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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1999 Commission file number 0-19728
GRANITE BROADCASTING CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3458782
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(State of Incorporation) (I.R.S. Employer
Identification No.)
767 Third Avenue, 34th Floor
New York, New York 10017
(212) 826-2530
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (Nonvoting), $.01 par value per share
Cumulative Convertible Exchangeable Preferred Stock, $.01 par value per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of March 1, 2000, 18,168,071 shares of Granite Broadcasting
Corporation Common Stock (Nonvoting) were outstanding. The aggregate market
value (based upon the last reported sale price on the Nasdaq National Market on
March 1, 2000) of the shares of Common Stock (Nonvoting) held by non-affiliates
was approximately $138,424,317. (For purposes of calculating the preceding
amounts only, all directors and executive officers of the registrant are assumed
to be affiliates.) As of March 1, 2000, 178,500 shares of Granite Broadcasting
Corporation Class A Voting Common Stock were outstanding, all of which were held
by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Item 14 of Part IV are incorporated by reference to:
Granite Broadcasting Corporation's Registration Statement No. 33-43770, filed on
November 5, 1991; Granite Broadcasting Corporation's Current Report on Form 8-K,
filed on June 25, 1993; Granite Broadcasting Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993, filed on November 15, 1993;
Amendment No. 2 to Granite Broadcasting Corporation's Registration Statement No.
33-71172, filed on December 16, 1993; Granite Broadcasting Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994, filed on March 29,
1995; Granite Broadcasting Corporation's Current Report on Form 8-K, filed on
July 14, 1995; Granite Broadcasting Corporation's Registration Statement No.
33-94862, filed on July 21, 1995; Amendment No. 2 to Granite Broadcasting
Corporation's Registration Statement No. 33-94862, filed on October 6, 1995;
Granite Broadcasting Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995, filed on March 28, 1996; Granite Broadcasting Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, filed on
August 13, 1996; Granite Broadcasting Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996, filed on March 21, 1997; Granite
Broadcasting Corporation's Current Report on Form 8-K, filed on October 17,
1997; Granite Broadcasting Corporation's Current Report on Form 8-K, filed on
March 2, 1998; Granite Broadcasting Corporation's Registration Statement No.
333-56327, filed on June 8, 1998; Granite Broadcasting Corporation's Current
Report on Form 8-K, filed on July 1, 1998; Granite Broadcasting Corporation's
Current Report on Form 8-K, filed on August 13, 1998; Granite Broadcasting
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, filed on March 31, 1999; Granite Broadcasting Corporation's Current Report
on Form 8-K, filed on May 11, 1999; and Granite Broadcasting Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed on
November 15, 1999.
PART I
ITEM 1. BUSINESS
Granite Broadcasting Corporation ("Granite" or the "Company"), a
Delaware corporation, is a group broadcasting company founded in 1988 to acquire
and manage network-affiliated television stations and other media and
communications-related properties. The Company's goal is to identify and acquire
properties that management believes have the potential for substantial long-term
appreciation and to aggressively manage such properties to improve their
operating results. The Company currently owns and operates nine
network-affiliated television stations: KNTV(TV), the ABC affiliate serving San
Jose, California and the Salinas-Monterey, California television market
("KNTV"); WTVH-TV, the CBS affiliate serving Syracuse, New York ("WTVH");
KSEE-TV, the NBC affiliate serving Fresno-Visalia, California ("KSEE"); WPTA-TV,
the ABC affiliate serving Fort Wayne, Indiana ("WPTA"); WEEK-TV, the NBC
affiliate serving Peoria-Bloomington, Illinois ("WEEK-TV"); KBJR-TV, the NBC
affiliate serving Duluth, Minnesota and Superior, Wisconsin ("KBJR"); WKBW-TV,
the ABC affiliate serving Buffalo, New York ("WKBW"); WDWB-TV, the WB Network
affiliate serving Detroit, Michigan ("WDWB") and KBWB-TV, the WB Network
affiliate serving San Francisco-Oakland-San Jose, California ("KBWB"). KBJR and
WEEK were acquired in separate transactions in October 1988, WPTA was acquired
in December 1989, KNTV was acquired in February 1990, WTVH and KSEE were
acquired in December 1993, WKBW was acquired in June 1995, WDWB was acquired in
January 1997 and KBWB was acquired in July 1998. The Company owns each of its
television stations through separate wholly owned subsidiaries (collectively,
the "Subsidiaries"; references herein to the "Company" or to "Granite" include
Granite Broadcasting Corporation and its subsidiaries). The Company's long-term
objective is to acquire additional television stations and to pursue
acquisitions of other media and communications-related properties in the future.
The Company is also committed to growing its Internet properties with the goal
of becoming the number one local web destination in each of its markets. The
Company's internet strategy is to provide compelling local news, weather, sports
and entertainment information on each of its websites, leveraging its newsroom
assets and the power of television to drive viewers to the Web. The Company
plans to maintain its position as one of the most progressive broadcast groups
in the area of new media by continuing to not only explore Internet
opportunities, but to pursue broadband business applications that utilize
digital terrestrial spectrum for the delivery of digital content and services.
RECENT DEVELOPMENTS
KNTV AFFILIATION CHANGE AND NBC ALLIANCE
In September 1999, the Company and the American Broadcasting Companies,
Inc. ("ABC") agreed to terminate the ABC affiliation of KNTV, the ABC affiliate
serving the San Jose-Salinas-Monterey, California Designated Market Area
("DMA"), effective July 1, 2000. The Company received $14,000,000 in cash on
September 1, 1999 in accordance with the agreement.
On February 14, 2000, the Company announced the formation of a
strategic alliance (the "Strategic Alliance") with the National Broadcasting
Company, Inc. ("NBC"). Pursuant to the Strategic Alliance, KNTV is to become the
NBC affiliate in the San Francisco-Oakland-San Jose California DMA for a
ten-year term commencing on January 1, 2002 (the "San Francisco Affiliation").
The Company intends to file a petition with the Federal Communications
Commission (the "FCC") to change KNTV's market designation from San Jose,
California to San Francisco-Oakland-San Jose, California. In connection with the
affiliation switch to NBC, the Company intends to expand KNTV's coverage to
include a greater percentage of the San Francisco-Oakland-San Jose DMA. The
Company has received permission from the FCC to increase KNTV's signal coverage,
and anticipates consummating such increase in May 2000. The Company is also
seeking to reach all cable homes in the San Francisco-Oakland-San Jose DMA
through expanded cable coverage.
In addition, NBC is to extend the term of the Company's NBC affiliation
agreements with KSEE, WEEK and KBJR until December 31, 2011. As part of such
extension, NBC's affiliation payment obligations to Granite for such stations
will terminate as of December 31, 2001.
The Strategic Alliance further contemplates co-operative efforts
between the Company and NBC with respect to digital spectrum and the operation
of a cable news service in the San Francisco bay area, and provides for the
Company to participate in NBC group programming purchases and preferred
relationship technology and equipment deals to the extent such arrangements are
commercially and legally feasible. In addition, the Company anticipates entering
into joint sales agreements with the local Paxon Communications stations in both
the San Francisco-Oakland-San Jose, California and Fresno, California markets.
In consideration for the San Francisco Affiliation, the Company will
pay NBC $362,000,000 in nine annual installments, with the initial payment in
the amount of $61,000,000 being due January 1, 2002. In addition, Granite is
to grant NBC a warrant to acquire 2.5 million shares of the Company's Common
Stock (Nonvoting), par value $0.01 per share (the "Common Stock
(Nonvoting)"), at an exercise price of $12.50 per share (the "A Warrant") and
a warrant to purchase 2.0 million shares of Common Stock (Nonvoting) at an
exercise price of $15.00 per share (the "B Warrant"). The A Warrant vests in
full on December 31, 2000. The B Warrant vests in full on January 1, 2002, if
the San Francisco Affiliation is in effect on that date. Each warrant, once
vested, remains exercisable until December 31, 2011 and may be exercised for
cash or surrender of a portion of a then exercisable warrant. The aggregate
number of shares issuable upon exercise of the warrants (assuming they are
exercised for cash) would represent approximately 20.0% of the Common Stock
(Nonvoting) as of December 31, 1999 after giving effect to their issuance.
Granite has also agreed to pay $7,430,000 during 2001 in promotion expenses
in connection with KNTV's affiliation switch to NBC.
Other terms of the Strategic Alliance include a right of first refusal
in favor of NBC on the sale of KNTV, and an NBC right to purchase KNTV upon an
uncured event of default by Granite, at a value to be determined by an
independent appraiser. In addition, NBC will have the right to terminate the San
Francisco Affiliation if it elects to acquire an attributable interest in
another station in the San Francisco-Oakland-San Jose DMA. NBC can also
terminate the Strategic Alliance if the definitive affiliation and warrant
agreements are not executed by May 1, 2000.
WEEK-FM AND KEYE DISPOSITION
On July 30, 1999, the Company completed the disposition of WEEK-FM to
the Cromwell Group, Inc. of Illinois for $1,150,000 in cash. On August 31, 1999,
the Company completed the disposition of KEYE-TV, the CBS affiliate serving
Austin, Texas, to CBS Corporation for $160,000,000 in cash. A portion of the
proceeds from the sale of these stations was used to repay outstanding
indebtedness under the Company's bank credit agreement (the "Credit Agreement")
and to repurchase subordinated debt of the Company.
WNGS ACQUISITION
On November 16, 1999, the Company entered into a definitive agreement
to acquire WNGS-TV, the UPN affiliate serving Buffalo, New York, from Caroline
K. Powley for $23,000,000 in cash. Closing of the acquisition is subject to
certain closing conditions, including approval by the FCC. Two informal
objections have been filed against the application to assign WNGS-TV's FCC
Licenses from Ms. Powley to Granite. Both objections relate to FCC matters
asserted against Caroline K. Powley unrelated to her ownership of WNGS. Both
Caroline K. Powley and the Company have filed oppositions to these two informal
objections. The informal objections and the associated oppositions are still
pending before the FCC. The Company expects to complete the acquisition in the
fourth quarter of 2000.
FT. WAYNE - WB CABLE ALLIANCE
The Company has formed an alliance with the WB Television Network (the
"WB Network") for the cable distribution of WB Network programming in Fort
Wayne, Indiana. The cablecasting of this WB Network programming began on October
7, 1999 on the Comcast cable system, which serves approximately 32% of the Fort
Wayne area.
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CONVERSION OF PREFERRED STOCK
On August 16, 1999 the Company announced it would redeem all
outstanding shares of its Cumulative Convertible Exchangeable Preferred Stock on
September 15, 1999 (the "Redemption Date") at a redemption price of $25.97 per
share, plus accrued but unpaid dividends. Holders of the Cumulative Convertible
Exchangeable Preferred Stock had the option to accept the Redemption Price or
convert each preferred share into five shares of Common Stock (Nonvoting) at any
time on or before September 10, 1999. All shares of the Cumulative Convertible
Exchangeable Preferred Stock were converted into Common Stock (Nonvoting) prior
September 10, 1999.
OTHER DEVELOPMENTS
On August 5, 1999, the FCC revised its ownership rules to permit the
joint ownership of two television stations in a single market under various
circumstances. As a result of the FCC decision, the Company became one of the
first broadcasters to permanently own and operate two stations serving a top ten
market. The Company has owned and operated KNTV since 1990. The Company
completed the acquisition of KBWB on July 21, 1998. The FCC has consented to
Granite's permanent joint ownership of these two stations.
COMPANY AND INDUSTRY OVERVIEW
The following table sets forth general information for each of the
Company's television stations:
OTHER
COMMERCIAL EXPIRATION
MARKET DATE OF CHANNEL/ NETWORK MARKET STATIONS DATE OF
STATION AREA ACQUISITION FREQUENCY AFFILIATION RANK(1) IN DMA FCC LICENSE
- ------- -------- ----------- --------- ----------- ----- ----------- -----------
KBWB-TV San Francisco-
Oakland -
San Jose, CA 07/20/98 20/UHF WB 5 14(2) 12/01/06
WDWB-TV Detroit, MI 01/31/97 20/UHF WB 9 9(6) 10/01/05
WKBW-TV Buffalo, NY 06/29/95 7/VHF ABC 44 5 06/01/07
KNTV(TV) San Jose,
Salinas -
Monterey, CA 02/05/90 11/VHF ABC(5) 49 5(3) 12/01/06
KSEE-TV Fresno-
Visalia, CA 12/23/93 24/UHF NBC 54 10(4) 12/01/06
WTVH-TV Syracuse, NY 12/23/93 5/VHF CBS 76 4 06/01/07
WPTA-TV Fort Wayne, IN 12/11/89 21/UHF ABC 103 3 08/01/05
WEEK-TV Peoria -
Bloomington,
IL 10/31/88 25/UHF NBC 110 4 12/01/05
KBJR-TV Duluth, MN -
Superior, WI 10/31/88 6/VHF NBC 133 2 12/01/05
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(1) "Market rank" refers to the size of the television market or Designated
Market Area ("DMA") as defined by the A.C. Nielsen Company ("Nielsen"),
except for San Jose. KNTV, whose DMA is the Salinas-Monterey television
market, primarily serves San Jose and Santa Clara County (which are
part of the San Francisco-Oakland-San Jose DMA). If Santa Clara County
were a separate DMA, it would rank as the 49th largest
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DMA in the United States. All market rank data is derived from the
Nielsen Station Index for September 1999.
(2) Includes KDTV, San Francisco and KSTS, San Jose, both of which
broadcast entirely in Spanish.
(3) Includes KSMS, Salinas-Monterey and KCU, Salinas, both of which
broadcast entirely in Spanish.
(4) Includes KFTV Hanford-Fresno and KMSG, Sanger-Fresno, both of which
broadcast entirely in Spanish.
(5) KNTV will be an ABC affiliate through June 30, 2000. The Company has
entered into a Strategic Alliance with NBC pursuant to which KNTV will
be affiliated with NBC commencing on January 1, 2002. The Company
intends to file a petition with the FCC to change KNTV's market
designation from San Jose, California to San Francisco-Oakland-San
Jose, California. See "Recent Developments--KNTV Affiliation Change and
NBC Alliance."
(6) Includes CBET Windsor, Canada.
Commercial television broadcasting began in the United States on a
regular basis in the 1940s. Currently, there are a limited number of channels
available for broadcasting in any one geographic area and the license to operate
a broadcast station is granted by the FCC. Television stations can be
distinguished by the frequency on which they broadcast. Television stations
which broadcast over the very high frequency ("VHF") band of the spectrum
generally have some competitive advantage over television stations that
broadcast over the ultra-high frequency ("UHF") band of the spectrum because the
former usually have better signal coverage and operate at a lower transmission
cost. In television markets in which all local stations are UHF stations, such
as Fort Wayne, Indiana, Peoria-Bloomington, Illinois and Fresno-Visalia,
California, no competitive disadvantage exists.
Television station revenues are primarily derived from local, regional
and national advertising and, to a lesser extent, from network compensation and
revenues from studio rental and commercial production activities. Advertising
rates are based upon a program's popularity among the viewers an advertiser
wishes to attract, the number of advertisers competing for the available time,
the size and demographic make-up of the market served by the station, and the
availability of alternative advertising media in the market area. Because
broadcast television stations rely on advertising revenues, declines in
advertising budgets, particularly in recessionary periods, adversely affect the
broadcast industry, and as a result may contribute to a decrease in the
valuation of broadcast properties.
THE COMPANY'S STATIONS
Set forth below are the principal types of television gross revenues
(before agency and representative commissions) received by the Company's
television stations for the periods indicated and the percentage contribution of
each to the gross television revenues of the television stations owned by the
Company.
GROSS REVENUES, BY CATEGORY,
FOR THE COMPANY'S STATIONS
(dollars in thousands)
YEARS ENDED DECEMBER 31,
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1995 1996 1997 1998 1999
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AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
Local/Regional(1)........ $60,969 51.0% $73,491 47.5% $87,412 48.3% $89,144 46.0% $89,626 49.2%
National(2).............. 48,995 41.0 61,945 40.0 78,833 43.5 76,446 39.4 79,780 43.7
Network Compensation(3).. 4,154 3.5 7,289 4.7 7,859 4.3 6,715 3.5 5,074 2.8
Political(4)............. 1,498 1.3 7,265 4.7 1,036 0.6 15,752 8.1 2,601 1.4
Other Revenue(5)......... 3,849 3.2 4,851 3.1 5,943 3.3 5,877 3.0 5,249 2.9
------- ------ -------- ------ ------- ------ -------- ----- -------- -----
Total.................... $119,465 100.0% $154,841 100.0% $181,083 100.0% $193,934 100.0% $182,330 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
(1) Represents sale of advertising time to local and regional advertisers
or agencies representing such advertisers and other local sources.
(2) Represents sale of advertising time to agencies representing national
advertisers.
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(3) Represents payment by networks for broadcasting network programming.
(4) Represents sale of advertising time to political advertisers.
(5) Represents miscellaneous revenue, including payment for production of
commercials.
Automobile advertising constitutes the Company's single largest source
of gross revenues, accounting for approximately 34% of the Company's total gross
revenues in 1999. Gross revenues from restaurants and entertainment-related
businesses accounted for approximately 24% of the Company's total gross revenues
in 1999. Each other category of advertising revenue represents less than 8% of
the Company's total gross revenues.
The following is a description of each of the Company's television
stations:
KBWB: SAN FRANCISCO-OAKLAND-SAN JOSE, CALIFORNIA
KBWB began operations in 1968 and commenced operating as a WB Network
affiliate in 1995.
The San Francisco-Oakland-San Jose economy is centered around apparel,
banking and finance, biosciences, engineering and architecture, film and TV
production, health care, high technology, manufacturing, multimedia,
telecommunications, tourism and wineries. The average household income in the
DMA was $55,565, according to estimates provided in the BIA Investing in
Television 1999 Market Report (the "BIA Report"). Leading employers in the area
include Safeway Supermarkets, Hewlett-Packard, Seagate Technology, The Gap,
Intel, Chevron, Oracle, Kaiser-Permanente and Levi-Strauss. The San
Francisco-Oakland-San Jose DMA is also the home of several universities,
including the University of California Berkeley, San Francisco State University,
San Jose State University, Stanford University, California State
University-Hayward, Santa Clara University and the University of San Francisco,
with enrollment estimated at 122,000.
WDWB: DETROIT, MICHIGAN
WDWB began operating in 1962 and commenced operating as a WB Network
affiliate in 1995.
Detroit is the 9th largest DMA in the United States with a total of
1,855,500 television households and a population of 4,988,000 according to
Nielsen. Detroit's economy is based on manufacturing, retail and health
services. The largest employers are General Motors, Ford Motor Company,
Daimler-Chrysler, Detroit Medical Center, Henry Ford Health System and Blue
Cross Blue Shield of Michigan. The average household income in the DMA is
$46,547 according to estimates provided in the BIA Report.
WKBW: BUFFALO, NEW YORK
WKBW began operations in 1958 and is affiliated with ABC.
The Buffalo economy is centered around manufacturing, government,
health services and financial services. The average household income in the DMA
was $36,848, according to estimates provided in the BIA Report. Leading
employers in the area include General Motors, Ford Motor Company, American Axle
and Manufacturing, M&T Bank, Fleet Bank, Roswell Park Cancer Institute, Buffalo
General Hospital, NYNEX, Tops Markets and DuPont.
KNTV: SAN JOSE, CALIFORNIA
KNTV began operations in 1955 and will be affiliated with ABC through
June 30, 2000. On January 1, 2002, KNTV will become an NBC affiliate. See
"Recent Developments - KNTV Affiliation Change and NBC Alliance."
KNTV is the only network-affiliated station and only VHF station
licensed to serve San Jose, California, the largest city in Northern California
and the eleventh largest city in the United States. Its VHF signal is broadcast
on Channel 11 and covers all of Santa Clara County, which includes an area that
has come to be known as "Silicon
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Valley." Although the Nielsen rating service designates KNTV as the ABC
affiliate for the Salinas-Monterey market (which is southwest of and adjacent to
San Jose), according to the November 1999 Nielsen Monterey/Salinas Viewers In
Profile Report more than 72% of the station's audience resides in Santa Clara
County. If Santa Clara County were a separate DMA with its estimated 577,250
television households, it would rank as the 49th largest DMA in the United
States.
Santa Clara County has a diverse and affluent economy. The average
effective buying income by household was $57,890, according to the 1999
Demographics USA Report. The area is home to over 2,800 technological companies
as well as numerous institutions and companies of national reputation. Prominent
corporations located in Santa Clara County include Hewlett-Packard,
Lockheed/Martin, IBM, Apple, Intel, Sun Microsystems, Amdahl, Tandem Computers,
National Semiconductor, Syntex, Conner Peripherals, Varian Associates and Chips
& Technologies. Santa Clara County is also the home of several universities
including Stanford University, San Jose State University and Santa Clara
University with enrollments aggregating approximately 51,000 students.
The Company has entered the Strategic Alliance with NBC, which among
other matters, provides for KNTV to become the NBC affiliate in the San
Francisco-Oakland-San Jose DMA beginning on January 1, 2002. The Company intends
to file a petition with the FCC to change KNTV's market designation from San
Jose, California to San Francisco-Oakland-San Jose, California. See "Recent
Developments-KNTV Affiliation Change and NBC Alliance." In connection with the
affiliation switch to NBC, the Company intends to expand KNTV's coverage to
include a greater percentage of the San Francisco-Oakland-San Jose DMA. The
Company has received permission from the FCC to increase KNTV's signal strength,
and anticipates consummating such increase in May 2000. The Company expects that
such increase will enable KNTV's over-the-air signal to reach 92% of the
households in the San Francisco-Oakland-San Jose DMA. The Company also
anticipates being on substantially all cable systems in the San
Francisco-Oakland-San Jose DMA by January 1, 2002.
KSEE: FRESNO-VISALIA, CALIFORNIA
KSEE began operations in 1953 and is affiliated with NBC.
Fresno and the San Joaquin Valley is one of the most productive
agricultural areas in the world with over 6,000 square miles planted with more
than 250 different crops. Although farming continues to be the single most
important part of the Fresno area economy, the area now attracts a variety of
service-based industries and manufacturing and industrial operations. No single
employer or industry dominates the local economy. The average income by
household in the DMA was $34,709, according to estimates provided in the BIA
Report. The Fresno-Visalia DMA is also the home of several universities,
including Fresno State University, with enrollment estimated at 40,000.
WTVH: SYRACUSE, NEW YORK
WTVH began operations in 1948 and is affiliated with CBS.
The Syracuse economy is centered on manufacturing, education and
government. The average income by household in the DMA was $37,667, according to
estimates provided in the BIA Report. Prominent corporations located in the area
include Carrier Corporation, New Venture Gear, Bristol-Myers Squibb,
Crouse-Hinds, Nestle Foods and Lockheed/Martin. The Syracuse DMA is also the
home of several universities, including Syracuse University, Cornell University
and Colgate University, with enrollments aggregating over 50,000 students.
WPTA: FORT WAYNE, INDIANA
WPTA began operations in 1957 and is affiliated with ABC.
The Fort Wayne economy is centered on manufacturing, government,
insurance, financial services and education. The average income by household in
the DMA was $42,846, according to estimates provided in the BIA Report.
Prominent corporations located in the area include Magnavox, Lincoln National
Life Insurance, General
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Electric, General Motors, North American Van Lines, GTE, Dana, Phelps Dodge,
ITT, and Tokheim. Fort Wayne is also the home of several universities, including
the joint campus of Indiana University and Purdue University at Fort Wayne, with
enrollments aggregating over 11,000 students.
WEEK: PEORIA-BLOOMINGTON, ILLINOIS
WEEK began operations in 1953 and is affiliated with NBC.
The Peoria economy is centered on agriculture and heavy equipment
manufacturing but has achieved diversification with the growth of service-based
industries such as conventions, healthcare and higher technology manufacturing.
Prominent corporations located in Peoria include Caterpillar, Bemis, Central
Illinois Light Company, Commonwealth Edison Company, Komatsu-Dresser Industries,
IBM, Trans-Technology Electronics and Keystone Steel & Wire. In addition, the
United States Department of Agriculture's second largest research facility is
located in Peoria, and the area has become a major regional healthcare center.
The economy of Bloomington, on the other hand, is focused on insurance,
education, agriculture and manufacturing. Prominent corporations located in
Bloomington include State Farm Insurance Company, Country Companies Insurance
Company and Diamond-Star Motors Corporation (a subsidiary of Mitsubishi). The
average income by household in the DMA was $44,470, according to estimates
provided in the BIA Report. The Peoria-Bloomington area is also the home of
numerous institutions of higher education including Bradley University, Illinois
Central College, Illinois Wesleyan University, Illinois State University, Eureka
College and the University of Illinois College of Medicine, with enrollments
aggregating over 38,000 students.
KBJR: DULUTH, MINNESOTA AND SUPERIOR, WISCONSIN
KBJR began operations in 1954 and is affiliated with NBC.
The area's primary industries include mining, fishing, food products,
paper, medical, shipping, tourism and timber. The average income by household in
the DMA was $33,026, according to estimates provided in the BIA Report. Duluth
is one of the major ports in the United States out of which iron ore, coal,
limestone, cement, grain, paper and chemicals are shipped. Prominent
corporations located in the area include Northwest Airlines, Minnesota Power,
U.S. West, Mesabi & Iron Range Railway Co., Walmart, Jeno Paulucci
International, Lake Superior Industries, Potlatch Corporation, Boise Cascade,
Burlington Northern Railway, Target (Dayton-Hudson Corporation), ConAgra,
International Multifoods, Peavey, Cargill, U.S. Steel, Cleveland-Cliffs
Corporation, NorWest Bank, Shopko, Cub Foods and Advanstar. The Duluth-Superior
area is also the home of numerous educational institutions such as the
University of Minnesota-Duluth, the University of Wisconsin-Superior and the
College of St. Scholastica, with enrollments aggregating over 12,000 students.
NETWORK AFFILIATION
Whether or not a station is affiliated with one of the major networks,
NBC, ABC, CBS, Fox (the "Traditional Networks") or the WB Network or United
Paramount Networks ("UPN" and collectively with the WB Network and the
Traditional Networks, the "Networks"), has a significant impact on the
composition of the station's revenues, expenses and operations. A typical
Traditional Network affiliate receives the significant portion of its
programming each day from the Network. Historically, this programming, along
with cash payments, is provided to the affiliate by the Traditional Network in
exchange for a substantial majority of the advertising inventory during Network
programs. The Traditional Network then sells this advertising time and retains
the revenues so generated. A typical WB Network or UPN affiliate receives prime
time programming from the Network pursuant to arrangements agreed upon by the
affiliate and the Network.
In contrast, a fully independent station purchases or produces all of
the programming that it broadcasts, resulting in generally higher programming
costs, although the independent station is, in theory, able to retain its entire
inventory of advertising and all of the revenue obtained therefrom. However,
barter and cash-plus-barter arrangements are becoming increasingly popular.
Under such arrangements, a national program distributor typically
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retains up to 50% of the available advertising time for programming it supplies,
in exchange for reduced fees for such programming.
Each of the Company's stations is affiliated with a Network pursuant to
an affiliation agreement. KSEE, WEEK and KBJR are affiliated with NBC; KNTV will
be affiliated with ABC until June 30, 2000 and will become affiliated with NBC
on January 1, 2002 (see "Recent Developments--KNTV Affiliation Change and NBC
Alliance"); WPTA and WKBW are affiliated with ABC; WTVH is affiliated with CBS;
and KBWB and WDWB are affiliated with the WB Network.
In substance, each Traditional Network affiliation agreement provides
the Company's station with the right to broadcast all programs transmitted by
the Network with which it is affiliated. In exchange, the Network has the right
to sell a substantial majority of the advertising time during such broadcast. In
addition, historically, for every hour that the station elects to broadcast
Traditional Network programming, the Network has paid the station a fee (the
"Network Compensation Fee"), specified in each affiliation agreement, which
varies with the time of day. Typically, "prime-time" programming (Monday through
Saturday 8 - 11p.m. and Sunday 7 - 11p.m. Eastern Time) generates the highest
hourly rates. Rates are subject to increase or decrease by the Network during
the term of each affiliation agreement, with provisions for advance notice to,
and right of termination by, the station in the event of a reduction in rates.
As part of the Strategic Alliance with NBC, in exchange for the San Francisco
Affiliation and extending the terms of the NBC affiliation agreements for KSEE,
WEEK and KBJR, Granite is to pay NBC $362 million in nine installments
commencing on January 1, 2002 and Network Compensation Fees payable to KSEE,
WEEK and KBJR, will terminate as of December 31, 2001.
Under each WB Network affiliation agreement, the Company's stations
receive "prime-time" programming from the WB Network. KBWB and WDWB pay an
affiliation fee for the programming it receives pursuant to its affiliation
agreement.
The Network affiliation agreements provide for contract terms ranging
from seven to eleven years. Under each of the Company's affiliation agreements,
the Networks may, under certain circumstances, terminate the agreement upon
advance written notice. Under the Company's ownership, none of its stations has
received a termination notice from its respective Network.
COMPETITION
The financial success of the Company's television stations are
dependent on audience ratings and revenues from advertisers within each
station's geographic market. The Company's stations compete for revenues with
other television stations in their respective markets, as well as with other
advertising media, such as newspapers, radio, magazines, outdoor advertising,
transit advertising, yellow page directories, the Internet, direct mail and
local cable systems. Some competitors are part of larger companies with
substantially greater financial resources than the Company.
Competition in the broadcasting industry occurs primarily in individual
markets. Generally, a television broadcasting station in one market does not
compete with stations in other market areas. The Company's television stations
are located in highly competitive markets.
In addition to management experience, factors that are material to a
television station's competitive position include signal coverage, local program
acceptance, Network affiliation, audience characteristics, assigned frequency
and strength of local competition. The broadcasting industry is continuously
faced with technological change and innovation, the possible rise in popularity
of competing entertainment and communications media, changes in labor conditions
and governmental restrictions or actions of federal regulatory bodies, including
the FCC and the Federal Trade Commission, any of which could possibly have a
material adverse effect on the Company's operations and results.
Conventional commercial television broadcasters also face competition
from other programming, entertainment and video distribution systems, the most
common of which is cable television. These other
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programming, entertainment and video distribution systems can increase
competition for a broadcasting station by bringing into its market distant
broadcasting signals not otherwise available to the station's audience and also
by serving as distribution systems for non-broadcast programming. Programming is
now being distributed to cable television systems by both terrestrial microwave
systems and by satellite. Other sources of competition include home
entertainment systems (including video cassette recorders and playback systems,
video discs and television game devices), the Internet, multi-point distribution
systems, multichannel multi-point distribution systems, video programming
services available through the Internet and other video delivery systems. The
Company's television stations also face competition from direct broadcast
satellite services which transmit programming directly to homes equipped with
special receiving antennas and from video signals delivered over telephone
lines. Satellites may be used not only to distribute non-broadcast programming
and distant broadcasting signals but also to deliver certain local broadcast
programming which otherwise may not be available to a station's audience.
The broadcasting industry is continuously faced with technological
change and innovation, which could possibly have a material adverse effect on
the Company's operations and results. Video compression techniques, now in use
with direct broadcast satellites and in development for cable, are expected to
permit greater numbers of channels to be carried within existing bandwidth.
These compression techniques, as well as other technological developments, are
applicable to all video delivery systems, including over-the-air broadcasting
and other non-broadcast commercial applications, and have the potential to
provide vastly expanded programming to highly targeted audiences. Reduction in
the cost of creating additional channel capacity could lower entry barriers for
new channels and encourage the development of increasingly specialized niche
programming. This ability to reach very narrowly defined audiences may alter the
competitive dynamics for advertising expenditures. The Company is unable to
predict the effect that technological changes will have on the Company.
Commercial television broadcasting may face future competition from interactive
video and data services that provide two-way interaction with commercial video
programming, along with information and data services that may be delivered by
commercial television stations, cable television, direct broadcast satellites,
multi-point distribution systems, multichannel multi-point distribution systems
or other video delivery systems. In addition, recent actions by the FCC,
Congress and the courts all presage significant future involvement in the
provision of video services by telephone companies. The Telecommunications Act
of 1996 lifts the prohibition on the provision of cable television services by
telephone companies in their own telephone areas subject to regulatory
safeguards and permits telephone companies to own cable systems under certain
circumstances. It is not possible to predict the impact on the Company's
television stations of any future relaxation or elimination of the existing
limitations on the ownership of cable systems by telephone companies. The
elimination or further relaxation of the restriction, however, could increase
the competition the Company's television stations face from other distributors
of video programming.
FCC LICENSES
Television broadcasting is subject to the jurisdiction of the FCC under
the Communications Act of 1934, as amended (the "Communications Act"). The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and impose
penalties for violation of such regulations. The Telecommunications Act of 1996,
which amends major provisions of the Communications Act, was enacted on February
8, 1996. The FCC has commenced, but not yet completed, implementation of the
provisions of the Telecommunications Act of 1996.
The Communications Act prohibits the assignment of a license or the
transfer of control of a licensee without prior approval of the FCC. In
addition, foreign governments, representatives of foreign governments,
non-citizens, representatives of non-citizens, and corporations or partnerships
organized under the laws of a foreign nation are barred from holding broadcast
licenses. Non-citizens, however, may own up to 20% of the capital stock of a
licensee and up to 25% of the capital stock of a United States corporation that,
in turn, owns a controlling interest in a licensee. A broadcast license may not
be granted to or held by any corporation that is controlled, directly or
indirectly, by any other corporation of which more than one-fourth of the
capital stock is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or
revocation of such license. Under the
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Telecommunications Act of 1996, non-citizens may serve as officers and directors
of a broadcast licensee and any corporation controlling, directly or indirectly,
such licensee. The Company is restricted by the Communications Act from having
more than one-fourth of its capital stock owned by non-citizens, foreign
governments or foreign corporations, but not from having an officer or director
who is a non-citizen.
Television broadcasting licenses generally are granted and renewed for
a period of eight years, but may be renewed for a shorter period upon a finding
by the FCC that the "public interest, convenience and necessity" would be served
thereby. At the time application is made for renewal of a television license,
parties in interest as well as members of the public may apprise the FCC of the
service the station has provided during the preceding license term and urge the
grant or denial of the application. Under the Telecommunications Act of 1996 as
implemented in the FCC's rules, a competing application for authority to operate
a station and replace the incumbent licensee may not be filed against a renewal
application and considered by the FCC in deciding whether to grant a renewal
application. The statute modified the license renewal process to provide for the
grant of a renewal application upon a finding by the FCC that the licensee (1)
has served the public interest, convenience, and necessity; (2) has committed no
serious violations of the Communications Act or the FCC's rules; and (3) has
committed no other violations of the Communications Act or the FCC's rules which
would constitute a pattern of abuse. If the FCC cannot make such a finding, it
may deny a renewal application, and only then may the FCC accept other
applications to operate the station of the former licensee. In the vast majority
of cases, broadcast licenses are renewed by the FCC even when petitions to deny
are filed against broadcast license renewal applications. All of the Company's
existing licenses are in effect and are subject to renewal at various times
during 2005, 2006 and 2007. Although there can be no assurance that the
Company's licenses will be renewed, the Company is not aware of any facts or
circumstances that would prevent the Company from having its licenses renewed.
FCC regulations govern the multiple ownership of broadcast stations and
other media on a national and local level. The Telecommunications Act of 1996
directs the FCC to eliminate or modify certain rules regarding the multiple
ownership of broadcast stations and other media on a national and local level.
Pursuant to this directive, the FCC has revised its rules to eliminate the limit
on the number of television stations that an individual or entity may own or
control nationally, provided that the audience reach of all television stations
owned does not exceed 35% of all U.S. households. For purposes of this
calculation, stations in the UHF band, which covers channels 14 - 69, are
attributed with only 50% of the households attributed to stations in the VHF
band, which covers channels 2 - 13. Under its recently revised ownership rules,
if an entity has attributable interests in two television stations in the same
market, the FCC will count the audience reach of that market only once for
purposes of applying the national ownership cap.
During 1999, the FCC relaxed its "television duopoly" rule, which
previously barred any entity from having an attributable interest in two
television stations with overlapping service areas. The FCC's new television
duopoly rule permits a party to have attributable interests in two television
stations without regard to signal contour overlap provided the stations are
licensed to separate DMAs, as determined by Nielsen. In addition, the new rule
permits parties to own up to two television stations in the same DMA as long as
at least eight independently owned and operating full-power television stations
remain in the market at the time of acquisition, and at least one of the two
stations is not among the top four ranked stations in the DMA based on specified
audience share measures. The FCC also may grant a waiver of the television
duopoly rule if one of the two television stations is a "failed" or "failing"
station, if the proposed transaction would result in the construction of an
unbuilt television station or if extraordinary public interest factors are
present. With the changes in the FCC's rule on television duopolies, the
Company's common ownership of KNTV and KBWB is fully consistent with the
Commission's rules. The Company also is seeking to establish a second television
duopoly in the Buffalo, New York DMA. The Company currently owns WKBW, Buffalo,
New York and has filed an assignment application requesting FCC consent to
acquire WNGS, which also is located in the Buffalo DMA. See "Recent
Developments--WNGS Acquisition." The Company believes that this joint ownership
is fully consistent with the FCC's new television duopoly rule.
The FCC also relaxed its "one-to-a-market" rule in 1999, which
restricts the common ownership of television and radio stations in the same
market. One entity may now own up to two television stations and six radio
stations in the same market provided that: (1) 20 independent voices (including
certain newspapers and a single cable system) will remain in the relevant market
following consummation of the proposed transaction, and
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(2) the proposed combination is consistent with the television duopoly and local
radio ownership rules. If fewer than 20 but more than 9 independent voices will
remain in a market following a proposed transaction, and the proposed
combination is otherwise consistent with the FCC's rules, a single entity may
have attributable interests in up to two television stations and four radio
stations. If neither of these various "independent voices" tests are met, a
party generally may have an attributable interest in no more than one television
station and one radio station in a market. The FCC's rules restrict the holder
of an attributable interest in a television station from also having an
attributable interest in a daily newspaper or cable television system serving a
community located within the coverage area of that television station.
The FCC also recently eliminated its "cross-interest" policy, which had
prohibited common ownership of an attributable interest in one media outlet and
a "meaningful", non-attributable interest in another media outlet serving
essentially the same market.
Although the FCC's recent revisions to its broadcast ownership rules
became effective on November 16, 1999, several petitions have been filed at the
FCC seeking reconsideration of the new rules. The Company cannot predict the
outcome of these reconsideration requests.
As directed by the Telecommunications Act of 1996, the FCC has
eliminated its prior restriction on the common ownership of a cable system and a
television network. Although the statute lifts the prior statutory restriction
on the common ownership of a cable television system and a television station
located in the same geographic market, the FCC is not statutorily required to
eliminate its regulatory restriction on such common ownership. The FCC has
initiated a proceeding to solicit comments on retaining, modifying, or
eliminating this regulatory restriction. The Telecommunications Act of 1996
authorizes the FCC to permit the common ownership of multiple television
networks under certain circumstances.
Ownership of television licensees generally is attributed to officers,
directors and shareholders who own 5% or more of the outstanding voting stock of
a licensee, except that certain institutional investors who exert no control or
influence over a licensee may own up to 20% of such outstanding voting stock
before attribution results. Under FCC regulations, debt instruments, non-voting
stock and certain limited partnership interests (provided the licensee certifies
that the limited partners are not "materially involved" in the media-related
activities of the partnership) and voting stock held by minority shareholders
where there is a single majority shareholder generally will not result in
attribution. However, under the FCC's new "equity-debt plus" rule, a party will
be deemed to be attributable if it owns equity (including all stockholdings,
whether voting, non-voting, common or preferred) and debt interests, in the
aggregate, exceeding 33% of the total asset value (including debt and equity) of
the licensee and it either provides 15% of the station's weekly programming or
owns an attributable interest in another broadcast station, cable system or
daily newspaper in the market. The "equity-debt plus" attributable rule will
apply even if there is a single majority shareholder. Under the FCC's multiple
and cross-ownership rules, which have been revised in accordance with the
Telecommunications Act of 1996, an officer or director of the Company, a party
attributable under the "equity-debt plus" rule or a holder of the Company's
voting common stock who has an attributable interest in other broadcast
stations, a cable television system or a daily newspaper may violate the FCC
regulations depending on the number and location of the other broadcasting
stations, cable television systems or daily newspapers attributable to such
person. None of the Company's officers, directors or holders of voting common
stock have attributable or non-attributable interests in broadcasting stations,
cable television systems or daily newspapers that violate the FCC's multiple and
cross-ownership rules.
In addition, for purposes of its national and local multiple ownership
rules, the FCC recently revised its rules to attribute local marketing
agreements ("LMAs") that involve more than 15% of the brokered station's weekly
program time. Thus, if an entity owns one television station in a market and has
a qualifying LMA with another station in the same market, this arrangement must
comply with all of the FCC's ownership rules including the television duopoly
rule. LMA arrangements entered into prior to November 5, 1996 are grandfathered
until 2004. LMAs entered into on or after November 5, 1996 have until
approximately August 2001 to come into compliance with this requirement.
Petitions for reconsideration of this FCC rule change are pending. The Company
cannot predict the outcome of these reconsideration requests.
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Irrespective of the FCC rules, the Justice Department and the Federal
Trade Commission (together the "Antitrust Agencies") have the authority to
determine that a particular transaction presents antitrust concerns. The
Antitrust Agencies have recently increased their scrutiny of the television and
radio industries, and have indicated their intention to review matters related
to the concentration of ownership within markets (including LMAs) even when the
ownership or LMA in question is permitted under the regulations of the FCC.
There can be no assurance that future policy and rulemaking activities of the
Antitrust Agencies will not impact the Company's operations.
The Telecommunications Act of 1996 authorizes the FCC to issue
additional licenses for digital television ("DTV") services only to Existing
Broadcasters (as defined herein). DTV is a technology that will improve the
technical quality of television service. The Telecommunications Act of 1996
directs the FCC to adopt rules to permit Existing Broadcasters to use their DTV
channels for various purposes, including foreign language, niche, or other
specialized programming. The statute also authorizes the FCC to collect fees
from Existing Broadcasters who use their DTV channels to provide services for
which payment is received. See "Digital Television Service."
In accordance with requirements of the Telecommunications Act of 1996,
the FCC has approved a voluntary rating system proposed by the broadcast
industry to identify video programming that contains sexual, violent or such
other material about which parents should be informed prior to viewing by
children. The rating system also indicates the appropriateness of the
programming for children according to age and/or maturity. The rating system
applies to all television programming except news, sports and unedited movies
rated by the Motion Picture Association of America.
In connection with this programming rating system, the FCC also has
established technical requirements of equipping new television receivers with a
device, termed a "V-chip," which will permit parents to block programming with a
common rating designation from their television sets. All new television
receiver models with picture screens 13 inches or greater are required to be
equipped with this "V-chip."
Pursuant to the Balanced Budget Act of 1997, the FCC has adopted
competitive bidding procedures to select among mutually exclusive applications
for licenses for new commercial broadcast stations and major modifications to
existing broadcast facilities.
THE CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION
The Cable Television Consumer Protection and Competition Act of 1992
(the "Cable Act") and the FCC's implementing regulations give television
stations the right to control the use of their signals on cable television
systems. Under the Cable Act, at three year intervals beginning in June 1993,
each television station is required to elect whether it wants to avail itself of
must-carry rights or, alternatively, to grant retransmission consent. If a
television station elects to exercise its authority to grant retransmission
consent, cable systems are required to obtain the consent of that television
station for the use of its signal and could be required to pay the television
station for such use. The Cable Act further requires mandatory cable carriage of
all qualified local television stations electing their must-carry rights or not
exercising their retransmission rights. Under the FCC's rules, television
stations were required to make their election between must-carry and
retransmission consent status by October 1, 1999, for the period from January 1,
2000 through December 31, 2002. Television stations that fail to make an
election by the specified deadline are deemed to have elected must-carry status
for the relevant three year period. For the three year period beginning January
1, 2000, each of the Company's stations has either elected its must-carry
rights, entered into retransmission consent agreements, or obtained an extension
to permit the Company to continue negotiating a retransmission consent agreement
with substantially all cable systems in its DMA. The FCC currently is conducting
a rulemaking proceeding to determine the scope of the cable systems' carriage
obligations with respect to digital broadcast signals during and following the
transition from analog to DTV service.
DIGITAL TELEVISION
The FCC has adopted rules authorizing DTV service and intends to adopt
other rules to implement the new service. In 1996, the FCC adopted a
transmission standard for DTV which is consistent with a consensus agreement
voluntarily developed by a broad cross-section of parties, including the
broadcasting, equipment manufacturing and computer industries. This digital
standard should improve the quality of both the audio and
-12-
video signals of television stations. The FCC has "set aside" channels within
the existing television spectrum for DTV and limited initial DTV eligibility to
existing television stations and certain applicants for new television stations
("Existing Broadcasters"). The FCC has adopted a DTV table of allotments as well
as service and licensing rules to implement the service. The DTV allotment table
provides a channel for DTV operations for each Existing Broadcaster and is
intended to enable Existing Broadcasters to replicate their existing service
areas. The affiliates of CBS, NBC, ABC and Fox in the ten largest U.S.
television markets were required to initiate commercial DTV service with a
digital signal by May 1, 1999. Affiliates of these networks located in the 11th
through the 30th largest U.S. television markets were required to begin DTV
operation by November 1, 1999. All other commercial stations are required to
begin DTV broadcasts by May 1, 2002. All of the company-owned stations must meet
the May 1, 2002 construction deadline. By 2006, broadcasters will have to
convert to DTV service, terminate their existing analog service and surrender
their present analog channel to the FCC. The FCC has begun issuing construction
permits for DTV operations to broadcast licensees. All of the Company's
stations, have filed applications requesting FCC authorization to begin
construction of DTV facilities. Each station also has requested FCC consent to
maximize its digital facilities and technical operations. Stations KBWB and KNTV
have authorization to construct their digital facilities, and KNTV already has
commenced its digital operations.
Due to additional equipment requirements, implementation of DTV service
will impose substantial additional costs on television stations. It is also
possible that advances in technology may permit Existing Broadcasters to enhance
the picture quality of existing systems without the need to implement DTV
service in a high definition format. The Company will incur significant expense
for DTV conversion and is unable to predict the extent or timing of consumer
demand for any such digital television services.
The FCC has adopted rules that will require the Company to pay a fee of
5% of the gross revenues received from any ancillary or supplemental uses of the
DTV spectrum for which the Company charges subscription fees or other specified
compensation. No fees will be due for commercial advertising revenues received
from free over-the-air broadcasting services. The FCC also has initiated a
rulemaking proceeding to examine: (1) whether, and to what extent, cable "must
carry" obligations should be applied to DTV signals; and (2) various DTV tower
siting issues. The Commission has initiated a notice of inquiry to examine
whether additional public interest obligations should be imposed on DTV
licensees. The FCC also has initiated a rulemaking proceeding to examine a
number of issues that have arisen as television stations convert from analog to
digital operations, including tower siting, signal replication and several other
matters.
SATELLITE HOME VIEWER IMPROVEMENT ACT
The Satellite Home Viewer Improvement Act ("SHVIA") enables satellite
carriers to provide more television programming to subscribers. Specifically,
SHVIA: (1) provides a statutory copyright license to enable satellite carriers
to retransmit a local television broadcast station into the station's local
market (i.e., provide "local-into-local" service); (2) permits the continued
importation of distant network signals (i.e., network signals that originate
outside of a satellite subscriber's local television market or designated market
areas ("DMA") for certain existing subscribers; (3) provides broadcast stations
with retransmission consent rights in their local markets; and (4) mandates
carriage of broadcast signals in their local markets after a phase-in period.
"Local markets" are defined to include both a station's DMA and its county of
license.
SHVIA requires that, with several exceptions, satellite carriers may
not retransmit the signal of a television broadcast station without the express
authority of the originating station. Such express authorization is not needed,
however, when satellite carriers retransmit a station's signal into its local
market (i.e., provide local-into-local transmissions) prior to May 28, 2000.
This retransmission can occur without the station's consent. Beginning May 29,
2000, however, a satellite carrier must obtain a station's consent before
retransmitting its signal within the local market. Additional exceptions to the
retransmission consent requirement exist for noncommercial stations, certain
superstations and broadcast stations that have asserted their must-carry rights.
In addition, SHVIA permits satellite carriers to provide distant or
nationally broadcast programming to subscribers in "unserved" households (i.e.,
households are unserved by a particular network if they do not receive a signal
of at least Grade B intensity from a station affiliated with that network) until
December 31, 2004.
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However, satellite television providers can retransmit the distant signals of no
more than two stations per day for each television network.
SHVIA provides for mandatory carriage of television broadcast stations
by satellite carriers, effective January 1, 2002, under certain circumstances.
Effective January 1, 2002, a satellite carrier that retransmits one local
television broadcast station into its local market under a retransmission
consent agreement must carry all television broadcast stations in that same
market upon request. Satellite carriers are not required, however, to carry the
signal of a station that substantially duplicates the programming of another
station in the market, and are not required to carry more than one affiliate of
the same network in a given market unless the television stations are located in
different states.
In addition, SHVIA requires the FCC to commence a rulemaking proceeding
that extends the network nonduplication, syndicated exclusivity and sports
blackout rules to the satellite retransmission of nationally distributed
superstations. The FCC already has initiated several rulemaking proceedings, as
required by SHVIA, to implement certain aspects of this Act. Pursuant to SHVIA,
satellite carriers are beginning to offer local broadcast signals to subscribers
in some of the nation's largest television markets. To date, however, these
carriers have concentrated on retransmitting local broadcast programming offered
by Fox, ABC, NBC and CBS affiliates. Satellite carriers have not yet begun to
retransmit the signals of stations that are either affiliated with the WB or
other networks outside the top four, or located in smaller television markets.
Beginning May 29, 2000, satellite carriers that seek to retransmit the broadcast
signals of the Company's stations into the stations' respective local markets
will be required to negotiate the terms of this retransmission with the Company.
In addition, after January 1, 2002, the Company's stations, especially those
located in the larger television markets, may be permitted to invoke must carry
rights to require satellite distribution of their signals into local markets. At
this point, however, the Company cannot predict when, or how extensively,
satellite carriers will seek to retransmit the signals of the Company's
stations, or those of the stations' competitors, into local markets.
PROPOSED LEGISLATION AND REGULATIONS
The FCC currently has under consideration and the Congress and the FCC
may in the future consider and adopt new or modify existing laws, regulations
and policies regarding a wide variety of matters that could, directly or
indirectly, affect the operation, ownership, and profitability of the Company's
broadcast properties, result in the loss of audience share and advertising
revenues for the Company's stations, and affect the ability of the Company to
acquire additional stations or finance such acquisitions. Such matters include:
(i) spectrum use or other fees on FCC licensees; (ii) matters relating to
minority and female involvement in the broadcasting industry; (iii) rules
relating to political broadcasting and advertising; (iv) technical and frequency
allocation matters; (v) changes in the FCC's cross-interest, multiple ownership
and cross-ownership rules and policies; (vi) changes to broadcast technical
requirements; (vii) changes to the standards governing the evaluation and
regulation of television programming directed towards children, and violent and
indecent programming; (viii) restrictions on the advertisement of certain
alcoholic products; (ix) an examination of whether the cable must-carry
requirement mandates carriage of both analog and digital television signals; (x)
an examination of legislation and FCC rules governing the ability of viewers to
receive local and distant television network programming directly via satellite;
and (xi) an examination of issues that have arisen during the transition from
analog to digital television service. The Company cannot predict whether such
changes will be adopted or, if adopted, the effect that such changes would have
on the business of the Company.
As an example of the above proposed changes, the FCC has a rulemaking
proceeding pending where it seeks comment on whether it should relax attribution
and other rules to facilitate greater minority and female ownership. This
proceeding currently is being held in abeyance due to uncertainty created by a
1995 Supreme Court decision which narrowed the legal basis for affirmative
action programs. The Telecommunications Act of 1996 requires the FCC to review
the broadcast ownership rules every two years and to repeal or modify any rules
that are determined to no longer be in the public interest.
The FCC also has initiated a notice of inquiry proceeding seeking
comment on whether the public interest would be served by establishing limits on
the amount of commercial matter broadcast by television stations. No prediction
can be made at this time as to whether the FCC will impose any limits on
commercials at the conclusion
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of its deliberation. The imposition of limits on the commercial matter broadcast
by television stations may have an adverse effect on the Company's revenues.
On November 29, 1999, Congress enacted the Community Broadcasters
Protection Act, which created a new "Class A" status for low power television
stations. Under this new statute, certain LPTV stations which previously had
secondary status to full power television stations, are eligible for "Class A"
status and are entitled to protection from future displacement by full-power
television stations under certain circumstances. The FCC has initiated
rulemaking proceedings to adopt rules governing the extent of interference
protection that must be afforded to Class A stations and the eligibility
criteria for these stations. Since Class A stations are required to provide
interference protection to full-power television stations, these new facilities
are not expected to adversely affect the operations of the Company's television
stations.
Legislation also has been introduced in the U.S. Congress to provide a
tax deferral on gains made from the sale of telecommunications businesses in
specific circumstances. This tax deferral is designed to promote greater
diversity in the ownership of telecommunications businesses. The Company, at the
present time, cannot predict how this legislation will affect its operations, if
adopted.
SEASONALITY
The Company's operating revenues are generally lower in the first
calendar quarter and generally higher in the fourth calendar quarter than in the
other two quarters, due in part to increases in retail advertising in the fall
months in preparation for the holiday season, and in election years due to
increased political advertising.
EMPLOYEES
The Company and its subsidiaries currently employ approximately 940
persons, of whom approximately 279 are represented by three unions pursuant to
contracts expiring in 2000, 2001 and 2002 (and one of which has expired but
which the Company is currently renegotiating) at the Company's stations. The
Company believes its relations with its employees are good.
-15-
ITEM 2. PROPERTIES
The Company's principal executive offices are located in New York, New
York. The lease agreement, for approximately 9,500 square feet of office space
in New York, expires January 31, 2011.
The types of properties required to support each of the Company's
stations include offices, studios, transmitter sites and antenna sites. A
station's studios are generally housed with its offices in downtown or business
districts. The transmitter sites and antenna sites are generally located so as
to provide maximum market coverage.
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The following table contains certain information describing the general
character of the Company's properties:
METROPOLITAN OWNED OR EXPIRATION
STATION AREA AND USE LEASED APPROXIMATE SIZE OF LEASE
KNTV SAN JOSE, CALIFORNIA
Office and Studio Owned 26,469 sq. feet -
Tower Site Leased 2,080 sq. feet 9/30/02
Low Power Transmission Site Leased 100 sq. feet 1/1/01(1)
WTVH SYRACUSE, NEW YORK
Office and Studio Owned 41,500 sq. feet -
ONONDAGA, NEW YORK
Tower Site Owned 2,300 sq. feet -
KSEE FRESNO, CALIFORNIA
Office and Studio Owned 32,000 sq. feet -
BEAR MOUNTAIN, FRESNO
COUNTY, CALIFORNIA
Tower Site Leased 9,300 sq. feet 3/22/51
WPTA FORT WAYNE, INDIANA
Office, Studio and Tower Site Owned 18,240 sq. feet -
WEEK PEORIA, ILLINOIS
Office, Studio and Tower Site Owned 20,000 sq. feet -
BLOOMINGTON, ILLINOIS
Studio and Sales Office Leased 617 sq. feet (2)
KBJR DULUTH, MINNESOTA, SUPERIOR, WISCONSIN
Office and Studio Owned 20,000 sq. feet -
Tower Site Owned 3,300 sq. feet -
KBWB SAN FRANCISCO, CALIFORNIA
Office and Studio Leased 25,777 sq. feet 8/31/02
Tower Site Leased 2,750 sq. feet 2/28/05
WKBW BUFFALO, NEW YORK
Office and Studio Owned 32,000 sq. feet -
COLDEN, NEW YORK
Tower Site Owned 3,406 sq. feet -
WDWB SOUTHFIELD, MICHIGAN
Office Leased 8,850 sq. feet 12/31/00
SOUTHFIELD, MICHIGAN
Studio and Tower Site Leased(3) 30,000 sq. feet 9/30/06
(1) Assuming exercise of all of the Company's renewal options under
such lease.
(2) This lease is in effect on a month-to-month basis.
(3) The Company owns a 3,400 square foot building on the property.
-17-
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On each of January 8, 1999 and February 23, 1999, the holders of all of
the Company's Voting Common Stock adopted resolutions by written consent in lieu
of a special meeting amending the Granite Broadcasting Corporation Stock Option
Plan (a copy of the Stock Option Plan is filed as exhibit 10.1 hereto).
On April 27, 1999, the holders of all of the Company's Voting Common
Stock adopted resolutions by written consent in lieu of an annual meeting
appointing Ernst & Young LLP as independent auditors of the Company and electing
W. Don Cornwell, Stuart J. Beck, James L. Greenwald, Martin F. Beck, Edward
Dugger, III, Thomas R. Settle, Charles J. Hamilton, Jr., Robert E. Selwyn, Jr.,
Jon E. Barfield and M. Frederick Brown as directors of the Company.
On July 27, 1999, the holders of all of the Company's Voting Common
Stock adopted resolutions by written consent in lieu of a special meeting
amending the Granite Broadcasting Corporation Directors' Stock Option Plan (a
copy of the Directors' Stock Option Plan is filed as exhibit 10.19 hereto).
-18-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock (Nonvoting) is traded over-the-counter on
the Nasdaq National Market under the symbol GBTVK. As of March 1, 2000, the
approximate number of record holders of Common Stock (Nonvoting) was 145.
The range of high and low prices for the Common Stock (Nonvoting) for
each full quarterly period during 1998 and 1999 is set forth in Note 15 to the
Consolidated Financial Statements in Item 8 hereof. At March 1, 2000, the
closing price of the Common Stock (Nonvoting) was $8.125 per share.
The Company's publicly traded Cumulative Convertible Exchangeable
Preferred Stock, par value $.01 per share (the "Cumulative Convertible
Exchangeable Preferred Stock") was traded on the OTC Bulletin Board under the
symbol GBTVP. The range of high and low prices for each full quarterly period
that the Cumulative Convertible Exchangeable Preferred Stock traded during 1998
and 1999 is set forth in Note 15 to the Consolidated Financial Statements in
Item 8 hereof. As of September 10, 1999, all outstanding shares of the
Cumulative Convertible Exchangeable Preferred Stock were converted into Common
Stock (Nonvoting).
There is no established public trading market for the Company's Class A
Voting Common Stock, par value $.01 per share (the "Voting Common Stock;" the
Voting Common Stock and the Common Stock (Nonvoting) are referred to herein
collectively as the "Common Stock"). As of March 1, 2000, the number of record
holders of Voting Common Stock was 2.
The Company had declared and paid quarterly cash dividends at a
quarterly rate of $.4844 per share on the Cumulative Convertible Exchangeable
Preferred Stock each quarter since its issuance. The Company has never declared
or paid a cash dividend on its Common Stock and does not anticipate paying a
dividend on its Common Stock in the foreseeable future. The payment of cash
dividends on Common Stock is subject to certain limitations under the Indentures
governing the Company's 10-3/8% Senior Subordinated Notes due May 15, 2005,
9-3/8% Senior Subordinated Notes due December 1, 2005 and the 8-7/8% Senior
Subordinated Notes due May 15, 2008, respectively, and is restricted under the
Company's Credit Agreement. The Company is also prohibited from paying dividends
on any Common Stock until all accrued but unpaid dividends on the Company's
Series A Convertible Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock"), are paid in full. All outstanding shares of Series A
Preferred Stock were converted into Common Stock (Nonvoting) in August 1995.
Accrued dividends on the Series A Preferred Stock, which totaled $262,844 at
December 31, 1999, are payable on the date on which such dividends may be paid
under the Company's existing debt instruments.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with the
consolidated financial statements and notes thereto included at Item 8 herein.
The selected consolidated financial data for the years ended December 31, 1995,
1996, 1997, 1998 and 1999 are derived from the Company's audited Consolidated
Financial Statements.
The acquisitions by the Company of its operating properties during the
periods reflected in the following selected financial data materially affect the
comparability of such data from one period to another.
YEARS ENDED DECEMBER 31,
1995 1996 1997 1998 1999
-------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (Dollars in thousands except per share data)
Net revenue................................... $ 99,895 $ 129,164 $ 153,512 $ 161,104 $149,847
Station operating expenses.................... 55,399 72,089 83,729 89,812 92,874
Time brokerage agreement fees................. - 150 600 428 -
Depreciation.................................. 4,514 6,144 5,718 5,388 5,455
Amortization.................................. 7,592 9,737 13,824 18,493 26,667
Corporate expense............................. 3,132 4,800 6,639 8,179 8,862
Non-cash compensation......................... 363 496 986 977 935
-------- -------- -------- -------- --------
Operating income.............................. 28,895 35,748 42,016 37,827 15,054
Equity in net loss (income) of investee....... (439) 995 1,531 973 254
Interest expense, net......................... 27,026 36,765 38,986 38,896 36,352
Non-cash interest expense..................... 1,738 2,087 2,182 2,095 3,115
Gain on sale of assets........................ - - - (57,776) (101,292)
Gain from insurance claim..................... - - - (2,159) (4,079)
Other expenses................................ 798 1,034 1,167 1,381 1,616
-------- -------- -------- -------- --------
Income (loss) before income taxes and (228) (5,133) (1,850) 54,417 79,088
extraordinary item............................
Provision for income tax...................... (555) (761) (1,616) (10,250) (31,574)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item....... (783) (5,894) (3,466) 44,167 47,514
Extraordinary loss net of tax benefit in 1998
and 1999 of $950,000 and $256,655, respectively - (2,891) (5,569) (1,761) (385)
-------- -------- -------- -------- --------
Net income (loss) ............................ $ (783) $ (8,785) $ (9,035) $ 42,406 $ 47,129
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) attributable to common $(4,368) $ (12,310) $ (31,207) $ 16,896 $ 19,912
shareholders..................................
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER COMMON SHARE:
Basic income (loss) before extraordinary item $ (0.74) $ (1.09) $ (2.93) $ 1.80 $ 1.46
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic net income (loss).................... $ (0.74) $ (1.43) $ (3.57) $ 1.63 $ 1.43
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares outstanding. 5,920 8,612 8,765 10,358 13,969
Net income (loss) attributable to common
shareholders - assuming dilution............ $(4,368) $ (12,310) $ (31,207) $ 19,776 $ 21,588
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER COMMON SHARE:
Diluted income (loss) before extraordinary $ (0.74) $ (1.09) $ (2.93) $ 1.27 $ 1.16
item.......................................
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted net income (loss) ................. $ (0.74) $ (1.43) $ (3.57) $ 1.17 $ 1.14
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common share outstanding -
Assuming dilution........................ 5,920 8,612 8,765 16,967 19,012
DECEMBER 31,
----------------------------------------------------------
SELECTED BALANCE SHEET DATA: 1995 1996 1997 1998 1999
-------- ---------- ------------ ----------- ---------
Total assets.................................. $ 452,221 $ 452,563 $633,614 $781,974 $730,591
Total debt.................................... 341,000 351,561 392,779 426,399 303,874
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Redeemable preferred stock.................... 45,488 45,488 207,700 216,351 210,709
Stockholders' equity (deficit) ............... 8,868 (3,135) (33,257) (1,470) 50,084
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain sections of this Form 10-K, including "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain various "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, which represent the
Company's expectations or beliefs concerning future events. The "forward-looking
statements" include, without limitation, the renewal of the Company's FCC
licenses and the Company's ability to meet its future liquidity needs. The
Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
"forward-looking statements". Such factors include, without limitation, general
economic conditions, competition in the markets in which the Company's stations
are located, technological change and innovation in the broadcasting industry
and proposed legislation.
INTRODUCTION
Comparisons of the Company's consolidated financial statements between
the years ended December 31, 1999 and 1998 have been affected by the acquisition
of KBWB, which occurred on July 20, 1998, the sale of WWMT, which occurred on
July 15, 1998, the sale of WLAJ, which occurred on August 17, 1998, the sale of
WEEK-FM, which occurred on July 30, 1999 and the sale of KEYE, which occurred on
August 31, 1999. The comparisons between the years ended December 31, 1998 and
1997 have been affected by the acquisition of KBWB, the acquisition of WDWB,
which occurred on January 31, 1997, and the sales of WWMT and WLAJ.
The Company's revenues are derived principally from local and national
advertising and, to a lesser extent, from network compensation for the broadcast
of programming and revenues from studio rental and commercial production
activities. The primary operating expenses involved in owning and operating
television stations are employee salaries, depreciation and amortization,
programming and advertising and promotion. Amounts referred to in the following
discussion have been rounded to the nearest thousand.
The following table sets forth certain operating data for the three years ended
December 31, 1997, 1998 and 1999:
YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
Operating income........................ $ 42,016,000 $ 37,827,000 $ 15,054,000
Time brokerage agreement fees........... 600,000 428,000 -
Depreciation and amortization........... 19,542,000 23,881,000 32,122,000
Corporate expense....................... 6,639,000 8,179,000 8,862,000
Non-cash compensation................... 986,000 978,000 935,000
Program amortization.................... 9,384,000 11,149,000 15,245,000
Program payments........................ (10,706,000) (11,747,000) (15,429,000)
-------------- ------------ -----------
Broadcast cash flow..................... $ 68,461,000 $ 70,695,000 $ 56,789,000
============= =========== ===========
"Broadcast cash flow" means operating income plus time brokerage
agreement fees, depreciation, amortization, corporate expense, non-cash
compensation and program amortization, less program payments. The Company has
included broadcast cash flow data because such data are commonly used as a
measure of performance for broadcast companies and are also used by investors to
measure a company's ability to service debt. Broadcast cash flow is not, and
should not be used as an indicator or alternative to operating income, net loss
or cash flow as reflected in the consolidated financial statements, is not a
measure of financial performance under generally accepted
-21-
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.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net revenue for the year ended December 31, 1999 totaled $149,847,000;
a decrease of $11,257,000 or 7% as compared to $161,104,000 for the year ended
December 31, 1998. The decrease was primarily due to the loss of political
advertising in a non-election year as well as the loss of Olympic-related
advertising revenue at the Company's CBS affiliated stations. The decrease was
also due to the loss of revenue from the disposition of WWMT and WLAJ in the
third quarter of 1998 and the disposition of KEYE in August of 1999, offset, in
part, by the added revenues from the acquisition of KBWB in the third quarter of
1998 and strong revenue growth at the Company's WB affiliates.
Station operating expenses for the year ended December 31, 1999 totaled
$92,874,000; an increase of $3,062,000 or 3% as compared to $89,812,000 for the
year ended December 31, 1998. The increase was primarily due to increases in
programming and promotion expense at the Company's WB affiliates and in news
expense at the Company's San Francisco duopoly. These increases were offset, in
part, by an overall reduction in expenses resulting from the acquisition and
dispositions.
Amortization increased $8,173,000 or 44% for the twelve months ended
December 31, 1999 as compared to the prior year primarily due to additional
intangible amortization expense associated with the acquisition of KBWB.
Corporate expense increased $682,000, or 8% during the year ended December 31,
1998 compared to the same period a year earlier, primarily due to the expansion
of the Company's Internet business.
The equity in net loss of investee of $254,000 and $973,000 for the
years ended December 31, 1999 and 1998, respectively, resulted from the Company
recognizing its pro rata share of the losses of Datacast, LLC under the equity
method of accounting. The Company has written off its entire investment and no
other charges will be incurred.
Net interest expense decreased $2,543,000 or 7% primarily due to lower
levels of outstanding indebtedness. The Company used the net proceeds from the
sale of KEYE to repay a total of $129,000,000 of debt.
Non-cash interest expense increased $1,020,000 or 49% due to the
amortization of imputed interest on the Company's obligations to the WB Network.
The net gain on asset dispositions of $101,292,000 for the year ended
December 31, 1999 resulted primarily from the sale of KEYE in August 1999. The
net gain on asset dispositions of $57,776,000 for the year ended December 31,
1998 resulted primarily from the sale of WWMT in August 1998.
The gain on insurance settlement resulted from insurance proceeds the
Company received in excess of the net book value of assets that were destroyed
in a fire and, separately, in an ice storm, at KBJR. The Company anticipates
that it will recognize additional gains in 2000 as further insurance proceeds
are received upon replacement of the destroyed assets.
The Company reported income before taxes and extraordinary item of
$79,088,000 for the year ended December 31, 1999. The Company has partially
offset this income with its remaining available net operating loss
carryforwards. The provision for income taxes for the year consists of
$25,508,000 of current federal and state taxes and $5,809,000 of deferred taxes.
During 1999, the Company repurchased $59,255,000 principal amount of
its subordinated notes at various repurchase prices. In connection with the
repurchases, the Company incurred an extraordinary loss after the write-off of
related deferred financing fees, net of tax, of $385,000.
-22-
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net revenue for the year ended December 31, 1998 totaled $161,104,000,
an increase of $7,592,000, or 5% compared to net revenue of $153,512,000 for the
year ended December 31, 1997. Of this increase, $1,193,000 was due to the
inclusion of one additional month of operations of WDWB. The remaining increase
was primarily due to increases in local and national advertising revenue driven
largely by first quarter Olympic spending at the Company's CBS affiliated
stations, heavy political spending and the impact of the acquisition of KBWB,
offset, in part, by the dispositions of WWMT and WLAJ.
Station operating expenses for the year ended December 31, 1998 totaled
$89,812,000, an increase of $6,083,000 or 7% compared to $83,729,000 for the
same period a year earlier. Of this increase, $733,000 was due to the inclusion
of one additional month of operations of WDWB. The remaining increase was
primarily due to increased news, programming, promotion and sales expenses and
the inclusion of operating expenses of KBWB, offset, in part by, the
dispositions of WWMT and WLAJ.
Depreciation and amortization increased $4,339,000 or 22% for the year
ended December 31, 1998 as compared to the prior year primarily due to the
acquisition of KBWB and the inclusion of one additional month of operations of
WDWB, offset, in part, by the disposition of WWMT and WLAJ. Corporate expense
increased $1,540,000, or 23% during the year ended December 31, 1998 compared to
the same period a year earlier, primarily due to higher administrative costs
associated with the expansion of the Company's corporate office.
The equity in net loss of investee of $973,000 and $1,532,000 for the
years ended December 31, 1998 and 1997, respectively, resulted from the Company
recognizing its pro rata share of the losses of Datacast, LLC under the equity
method of accounting.
Net interest expense remained flat for the year ended December 31, 1998
compared to the prior year despite higher levels of outstanding indebtedness as
a result of the Company's strategic plan to reduce its cost of borrowing. During
the first quarter of 1997, the Company repurchased $19,405,000 principal amount
of its 9-3/8% Senior Subordinated Notes due December 1, 2005 (the "9-3/8%
Notes") at a discount. In September 1997, the Company redeemed the entire
outstanding amount of its $60,000,000 principal amount 12.75% Senior
Subordinated Debentures, due September 1, 2002 (the "12.75% Debentures") at a
redemption price of 106.375%. This debt was replaced with credit agreement
borrowings with a lower rate of interest. During the second quarter of 1998, the
Company completed an offering of $175,000,000 of its 8-7/8% Senior Subordinated
Debentures, due May 15, 2008 (the "8-7/8% Notes"). The proceeds of the offering
were used to repay all of the Company's then outstanding borrowings under its
then existing bank credit agreement and to repurchase $22,960,000 principal
amount of its 10-3/8% Senior Subordinated Notes, due May 15, 2005 (the "10-3/8%
Notes") at a repurchase price of 105.75%. During the third quarter of 1998, the
Company used lower rate Credit Agreement borrowings to repurchase an additional
$9,500,000 principal amount of the 10-3/8% Notes at a repurchase price of
101.50%. During the fourth quarter of 1999, the Company used lower rate bank
borrowings to repurchase an additional $46,100,000 principal amount of its
subordinated debt at discounts ranging from 89% to 95%.
The gain on insurance settlement resulted from insurance proceeds
received in excess of the net book value of assets that were destroyed in a fire
at KBJR.
Other expenses increased $214,000 or 18% during the year ended December
31, 1998 as compared to the same period a year earlier primarily due to costs
incurred in connection with the relocation of several employees in 1998.
In connection with the sale of WWMT and WLAJ, the Company recognized a
pre-tax gain for financial statement purposes of $57,776,000 during the third
quarter of 1998. The Company had sufficient net operating loss carryforwards to
offset regular federal taxes on the gain. However, the tax provision for 1998
includes a cash tax of approximately $1,689,000 consisting of federal
alternative minimum taxes and state income taxes.
-23-
In connection with the repurchases of subordinated debt throughout the
year, the Company incurred an extraordinary loss, net of taxes, during the year
ended December 31, 1998 of $1,761,000 relating to premiums paid and the
write-off of deferred financing costs, offset, in part, by the repurchases made
at a discount in the fourth quarter. In connection with the redemption of the
12.75% Debentures and the repurchase of $19,405,000 principal amount of its
9-3/8% Notes, the Company recognized an extraordinary loss during the year ended
December 31, 1997 of $5,569,000 related to net premiums paid and the write-off
of the related deferred financing fees.
LIQUIDITY AND CAPITAL RESOURCES
On July 30, 1999 the Company completed the disposition of WEEK-FM to
the Cromwell Group, Inc. of Chicago for $1,150,000 in cash. On August 31, 1999
the Company completed the disposition of KEYE to CBS Corporation for
$160,000,000 in cash. A portion of the proceeds from the sale of these stations
was used to repay outstanding indebtedness under the Company's Credit Agreement
and to repurchase subordinated debt of the Company. The Company recognized a
pre-tax gain for financial statement reporting purposes on the sale of these
stations of $103,470,000. The Company utilized its remaining net operating loss
carryforwards to partially reduce income for tax purposes. The 1999 tax
provision includes approximately $25,508,000 of current federal and state income
taxes, which were paid in December 1999.
In July 1999, the Company and ABC agreed to terminate the ABC
affiliation of KNTV, effective July 1, 2000. The Company received $14,000,000 in
cash on September 1, 1999 in accordance with the agreement. On February 14,
2000, the Company announced the formation of the Strategic Alliance with NBC.
Pursuant to the Strategic Alliance, KNTV is to become the NBC affiliate in the
San Francisco-Oakland-San Jose California market for a ten-year term commencing
on January 1, 2002. In addition, NBC is to extend the term of the Company's NBC
affiliation agreements with KSEE, WEEK and KBJR until December 31, 2011. As part
of such extension, NBC's affiliation payment obligations to Granite for such
stations will terminate as of December 31, 2001.
In consideration for the San Francisco Affiliation, the Company will
pay NBC $362,000,000 in nine annual installments, with the initial payment in
the amount of $61,000,000 being due January 1, 2002. Granite has also agreed to
pay $2,430,000 during 2001 in promotion expenses in connection with KNTV's
affiliation switch to NBC. See "Recent Developments KNTV Affiliation Change and
NBC Alliance."
On November 16, 1999, the Company entered into a definitive agreement
to acquire WNGS-TV, the UPN affiliate serving Buffalo, New York, from Caroline
K. Powley for $23,000,000 in cash. In connection therewith, the Company made a
$2,000,000 deposit which is refundable, under certain circumstances, if the
acquisition is not completed. The acquisition is subject to satisfaction of
certain conditions, including approval by the FCC. The Company expects to
complete the acquisition in the fourth quarter of 2000.
On June 10, 1998, the Company amended and restated its bank credit
agreement (as amended and restated, the "Credit Agreement") which, among other
things, allows for revolving credit borrowings of $260,000,000 and permits
borrowings of up to an additional $240,000,000 on an uncommitted basis. The
Credit Agreement can be used to fund future acquisitions of broadcast stations
and for general working capital purposes. As of March 23, 1999, February 16,
2000 and March 17, 2000, the Company amended the Credit Agreement to revise the
maximum consolidated total debt to consolidated cash flow ratio covenant
contained therein. As of March 17, 2000, the Company had $11,663,000 of
borrowings outstanding under the Credit Agreement and the ability to borrow in
compliance with the financial covenants thereunder an additional $40,763,000 for
acquisitions and working capital purposes. The Company expects to enter into a
replacement credit agreement (the "New Credit Agreement") during the year 2000
to enable the Company to meet its long-term borrowing needs.
During 1999, the Company repurchased $59,255,000 of its subordinated
debentures at various prices.
Net cash used in operating activities was $26,801,000 during the year
ended December 31, 1999 compared to net cash provided by operating activities of
$19,027,000 and $10,345,000 during the years ended
-24-
December 31, 1998 and 1997, respectively. The change from 1998 to 1999 was
primarily a result of an increase in cash paid for taxes, a decrease in
broadcast cash flow and an increase in net operating assets in 1999. The
increase in net cash provided by operating activities from 1997 to 1998 was
primarily due to a less significant increase in net operating assets, an
increase in broadcast cash flow and a decrease in cash paid for interest in
1998.
Net cash provided by investing activities was $156,471,000 during the
year ended December 31, 1999 compared to net cash used in investing activities
of $43,825,000 and $186,499,000 during the years ended December 31, 1998 and
1997, respectively. Cash provided by investing activities during 1999 resulted
primarily from the sale of KEYE. Cash used in investing activities during 1998
resulted primarily from the purchase of KBWB as well as payments made in
connection with securing the WB Network affiliation agreement at that station,
offset, in part, by proceeds from the sale of WWMT in 1998. Cash used in
investing activities during 1997 resulted primarily from the purchase of WDWB
and the deposit made in advance of the purchase of KBWB.
Net cash used in financing activities was $124,978,000 during the year
ended December 31, 1999 compared to net cash provided by financing activities of
$23,390,000 and $177,769,000 during the years ended December 31, 1998 and 1997,
respectively. The change from 1998 to 1999 resulted primarily from the issuance
of the 8-7/8% Notes during 1998, offset, in part, by a decrease in repurchases
of subordinated debt and a reduction in payment of deferred financing fees in
1999. The decrease in net cash provided by financing activities from 1997 to
1998 resulted primarily from a net decrease in bank borrowings, an increase in
payments for deferred financing fees and the issuance of the 12-3/4% Cumulative
Exchangeable Preferred Stock during 1997, offset in part by the issuance of the
8-7/8% Notes in 1998.
The Company anticipates that future requirements for capital
expenditures will include those incurred during the ordinary course of business,
which include costs associated with the implementation of digital television
technology. The Company believes that internally generated funds from operations
and borrowings under the Credit Agreement and the New Credit Agreement will be
sufficient to satisfy the Company's cash requirements for its existing
operations for the next twelve months and for the foreseeable future thereafter.
The Company expects that any future acquisitions of television stations would be
financed through funds generated from operations and additional debt and equity
financings.
YEAR 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $1,490,000 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are affected by changes in short-term
interest rates as a result of its Credit Agreement. Under its Credit
Agreement, the Company pays interest at floating rates based on Eurodollar.
The Company has not entered into any agreements to hedge such risk. Assuming
the balance under the Credit Agreement as of December 31, 1999 remains
outstanding in 2000, a 2% increase in Eurodollar would increase interest
expense by $340,000. This analysis does not consider the effects of the
reduced level of overall economic activity that could exist in such an
environment. Further, in the event of an increase in interest rates,
management could potentially take actions to mitigate its exposure to the
change.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Granite Broadcasting Corporation
We have audited the accompanying consolidated balance sheets of Granite
Broadcasting Corporation as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a) of the Granite Broadcasting Corporation Form 10K for the fiscal year
ended December 31, 1999. These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Granite
Broadcasting Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 18, 2000
-26-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
Net revenue............................................... $153,511,540 $161,104,371 $149,846,955
Station operating expenses................................ 83,728,786 89,811,723 92,874,454
Time brokerage agreement fees............................. 600,000 427,810 -
Depreciation.............................................. 5,717,989 5,387,800 5,454,819
Amortization.............................................. 13,824,248 18,493,235 26,666,719
Corporate expense......................................... 6,639,159 8,179,232 8,861,640
Non-cash compensation expense............................. 985,634 977,502 935,142
------------ ------------ -------------
Operating income........................................ 42,015,724 37,827,069 15,054,181
Other (income) expenses:
Equity in net loss of investee.......................... 1,531,542 973,439 253,603
Interest expense, net................................... 38,985,979 38,895,358 36,351,950
Non-cash interest expense............................... 2,181,686 2,095,115 3,114,890
Gain on sale of assets.................................. - (57,775,928) (101,291,854)
Gain from insurance claim............................... - (2,158,961) (4,079,207)
Other................................................... 1,167,144 1,381,443 1,616,072
------------ ------------ -------------
Income (loss) before income taxes and
extraordinary item.................................... (1,850,627) 54,416,603 79,088,727
Provision for income taxes.............................. 1,616,212 10,250,000 31,574,238
------------ ------------ -------------
Income (loss) before extraordinary item................... (3,466,839) 44,166,603 47,514,489
Extraordinary loss, net of tax benefit in 1998 and 1999
of $950,000 and $256,655, respectively.................. (5,569,119) (1,761,002) (384,983)
------------ ------------ -------------
Net income (loss)..................................... $ (9,035,958) $ 42,405,601 $ 47,129,506
------------ ------------ -------------
------------ ------------ -------------
Net income (loss) attributable to common shareholders..... $(31,207,468) $16,895,727 $19,912,091
------------ ------------ -------------
------------ ------------ -------------
Per common share:
Basic income (loss) before extraordinary item....... $ (2.93) $ 1.80 $ 1.46
Basic extraordinary loss............................ (0.64) (0.17) (0.03)
------------ ------------ -------------
Basic net income (loss)........................... $ (3.57) $ 1.63 $ 1.43
------------ ------------ -------------
------------ ------------ -------------
Weighted average common shares outstanding................ 8,764,705 10,358,371 13,968,611
Net income (loss) attributable to common shareholders -
assuming dilution......................................... $(31,207,468) $ 19,775,599 $ 21,588,040
Per common share:
Diluted income (loss) before extraordinary item..... $ (2.93) $ 1.27 $ 1.16
Diluted extraordinary loss........................... (0.64) (0.10) (0.02)
------------ ------------ -------------
Diluted net income (loss) ........................... $ (3.57) $ 1.17 $ 1.14
------------ ------------ -------------
------------ ------------ -------------
Weighted average common shares outstanding -
assuming dilution....................................... 8,764,705 16,966,501 19,011,795
See accompanying notes.
-27-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS 1998 1999
- ------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents................................................ $