be required to purchase certain of the LMA stations. Potential commitments
for fulfilling these put options totaled a maximum of $14.0 million, subject to
adjustments for monthly rental payments, at December 31, 1998.
Future minimum payments required under all four of these LMAs are as
follows (in thousands):
<TABLE>
<C> <C>
1999 ............................................................. $1,064
2000 ............................................................. 1,064
2001 ............................................................. 1,064
2002 ............................................................. 1,064
2003 ............................................................. 1,064
Thereafter ....................................................... 783
------
Total ............................................................ $6,103
======
</TABLE>
84
<PAGE> 87
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - UNAUDITED QUARTERLY DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998 - Combined Company/Predecessor
- -----------------------------------
Net revenues $60,015 $61,777 $ 55,778 $55,770
Operating income 14,730 11,741 4,566 8,937
Net loss $(6,472) $(1,364) $ (8,784) $(1,684)
1997 - Predecessor
- -----------------------------------
Net revenues $61,662 $83,305 $ 71,911 $74,641
Operating income 17,117 30,468 25,129 34,741
Net income $ 7,137 $15,550 $ 9,935 $15,485
1996 - Predecessor
- -----------------------------------
Net revenues $57,539 $75,576 $ 68,780 $71,472
Operating income 15,990 28,274 22,378 32,518
Net income $ 5,952 $13,841 $ 9,745 $16,923
- -------------------------------------------------------------------------------
</TABLE>
NOTE 16- RECENT PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," effective for years beginning after December 15, 1997.
SFAS 130 requires that a company report items of other comprehensive income
either below the total for net income in the income statement, or in a statement
of changes in equity, and to disclose the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. As the Company has
no items of other comprehensive income in any period presented, the adoption of
SFAS 130 does have an impact on these financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for years beginning after
December 15, 1997. SFAS 131 requires that a company report financial and
descriptive information about its reportable operating segments pursuant to
criteria that differ from current accounting practice. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The financial information to be reported includes segment profit or
loss, certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general-purpose financial statements. SFAS 131
also requires information about revenues from products or services, countries
where the company has operations or assets and major customers. Management
believes that the Company has only one operating segment, as defined in Note 1,
and so the adoption of SFAS 131 has a limited impact on the consolidated
financial statements.
Effective December 31, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." The
provisions of SFAS No. 132 revise employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans. It standardizes the disclosure requirements for pesnions and
other postretirement benefits to the extent practicable.
In April 1998, Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of
Start-Up Activities,"effective for fiscal years beginning after December 15,
1998. This SOP provides guidance on the financial reporting of start-up costs
and organization costs. It requires that costs of start-up activities and
organization costs be expensed as incurred. Initial application of SOP 98-5
should be reported as the cumulative effect of a change in accounting principle,
as described in Accounting Principles Board (APB) Opinion No. 20,
85
<PAGE> 88
LIN TELEVISION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"Accounting Changes". When adopting this SOP, entities are not required to
report the pro forma effects of retroactive application. Management does not
believe the implementation of SOP 98-5 will have a material impact on its
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after
September 15, 1999. SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet at fair value. If certain
conditions are met, a derivative may be specifically designated as a fair value
hedge, a cash flow hedge, or a foreign currency hedge. A specific accounting
treatment applies to each type of hedge. Management does not believe the
implementation of SFAS 133 will have a material impact on its consolidated
financial results.
86
<PAGE> 89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with the Accountants on any accounting
or financial disclosure.
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following table provides the information concerning the directors
and executive officers of LIN Holdings and LIN Television:
Name Age Position
- --------------------------- --- ------------------------------------------------
Thomas O. Hicks............ 53 Chairman of the Board of LIN Holdings and
LIN Television
Michael J. Levitt.......... 40 Vice President and Director of LIN Holdings
and LIN Television
John R. Muse............... 45 Director of LIN Holdings and LIN Television
Jeffrey A. Marcus.......... 52 Director of LIN Holdings and LIN Television
C. Dean Metropoulos........ 52 Director of LIN Holdings and LIN Television
Eric C. Neuman............. 54 Vice President and Director of LIN Holdings
and LIN Television
Gary R. Chapman............ 55 Director, President and Chief Executive Officer
of LIN Holdings and LIN Television
James G. Babb, Jr.......... 67 Vice President of Industry Relations of LIN
Holdings and LIN Television
Paul Karpowicz............. 45 Vice President of Television of LIN Holdings and
LIN Television
Peter E. Maloney........... 44 Vice President of Finance of LIN Holdings and
LIN Television
C. Robert Ogren, Jr........ 55 Vice President of Engineering and Operations of
LIN Holdings and LIN Television
Gregory M. Schmidt......... 49 Vice President of New Development, General
Counsel and Secretary of LIN Holdings and
LIN Television
Denise M. Parent........... 35 Vice President, Deputy General Counsel of LIN
and LIN Television
THOMAS O. HICKS is the Chairman of the Board of LIN Holdings and LIN
Television and has served in such position since. Mr. Hicks is a Chairman of the
Board and Chief Executive Officer of Hicks Muse, a private investment firm
located in Dallas, St. Louis, New York, Mexico City and London specializing in
strategic investments, leveraged acquisitions and recapitalizations. From 1984
to May 1989, Mr. Hicks was Co-Chairman of the Board and Co-Chief Executive
Officer of Hicks & Haas, Incorporated, a Dallas based private investment firm.
Mr. Hicks serves as a chairman and CEO of Chancellor, director of Capstar
Broadcasting Corporation, Sybron International Corporation, Inc., Cooperative
Computing, Inc., International Home Foods, Triton Energy, D.A.C. Vision Inc. and
Olympus Real Estate Corporation.
MICHAEL J. LEVITT is Vice President and a director of LIN Holdings and
LIN Television and has served in such position since March 3, 1998. Mr. Levitt
is a Managing Director and Principal of Hicks Muse. Before joining Hicks Muse,
Mr. Levitt was a Managing Director and Deputy Head of Investment Banking with
Smith Barney Inc. from 1993 through 1995. From 1986 through 1993, Mr. Levitt was
with Morgan Stanley & Co. Incorporated, most recently as a Managing Director
responsible for the New York-based Financial Entrepreneurs Group. Mr. Levitt
also serves as a director of Chancellor, Capstar Broadcasting Corporation, STC
Broadcasting, Inc., Atrium Companies, Inc. and International Home Foods, Inc.
JOHN R. MUSE has been a director of LIN Holdings and LIN Television
since May 1998. Mr. Muse co-founded Hicks Muse in 1989 and is Chief Operating
Officer and a Partner of Hicks Muse. Prior
87
<PAGE> 90
to the formation of Hicks Muse, Mr. Muse headed the investment/merchant banking
activities of Prudential Securities for the southwest region of the United
States from 1984 to 1989. Mr. Muse is Chairman of Arena Brands, Inc., Lucchese,
Inc., Sunrise Television Corp. and serves as director of Arnold Palmer Golf
Management Co., Glass's Group, International Home Foods, Inc., Olympus Real
Estate Corporation, Regal Cinemas, Inc. and Suiza Foods Corporation. Mr. Muse
also serves in the Board of Directors for Goodwill Industries, SMU Edwin Cox
School of Business, the UCLA Anderson School Board of Visitors, and on the Board
of Trustees of St. Mark's School of Texas.
JEFFREY A. MARCUS has been a director of LIN Holdings and LIN
Television since March 1999. Mr. Marcus was the President and Chief Executive
Officer of Chancellor from June 1, 1998 until March 1999. Prior to joining
Chancellor on June 1, 1998, Mr. Marcus served as the Chairman and Chief
Executive Officer of Marcus Cable Properties, Inc. and Marcus Company, L.L.C.
(collectively "Marcus Cable"), the ninth largest cable television multiple
system operator (MSO) in the United States, which Mr. Marcus formed in 1990. Mr.
Marcus continues to serve as Chairman of Marcus and as director of Marcus Cable
Properties, Inc. Until November 1998, Mr. Marcus served as Chairman and Chief
Executive Office of WestMarc Communications, Inc., an MSO formed through merger
in 1987 of Marcus Communications, Inc. and Western TeleCommunications, Inc. Mr.
Marcus has more than 29 years experience in the cable television business. Mr.
Marcus is a co-owner of the Texas Rangers Baseball Club and serves as a director
of Brinker International, Inc. and Chancellor and a director or trustee of
several charitable and civic organizations.
C. DEAN METROPOULOS has been a director of LIN Holdings and LIN
Television since May 1998. Mr. Metropoulos is the Chairman of the Board of
Directors and Chief Executive Officer of International Home Foods, Inc. and
Chief Executive Officer of C. Dean Metropoulos & Co., a management services
company. From 1993 through 1997, Mr. Metropoulos served as Chairman of the Board
and Chief Executive Officer of the Morningstar Group, Inc. From 1983 through
1993, he served as President and Chief Executive Officer of Stella Foods, Inc.
Before then, Mr. Metropoulos served in a variety of U.S. and international
executive positions with GTE Corporation, including Vice President and General
Manager -- Europe and Vice President and Controller, GTE International. Mr.
Metropoulos also serves as a Director of Suiza Foods and Atrium Companies, Inc.
ERIC C. NEUMAN is Vice President and a director of LIN Holdings and LIN
Television. Mr. Neuman will resume his position as an officer of Hicks Muse in
April 1999. Mr. Neuman was the Senior Vice President of Strategic Development
for Chancellor Media from July 1998 to March 1999. From May 1993 to July 1,
1998, Mr. Neuman served as an officer of Hicks Muse since 1993 and was most
recently serving as a Senior Vice President thereof. From 1985 to 1993 Mr.
Neuman served as a Managing General Partner of Communications Partner, Ltd. A
Dallas-based private investment firm specializing in media and communications
businesses. Mr. Neuman also serves as a director of Chancellor,and STC
Broadcasting.
GARY R. CHAPMAN has been President of LIN Television since 1989 and a
director and CEO since November 1994 and became a director, the President and
CEO of the Company concurrently with the closing of the Acquisition. Mr. Chapman
served as Joint Chairman of the National Association of Broadcasters from 1991
to 1993 and serves as a board member of the Advanced Television Test Center.
Currently, Mr. Chapman serves on the Board of Directors of the Association for
Maximum Service Television and is Co-Chairman of the Advisory Board of Governors
for the National Association of Broadcasters Education Foundation.
JAMES G. BABB, JR. has been Vice President of Industry Relations of LIN
Television since April 1996 and became the Company's Vice President of Industry
Relations concurrently with the closing of
88
<PAGE> 91
the Acquisition. Prior to joining the Company, Mr. Babb was Chairman, CEO and
President of Outlet Communication, Inc. from May 1991 to February 1996. Mr. Babb
currently serves as the Chairman of the Television Board of the National
Association of Broadcasters.
PAUL KARPOWICZ has served as Vice President of Television of LIN
Television since January 1994 and became the Vice President of Television of the
Company concurrently with the closing of the Acquisition. Prior to January 1994,
Mr. Karpowicz served as general manager of LIN Television's Indianapolis CBS
Affiliate station, WISH-TV, from July 1989 through July 1995.
PETER E. MALONEY has served as Vice President of Finance of LIN
Television since January 1995 and became the Vice President of Finance of the
Company concurrently with the closing of the Acquisition. Prior to January 1995,
Mr. Maloney was employed by LIN Broadcasting as Vice President of Tax from June
1990 to December 1994 and as Director of Taxation and Financial Planning from
January 1983 to June 1990.
C. ROBERT OGREN, JR. has been Vice President of Engineering and
Operations of LIN Television since November 1990 and became the Vice President
of Engineering and Operations of the Company concurrently with the closing of
the Acquisition. Prior to November 1990, Mr. Ogren was Director of Engineering
at WBAL-TV from June 1989 to October 1990 and Director of Engineering for
Freedom Newspapers, Inc. from June 1984 to May 1989.
GREGORY M. SCHMIDT has been Vice President of New Development, General
Counsel and Secretary of LIN Television since March 1995. He became Vice
President of New Development, General Counsel and Secretary of the Company
concurrently with the closing of the Acquisition. From 1985 to 1995, he was a
partner at Covington & Burling, a Washington law firm with a high-profile
presence in regulatory and communications law.
DENISE M. PARENT has been Vice President-Deputy General Counsel of LIN
Television since March 1997 and became Vice President-Deputy General Counsel of
the Company concurrently with the closing of the Acquisition. From 1993 to 1997,
Ms. Parent was employed by The Providence Journal Company as Senior Corporate
Counsel. Prior to 1993, Ms. Parent was employed by Adler, Pollock & Sheehan,
Incorporated, a law firm in Providence, Rhode Island.
89
<PAGE> 92
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to or earned in 1998, 1997
and 1996, including deferred compensation, by the Chief Executive Officer of LIN
Television and LIN Holdings (the "CEO"), and the five other most highly
compensated executive officers of LIN Television and LIN Holdings for services
rendered during the years ended December 31, 1998, 1997 and 1996 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------------ ---------------
Other Annual Securities
Compensation Underlying
Name and Principal Position Year Salary($) Bonus($) ($)(a) Options/SARs(#)
- --------------------------- ---- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gary R. Chapman....................... 1998 500,000 500,000 13,863 13,248,600
President & CEO 1997 500,000 205,000 22,305 100,000
1996 475,000 146,250 48,632 75,000
Gregary M. Schmidt.................... 1998 330,000 105,000 2,619 3,763,500
Vice President of New Development, 1997 320,000 100,000 11,559 47,000
General Counsel & Secretary 1996 310,000 95,000 21,764 39,500
Paul Karpowicz........................ 1998 330,000 135,000 1,930 4,263,500
Vice President, Television 1997 300,000 110,000 237,708 47,000
1996 237,000 150,000 237,840 39,500
Deborah R. Jacobson (b)............... 1998 185,000 83,000 1,439 2,238,700
Vice President, Corporate 1997 180,000 65,000 11,665 35,000
Development & Treasurer to 1996 175,000 78,000 11,400 29,000
January 1999
Peter E. Maloney...................... 1998 180,000 83,000 2,112 2,738,700
Vice President, Finance 1997 165,000 80,000 6,898 35,000
1996 145,000 65,000 5,763 29,000
C. Robert Ogren, Jr................... 1998 180,000 83,000 4,150 1,738,700
Vice President, Engineering 1997 165,000 80,000 10,701 35,000
and Operations 1996 140,000 65,000 8,849 29,000
</TABLE>
- ------------------
(a) The amount set forth in Other Annual Compensation includes as to all named
executive officers the value of executive life and disability insurance and
as to most named executive officers the personal use of Company automobiles
and nonqualified pension contributions. In addition, such amount includes
relocation expenses of $196,345 for Mr. Karpowicz in 1996, and an
additional $212,196 tax gross-up relocation payment for Mr. Karpowicz in
1997.
(b) Deborah R. Jacobson resigned as an officer of the Company effective January
6, 1999 simultaneously with her appointment as an officer of Chancellor.
90
<PAGE> 93
The following table sets forth certain information concerning stock options
grants during the year ended December 31, 1998, to the Named Executive Officers.
OPTION/SAR GRANTS DURING THE 1998 FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------- Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rate of Stock
Securities Options/SAR Price Appreciation for
Underlying Granted to Exercise or Option Term(2)
Options/SAR Employees in Base Price Expiration -------------------------
Name Granted(#) Fiscal Year(%) ($/Share) Date 5%($) 10%($)
- ---- ----------- -------------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gary R. Chapman............... 5,285,582 $ -- 3/3/08 8,615,499 13,689,657
5,428,836 $0.50 3/3/08 6,134,585 11,346,267
2,534,182 $1.00 9/30/08 1,596,535 4,029,349
---------- ---- --------------------------
13,248,600 26.7% 16,346,618 29,065,274
Gregory M. Schmidt............ 1,654,896 $ -- 3/3/08 2,697,480 4,286,181
1,185,104 $0.71 3/3/08 1,091,720 2,229,419
923,500 $1.00 9/30/08 581,805 1,468,365
3,763,500 7.6% 4,371,005 7,983,965
Paul Karpowicz................ 1,745,708 $ -- 3/3/08 2,845,504 4,521,384
1,594,292 $0.53 3/3/08 1,758,696 3,289,216
923,500 $1.00 9/30/08 581,805 1,468,365
---------- ---- --------------------------
4,263,500 8.6% 5,186,005 9,278,965
Deborah R. Jacobson........... 1,000,000 $ -- 3/3/08 1,630,000 2,590,000
590,000 $1.00 3/3/08 371,700 938,100
648,700 $1.00 9/30/08 408,681 1,031,433
---------- ---- --------------------------
2,238,700 4.5% 2,410,381 4,559,533
Peter E. Maloney.............. 1,226,318 $ -- 3/3/08 1,998,898 3,176,164
863,682 $0.68 3/3/08 817,802 1,646,936
648,700 $1.00 9/30/08 408,681 1,031,433
---------- ---- --------------------------
2,738,700 5.5% 3,225,381 5,854,533
C. Robert Ogren Jr............ 500,000 $ -- 3/3/08 815,000 1,295,000
590,000 $1.00 3/3/08 371,700 938,100
648,700 $1.00 9/30/08 408,681 1,031,433
---------- ---- --------------------------
1,738,700 $3.5% 1,595,381 3,264,533
</TABLE>
(a) The dollar amounts set forth under these columns are the result of
calculations at the 5% and 10% assumed rates set forth by the SEC and
therefore are not intended to forecast possible future appreciation, if
any, of the Company's Common Stock price. The assumed annual rates of
appreciation would result in the Company's stock increasing to $1.62 and
$2.59, respectively, from a base price of $1.00.
(b) All options granted to the named executive become exercisable for shares of
common stock of Ranger Equity Holdings Corporation ("Ranger") have vesting
terms of four to five years and have an option term of ten years. In the
event of a change in control, the name executive officers may surrender
their vested options to the Company in exchange for a cash payment. See "--
Employment Contracts and Termination and Change in Control Arrangements."
91
<PAGE> 94
The following table discloses, for the Named Executive Officers, individual
excercises of options during the year ended December 31, 1998, and the number
and values of the options held by such named executive officer at December 31,
1998.
AGGREGATE EXERCISES DURING THE 1998 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Value of Value of
Underlying Shares Underlying Exercised In-the- Unexerciseable
Exerciseable Unexerciseable Money Options in-the-Money
Shares Acquired Value Options At Fiscal Options At Fiscal at Fiscal Options at Fiscal
Name on Execise(#) Realized($) Year End(#) Year End(#) Year End($) Year End ($)
- ---- --------------- ----------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Gary R. Chapman ......... 217,556 7,178,565 5,285,582 7,963,018 5,506,274 8,295,502
Gregory M. Schmidt ...... 68,460 1,722,881 1,654,896 2,108,604 1,723,994 2,196,646
Paul Karpowicz .......... 63,842 1,965,309 1,745,708 2,517,792 1,818,598 2,622,919
Deborah R. Jacobson ..... 71,707 1,788,569 1,000,000 1,238,700 1,041,754 1,290,420
Peter E. Maloney ........ 54,835 1,716,101 1,226,318 1,512,382 1,277,521 1,575,529
C. Robert Ogren Jr ...... 87,366 2,437,960 500,000 1,238,700 520,877 1,290,420
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock Option Plan:
The Company participates in the Ranger Equity Holdings Corporation 1998
Stock Option Plan (the "1998 Option Plan"). Pursuant to the 1998 Option Plan
nonqualified options have been granted to certain directors, officers and key
employees of the Company. Prior to March 2, 1998, nonqualified options were
granted to directors, officers and key employees of the Company pursuant to the
LIN Television Corporation 1994 Adjustment Stock Incentive Plan, the Amended
and Restated 1994 Stock Incentive Plan and the 1994 Nonemployee Director Stock
Incentive each of which were terminated and all options granted under each were
exercised or cancelled on March 2, 1998.
Options granted pursuant to the 1998 Option Plan are generally not
exercisable until one year after grant, have vesting terms of four to five years
and expire ten years from the date of grant.
Retirement Plans
The Company maintains a Defined Benefit Retirement Plan (the "Pension
Plan"), a Supplemental Benefit Retirement Plan and a 401(K) Plan, each of which
covers certain employees of the Company and its subsidiaries.
The following table shows the estimated annual retirement benefits
payable under the Pension Plan and the Company's Supplemental Benefit Retirement
Plan as an annuity for life upon normal retirement for specified compensation
and years of credited service classifications, assuming retirement at age 65 on
December 31, 1998. Benefits are computed by multiplying (i) 1.25% of the
employee's average annual compensation (salary and bonus, excluding option gains
and benefits or payments received under any other benefit plan for the three
consecutive years producing the highest average) times (ii) the employee's
number of years of credited service, up to a maximum of 32 years. Sections 401
(a) (17) and 415 of the Internal Revenue Code of 1986, as amended, (the"Code"),
limit the annual benefits that may be paid from a tax qualified retirement plan
such as the Pension Plan and the Supplemental Benefit Retirement Plan. As
permitted by the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Company's
92
<PAGE> 95
Supplemental Benefit Retirement Plan authorizes the payment out of the Company's
general funds of any benefits calculated under the provisions of the Pension
Plan that may be above the limits of Sections 401 (a)(17) and 415 of the Code.
PENSION TABLE
<TABLE>
<CAPTION>
Three Year
Average Annual
Compensation Years of Credited Service
- -------------- ---------------------------------------------------------------
10 15 20 25 30 32
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
70,000 8,750 13,125 17,500 21,875 26,250 28,000
100,000 12,500 18,750 25,000 31,250 37,500 40,000
150,000 18,750 28,125 37,500 46,875 56,250 60,000
200,000 25,000 37,500 50,000 62,500 75,000 80,000
300,000 37,500 56,250 75,000 93,750 112,500 120,000
400,000 50,000 75,000 100,000 125,000 150,000 160,000
500,000 62,500 93,750 125,000 156,250 187,500 200,000
750,000 93,750 140,625 187,500 234,375 281,250 300,000
</TABLE>
As of December 31, 1998, Mr. Chapman had ten years of credited service
under the Pension Plan, Mr. Karpowicz had nine and 1/2 years of credited
service, Mr. Schmidt had four years of credited service under the Pension Plan,
Mr. Maloney had fifteen years of credited service under the Pension Plan, and
Mr. Ogren had nine years of credited service. Mr. Karpowicz's several years of
employment with the Company in the late 1970s do not qualify as years of
credited service under the terms of the Pension Plan. Benefit amounts under the
Pension Plan are not subject to any deduction for Social Security benefits or
other offset amounts.
EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE IN CONTROL ARRANGEMENTS
Employment Agreement with Gary Chapman. The Company has an employment
agreement with Mr. Chapman. The employment agreement provides for
(i) a term that ends on December 31, 1999,
(ii) a minimum annual salary of $475,000, and
(iii) a target bonus of at least $150,000.
The agreement also provides for option grants, participation in certain of the
Company's benefit programs, additional severance benefits upon termination
without cause, and the vesting of unvested options in the event of certain
changes in control of the Company.
Severance Compensation Agreements. The Company has entered into
Severance Compensation Agreements with Mr. Chapman and the other Named Executive
Officers of the Company. Under such agreements, if employment is terminated
other than for cause (as defined in the Severance Compensation Agreements), the
employee is entitled to certain severance benefits in addition to any
compensation otherwise payable. Such severance benefits include a lump sum
payment designed to provide the equivalent to the sum of (i) an amount equal to
two times the employee's annual base salary on the Date of Termination (as
defined in the Severance Compensation Agreements); (ii) an amount equal to two
times the bonus compensation paid to the employee with respect to the last
complete fiscal year; and (iii) the present value as of the Date of Termination,
of the sum of (a) all benefits which have accrued to the employee but have not
vested under the LIN Television Corporation Retirement Plan as of the Date of
Termination and (b) all additional benefits which would have accrued to the
employee under the Retirement Plan if the employee had continued to be employed
by the Company on the same terms the employee was employed on the Date of
Termination. In addition to such cash payments, the employee is entitled to
life, health and disability and accident insurance benefits substantially
similar to those which
93
<PAGE> 96
the employee was receiving prior to the Notice of Termination (as defined in the
Severance Compensation Agreements)(or, if greater, immediately prior to a Change
in Control, as defined in the Severance Compensation Agreements) for a period of
two years.
The Company expects to enter into continuing employment and severance
agreements with Mr. Chapman and the other named executive officers of the
Company.
Director Compensation
Directors of LIN Holdings and LIN Television, who are also employees of
LIN Television, LIN Holdings or Hicks Muse serve without additional
compensation. At present there are no independent directors of LIN Television or
LIN Holdings.
Compensation Committee Interlocks and Insider Participation
In 1998 the respective boards of directors of LIN Holdings and LIN
Television appointed Messrs. Levitt, Metropoulos and Neuman to the Compensation
Committee for each company, of which Mr. Levitt acts as chairman. Messrs. Levitt
and Neuman are Vice Presidents of LIN Holdings and LIN Television and Mr. Levitt
is a principal of Hicks Muse, which through its affiliates controls
approximately 74.7% of the outstanding common stock of Ranger. An affiliate of
Hicks Muse is a party to the Monitoring and Oversight Agreement and the
Financial Advisory Agreement, each as defined in "Item 13. Certain Relationships
and Related Transactions." Messrs. Hicks, Levitt and Neuman serve as directors
of Chancellor and Mr. Neuman served as a Senior Vice President of Strategic
Development of Chancellor in 1998. The Company leases an aircraft to Chancellor
under a lease agreement which expires in October 1999. Special Services Delaware
B, Inc., an indirect subsidiary of Ranger and a company in which the Company
owns a 25% interest leases a second aircraft to Chancellor pursuant to a lease
which expires in November 2003. See "Item 13. Certain Relationships and Related
Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
LIN Television has 1,000 shares of common stock, par value $.01 per
share, issued and outstanding, all of which are owned by LIN Holdings. LIN
Holdings has 1,000 shares of common stock, par value $0.01 per share, issued and
outstanding, 630 of which are owned by Ranger B and 370 of which are owned by
Ranger Equity Holdings A Corp. All of the shares of capital stock of Ranger
Equity Holdings A Corp. and Ranger B are held by Ranger, which is controlled by
a limited partnership controlled by a limited liability company which is in turn
controlled by Thomas O. Hicks. For a description of the relationship between
Hicks Muse and the Company, see "Item 13. Certain Relationships and Related
Transactions."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Acquisition, LIN Holdings, LIN Television and
certain of their respective affiliates (collectively, the "Clients") entered
into a ten-year agreement (the "Monitoring and Oversight Agreement") with Hicks,
Muse & Co. Partners, L.P., ("Hicks Muse Partners"), an affiliate of Hicks Muse,
pursuant to which the Clients agreed to pay Hicks Muse Partners an annual fee
(payable quarterly) for oversight and monitoring services to the Clients. The
aggregate annual fee is adjustable on January 1 of each calendar year to an
amount equal to 1.0% of the budgeted consolidated annual earnings before
interest, tax, depreciation and amortization ("EBITDA") of LIN Holdings and its
subsidiaries for the then current fiscal year. Upon the acquisition by LIN
Holdings and its subsidiaries of another entity or business, the fee shall be
adjusted prospectively in the same manner using the pro forma consolidated
annual EBITDA of LIN Holdings and it subsidiaries. In no event shall the annual
fee be less than
94
<PAGE> 97
$1,000,000. Hicks Muse Partners is also entitled to reimbursement for any
expenses incurred by it in connection with rendering services allocable to LIN
Holdings and LIN Television.
The Clients, jointly and severally, have agreed to indemnify Hicks Muse
Partners, its affiliates, and their respective directors, officers, controlling
persons, agents and employees from and against all claims, liabilities, losses,
damages, expenses and fees related to or arising out of or in connection with
the services rendered by Hicks Muse Partners under the Monitoring and Oversight
Agreement and not resulting primarily from the bad faith, gross negligence, or
willful misconduct of Hicks Muse Partners. The Monitoring and Oversight
Agreement makes available the resources of Hicks Muse Partners concerning a
variety of financial and operational matters. LIN Holdings and LIN Television do
not believe that the services that have been and will continue to be provided to
them by Hicks Muse Partners could otherwise be obtained by them without the
addition of personnel or the engagement of outside professional advisors. In the
opinion of LIN Holdings and LIN Television, the fees provided for under the
Monitoring and Oversight Agreement reasonably reflect the benefits received and
to be received by LIN Holdings and LIN Television.
In connection with the Acquisition, the Clients also entered into a
ten-year agreement (the "Financial Advisory Agreement") with Hicks Muse
Partners, pursuant to which Hicks Muse Partners received a financial advisory
fee at the closing of the Acquisition as compensation for its services as
financial advisor to the Clients in connection with the Acquisition. Hicks Muse
Partners also is entitled to receive a fee equal to 1.5% of the "transaction
value" (as defined below) for each "subsequent transaction" (as defined below)
in which a Client is involved. The term "transaction value" means the total
value of the subsequent transaction including without limitation, the aggregate
amount of the funds required to complete the subsequent transaction (excluding
any fees payable pursuant to the Financial Advisory Agreement), including the
amount of any indebtedness, preferred stock or similar obligations assumed (or
remaining outstanding). The term "subsequent transaction" means any future
proposal for a tender offer, acquisition, sale, merger, exchange offer,
recapitalization, restructuring or other similar transaction directly involving
LIN Holdings or any of its subsidiaries, and any other person or entity.
In addition, the Clients, jointly and severally, have agreed to
indemnify Hicks Muse Partners, its affiliates, and their respective directors,
officers, controlling persons, agents and employees from and against all claims,
liabilities, losses, damages, expenses and fees related to or arising out of or
in connection with the services rendered by Hicks Muse Partners under the
Financial Advisory Agreement and not resulting primarily from the bad faith,
gross negligence, or willful misconduct of Hicks Muse Partners. The Financial
Advisory Agreement makes available the resources of Hicks Muse Partners
concerning a variety of financial and operation matters. LIN Holdings and LIN
Television do not believe that the services that will be provided by Hicks Muse
Partners could otherwise be obtained by them without the addition of personnel
or engagement of outside professional advisors. In the opinion of LIN Holdings
and LIN Television, the fees provided for under the Financial Advisory Agreement
reasonably reflect the benefits received and to be received by LIN Holdings and
LIN Television.
The Company leases an aircraft to Chancellor pursuant to a lease
agreement that expires in October 1999 and which calls for monthly rent payments
of $60,000 to the Company. As of December 31, 1998 Chancellor owed the Company
approximately $60,000 with respect to this lease. Special Services Delaware B,
Inc. ("SSDB"), an indirect subsidiary of Ranger and a company in which the
Company owns a 25% interest, leases a second aircraft to Chancellor pursuant to
a lease which expires in November 2003.
The Company has a pending agreement to a sell its KXTX-TV to SSG, an
entity in which Thomas O. Hicks has substantial ownership interest (See Item 1 -
Business, Pending Transaction -- KXTX-TV Disposition.) KXTX-TV currently holds
the broadcast rights to the Texas Rangers Baseball games, a team in which Thomas
O. Hicks also has a substantial ownership interest and Jeffrey A. Marcus is a
co-owner. Pursuant to contracts negotiated prior to Mr. Hicks acquisition of the
Texas Rangers, the Company is obligated to pay approximately $10.0 million to
the Texas Rangers for such broadcast rights.
95
<PAGE> 98
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. The financial statements of LIN Holdings Corp.
and LIN Television Corporation are set forth under Item 8 herein and are
incorporated herein by reference.
(a) (2) Financial Statement Schedules. The financial statement schedules of LIN
Holdings Corp. and LIN Television Corporation are set forth on pages F1
through F4 hereto and are incorporated herein by reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by LIN Holdings
Corp. or LIN Television Corporation during the fourth quarter ended
December 31, 1998.
(c) Exhibits:
Exhibit
Number Description
- ------- -----------
2.1 -- Agreement and Plan of Merger among Ranger Holdings Corp., Ranger
Acquisition Company and LIN Television Corporation dated as of
August 12, 1997, as amended as of October 21, 1997. (1)
3.1.1 -- Certificate of Incorporation of LIN Holdings Corp. (formerly known
as Ranger Holdings Corp.). (1)
3.1.2 -- Certificate of Amendment of Certificate of Incorporation of LIN
Holdings Corp. (formerly known as Ranger Holdings Corp). (1)
3.2 -- Bylaws of LIN Holdings Corp. (1)
3 3 -- Restated Certificate of Incorporation of LIN Television
Corporation. (1)
3.4 -- Restated Bylaws of LIN Television Corporation. (1)
4.1 -- Indenture, dated as of March 3, 1998, among LIN Acquisition Company,
the Guarantors named therein, and United States Trust Company of New
York, as Trustee, relating to the Senior Subordinated Notes.(1)
4.2 -- Indenture, dated as of March 3, 1998, among LIN Holdings Corp. and
United States Trust Company of New York, as Trustee, relating to the
Senior Discount Notes.(1)
10.1 -- Credit Agreement, dated as of March 3, 1998, among LIN Holdings
Corp., LIN Television Corporation, the lenders party thereto, The
Chase Manhattan Bank, as Administrative Agent, Issuing Lender and
Swingline Lender, the Bank of New York, as Syndication Agent, and
National Westminster Bank PLC, as Documentation Agent.(1)
10.2 -- Guarantee and Collateral Agreement, dated as of March 3, 1998, made
by LIN Holdings Corp., LIN Acquisition Company, LIN Television
Corporation and the Guarantors named herein, in favor of The Chase
Manhattan Bank, as Administrative Agent.(1)
10.3 -- Monitoring and Oversight Agreement, dated as of March 3, 1998, among
LIN Television Corporation, LIN Holdings Corp., Ranger Equity
Holdings Corporation, Ranger Equity Holdings A Corp., Ranger Equity
Holdings B Corp. and Hicks, Muse & Co. Partners, L.P.(1)
10.4 -- Financial Advisory Agreement, dated as of March 3, 1998, among LIN
Television Corporation, LIN Holdings Corp., Ranger Equity Holdings
Corporation, Ranger Equity Holdings A Corp., Ranger Equity Holdings
B Corp. and Hicks, Muse & Co. Partners, L.P.(1)
10.5 -- Amended and Restated Transaction Agreement, dated as of January 22,
1998, between National Broadcasting Company, Inc., Outlet
Broadcasting, Inc., LIN Television of Texas, L.P., LIN Television
Corporation, Station Venture Holdings, LLC, Station Venture
Operations, LP, and Ranger Holdings Corp.(1)
96
<PAGE> 99
Exhibit
Number Description
- ------- -----------
10.6 -- Asset Purchase Option Agreement, dated as of March 3, 1998, among
LIN Holdings Corp. and Birmingham Broadcasting (WVTM TV), Inc. and
joined in by National Broadcasting Company, Inc. for the sole
purpose of Article 12.(1)
10.7 -- Asset Purchase Agreement, dated as of August 12, 1997, among LIN
Holdings Corp., LIN Television Corporation, LIN Broadcasting
Corporation, LIN Michigan Broadcasting Corporation and LCH
Communications, Inc.(1)
10.8 -- Television Affiliation Agreement for WAND-TV with American
Broadcasting Companies, Inc., dated February 8, 1990, as amended.(2)
10.9 -- Television Affiliation Agreement for WANE-TV with CBS, Inc., dated
November 1, 1992. (2)
10.10 -- Television Affiliation Agreement for WISH-TV with CBS, Inc., dated
November 1, 1992, as amended. (2)
10.11 -- Television Affiliation Agreement for WTNH-TV with American
Broadcasting Companies, Inc., dated February 17, 1993, as
amended.(2)
10.12 -- Television Affiliation Agreement for WIVB-TV with CBS, Inc., dated
December 4, 1992.(1)
10.13.1 -- Television Affiliation Agreement for KXAN-TV with National
Broadcasting Company, Inc., dated April 12, 1995.(3)
10.13.2 -- Amendment to Television Affiliation Agreement for KXAN-TV with
National Broadcasting Company, Inc., dated March 2, 1998.(1)
10.14.1 -- Television Affiliation Agreement for WOOD-TV with National
Broadcasting Company, Inc., dated April 12, 1995.(3)
10.14.2 -- Amendment to Television Affiliation Agreement for WOOD-TV with
National Broadcasting Company, Inc., dated March 2, 1998.(1)
10.15.1 -- Television Affiliation Agreement for WAVY-TV with National
Broadcasting Company, Inc., dated April 12, 1995.(3)
10.15.2 -- Amendment to Television Affiliation Agreement for WAVY-TV with
National Broadcasting Company, Inc., dated March 2, 1998.(1)
10.16 -- Severance Compensation Agreement dated as of September 5, 1996,
between LIN Television Corporation and Gary R. Chapman.(3)+
10.17 -- Employment Agreement dated as of September 5, 1996, between LIN
Television Corporation and Gary R. Chapman.(4)+
10.18 -- Severance Compensation Agreement dated as of September 5, 1996,
between LIN Television Corporation and Paul Karpowicz.(4)+
10.19 -- Severance Compensation Agreement dated as of September 5, 1996,
between LIN Television Corporation and C. Robert Ogren, Jr.(4)+
10.20 -- Severance Compensation Agreement dated as of September 5, 1996,
between LIN Television Corporation and Gregory M. Schmidt.(4)+
10.21 -- Severance Compensation Agreement dated as of September 5, 1996,
between LIN Television Corporation and Peter E. Maloney.(1)+
10.22 -- LIN Television Corporation Amended and Restated 1994 Stock Incentive
Plan.(2)+
10.23 -- Supplemental Benefit Retirement Plan of LIN Television Corporation
and Subsidiary Companies, as amended and restated.(2)+
10.24 -- LIN Television Corporation Retirement Plan, as amended and
restated.(2)+
10.25 -- LIN Television Corporation 401 (k) Plan and Trust. (2)+
10.26 -- Ranger Equity Holdings Corporation 1998 Stock Option Plan. +*
97
<PAGE> 100
10.27 -- Agreement and Plan of Merger dated as of July 7, 1998, between
Chancellor Media Corporation and Ranger Equity Holdings
Corporation.(5)
21.1 -- Subsidiaries of the Registrants.(1)
27.1 -- Financial Data Schedule for LIN Holdings Corp.*
27.2 -- Financial Data Schedule for LIN Television Corporation.*
+ Management contract or compensatory plan or arrangement.
* Filed herewith.
(1.) Incorporated by reference to the Registration Statement on Form S-1 of LIN
Holdings Corp. and LIN Television Corporation, dated May 29, 1998, File
No. 333-54003.
(2.) Incorporated by reference to the Registration Statement on Form S-1 of LIN
Broadcasting Corporation, dated October 4, 1994, File No. 33-84718.
(3.) Incorporated by reference to the Quarterly Report on Form 10-Q of LIN
Television Corporation for the fiscal quarter ended March 31, 1995, File
No. 0-2481.
(4.) Incorporated by reference to the Quarterly Report on form 10-Q of LIN
Television Corporation for the fiscal quarter ended September 30, 1996,
File No. 0-25206.
(5.) Incorporated by reference to the Registration Statement on Form S-1/A of
LIN Holdings Corp. and LIN Television Corporation, dated August 7, 1998,
File No. 333-54003.
98
<PAGE> 101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of LIN Holdings Corp. and LIN Television Corporation,
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LIN HOLDINGS CORP.
LIN TELEVISION CORPORATION
By: /s/ Gary R. Chapman
-------------------------------------
Gary R. Chapman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of each of LIN Holdings Corp.
and LIN Television Corporation in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Gary R. Chapman President, Chief Executive Officer, 3/31/99
- --------------------------- and Director (Principal Executive
Gary R. Chapman Officer)
/s/ Peter E. Maloney Vice President of Finance 3/31/99
- --------------------------- (Principal Financial Officer)
Peter E. Maloney
/s/ Thomas O. Hicks Chairman of the Board 3/31/99
- --------------------------- of Directors
Thomas O. Hicks
/s/ Michael J. Levitt Director 3/31/99
- ---------------------------
Michael J. Levitt
/s/ John R. Muse Director 3/31/99
- ---------------------------
John R. Muse
/s/ Jeffrey A. Marcus Director 3/31/99
- ---------------------------
Jeffrey A. Marcus
/s/ C. Dean Metropoulos Director 3/31/99
- ---------------------------
C. Dean Metropoulos
/s/ Eric C. Neuman Director 3/31/99
- ---------------------------
Eric C. Neuman
99
<PAGE> 102
Schedule I - Condensed Financial Information of the Registrant
LIN HOLDINGS CORP.
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Other current assets $ -- $ 1
Deferred financing costs 11,712 --
Other noncurrent assets 6,300 --
Investment in wholly-owned subsidiaries 744,977 --
-------- ----
TOTAL ASSETS $762,989 $ 1
======== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt 216,565 --
-------- ----
Total liabilities 216,565 --
-------- ----
Stockholders' equity:
Additional paid-in capital 558,123 1
Accumulated deficit (11,699) --
-------- ----
Total stockholders' equity 546,424 1
-------- ----
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $762,989 $ 1
======== ====
</TABLE>
F-1
<PAGE> 103
Schedule I - Condensed Financial Information of the Registrant
LIN HOLDINGS CORP.
Condensed Statement of Operations
(In Thousands)
<TABLE>
<CAPTION>
March 3 - December 31
1998
---------------------
<S> <C>
Other expense:
Interest expense $ 17,999
--------
Total Other Expense 17,999
--------
Loss before benefit from income taxes (17,999)
Benefit from income taxes (6,300)
--------
Net loss $(11,699)
========
</TABLE>
F-2
<PAGE> 104
Schedule I - Condensed Financial Information of the Registrant
LIN HOLDINGS CORP.
Condensed Statements of Stockholders' Equity
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------- Treasury Paid-in Accumulated Stockholders'
Shares Amount Stock Capital Deficit Equity
------ ------ -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from issuance of common stock 1 $ -- $ -- $ 1 $ -- $ 1
----- ----- ----- -------- -------- --------
Balance at December 31, 1997 1 -- -- 1 -- 1
----- ----- ----- -------- -------- --------
Balance at March 2, 1998 1 -- -- 1 -- 1
Acquisition of LIN Television Corporation
and contribution of KXAS-TV to
joint venture -- -- -- 558,122 -- 558,122
Net loss -- -- -- -- (11,699) (11,699)
----- ----- ----- -------- -------- --------
Balance at December 31, 1998 1 $ -- $ -- $558,123 $(11,699) $546,424
===== ===== ===== ======== ======== ========
</TABLE>
F-3
<PAGE> 105
Schedule I - Condensed Financial Information of the Registrant
LIN HOLDINGS CORP.
Condensed Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
March 3 - December 31
1998
---------------------
<S> <C>
Investment in LIN Television Corporation $(744,977)
---------
NET CASH USED IN INVESTING ACTIVITIES (744,977)
---------
FINANCING ACTIVITIES:
Proceeds from long-term debt 199,631
Loan fees incurred on long-term debt (12,777)
Proceeds from capital contributions 558,123
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 744,977
---------
Net increase in cash and cash equivalents --
Cash and cash equivalents at the beginning of the period --
---------
Cash and cash equivalents at the end of the period $ --
=========
</TABLE>
F-4
<PAGE> 106
Schedule II - Valuation and Qualifying Accounts
LIN HOLDINGS CORP.
(In Thousands)
<TABLE>
<CAPTION>
Additions:
Balance at Charged to
Beginning of Costs and Other Balance at
Period Expensed Deductions Deductions End of Period
------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Period from March 3, 1998 to December 31, 1998:
Allowance for Doubtful Accounts ................. $1,988 $422 $431(1) $308(2) $1,671
Period for January 1, 1998 to December 31, 1998:
Allowance for Doubtful Accounts ................. $2,197 $133 $ 34(1) $308(2) $1,988
Year ended December 31, 1997 (Predecessor):
Allowance for Doubtful Accounts ................. $1,960 $971 $734(1) $ -- $2,197
Year ended December 31, 1996 (Predecessor):
Allowance for Doubtful Accounts ................. $1,964 $496 $500(1) $ -- $1,960
</TABLE>
- ----------
(1) Uncollected accounts written off, net of recoveries.
(2) Contribution of KXAS-TV to station joint venture.
F-5
<PAGE> 1
EXHIBIT 10.26
RANGER EQUITY HOLDINGS CORPORATION
1998 STOCK OPTION PLAN
1. PURPOSE.
Ranger Equity Holdings Corporation, a Delaware corporation
(herein, together with its successors, referred to as the "COMPANY"), by means
of this 1998 Stock Option Plan (the "PLAN"), desires to afford certain
individuals and key employees of the Company and any subsidiary corporation
thereof now existing or hereafter formed or acquired (such subsidiary
corporations sometimes referred to herein as "RELATED ENTITIES") who are
responsible for the continued growth of the Company an opportunity to acquire a
proprietary interest in the Company, and thus to create in such persons an
increased interest in and a greater concern for the welfare of the Company and
any Related Entities. The Plan supersedes and replaces the LIN Television
Corporation (i) Amended and Restated 1994 Stock Incentive Plan, (ii) 1994
Adjustment Stock Incentive Plan, and (iii) 1994 Nonemployee Director Stock
Incentive Plan, each of which has been terminated in its entirety and all
options granted under each have been cancelled.
The stock options described in Sections 6 and 7 (the
"OPTIONS"), and the shares of Common Stock (as hereinafter defined) acquired
pursuant to the exercise of such Options are a matter of separate inducement and
are not in lieu of any salary or other compensation for services. As used in the
Plan, the terms "parent corporation" and "subsidiary corporation" shall mean,
respectively, a corporation within the definition of such terms contained in
Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986,
as amended (the "CODE").
2. ADMINISTRATION.
The Plan shall be administered by the Compensation Committee
of the Board of Directors of the Company or by any other committee appointed by
the Board of Directors of the Company to administer this Plan (the "COMMITTEE");
PROVIDED, the entire Board of Directors of the Company (the "BOARD OF
DIRECTORS") may act as the Committee if it chooses to do so. The number of
individuals that shall constitute the Committee shall be determined from time to
time by a majority of all the members of the Board of Directors, and, unless
that majority of the Board of Directors determines otherwise, shall be no less
than two individuals. A majority of the Committee shall constitute a quorum (or
if the Committee consists of only two members, then both members shall
constitute a quorum), and subject to the provisions of Section 5, the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by all members of the Committee, shall be the acts of
the Committee. Whenever the Company shall have a class of equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), each member of the Committee shall be required to
be a "Non-Employee Director" within the meaning of
<PAGE> 2
Rule 16b-3, as amended ("RULE 16B-3"), or other applicable rules under Section
16(b) of the Exchange Act and the Committee shall administer the Plan so as to
comply at all times with the Exchange Act.
The members of the Committee shall serve at the pleasure of
the Board of Directors, which shall have the power, at any time and from time to
time, to remove members from or add members to the Committee. Removal from the
Committee may be with or without cause. Any individual serving as a member of
the Committee shall have the right to resign from membership in the Committee by
written notice to the Board of Directors. The Board of Directors, and not the
remaining members of the Committee, shall have the power and authority to fill
vacancies on the Committee, however caused. The Board of Directors shall
promptly fill any vacancy that causes the number of members of the Committee to
be below two or, if the Company has a class of equity securities registered
pursuant to Section 12 of the Exchange Act, any other number that Rule 16b-3 may
require from time to time.
3. SHARES AVAILABLE.
Subject to the adjustments provided in Section 10, the maximum
aggregate number of shares of common stock, par value $.01 per share, of the
Company ("COMMON STOCK") in respect of which Options may be granted for all
purposes under the Plan shall be 30,000,000 shares. If, for any reason, any
shares as to which Options have been granted cease to be subject to purchase
thereunder, including the expiration of such Option, the termination of such
Option prior to exercise, or the forfeiture of such Option, such shares shall
thereafter be available for grants under the Plan. Options granted under the
Plan may be fulfilled in accordance with the terms of the Plan with (i)
authorized and unissued shares of the Common Stock, (ii) issued shares of such
Common Stock held in the Company's treasury, or (iii) issued shares of Common
Stock reacquired by the Company in each situation as the Board of Directors or
the Committee may determine from time to time.
4. ELIGIBILITY AND BASES OF PARTICIPATION.
Grants of Incentive Options (as hereinafter defined) and
Non-Qualified Options (as hereinafter defined) may be made under the Plan,
subject to and in accordance with Section 6, to Key Employees. As used herein,
the term "KEY EMPLOYEE" shall mean any employee of the Company or any Related
Entity, including officers and directors of the Company or any Related Entity
who are also employees of the Company or any Related Entity, who are regularly
employed on a salaried basis and who are so employed on the date of such grant,
whom the Committee identifies as having a direct and significant effect on the
performance of the Company or any Related Entity.
Grants of Non-Qualified Options may be made, subject to and in
accordance with Section 7, to any Eligible Non-Employee. As used herein, the
term "ELIGIBLE NON-EMPLOYEE" shall mean any person or entity of any nature
whatsoever, specifically including an individual, a firm, a company, a
corporation, a partnership, a trust, or other entity (collectively, a "PERSON"),
that the Committee designates as eligible
2
<PAGE> 3
for a grant of Options pursuant to this Plan because such Person performs bona
fide consulting, advisory, or other services for the Company or any Related
Entity (other than services in connection with the offer or sale of securities
in a capital-raising transaction) and the Board of Directors or the Committee
determines that the Person has a direct and significant effect on the financial
development of the Company or any Related Entity.
The adoption of this Plan shall not be deemed to give any
Person a right to be granted any Options.
5. AUTHORITY OF COMMITTEE.
Subject to and not inconsistent with the express provisions of
the Plan, the Code and, if applicable, Rule 16b-3, the Committee shall have
plenary authority to:
a. determine the Key Employees and Eligible Non-Employees to whom
Options shall be granted, the time when such Options shall be
granted, the number of Options, the purchase price or exercise
price of each Option, the period(s) during which such Options
shall be exercisable (whether in whole or in part, including
whether such Options shall become immediately exercisable upon
the consummation of a Change in Control), the restrictions to
be applicable to Options and all other terms and provisions
thereof (which need not be identical);
b. require, as a condition to the granting of any Option, that
the Person receiving such Option agree not to sell or
otherwise dispose of such Option, any Common Stock acquired
pursuant to such Option, or any other "derivative security"
(as defined by Rule 16a-1(c) under the Exchange Act) for a
period of six months following the later of (i) the date of
the grant of such Option or (ii) the date when the exercise
price of such Option is fixed if such exercise price is not
fixed at the date of grant of such Option, or for such other
period as the Committee may determine;
c. provide an arrangement through registered broker-dealers
whereby temporary financing may be made available to an
optionee by the broker-dealer, under the rules and regulations
of the Board of Governors of the Federal Reserve, for the
purpose of assisting the optionee in the exercise of an
Option, such authority to include the payment by the Company
of the commissions of the broker-dealer;
d. provide the establishment of procedures for an optionee (i) to
have withheld from the total number of shares of Common Stock
to be acquired upon the exercise of an Option (other than an
Incentive Option) that number of shares having a Fair Market
Value which, together with such cash as shall be paid in
respect of fractional shares, shall equal the aggregate
exercise price under such Option for the number of shares then
being acquired (including the shares to be so withheld), and
(ii) to exercise a portion of an Option by delivering that
number of shares of Common
3
<PAGE> 4
Stock already owned by such optionee having an aggregate Fair
Market Value which shall equal the partial Option exercise
price and to deliver the shares thus acquired by such optionee
in payment of shares to be received pursuant to the exercise
of additional portions of such Option, the effect of which
shall be that such optionee can in sequence utilize such newly
acquired shares in payment of the exercise price of the entire
Option, together with such cash as shall be paid in respect of
fractional shares; PROVIDED, HOWEVER, that in the case of an
Incentive Option, no shares shall be used to pay the exercise
price unless such shares were not acquired through the
exercise of an Incentive Option or, if so acquired, have been
held for more than two years since the grant of such Option
and for more than one year since the exercise of such Option;
e. provide (in accordance with Section 13 or otherwise) the
establishment of a procedure whereby a number of shares of
Common Stock or other securities may be withheld from the
total number of shares of Common Stock or other securities to
be issued upon exercise of an Option (other than an Incentive
Option) to meet the obligation of withholding for income,
social security and other taxes incurred by an optionee upon
such exercise or required to be withheld by the Company or a
Related Entity in connection with such exercise;
f. prescribe, amend, modify and rescind rules and regulations
relating to the Plan;
g. make all determinations permitted or deemed necessary,
appropriate or advisable for the administration of the Plan,
interpret any Plan or Option provision, perform all other
acts, exercise all other powers, and establish any other
procedures determined by the Committee to be necessary,
appropriate, or advisable in administering the Plan or for the
conduct of the Committee's business. Any act of the Committee,
including interpretations of the provisions of the Plan or any
Option and determinations under the Plan or any Option shall
be final, conclusive and binding on all parties.
The Committee may delegate to one or more of its members, or
to one or more agents, such administrative duties as it may deem advisable, and
the Committee or any Person to whom it has delegated duties as aforesaid may
employ one or more Persons to render advice with respect to any responsibility
the Committee or such Person may have under the Plan; PROVIDED, HOWEVER, that
whenever the Company has a class of equity securities registered under Section
12 of the Exchange Act, the Committee may not delegate any duties to a member of
the Board of Directors who, if elected to serve on the Committee, would not
qualify as a "Non-Employee Director" to administer the Plan as contemplated by
Rule 16b-3, as amended, or other applicable rules under the Exchange Act. The
Committee may employ attorneys, consultants, accountants, or other Persons and
the Committee, the Company, and its officers and directors shall be entitled to
rely upon the advice, opinions, or valuations of any such Persons. No member or
agent of the
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Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan and all members and
agents of the Committee shall be fully protected by the Company in respect of
any such action, determination or interpretation.
6. STOCK OPTIONS FOR KEY EMPLOYEES.
Subject to the express provisions of this Plan, the Committee
shall have the authority to grant incentive stock options pursuant to Section
422 of the Code ("INCENTIVE OPTIONS"), to grant non-qualified stock options
(options which do not qualify under Section 422 of the Code) ("NON-QUALIFIED
OPTIONS"), and to grant both types of Options to Key Employees. No Incentive
Option shall be granted pursuant to this Plan after the earlier of ten years
from the date of adoption of the Plan or ten years from the date of approval of
the Plan by the stockholders of the Company. Incentive Options may be granted
only to Key Employees. The terms and conditions of the Options granted under
this Section 6 shall be determined from time to time by the Committee; PROVIDED,
HOWEVER, that the Options granted under this Section 6 shall be subject to all
terms and provisions of the Plan (other than Section 7), including the
following:
a. OPTION EXERCISE PRICE. Subject to Section 4, the Committee
shall establish the Option exercise price at the time any
Option is granted at such amount as the Committee shall
determine; PROVIDED, that, in the case of an Incentive Option,
such price shall not be less than the Fair Market Value per
share of Common Stock at the date the Option is granted; and
PROVIDED, FURTHER, that in the case of an Incentive Option
granted to a person who, at the time such Incentive Option is
granted, owns shares of the Company or any Related Entity
which possess more than 10% of the total combined voting power
of all classes of shares of the Company or of any Related
Entity, the option exercise price shall not be less than 110%
of the Fair Market Value per share of Common Stock at the date
the Option is granted. The Option exercise price shall be
subject to adjustment in accordance with the provisions of
Section 10 of the Plan.
b. PAYMENT. The price per share of Common Stock with respect to
each Option exercise shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other
means acceptable to the Committee, including delivery to the
Company of shares of Common Stock owned by the optionee or by
the delivery or withholding of shares pursuant to a procedure
created pursuant to Section 5.d. of the Plan (but, with
respect to Incentive Options, subject to the limitations
described in such Section 5.d.). Shares delivered to or
withheld by the Company in payment of the Option exercise
price shall be valued at the Fair Market Value of the Common
Stock on the day preceding the date of the exercise of the
Option.
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<PAGE> 6
c. EXERCISABILITY OF STOCK OPTION. Unless otherwise determined by
the Committee at the time of grant, stock options granted
hereunder shall become exercisable according to the vesting
schedule set forth below:
one-fifth of the shares of Common Stock underlying the stock option
grant shall become exercisable on the first anniversary of the date of
grant and remain exercisable until the stock option expires; and
one-fifth of the shares of Common Stock underlying the stock option
grant shall become exercisable on the second anniversary of the date of
grant and remain exercisable until the stock option expires; and
one-fifth of the shares of Common Stock underlying the stock option
grant shall become exercisable on the third anniversary of the date of
grant and remain exercisable until the stock option expires; and
one-fifth of the shares of Common Stock underlying the stock option
grant shall become exercisable on the fourth anniversary of the date of
grant and remain exercisable until the stock option expires; and
one-fifth of the shares of Common Stock underlying the stock option
grant shall become exercisable on the fifth anniversary of the date of
grant and remain exercisable until the stock option expires.
No Option by its terms shall be exercisable after the expiration of ten
years from the date of grant of the Option, unless, as to any
Non-Qualified Option, otherwise expressly provided in such Option;
PROVIDED, HOWEVER, that no Incentive Option granted to a person who, at
the time such Option is granted, owns stock of the Company, or any
Related Entity, possessing more than 10% of the total combined voting
power of all classes of stock of the Company, or any Related Entity,
shall be exercisable after the expiration of five years from the date
such Option is granted.
d. DEATH. If any optionee's employment with the Company or a
Related Entity terminates due to the death of such optionee,
the estate of such optionee, or a Person who acquired the
right to exercise such Option by bequest or inheritance or by
reason of the death of the optionee, shall have the right to
exercise such Option in accordance with its terms at any time
and from time to time within 180 days after the date of death
unless a longer or shorter period is expressly provided in
such Option or established by the Committee pursuant to
Section 8 (but in no event after the expiration date of such
Option).
e. DISABILITY. If the employment of any optionee terminates
because of his Disability (as defined in Section 18), such
optionee or his legal representative shall have the right to
exercise the Option in accordance with its terms at any time
and from time to time within 180 days after the date of such
termination unless a longer or shorter period is expressly
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<PAGE> 7
provided in such Option or established by the Committee
pursuant to Section 8 (but not after the expiration date of
the Option); PROVIDED, HOWEVER, that in the case of an
Incentive Option, the optionee or his legal representative
shall in any event be required to exercise the Incentive
Option within one year after termination of the optionee's
employment due to his Disability.
f. TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. Unless an
optionee's Option expressly provides otherwise, such optionee
shall immediately forfeit all rights under his Option, except
as to the shares of stock already purchased thereunder, if the
employment of such optionee with the Company or a Related
Entity is terminated by the Company or any Related Entity for
Good Cause (as defined below) or if such optionee voluntarily
terminates employment without the consent of the Company or
any Related Entity. The determination that there exists Good
Cause for termination shall be made by the Option Committee
(unless otherwise agreed to in writing by the Company and the
optionee).
g. OTHER TERMINATION OF EMPLOYMENT. If the employment of an
optionee with the Company or a Related Entity terminates for
any reason other than those specified in subsections 6(d), (e)
or (f) above, such optionee shall have the right to exercise
his Option in accordance with its terms, within 30 days after
the date of such termination, unless a longer or shorter
period is expressly provided in such Option or established by
the Committee pursuant to Section 8 (but not after the
expiration date of the Option); PROVIDED, that no Incentive
Option shall be exercisable more than three months after such
termination.
h. MAXIMUM EXERCISE. The aggregate Fair Market Value of stock
(determined at the time of the grant of the Option) with
respect to which Incentive Options are exercisable for the
first time by an optionee during any calendar year under all
plans of the Company and any Related Entity shall not exceed
$100,000.
i. CONTINUATION OF EMPLOYMENT. Each Incentive Option shall
require the optionee to remain in the continuous employ of the
Company or any Related Entity from the date of grant of the
Incentive Option until no more than three months prior to the
date of exercise of the Incentive Option.
7. Stock Option Grants to Eligible Non-
Employees. Subject to the express provisions of this Plan, the
Committee shall have the authority to grant Non-Qualified Options (and not
Incentive Options) to Eligible Non-Employees; PROVIDED, HOWEVER, that whenever
the Company has any class of equity securities registered pursuant to Section 12
of the Exchange Act, no Eligible Non-Employee then serving on the Committee (or
such other committee then administering the Plan) shall be granted Options
hereunder if the grant of such Options would cause such Eligible Non-Employee to
no longer be a "Non-Employee Director" as set forth in
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<PAGE> 8
Section 2 hereof. The terms and conditions of the Options granted under this
Section 7 shall be determined from time to time by the Committee; PROVIDED,
HOWEVER, that the Options granted under this Section 7 shall be subject to all
terms and provisions of the Plan (other than Section 6), including the
following:
a. OPTION EXERCISE PRICE. Subject to Section 4, the Committee
shall establish the Option exercise price at the time any
Non-Qualified Option is granted at such amount as the
Committee shall determine. The Option exercise price shall be
subject to adjustment in accordance with the provisions of
Section 10 of the Plan.
b. PAYMENT. The price per share of Common Stock with respect to
each Option exercise shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other
means acceptable to the Committee, including delivery to the
Company of shares of Common Stock owned by the optionee or by
the delivery or withholding of shares pursuant to a procedure
created pursuant to Section 5.d. of the Plan. Shares delivered
to or withheld by the Company in payment of the Option
exercise price shall be valued at the Fair Market Value of the
Common Stock on the day preceding the date of the exercise of
the Option.
c. EXERCISABILITY OF STOCK OPTION. Subject to Section 8, each
Option shall be exercisable in one or more installments as the
Committee may determine at the time of the grant. No Option
shall be exercisable after the expiration of ten years from
the date of grant of the Option, unless otherwise expressly
provided in such Option.
d. DEATH. If the retention by the Company or any Related Entity
of the services of any Eligible Non-Employee terminates
because of his death, the estate of such optionee, or a Person
who acquired the right to exercise such Option by bequest or
inheritance or by reason of the death of the optionee, shall
have the right to exercise such Option in accordance with its
terms, at any time and from time to time within 180 days after
the date of death unless a longer or shorter period is
expressly provided in such Option or established by the
Committee pursuant to Section 8 (but in no event after the
expiration date of such Option).
e. DISABILITY. If the retention by the Company or any Related
Entity of the services of any Eligible Non-Employee terminates
because of his Disability, such optionee or his legal
representative shall have the right to exercise the Option in
accordance with its terms at any time and from time to time
within 180 days after the date of the optionee's termination
unless a longer or shorter period is expressly provided in
such Option or established by the Committee pursuant to
Section 8 (but not after the expiration of the Option).
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<PAGE> 9
f. TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. If the retention
by the Company or any Related Entity of the services of any
Eligible Non-Employee is terminated (i) for Good Cause, (ii)
as a result of removal of the optionee from office as a
director of the Company or of any Related Entity for cause by
action of the stockholders of the Company or such Related
Entity in accordance with the by-laws of the Company or such
Related Entity, as applicable, and the corporate law of the
jurisdiction of incorporation of the Company or such Related
Entity, or (iii) as a result of the voluntarily termination by
optionee of optionee's service without the consent of the
Company or any Related Entity, then such optionee shall
immediately forfeit his rights under his Option except as to
the shares of stock already purchased. The determination that
there exists Good Cause for termination shall be made by the
Option Committee (unless otherwise agreed to in writing by the
Company and the optionee).
g. OTHER TERMINATION OF RELATIONSHIP. If the retention by the
Company or any Related Entity of the services of any Eligible
Non-Employee terminates for any reason other than those
specified in subsections 7(d), (e) or (f) above, such optionee
shall have the right to exercise his or its Option in
accordance with its terms within 30 days after the date of
such termination, unless a longer or shorter period is
expressly provided in such Option or established by the
Committee pursuant to Section 8 (but not after the expiration
date of the Option).
h. INELIGIBILITY FOR OTHER GRANTS. Any Eligible Non-Employee who
receives an Option pursuant to this Section 7 shall be
ineligible to receive any Options under any other Section of
the Plan.
8. CHANGE OF CONTROL.
If (i) a Change of Control shall occur, (ii) the Company shall
enter into an agreement providing for a Change of Control, or (iii) any member
of the HMC Group shall enter into an agreement providing for a Change in
Control, then the Committee may declare any or all Options outstanding under the
Plan to be exercisable in full at such time or times as the Committee shall
determine, notwithstanding the express provisions of such Options. Each Option
accelerated by the Committee pursuant to the preceding sentence shall terminate,
notwithstanding any express provision thereof or any other provision of the
Plan, on such date (not later than the stated exercise date) as the Committee
shall determine.
9. PURCHASE OPTION.
a. Except as otherwise expressly provided in any particular
Option, if (i) any optionee's employment (or, in the case of
any Option granted under Section 7, the optionee's
relationship) with the Company or a Related Entity terminates
for any reason at any time or (ii) a Change of Control occurs,
the Company and/or its designee(s) shall have the option (the
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<PAGE> 10
"PURCHASE OPTION") to purchase, and if the option is
exercised, the optionee (or the optionee's executor or the
administrator of the optionee's estate, in the event of the
optionee's death, or the optionee's legal representative in
the event of the optionee's incapacity, or the optionee's
transferee in the event of a sale, exchange or other
disposition of shares of Common Stock (hereinafter,
collectively with such optionee, the "GRANTOR")) shall sell to
the Company and/or its assignee(s), all or any portion (at the
Company's option) of the shares of Common Stock and/or Options
held by the Grantor (such shares of Common Stock and Options
collectively being referred to as the "PURCHASABLE SHARES").
b. The Company shall give notice in writing to the Grantor of the
exercise of the Purchase Option within one year from the date
of the termination of the optionee's employment or engagement
or such Change of Control. Such notice shall state the number
of Purchasable Shares to be purchased and the determination of
the Board of Directors of the Fair Market Value per share of
such Purchasable Shares. If no notice is given within the time
limit specified above, the Purchase Option shall terminate.
c. The purchase price to be paid for the Purchasable Shares
purchased pursuant to the Purchase Option shall be, in the
case of any Common Stock, the Fair Market Value per share as
of the date of the notice of exercise of the Purchase Option
times the number of shares being purchased, and in the case of
any Option, the Fair Market Value per share times the number
of vested shares subject to such Option which are being
purchased, less the applicable per share Option exercise
price. The purchase price shall be paid in cash. The closing
of such purchase shall take place at the Company's principal
executive offices within ten days after the purchase price has
been determined. At such closing, the Grantor shall deliver to
the purchaser(s) the certificates or instruments evidencing
the Purchasable Shares being purchased, duly endorsed (or
accompanied by duly executed stock powers) and otherwise in
good form for delivery, against payment of the purchase price
by check of the purchaser(s). In the event that,
notwithstanding the foregoing, the Grantor shall have failed
to obtain the release of any pledge or other encumbrance on
any Purchasable Shares by the scheduled closing date, at the
option of the purchaser(s) the closing shall nevertheless
occur on such scheduled closing date, with the cash purchase
price being reduced to the extent of all unpaid indebtedness
for which such Purchasable Shares are then pledged or
encumbered.
d. To assure the enforceability of the Company's rights under
this Paragraph 9, each certificate or instrument representing
Common Stock or an Option held by him or it shall bear a
conspicuous legend in substantially the following form:
"THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE
PURSUANT TO THIS
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AGREEMENT] ARE SUBJECT TO AN OPTION TO REPURCHASE PROVIDED
UNDER THE PROVISIONS OF THE COMPANY'S 1998 STOCK OPTION PLAN
AND A STOCK OPTION AGREEMENT ENTERED INTO PURSUANT THERETO. A
COPY OF SUCH OPTION PLAN AND OPTION AGREEMENT ARE AVAILABLE
UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE
OFFICES."
The Company's rights under this Section 9 shall terminate upon
the consummation of a Qualifying Public Offering.
10. ADJUSTMENT OF SHARES.
Unless otherwise expressly provided in a particular Option, in
the event that, by reason of any merger, consolidation, combination,
liquidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares or
other like change in capital structure of the Company (collectively, a
"REORGANIZATION"), the Common Stock is substituted, combined, or changed into
any cash, property, or other securities, or the shares of Common Stock are
changed into a greater or lesser number of shares of Common Stock, the number
and/or kind of shares and/or interests subject to an Option and the per share
price or value thereof shall be appropriately adjusted by the Committee to give
appropriate effect to such Reorganization. Any fractional shares or interests
resulting from such adjustment shall be eliminated. Notwithstanding the
foregoing, (i) each such adjustment with respect to an Incentive Option shall
comply with the rules of Section 424(a) of the Code, and (ii) in no event shall
any adjustment be made which would render any Incentive Option granted hereunder
other than an "incentive stock option" for purposes of Section 422 of the Code.
In the event the Company is not the surviving entity of a
Reorganization and, following such Reorganization, any optionee will hold
Options issued pursuant to this Plan which have not been exercised, cancelled,
or terminated in connection therewith, the Company shall cause such Options to
be assumed (or cancelled and replacement Options issued) by the surviving entity
or a Related Entity.
11. ASSIGNMENT OR TRANSFER.
Except as otherwise expressly provided in any Nonqualified
Option, no Option granted under the Plan or any rights or interests therein
shall be assignable or transferable by an optionee except by will or the laws of
descent and distribution, and during the lifetime of an optionee, Options
granted to him or her hereunder shall be exercisable only by the optionee or, in
the event that a legal representative has been appointed in connection with the
Disability of an optionee, such legal representative.
12. COMPLIANCE WITH SECURITIES LAWS.
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<PAGE> 12
The Company shall not in any event be obligated to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") or any applicable state securities law to permit exercise of
any Option or to issue any Common Stock in violation of the Securities Act or
any applicable state securities law. Each optionee (or, in the event of his
death or, in the event a legal representative has been appointed in connection
with his Disability, the Person exercising the Option) shall, as a condition to
his right to exercise any Option, deliver to the Company an agreement or
certificate containing such representations, warranties and covenants as the
Company may deem necessary or appropriate to ensure that the issuance of shares
of Common Stock pursuant to such exercise is not required to be registered under
the Securities Act or any applicable state securities law.
Certificates for shares of Common Stock, when issued, may have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED
FOR SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE
ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH
OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT
VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Common Stock
issued pursuant to an effective registration statement under the Securities Act
and in accordance with applicable state securities laws.
13. WITHHOLDING TAXES.
By acceptance of the Option, the optionee will be deemed to
(i) agree to reimburse the Company or Related Entity by which the optionee is
employed for any federal, state, or local taxes required by any government to be
withheld or otherwise deducted by such corporation in respect of the optionee's
exercise of all or a portion of the Option; (ii) authorize the Company or any
Related Entity by which the optionee is employed to withhold from any cash
compensation paid to the optionee or in the optionee's behalf, an amount
sufficient to discharge any federal, state, and local taxes imposed on the
Company, or the Related Entity by which the optionee is employed, and which
otherwise has not been reimbursed by the optionee, in respect of the optionee's
exercise of all or a portion of the Option; and (iii) agree that the Company
may, in its discretion, hold the stock certificate to which the optionee is
entitled upon exercise of the Option as security for the payment of the
aforementioned withholding tax liability, until
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<PAGE> 13
cash sufficient to pay that liability has been accumulated, and may, in its
discretion, effect such withholding by retaining shares issuable upon the
exercise of the Option having a Fair Market Value on the date of exercise which
is equal to the amount to be withheld.
14. COSTS AND EXPENSES.
The costs and expenses of administering the Plan shall be
borne by the Company and shall not be charged against any Option nor to any
employee receiving an Option.
15. FUNDING OF PLAN.
The Plan shall be unfunded. The Company shall not be required
to make any segregation of assets to assure the payment of any Option under the
Plan.
16. OTHER INCENTIVE PLANS
The adoption of the Plan does not preclude the adoption by
appropriate means of any other incentive plan for employees.
17. EFFECT ON EMPLOYMENT.
Nothing contained in the Plan or any agreement related hereto
or referred to herein shall affect, or be construed as affecting, the terms of
employment of any Key Employee except to the extent specifically provided herein
or therein. Nothing contained in the Plan or any agreement related hereto or
referred to herein shall impose, or be construed as imposing, an obligation on
(i) the Company or any Related Entity to continue the employment of any Key
Employee, and (ii) any Key Employee to remain in the employ of the Company or
any Related Entity.
18. DEFINITIONS.
In addition to the terms specifically defined elsewhere in the
Plan, as used in the Plan, the following terms shall have the respective
meanings indicated:
"AFFILIATE" shall mean, as to any Person, a Person that directly, or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person.
"BOARD OF DIRECTORS" shall have the meaning set forth in Section 2
hereof.
"CHANGE OF CONTROL" shall mean the first to occur of the following
events: (i) any sale, lease, exchange, or other transfer (in one
transaction or series of related transactions) of all or substantially
all of the assets of the Company to any Person or group of related
Persons for purposes of Section 13(d) of the Exchange Act, other than
one or more members of the HMC Group, (ii) a majority of the Board of
Directors of the Company shall consist of Persons who are not
Continuing
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Directors; or (iii) the acquisition by any Person or Group (other than
one or more members of the HMC Group) of the power, directly or
indirectly, to vote or direct the voting of securities having more than
50% of the ordinary voting power for the election of directors of the
Company.
"CODE" shall have the meaning set forth in Section 1 hereof.
"COMMITTEE" shall have the meaning set forth in Section 2 hereof.
"COMMON STOCK" shall have the meaning set forth in Section 3 hereof.
"COMPANY" shall have the meaning set forth in Section 1 hereof.
"CONTINUING DIRECTOR" shall mean, as of the date of determination, any
Person who (i) was a member of the Board of Directors of the Company on
the date of adoption of this Plan, (ii) was nominated for election or
elected to the Board of Directors of the Company with the affirmative
vote of a majority of the Continuing Directors who were members of such
Board of Directors at the time of such nomination or election, or (iii)
is a member of the HMC Group.
"DISABILITY" shall mean permanent disability as defined under the
appropriate provisions of the applicable long-term disability plan
maintained for the benefit of employees of the Company or any Related
Entity who are regularly employed on a salaried basis unless another
meaning shall be agreed to in writing by the Committee and the
optionee; PROVIDED, HOWEVER, that in the case of an Incentive Option
"disability" shall have the meaning specified in Section 22(e)(3) of
the Code.
"ELIGIBLE NON-EMPLOYEE" shall have the meaning set forth in Section 4
hereof.
"EXCHANGE ACT" shall have the meaning set forth in Section 2 hereof.
"FAIR MARKET VALUE" shall, as it relates to the Common Stock, mean the
average of the high and low prices of such Common Stock as reported on
the principal national securities exchange on which the shares of
Common Stock are then listed on the date specified herein, or if there
were no sales on such date, on the next preceding day on which there
were sales, or if such Common Stock is not listed on a national
securities exchange, the last reported bid price in the
over-the-counter market, or if such shares are not traded in the
over-the-counter market, the per share cash price for which all of the
outstanding Common Stock could be sold to a willing purchaser in an
arms length transaction (without regard to minority discount, absence
of liquidity, or transfer restrictions imposed by any applicable law or
agreement) at the date of the event giving rise to a need for a
determination. Except as may be otherwise expressly provided in a
particular Option, Fair Market Value shall be determined in good faith
by the Committee.
"GOOD CAUSE", with respect to any Key Employee, shall mean (unless
another definition is agreed to in writing by the Company and the
optionee) termination
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<PAGE> 15
by action of the Board of Directors because of: (A) the optionee's
conviction of, or plea of nolo contendere to, a felony or a crime
involving moral turpitude; (B) the optionee's personal dishonesty,
willful misconduct, willful violation of any law, rule, or regulation
(other than minor traffic violations or similar offenses) or breach of
fiduciary duty which involves personal profit; (C) the optionee's
willful commission of material mismanagement in the conduct of his
duties as assigned to him by the Board of Directors or the optionee's
supervising officer or officers of the Company; (D) the optionee's
willful failure to execute or comply with the policies of the Company
or his stated duties as established by the Board of Directors or the
optionee's supervising officer or officers of the Company, or the
optionee's intentional failure to perform the optionee's stated duties;
or (E) substance abuse or addiction on the part of the optionee. "GOOD
CAUSE", with respect to any Eligible Non-Employee, shall mean (unless
another definition is agreed to in writing by the Company and the
optionee) termination by action of the Board of Directors because of:
(A) the optionee's conviction of, or plea of nolo contendere to, a
felony or a crime involving moral turpitude; (B) the optionee's
personal dishonesty, willful misconduct, willful violation of any law,
rule, or regulation (other than minor traffic violations or similar
offenses) or breach of fiduciary duty which involves personal profit;
(C) the optionee's willful commission of material mismanagement in
providing services to the Company or any Related Entity; (D) the
optionee's willful failure to comply with the policies of the Company
in providing services to the Company or any Related Entity, or the
optionee's intentional failure to perform the services for which the
optionee has been engaged; (E) substance abuse or addiction on the part
of the optionee; or (F) the optionee's willfully making any material
misrepresentation or willfully omitting to disclose any material fact
to the board of directors of the Company or any Related Entity with
respect to the business of the Company or any Related Entity.
"GRANTOR" has the meaning set forth in Section 9 hereof.
"HMC GROUP" shall mean Hicks, Muse, Tate & Furst Incorporated, its
Affiliates and their respective employees, officers, and directors (and
members of their respective families and trusts for the primary benefit
of such family members).
"INCENTIVE OPTIONS" shall have the meaning set forth in Section 6
hereof.
The term "INCLUDING" when used herein shall mean "including, but not
limited to".
"KEY EMPLOYEE" shall have the meaning set forth in Section 4 hereof.
"MARKETABLE SECURITIES" shall mean securities (i) of a class or series
listed or traded on the New York Stock Exchange, American Stock
Exchange, or NASDAQ National Market and (ii) which, as a matter of law,
shall at the time of acquisition be (or which at the date of
acquisition are legally committed to become within six months after the
date of acquisition) freely saleable in unlimited quantities by the HMC
Group to the public, either pursuant to an
15
<PAGE> 16
effective registration statement under the Securities Act of 1933, as
amended (including a current prospectus which is available for
delivery), or without the necessity of such registration.
"NON-QUALIFIED OPTIONS" shall have the meaning set forth in Section 6
hereof.
"OPTIONS" shall have the meaning set forth in Section 1 hereof.
"PERSON" shall have the meaning set forth in Section 4 hereof.
"PLAN" shall have the meaning set forth in Section 1 hereof.
"PURCHASABLE SHARES" shall have the meaning set forth in Section 9
hereof.
"PURCHASE OPTION" shall have the meaning set forth in Section 9 hereof.
"QUALIFYING PUBLIC OFFERING" shall mean a firm commitment underwritten
public offering of Common Stock the result of which is that the HMC
Group shall own less than 10% of the fully diluted common stock.
"RELATED ENTITIES" shall have the meaning set forth in Section 1
hereof.
"REORGANIZATION" shall have the meaning set forth in Section 10 hereof.
"RULE 16B-3" shall have the meaning set forth in Section 2 hereof.
"SECURITIES ACT" shall have the meaning set forth in Section 12 hereof.
"SUBSIDIARY" shall mean, with respect to any Person, any other Person
of which such first Person owns or has the power to vote, directly or
indirectly, securities representing a majority of the votes ordinarily
entitled to be cast for the election of directors or other governing
Persons.
19. AMENDMENT OF PLAN.
The Board of Directors shall have the right to amend, modify,
suspend or terminate the Plan at any time; PROVIDED, that no amendment shall be
made which shall increase the total number of shares of the Common Stock which
may be issued and sold pursuant to Options granted under the Plan or decrease
the minimum Option exercise price in the case of an Incentive Option, or modify
the provisions of the Plan relating to eligibility with respect to Incentive
Options unless such amendment is made by or with the approval of the
stockholders. The Board of Directors shall be authorized to amend the Plan and
the Options granted thereunder (i) to qualify as "incentive stock options"
within the meaning of Section 422 of the Code or (ii) to comply with Rule 16b-3
(or any successor rule) under the Exchange Act (or any successor law) and the
regulations (including any temporary regulations) promulgated thereunder. No
amendment,
16
<PAGE> 17
modification, suspension or termination of the Plan shall alter or impair any
Options previously granted under the Plan, without the consent of the holder
thereof.
20. EFFECTIVE DATE.
The Plan shall be effective as of May 1, 1998, and shall be
void retroactively if not approved by the stockholders of the Company within
twelve months thereafter.
17
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LIN
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