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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1996 Commission file number 0-19728
GRANITE BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3458782
(State of Incorporation) (I.R.S. Employer
Identification No.)
767 Third Avenue, 34th Floor
New York, New York 10017
(212) 826-2530
(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
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
--- ---
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 10, 1997, 8,582,091 shares of Granite Broadcasting
Corporation Common Stock (Nonvoting) and 1,819,500 shares of Granite
Broadcasting Corporation Cumulative Convertible Exchangeable Preferred Stock
were outstanding. The aggregate market value (based upon the last reported
sale price on the Nasdaq National Market on March 10, 1997) of the shares of
Common Stock (Nonvoting) held by non-affiliates was approximately
$82,148,005. The aggregate market value (based upon the last reported sale
price on the Nasdaq National Market on March 10, 1997) of shares of
Cumulative Convertible Exchangeable Preferred Stock held by non-affiliates
was approximately $97,337,287. (For purposes of calculating the preceding
amounts only, all directors and executive officers of the registrant are
assumed to be affiliates.) As of March 10, 1997, 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 Registration Statement
No. 33-52988, filed on October 6, 1992; 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 Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994, filed on November 14, 1994; 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 May 19, 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 Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, filed on
November 14, 1996; and Granite Broadcasting Corporation's Current Report on
Form 8-K, filed on December 17, 1996.
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
ten 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"); KEYE-TV, the CBS affiliate serving Austin, Texas ("KEYE"); WWMT-TV,
the CBS affiliate serving Grand Rapids-Kalamazoo-Battle Creek, Michigan
("WWMT"); WKBW-TV, the ABC affiliate serving Buffalo, New York ("WKBW"); and
WXON-TV, the WB affiliate serving Detroit, Michigan ("WXON"). 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, KEYE was acquired in February 1995, WWMT and WKBW
were acquired in separate transactions in June 1995 and WXON was acquired in
January 1997. WLAJ-TV, the ABC affiliate serving Lansing, Michigan ("WLAJ")
is currently being operated by the Company pursuant to a time brokerage
agreement that was entered into in October 1996. The Company owns each of
KNTV, WTVH, KSEE, WPTA, KBJR, KEYE, WWMT, WKBW and WXON 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.
Recent Developments
Acquisitions
On January 31, 1997, the Company acquired substantially all the assets
used in the operation of WXON, the WB affiliate serving Detroit, Michigan
(the "WXON Acquisition"), for approximately $175,000,000 in cash and the
assumption of certain liabilities. On January 8, 1997, the Company completed
the acquisition of WIVR-FM in Eureka, Illinois for $1,000,000 in cash. The
Company also changed the station's call letters to WEEK-FM. The radio
station will be run in combination with Granite-owned WEEK-TV, the leading
television station in the Peoria- Bloomington, Illinois television market.
Time Brokerage Agreement and Acquisition Agreement
In October 1996, the Company entered into agreements (the "WLAJ
Agreements") with the owner of WLAJ, the ABC affiliate serving Lansing,
Michigan, including a time brokerage agreement pursuant to which the Company
operates WLAJ. The Company has an agreement to acquire substantially all the
assets used in the operation of WLAJ for approximately $19.4 million in cash
(subject to certain adjustments) and the assumption of certain liabilities.
Other Developments
In April 1996, the Company joined Datacast LLC, a company formed to
establish and operate a national data center and network for the broadcast of
digital data through television station broadcast signals. The other equity
investors in Datacast LLC include Chris-Craft Industries, Inc., Lin
Television Corporation and Schurz Communications Inc. The Company has
committed to invest up to $2,500,000 in Datacast LLC, of which $1,750,000 has
been invested to date.
In June 1996, the Company began an alliance with Yahoo! Inc. which is
intended to extend the news franchise of each Granite station by providing
additional information about local and national news stories on Granite
Station web sites at www.granitetv.com. Both companies are working together
to develop local Yahoo! directories in all markets for which Granite stations
will serve as local advertising representative. The Company believes the
alliance with Yahoo! will enhance its efforts to develop the Internet into a
complementary advertising medium and additional revenue source.
In September 1996, the Company named Robert E. Selwyn, Jr. to the
newly-created position of Chief Operating Officer. Mr. Selwyn has over 20
years of experience in television broadcasting. Most recently, he was
Chairman and Chief Executive Officer of the New World Television Station
Group, where he had oversight responsibility for stations in a wide variety
of markets including Dallas, Detroit, Atlanta, Cleveland, San Diego and
Milwaukee.
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Company and Industry Overview
The following table sets forth general information for each of the
Company's television stations:
Other
Commercial
Market Date of Channel/ Network Market Stations Date of
Station Area Acquisition Frequency Affiliation Rank(1) in DMA FCC License
- - ------- ------ ----------- --------- ----------- ------ ---------- -----------
WXON-TV Detroit, MI 01/31/97 20/UHF WB 9 5 10/01/97
WWMT-TV Grand Rapids -
Kalamazoo -
Battle Creek, MI 06/01/95 3/VHF CBS 37 6 10/01/97
WKBW-TV Buffalo, NY 06/29/95 7/VHF ABC 39 4 06/01/99
KNTV(TV) San Jose,
Salinas -
Monterey, CA 02/05/90 11/VHF ABC 52 5(2) 12/01/98
KSEE-TV Fresno-
Visalia, CA 12/23/93 24/UHF NBC 55 9(3) 12/01/98
KEYE-TV Austin, TX 02/01/95 42/UHF CBS 63 6 08/01/98
WTVH-TV Syracuse, NY 12/23/93 5/VHF CBS 68 4 06/01/99
WPTA-TV Fort Wayne, IN 12/11/89 21/UHF ABC 103 4 08/01/97
WLAJ-TV Lansing, MI Pending(4) 53/UHF ABC 106 3 10/01/97
WEEK-TV Peoria -
Bloomington, IL 10/31/88 25/UHF NBC 110 3 12/01/97
KBJR-TV Duluth, MN -
Superior, WI 10/31/88 6/VHF NBC 134 2 12/01/97
- - ----------------
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 52nd largest DMA in the United States.
All market rank data is derived from an average of the Nielsen Station
Index for November 1996, May 1996, February 1996 and November 1995, unless
otherwise noted.
2 Includes KSMS, Salinas-Monterey and KCU, Salinas, both of which broadcast
entirely in Spanish.
3 Includes KFTV Hanford-Fresno and KMSG, Sanger-Fresno, both of which
broadcast entirely in Spanish.
4 WLAJ is currently being operated by the Company pursuant to a time
brokerage agreement. The Company intends to acquire WLAJ. Before the
Company acquires WLAJ, the station's licensed facilities will be modified
to eliminate certain signal coverage overlap with WWMT so that the Company
can obtain an FCC waiver of the restriction on the number of television
stations that may be under common ownership within the same geographic
market. Although there can be no assurance that the waiver will be
obtained, the Company believes that it will be able to obtain such a
waiver.
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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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1992 1993 1994 1995 1996
----------------- ---------------- ---------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Local/Regional(1). . $23,088 53.5% $25,416 56.3% $38,802 50.9% $60,969 51.0% $73,491 47.5%
National(2) . . 15,367 35.6 16,290 36.1 28,548 37.5 48,995 41.0 61,945 40.0
Network Compensation(3) . 1,427 3.3 1,286 2.8 2,244 2.9 4,154 3.5 7,289 4.7
Political(4). . 1,246 2.9 133 0.3 4,060 5.3 1,498 1.3 7,265 4.7
Other Revenue(5) . . 2,023 4.7 2,041 4.5 2,559 3.4 3,849 3.2 4,851 3.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total. . $43,151 100.0% $45,166 100.0% $76,213 100.0% $119,465 100.0% $154,841 100.0%
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
- - ------------------------
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.
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 20% of the Company's total gross
revenues in 1996. Gross revenues from restaurants and entertainment-related
businesses accounted for approximately 12% of the Company's total gross
revenues in 1996. Each other category of advertising revenue represents less
than 5% of the Company's total gross revenues.
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The following is a description of each of the Company's television
stations:
WXON: Detroit, Michigan
WXON began operating in 1962 and began operating as a WB affiliate in
1995.
Detroit is the 9th largest DMA in the United States with a total of
1,770,000 television households and a population of 4,730,000 according to
Nielsen. Detroit's economy is based on manufacturing, retail and health
services. The largest employers are General Motors, Ford Motor Company,
Chrysler, Detroit Medical Center, Henry Ford Health System and Blue Cross
Blue Shield of Michigan. The median household income in the DMA is $51,392
according to estimates provided in the BIA Investing in Television 1996
Report (the "BIA Report").
WWMT: Grand Rapids - Kalamazoo - Battle Creek, Michigan
WWMT began operations in 1950 and is affiliated with CBS.
The Grand Rapids - Kalamazoo - Battle Creek economy is centered around
manufacturing, health services, education and financial services. The median
household income in the DMA was $44,818, according to estimates provided in
the BIA Report. Leading employers in the area include Pharmacia-UpJohn,
Bronson Medical Center, Borgess Medical Center, Butterworth Hospital, St.
Mary's Health Services, Steel Case, Inc., Amway Corporation, Meijer, Inc.,
James River Corporation, General Motors Corporation and The Kellogg Company.
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 median household income in the DMA was
$39,726, 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 is affiliated with ABC.
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 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 February
1996 Nielsen Monterey/Salinas Viewers In Profile Report more than 62% of the
station's audience resides in the San Francisco-Oakland-San Jose television
market (the fifth largest DMA in the country). The Company believes that
substantially all of such audience resides in Santa Clara County. If Santa
Clara County were a separate DMA with its 522,980 television households, it
would rank as the 52nd largest DMA in the United States.
Santa Clara County has a diverse and affluent economy. The average
effective buying income by household was $57,028, according to the 1995
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.
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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.
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
median income by household in the DMA was $38,732, 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.
KEYE: Austin, Texas
KEYE began operations in 1983. The station, formerly a Fox affiliate,
became a CBS affiliate on July 2, 1995.
The Austin economy benefits from having large private sector employers
such as IBM, Motorola, HEB Stores, Advanced Micro Devices, Abbott
Laboratories, Texas Instruments, Dell Computers, 3M Corporation, Applied
Materials and SEMATECH. Approximately 825 high tech firms employ nearly
85,000 people in the area. This fact, plus the terrain of the region's Hill
Country, has resulted in the Austin area being nicknamed "Silicon Hills."
Since Austin, the nation's 27th largest city, is the state capital, as well
as home to the University of Texas, it also provides a substantial amount of
public sector employment opportunities. The median income per household in
the DMA was $45,741, according to estimates provided in the BIA Report. In
addition to the University of Texas, Southwestern University, Saint Edwards
University and Southwest Texas University are located in the DMA. Total
university enrollment in the DMA is approximately 100,000 students.
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 median income by household in the DMA was $43,036, 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 median income by household
in the DMA was $42,368, according to estimates provided in the BIA Report.
Prominent corporations located in the area include Magnavox, Lincoln National
Life Insurance, General 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.
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WLAJ: Lansing, Michigan
WLAJ began operations in 1990 and is an ABC affiliate.
Lansing is the 106th largest DMA in the United States with a total of
229,000 television households and a population of 639,000. Lansing is the
state capital and its economy is centered around government employment,
education and manufacturing. The largest employers are General Motors, the
State of Michigan, Michigan State University, Meijer Inc., Michigan Capital
Healthcare, Sparrow Hospital and Lansing Community College. The median
household income in the DMA is $46,143 according to estimates provided in the
BIA Report.
WEEK-TV and WEEK-FM: Peoria-Bloomington, Illinois
WEEK began operations in 1953 and is affiliated with NBC. WEEK-FM,
acquired in January 1997, will be run in combination with WEEK-TV.
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 median
income by household in the DMA was $44,705, 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 median income by household
in the DMA was $34,860, 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. Northwest
Airlines has completed construction of two airplane maintenance facilities in
the Duluth area that management estimates added approximately 1,000 jobs to
the Duluth area's economy. Prominent corporations located in the area
include 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 four major
networks, NBC, ABC, CBS or Fox (collectively, the "Networks"), has a
significant impact on the composition of the station's revenues, expenses and
operations. A typical Network affiliate receives the significant portion of
its programming each day from the Network. This programming, along with cash
payments, is provided to the affiliate by the Network in exchange
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for a substantial majority of the advertising inventory during Network
programs. The Network then sells this advertising time and retains the
revenues so generated.
In contrast, a fully independent station purchases or produces all of the
programming which 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
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 other than WXON is affiliated with a
Network pursuant to an affiliation agreement. KSEE, WEEK and KBJR are
affiliated with NBC; KNTV, WPTA, WKBW and WLAJ are affiliated with ABC; and
KEYE, WTVH and WWMT are affiliated with CBS. The Network affiliation
agreements provide for contract terms of ten years (other than the NBC
agreements for which the terms are seven years). WXON has an affiliation
arrangement with the WB Network, which is terminable by either party at will.
Under each of the Company's affiliation agreements, the Networks may
increase or decrease network compensation and, 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.
In substance, each affiliation agreement provides the stations 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, for
every hour that the station elects to broadcast Network programming, the
Network pays the station a fee, specified in each affiliation agreement,
which varies with the time of day. Typically, "prime-time" programming
(Monday through Saturday 8-11 p.m. and Sunday 7-11 p.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.
Competition
The financial success of the Company's television and radio stations is
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, 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), 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 competition 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 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. 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. 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
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, which is the licensee of one of
the existing stations, is restricted by the Communications Act from having
more than one-fifth 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.
-9-
Television broadcasting licenses are generally granted and renewed for a
period of five 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. The Telecommunications Act of 1996 extends the license
period for television stations to eight years. 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 that have come up for
renewal have been renewed and are in effect. Such licenses are subject to
renewal at various times during 1997, 1998 and 1999. 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.
The FCC also has initiated a rulemaking proceeding, in accordance with the
Telecommunications Act of 1996, to determine whether to retain, eliminate, or
modify its limitations on the number of television stations (currently one in
most instances) that an individual or entity may own within the same
geographic market.
Pursuant to the Telecommunications Act of 1996, the FCC has eliminated
the limit on the number of radio broadcast stations that an individual or
entity may own or control nationally. The FCC also has relaxed its local
radio multiple ownership rules governing the common ownership of radio
broadcast stations in the same geographic market. In accordance with the
Telecommunications Act of 1996, the FCC's rules permit the common ownership
of up to eight commercial radio stations, not more than five of which are in
the same service (i.e., AM or FM), in markets with 45 or more commercial
radio stations. In markets with 30 to 44 commercial radio stations, an
individual or entity may own up to seven commercial radio stations, not more
than four of which are in the same service. In markets with 15 to 29
commercial radio stations, an individual or entity may own up to six
commercial radio stations, not more than four of which are in the same
service. In markets with 14 or fewer commercial radio stations, an
individual or entity may own up to five commercial radio stations, not more
than three of which are in the same service, provided that the commonly owned
stations represent no more than 50% of the stations in the market.
The Telecommunications Act of 1996 does not eliminate the FCC's rules
restricting the common ownership of a radio station and a television station
in the same geographic market ("one-to-a-market rule") and the common
ownership of a daily newspaper and a broadcast station located in the same
geographic market. The statute, however, does relax the FCC's one-to-a-market
rule by authorizing the FCC to extend its waiver policy to stations located
in the 50 largest television markets. 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,
-10-
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.
Furthermore, in accordance with the statute, the FCC has initiated a review
of all of its ownership rules to determine whether they continue to serve the
public interest.
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 10% 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. Under the FCC's
multiple and cross-ownership rules, which have been or will be revised in
accordance with the Telecommunications Act of 1996, an officer or director of
the Company 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. In addition, the FCC's
cross-interest policy, which precludes an individual or entity from having an
attributable interest in one media property and a "meaningful" (but not
attributable) interest in another media property in the same area, may be
invoked in certain circumstances to reach interests not expressly covered by
the multiple ownership rules. 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 or the
cross-interest policy.
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 local
marketing agreements ("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 advanced television ("ATV") services only to Existing
Broadcasters (as defined herein). ATV 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
ATV 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 ATV channels to provide
services for which payment is received. Prior to the enactment of the
Telecommunications Act of 1996, members of Congress sought assurance from the
FCC that it would not implement any plan to award spectrum for ATV service
until additional legislation is enacted to resolve spectrum issues such as
whether broadcasters would be required to pay for ATV licenses. In response
to this request, the FCC stated that it would not award licenses or
construction permits for ATV service until such additional legislation is
enacted to address ATV spectrum issues. Such legislation, if adopted, may
require existing television broadcasters to pay for ATV licenses.
The Cable Television Consumer Protection and Competition Act
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
-11-
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, 1996, for the period from January
1, 1997 through December 31, 1999. Television stations that failed to make
an election by the specified deadline were deemed to have elected must-carry
status for the relevant three year period. Each of the Company's stations
has either elected its must-carry rights or entered into retransmission
consent agreements with substantially all cable systems in its DMA. KNTV has
elected to exercise its must-carry rights in both the Salinas-Monterey DMA
and Santa Clara County. The Company's other stations have elected to require
retransmission consent in substantially all cases. Approximately 60% of the
households in the geographic areas with respect to which the Company's
stations have elected to exercise their retransmission rights subscribe to
cable television.
In April 1993 the U.S. District Court for the District of Columbia upheld
the constitutionality of the must-carry provisions of the Cable Act.
However, on June 27, 1994, the U.S. Supreme Court vacated the lower court's
judgment and remanded the case to the District Court for further proceedings.
Although the Supreme Court found the must-carry rules to be content-neutral,
it also found that genuine issues of material fact still remained that must
be resolved on a more detailed evidentiary record. On remand, on December
13, 1995, the District Court upheld the constitutionality of the must-carry
rules. An appeal of the District Court's decision is pending before the
Supreme Court. In the meantime, however, the FCC's must-carry regulations
implementing the Cable Act remain in effect. The Company cannot predict the
outcome of such challenges. If the Supreme Court finds the must-carry rules
to be unconstitutional, some cable systems may delete carriage of signals of
some of the Company's stations and it is likely that either Congress or the
FCC will attempt to enact new must-carry requirements intended to withstand
constitutional scrutiny.
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)
the FCC's equal employment opportunity rules and other matters relating to
minority and female involvement in the broadcasting industry; (iii) rules
relating to political broadcasting; (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) limiting the tax deductibility of advertising expenses by
advertisers; and (viii) changes to the standards governing the evaluation and
regulation of television programming directed towards children, and violent
and indecent programming. 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 initiated
rulemaking proceedings to solicit comments on its multiple ownership,
attribution and minority ownership rules. More particularly, the FCC has
initiated proceedings requesting comment on: (i) narrowing the geographic
area where common ownership restrictions would be triggered by limiting it to
overlapping "Grade A" contours rather than "Grade B" contours and by
permitting (or granting waivers or exceptions for) certain UHF or UHF/VHF
station combinations; (ii) relaxing the rules prohibiting cross-ownership of
radio and television stations in the same market to allow certain
combinations where there remain alternative outlets and suppliers to ensure
diversity; (iii) treating television LMAs the same as radio LMAs, which would
currently preclude certain television LMAs where the programmer owns or has
an attributable interest in another television station in the same market;
(iv) establishing a grandfathering policy for certain television LMAs in the
event the FCC decides to treat interests in such LMAs as attributable; and
(v) treating a company's interest in a joint sales agreement for a television
station as an attributable interest for purposes of the FCC's ownership
rules. The FCC also 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
-12-
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 Company cannot predict the outcome of the FCC's
rulemaking proceedings or how FCC changes in its multiple and cross-ownership
rules, made in accordance with the Telecommunications Act of 1996, will
affect the Company's business.
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 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.
The FCC has begun adopting rules and proposing others to implement
advanced television service ("ATV") which includes high definition television
systems. ATV is a technology that will improve television audio and video
quality. The FCC has "set aside" channels within the existing television
system for ATV and has limited initial ATV eligibility to existing television
stations and certain applicants for new television stations ("Existing
Broadcasters"). The FCC has determined that ATV will be a digital system
which is incompatible with current television transmitters and receivers.
The rules for phasing in ATV service permit each television station to
provide conventional television service on its regular channel until some
point after ATV service has commenced. The FCC is seeking comments on a
timetable for requiring broadcasters to convert to ATV. Broadcasters will
have to convert to ATV by the conversion deadline and surrender then one
channel back to the FCC. The FCC issued for public comment a proposed ATV
Table of Allotments intended to provide an ATV channel for each Existing
Broadcaster, in a manner that attempts to replicate each station's existing
coverage area while taking into account interference to existing television
stations and between ATV stations. On December 26, 1996, the FCC adopted a
standard for the transmission of digital television in the United States,
which is consistent with a consensus agreement voluntarily developed by a
broad cross-section of parties, including the broadcasting, equipment
manufacturing and computer industries. Implementation of ATV service will
impose substantial additional costs on television stations to provide the new
service, due to increased equipment costs. 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 ATV service. Although the
Company believes the FCC will authorize ATV service, the Company cannot
predict when such authorization might be given or the effect such
authorization might have on the Company's business or capital expenditure
requirements.
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 1,170
persons, of whom approximately 277 are represented by two unions (including
11 bargaining units) pursuant to contracts expiring in 1997, 1998, 1999 and
2000 at the Company's stations. The Company believes its relations with its
employees are good.
-13-
Item 2. Properties
The Company's principal executive offices are located in New York, New
York. The lease agreement, for approximately 6,800 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.
-14-
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 9/30/97
Low Power Transmission Site Leased 100 sq. feet 1/1/2001(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 3/22/2034
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 12/31/97
KBJR Duluth, Minnesota,
Superior, Wisconsin
Office and Studio Owned 15,749 sq. feet --
Tower Site Owned 3,125 sq. feet --
KEYE Austin, Texas
Office and Studio Owned 14,000 sq. feet --
Tower Site Leased 1,600 sq. feet 5/1/98
WWMT Kalamazoo, Michigan
Office and Studio Owned 45,000 sq. feet --
Gun Lake, Michigan
Tower Site Owned 3,580 sq. feet --
WKBW Buffalo, New York
Office and Studio Owned 32,000 sq. feet --
Colden, New York
Tower Site Owned 3,406 sq. feet --
WXON Southfield, Michigan
Office Leased 8,850 sq. feet 5/31/99
Southfield, Michigan
Studio and Tower Site Leased(2) 30,000 sq. feet 9/30/06
- - ---------
1 Assuming exercise of all of the Company's renewal options under such lease.
2 The Company owns a 3,400 square foot building on the property.
-15-
Item 3. Legal Proceedings
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
-16-
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 10, 1997, the
approximate number of record holders of Common Stock (Nonvoting) was 126.
The range of high and low prices for the Common Stock (Nonvoting) for each
full quarterly period during 1995 and 1996 is set forth in Note 13 to the
Consolidated Financial Statements in Item 8 hereof. At March 10, 1997, the
closing price of the Common Stock (Nonvoting) was $10.50 per share.
The Company's publicly traded Cumulative Convertible Exchangeable Preferred
Stock, par value $.01 per share (the "Cumulative Convertible Exchangeable
Preferred Stock") is traded over-the-counter on the Nasdaq National Market under
the symbol GBTVP. The range of high and low prices for each full quarterly
period during 1995 and 1996, is set forth in Note 13 to the Consolidated
Financial Statements in Item 8 hereof. As of March 10, 1997, the closing price
for the Cumulative Convertible Exchangeable Preferred Stock was $54.75 per
share.
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 10, 1997, the number of record
holders of Voting Common Stock was 2.
The Company has 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 and anticipates continuing to pay such
dividends. The Company has, however, 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
12.75% Senior Subordinated Debentures due September 1, 2002, 10 3/8% Senior
Subordinated Notes due May 15, 2005 and 9 3/8% Senior Subordinated Notes due
December 1, 2005, respectively, and is restricted under the Company's credit
agreement (the "credit agreement"). The Company is also prohibited from paying
dividends on any Common Stock: (i) until all accrued but unpaid dividends on the
Cumulative Convertible Exchangeable Preferred Stock and 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, 1996,
are payable on the later of December 31, 1999 or the date on which such
dividends may be paid under the Company's existing debt instruments. If unpaid,
dividends on outstanding shares of Cumulative Convertible Exchangeable Preferred
Stock will accrue at an annual rate of $1.9375 per share.
-17-
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, 1992,
1993, 1994, 1995 and 1996 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,
----------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Statement of Operations
Data: (Dollars in thousands except per share data)
Net revenue $ 35,957 $ 37,499 $ 62,856 $ 99,895 $129,164
Station operating expenses 21,638 22,790 37,764 55,399 72,089
Depreciation 2,279 2,398 3,420 4,514 6,144
Amortization 3,983 3,865 4,715 9,330 11,824
Corporate expense 1,192 1,374 2,162 3,132 4,800
Non-cash compensation - 123 282 363 496
-------- -------- -------- -------- --------
Operating income 6,865 6,949 14,513 27,157 33,811
Other expenses 487 479 309 798 1,034
Equity in net loss (income)
of investee - - - (439) 995
Interest expense, net 11,675 10,977 10,707 27,026 36,915
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item (5,297) (4,507) 3,497 (228) (5,133)
(Provision) benefit for
income tax 471 472 (450) (555) (761)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item (4,826) (4,035) 3,047 (783) (5,894)
Extraordinary loss on
extinguishment of debt (5,709) (1,007) - - (2,891)
-------- -------- -------- -------- --------
Net income (loss) $(10,535) $ (5,042) $ 3,047 $ (783) $ (8,785)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss attributable to
common shareholders $(10,628) $ (5,278) $ (688) $ (4,333) $(12,310)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Loss before extraordinary
item per common share $ (1.22) $ (0.98) $ (0.15) $ (0.73) $ (1.09)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss per common share $ (2.63) $ (1.21) $ (0.15) $ (0.73) $ (1.43)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common
shares outstanding 4,041 4,365 4,498 5,920 8,612
Years Ended December 31,
----------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Selected Balance Sheet
Data:
Total assets $140,948 $191,517 $189,881 $452,221 $452,563
Total debt 101,611 99,000 99,250 341,000 351,561
Redeemable preferred
stock 1,574 49,139 49,171 45,488 45,488
Stockholders' (deficit)
equity 17,211 12,075 11,729 8,868 (3,135)
-18-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The consolidated financial statements of the Company reflect significant
increases between the years ended December 31, 1994, 1995 and 1996 in
substantially all line items. The principal reasons for such increases are the
acquisition of KEYE on February 1, 1995, the acquisition of WWMT on June 1, 1995
and the acquisition of WKBW on June 29, 1995 and the improvements in the
Company's operations.
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 expenses. Numbers 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, 1994, 1995 and 1996:
Year ended December 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Operating income $14,513,000 $27,157,000 $33,811,000
Add:
Depreciation and amortization 8,135,000 13,843,000 17,968,000
Corporate expense 2,162,000 3,132,000 4,800,000
Non-cash compensation 282,000 363,000 496,000
----------- ----------- -----------
Broadcast cash flow $25,092,000 $44,495,000 $57,075,000
----------- ----------- -----------
----------- ----------- -----------
"Broadcast cash flow" means operating income plus depreciation,
amortization, corporate expense and non-cash compensation. The Company has
included broadcast cash flow data because such data are commonly used as a
measure of performance for broadcast companies and are also used by investors to
measure a company's ability to service debt. Broadcast cash flow is not, and
should not be used as, an indicator or alternative to operating income, net
income or cash flow from operations as reflected in the Consolidated Financial
Statements, is not a measure of financial performance under generally accepted
accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
The Company has elected as provided under Statement of Financial Accounting
Standards No. 123 (Accounting for Stock-Based Compensation) to continue to
account for stock-based employee compensation under Accounting Principles Board
Opinion No. 25.
Years ended December 31, 1996 and 1995
Net revenue for the year ended December 31, 1996 totaled $129,164,000, an
increase of $29,269,000, or 29.3% compared to net revenue of $99,895,000 for the
year ended December 31, 1995. Of this increase, $21,262,000 resulted from the
inclusion of one additional month of operations of KEYE, five additional months
of operations of WWMT and six additional months of operations of WKBW in 1996.
The remaining increase was primarily a result of increased local and national
advertising, political spending and increased network compensation.
-19-
Station operating expenses for the year ended December 31, 1996 totaled
$72,089,000, an increase of $16,690,000, or 30.1% compared to station operating
expenses of $55,399,000 in the prior year. Of this increase, $10,648,000 was
due to the inclusion of one additional month of operating expenses of KEYE, five
additional months of operating expenses of WWMT and six additional months of
operating expenses of WKBW. The remaining increase was primarily due to higher
programming expenses and increased news expenses associated with the launch of a
news operation at KEYE.
Broadcast cash flow totaled $57,075,000 during the year ended December 31,
1996 compared to $44,495,000 during 1995, an increase of $12,580,000, or 28.3%.
Of the increase, $10,614,000 was due to the inclusion of one additional month of
operations of KEYE, five additional months of operations of WWMT and six
additional months of operations of WKBW.
Depreciation and amortization increased by $4,125,000, or 29.8% during the
year ended December 31, 1996 compared to 1995 primarily due to the inclusion of
one additional month of operations of KEYE, five additional months of operations
of WWMT and six additional months of operations of WKBW. Corporate expense
increased $1,668,000, or 53.3% during the year ended December 31, 1996 compared
to 1995, primarily due to higher administrative costs associated with the
expansion of the Company's corporate office to manage its expanded station
group. Non-cash compensation expense increased $133,000 during the year ended
December 31, 1996 compared to 1995 due to the granting of additional awards
payable in Common Stock (Nonvoting) to certain executive employees under the
Company's Management Stock Plan.
As a result of the factors discussed above, operating income increased
$6,654,000 or 24.5% during the year ended December 31, 1996 compared to 1995.
The equity in net loss of investee of $995,000 for the year ended December
31, 1996 resulted from the Company recognizing its pro rata share of the losses
of Datacast LLC accounted for under the equity method of accounting. The equity
in net income of investee of $439,000 for the year ended December 31, 1995
resulted from the Company recognizing its pro rata share of the earnings of
Queen City III Limited Partnership, the ultimate parent of WKBW, under the
equity method of accounting. On June 29, 1995, the Company acquired the
remaining interest in Queen City III Limited Partnership.
Net interest expense totaled $36,915,000 during the year ended December 31,
1996, an increase of $9,889,000, or 36.6% compared to net interest expense of
$27,026,000 during the year ended December 31, 1995, primarily due to higher
levels of outstanding indebtedness as a result of the acquisitions of WWMT and
WKBW in June of 1995.
During 1996, the Company incurred an extraordinary loss of $2,891,000 on
the early extinguishment of debt. See "--Liquidity and Capital Resources."
Net loss totaled $8,785,000 during the year ended December 31, 1996
compared to net loss of $783,000 during 1995, an increase of $8,002,000. This
change was primarily due to the changes in the line items discussed above.
Years ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 totaled $99,895,000, an
increase of $37,039,000, or 58.9% compared to net revenue of $62,856,000 for the
year ended December 31, 1994. Of this increase, $36,324,000 was due to the
inclusion of eleven months of operations of KEYE, seven months of operations of
WWMT and six months of operations of WKBW. The remaining increase of $715,000
resulted from a strong advertising environment in the first six months of the
year and increased network compensation, offset, in part, by lower political
advertising in a non-election year. Net revenue at the Company's nine stations
(including revenue
-20-
derived by KEYE, WWMT and WKBW prior to their acquisition by the Company)
increased $2,316,000, or 2.0% during the year ended December 31, 1995 as
compared to the same period in 1994.
Station operating expenses for the year ended December 31, 1995 totaled
$55,399,000, an increase of $17,635,000, or 46.7% compared to station operating
expenses of $37,764,000 for the same period a year earlier. Of this increase,
$16,589,000 was due to the inclusion of eleven months of operations of KEYE,
seven months of operations of WWMT and six months of operations of WKBW. The
remaining increase of $1,046,000 was primarily due to increased news and sales
development costs. Station operating expenses at the Company's nine stations
(including station operating expenses of KEYE, WWMT and WKBW prior to their
acquisition by the Company) decreased $1,779,000, or 2.7% during the year ended
December 31, 1995 as compared to the same period in 1994.
Broadcast cash flow totaled $44,495,000 during the year ended December 31,
1995 compared to $25,092,000 during the same period a year earlier, an increase
of $19,403,000, or 77.3%. Of this increase, $19,735,000 was due to the
inclusion of eleven months of operations of KEYE, seven months of operations of
WWMT and six months of operations of WKBW, which was offset, in part, by a
decrease in broadcast cash flow from the Company's initial six stations (the
"Initial Six Stations"). Broadcast cash flow at the Company's nine stations
(including broadcast cash flow of KEYE, WWMT and WKBW prior to their acquisition
by the Company) increased $537,000, or 1.0% during the year ended December 31,
1995 as compared to the same period in 1994.
Depreciation and amortization increased by $5,708,000, or 70.2% during the
year ended December 31, 1995 compared to the same period a year earlier
primarily due to the inclusion of eleven months of operations of KEYE, seven
months of operations of WWMT and six months of operations of WKBW. Corporate
expense increased $970,000, or 44.9% during the year ended December 31, 1995
compared to the same period a year earlier, primarily due to higher
administrative costs associated with the expansion of the Company's corporate
office to manage its expanded station group. Non-cash compensation expense
increased $81,000 during the year ended December 31, 1995 compared to the same
period a year earlier due to the granting of additional awards payable in Common
Stock (Nonvoting) to certain executive employees under the Company's Management
Stock Plan.
As a result of the factors discussed above, operating income increased
$12,644,000 or 87.1% during the year ended December 31, 1995 compared to the
same period a year earlier.
Net interest expense totaled $27,026,000 during the year ended December 31,
1995, an increase of $16,319,000, or 152.4% compared to net interest expense of
$10,707,000 during the same period a year earlier, primarily due to higher
levels of outstanding indebtedness as a result of the acquisitions of KEYE, WWMT
and WKBW.
Other expenses increased by $490,000 during the year ended December 31,
1995 compared to the same period a year earlier primarily due to the incurrence
of a charge to terminate and change certain service contracts.
Net loss totaled $783,000 during the year ended December 31, 1995 compared
to net income of $3,047,000 during the same period a year earlier, a decrease of
$3,830,000. This change is primarily due to the changes in the line items
discussed above.
Liquidity and Capital Resources
On February 22, 1996, the Company completed an offering of $110,000,000
principal amount of its 9 3/8% Senior Subordinated Notes due December 2005 (the
"9 3/8% Notes"). Proceeds from the sale of the 9 3/8% Notes were used to repay
all outstanding term loan and revolving credit borrowings under the Company's
then existing bank credit agreement and for general working capital purposes.
In connection with the repayment of the term loan (which is not subject to being
reborrowed), the Company incurred an extraordinary loss on the early
extinguishment of debt of $3,510,000 related to the write-off of deferred
financing fees. During the second quarter, the Company
-21-
purchased $2,000,000 face amount of its 10 3/8% Senior Subordinated Notes due
May 2005 and $13,500,000 face amount of its 9 3/8% Notes at a discount. As a
result of these transactions, the Company recognized a net extraordinary loss
for the year ended December 31, 1996 of $2,891,000.
In September 1996, the Company amended and restated its existing credit
agreement to increase the total amount of committed revolving credit borrowings
available thereunder from $60,000,000 to $200,000,000 and to permit borrowings
of up to $300,000,000 in the aggregate. The revolving credit facility can be
used to fund future acquisitions of broadcast stations and for general corporate
purposes. As of February 28, 1997, subject to compliance with financial
covenants, the Company had $149,000,000 of the revolving credit facility
borrowings available under the credit agreement available for acquisitions and
working capital purposes.
In October 1996, the Company entered into agreements with the owner of
WLAJ, the ABC affiliate serving Lansing, Michigan, including a time brokerage
agreement pursuant to which the Company operates WLAJ and an agreement to
acquire substantially all the assets used in the operation of WLAJ for
approximately $19.4 million in cash and the assumption of certain liabilities.
The Company anticipates financing the acquisition of WLAJ with borrowings under
the credit agreement. In connection with these agreements, the Company agreed
to provide a loan guarantee of up to $12,000,000 in favor of the owner of WLAJ.
On January 31, 1997, the Company acquired substantially all of the assets
of WXON, the WB affiliate serving Detroit, Michigan for $175,000,000 and the
assumption of certain liabilities. The Company financed the WXON Acquisition
using the proceeds from the sale of its 12 3/4% Cumulative Exchangeable
Preferred Stock (See Note 8 to the Company's Consolidated Financial
Statements) and borrowings of approximately $27,500,000 under the credit
agreement.
Cash flows provided by operating activities were $13,291,000 during the
year ended December 31, 1996 compared to $8,806,000 during the year ended
December 31, 1995 and $5,808,000 during the year ended December 31, 1994. The
increases from year to year resulted primarily from higher broadcast cash flow
offset, in part, by higher cash interest expense.
Cash flows used in investing activities were $14,435,000 during the year
ended December 31, 1996, compared to $236,343,000 during the year ended
December 31, 1995 and $2,628,000 during the year ended December 31, 1994.
Cash flows used in investing activities during the year ended December 31,
1996 related to capital expenditures, the deposit relating to the WXON
Acquisition and other capitalized acquisition costs and an investment in
Datacast LLC. Cash flows used in investing activities during the year ended
December 31, 1995 related primarily to the acquisitions of KEYE, WWMT and
WKBW while cash flows used in investing activities during the year ended
December 31, 1994 were related entirely to capital expenditures.
Cash flows provided by financing activities were $1,565,000 during the
year ended December 31, 1996 compared to cash flows provided by financing
activities of $225,685,000 during the year ended December 31, 1995 and cash
flows used in financing activities of $2,780,000 in 1994. The decrease from
1995 to 1996 resulted primarily from a decrease in net borrowings offset in
part by a decrease in payments for deferred financing fees. The increase
from 1994 to 1995 resulted primarily from a net increase in bank borrowings
and the proceeds from the sale of the 10 3/8% Notes, partially offset by
higher deferred financing fees and the redemption of the Company's adjustable
rate preferred stock.
The Company may recognize significant taxable income as a result of the
acquisition in 1995 of WKBW. Such taxable income would reduce the Company's
net operating losses for federal income tax purposes. For financial
reporting purposes, in accordance with Statement of Financial Accounting
Standards No. 109, any taxable income arising from the consummation of the
acquisition of WKBW is considered additional purchase price, which will be
amortized in future periods. See Note 10 to the Company's Consolidated
Financial Statements.
-22-
The Company believes that internally generated funds from operations and
borrowings under the credit agreement's revolving credit facility will be
sufficient to satisfy the Company's cash requirements for its operations for the
next twelve months and for the foreseeable future thereafter. The Company
expects that any additional acquisitions of television stations would be
financed through funds generated from operations, borrowings under the credit
agreement's revolving credit facility and additional debt and equity financings.
-23-
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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Granite
Broadcasting Corporation at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
January 24, 1997
-24-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1994 1995 1996
------------ ----------- ------------
Net revenue $ 62,856,425 $99,894,627 $129,164,353
Station operating expenses 37,763,732 55,398,930 72,089,368
Depreciation 3,420,850 4,513,919 6,144,193
Amortization 4,714,721 9,329,444 11,823,775
Corporate expense 2,162,621 3,131,943 4,799,984
Non-cash compensation expense 281,896 363,384 495,819
------------ ----------- ------------
Operating income 14,512,605 27,157,007 33,811,214
Other (income) expenses:
Equity in net (income) loss
of investee - (439,033) 995,019
Interest expense, net 10,707,147 27,026,680 36,915,306
Other 307,929 797,576 1,034,351
------------ ----------- ------------
Income (loss) before income
taxes and extraordinary item 3,497,529 (228,216) (5,133,462)
Provision for income taxes 450,125 554,884 761,000
------------ ----------- ------------
Income (loss) before
extraordinary item 3,047,404 (783,100) (5,894,462)
Extraordinary loss - - (2,891,250)
------------ ----------- ------------
Net income (loss) $ 3,047,404 $ (783,100) $ (8,785,712)
------------ ----------- ------------
------------ ----------- ------------
Net loss attributable to
common shareholders $ (687,730) $(4,333,381) $(12,310,993)
------------ ----------- ------------
------------ ----------- ------------
Per common share:
Loss before extraordinary
item $ (0.15) $ (0.73) $ (1.09)
Extraordinary loss - - (0.34)
------------ ----------- ------------
Net loss $ (0.15) $ (0.73) $ (1.43)
------------ ----------- ------------
------------ ----------- ------------
Weighted average common
shares outstanding 4,497,758 5,920,294 8,611,606
See accompanying notes.
-25-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,123 $ 555,753
Accounts receivable, less allowance for
doubtful accounts ($505,759 in 1995 and
$391,910 in 1996) 26,186,579 27,057,451
Film contract rights 5,813,366 6,276,660
Other current assets 3,854,774 9,784,966
------------ ------------
TOTAL CURRENT ASSETS 35,949,842 43,674,830
PROPERTY AND EQUIPMENT, NET 32,132,126 33,562,019
FILM CONTRACT RIGHTS AND OTHER NONCURRENT ASSETS 3,725,612 4,284,578
DEFERRED FINANCING FEES, less accumulated
amortization ($2,947,833 in 1995 and
$4,049,724 in 1996) 14,849,529 14,181,662
INTANGIBLE ASSETS, NET 365,564,029 356,860,115
------------ ------------
$452,221,138 $452,563,204
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 5,285,619 $ 4,016,964
Accrued interest 5,595,610 6,071,378
Other accrued liabilities. 3,500,066 4,497,534
Film contract rights payable and other
current liabilities 6,946,068 9,578,365
------------ ------------
TOTAL CURRENT LIABILITIES 21,327,363 24,164,241
LONG-TERM DEBT 341,000,000 351,560,900
FILM CONTRACT RIGHTS PAYABLE 3,669,534 3,383,428
DEFERRED TAX LIABILITY AND OTHER
NONCURRENT LIABILITIES 31,869,240 31,102,272
COMMITMENTS
REDEEMABLE PREFERRED STOCK 45,487,500 45,487,500
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock: 41,000,000 shares authorized
consisting of 1,000,000 shares of Class A
Common Stock, $.01 par value, and 40,000,000
shares of Common Stock (Nonvoting), $.01 par
value; 178,500 shares of Voting Common Stock
and 8,499,716 shares of Common Stock
(Nonvoting) (8,218,240 shares at December 31,
1995) issued and outstanding 83,967 86,782
Additional paid-in capital 46,864,202 45,547,145
Accumulated deficit (36,590,198) (45,375,910)
Less: Unearned compensation (1,490,470) (2,506,279)
Note receivable from officer - (886,875)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 8,867,501 (3,135,137)
------------ ------------
$452,221,138 $452,563,204
------------ ------------
------------ ------------
See accompanying notes.
-26-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1994, 1995 and 1996
Class A Common Series B Series C Additional Note Total
Common Stock Preferred Preferred Paid-in (Accumulated Unearned Receivable Stockholders'
Stock (Nonvoting) Stock Stock Capital Deficit) Compensation From Officer Equity (Deficit)
------- ----------- --------- --------- ----------- ------------ ------------ ------------ ----------------
Balance at
December 31,
1993 $1,785 $42,546 $ 5,006 $ 10,181 $51,362,550 $(38,854,502) $ (493,000) $ - $12,074,566
Accretion of and
dividends on
Series A
Redeemable
Preferred Stock (91,895) (91,895)
Conversion of
Redeemable
Preferred
Stock and
Series B and
Series C
Preferred
Stock into
Common Stock
(Nonvoting) 1,080 (373) (102) 59,359 59,964
Dividend on
Cumulative
Convertible
Exchangeable
Preferred Stock
and Adjustable
Rate Preferred
Stock (3,643,239) (3,643,239)
Issuance of 34,000
shares of Common
Stock (Nonvoting) 340 (340) --
Grant of Stock Award
under Management
Stock Plan 1,002,000 (1,002,000)
Stock expense
related to
Management
Stock Plan 281,896 281,896
Net income 3,047,404 3,047,404
------- ----------- -------- -------- ----------- ------------ ----------- --------- -----------
Balance at
December 31,
1994 1,785 43,966 4,633 10,079 48,688,435 (35,807,098) (1,213,104) -- 11,728,696
Accretion of
and dividends
on Series A
Redeemable
Preferred Stock (35,116) (35,116)
Conversion of
Series A
Redeemable
Preferred
Stock and
Series B and
C Preferred
Stock into
Common Stock
(Nonvoting) 36,069 (4,633) (10,079) 1,200,518 1,221,875
Dividend on
Cumulative
Convertible
Exchangeable
Preferred Stock
and Adjustable
Rate Preferred
Stock (3,550,281) (3,550,281)
Exercise of
Stock Options 1,574 31,376 32,950
Issuance of
Common Stock
(Nonvoting) 573 (573) --
Grant of Stock
Award under
Management
Stock Plan 640,750 (640,750) --
Stock expense
related to
Management
Stock Plan (110,907) 363,384 252,477
Net loss (783,100) (783,100)
------- ----------- --------- -------- ----------- ------------ ----------- ----------- -----------
Balance at
December 31,
1995 1,785 82,182 -- -- 46,864,202 (36,590,198) (1,490,470) -- 8,867,501
Dividend on
Cumulative
Convertible
Exchangeable
Preferred Stock (3,525,281) (3,525,281)
Exercise of
Stock Options 2,008 888,805 (886,875) 3,938
Issuance of
Common Stock
(Nonvoting) 807 (807) --
Grant of Stock
Award under
Management
Stock Plan 1,511,628 (1,511,628) --
Stock Expense
Related to
Management
Stock Plan (191,402) 495,819 304,417
Net loss (8,785,712) (8,785,712)
------- ----------- -------- -------- ----------- ------------ ----------- --------- -----------
Balance at
December 31,
1996 $1,785 $84,997 $ -- $ -- $45,547,145 $(45,375,910) $(2,506,279) $(886,875) $(3,135,137)
------- ----------- -------- -------- ----------- ------------ ----------- --------- -----------
------- ----------- -------- -------- ----------- ------------ ----------- --------- -----------
See accompanying notes.
-27-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------
1994 1995 1996
------------ ------------- -------------
Cash flows from operating
activities:
Net income (loss) $ 3,047,404 $ (783,100) $ (8,785,712)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Amortization of intangible
assets and deferred financing
fees 4,714,721 9,329,444 11,823,775
Extraordinary loss - - 2,891,250
Depreciation 3,420,850 4,513,919 6,144,193
Non-cash compensation expense 281,896 363,384 495,819
Non-cash deferred income taxes - 1,115,000 975,000
Deferred income taxes - (824,116) (589,000)
Equity in net (income) loss
of investee - (439,033) 995,019
Change in assets and liabilities
net of effects from
acquisitions of stations:
Increase in accounts receivable (1,499,860) (7,528,139) (870,872)
Increase in accrued liabilities 1,496,559 2,307,778 1,473,236
(Decrease) increase in accounts
payable (420,205) 2,689,051 (1,268,655)
Decrease (increase) in film
contract rights and
other noncurrent assets 640,968 (3,448,429) (517,279)
(Decrease) increase in film
contract rights payable
and other liabilities (3,390,646) 3,222,796 1,193,223
Increase in other assets (2,484,068) (1,712,859) (668,776)
------------ ------------- -------------
Net cash provided by operating
activities 5,807,619 8,805,696 13,291,221
------------ ------------- -------------
Cash flows from investing
activities:
Deposit for station
acquisition and other
related costs - - (5,957,000)
Investment in Datacast, LLC - - (1,500,000)
Payment for acquisitions of
stations, net of cash acquired - (228,660,507) -
Capital expenditures (2,627,793) (7,682,188) (6,938,477)
------------ ------------- -------------
Net cash used in investing
activities (2,627,793) (236,342,695) (14,395,477)
------------ ------------- -------------
Cash flows from financing
activities:
Proceeds from bank loan 1,500,000 174,250,000 34,000,000
Retirement of senior
subordinated notes - - (15,500,000)
Proceeds from exercise
of stock options - 32,950 3,938
Repayment of bank borrowings (1,250,000) (107,500,000) (117,500,000)
Redemption of Adjustable Rate
Preferred Stock - (2,000,000) -
Payment of deferred financing
fees (129,771) (10,537,110) (5,363,771)
Proceeds from senior
subordinated notes - 175,000,000 109,450,000
Dividends paid (3,564,120) (3,561,280) (3,525,281)
Other financing activities 663,894 - -
------------ ------------- -------------
Net cash provided by (used in)
financing activities (2,779,997) 225,684,560 1,564,886
------------ ------------- -------------
Net increase (decrease) in cash
and cash equivalents 399,829 (1,852,439) 460,630
Cash and cash equivalents,
beginning of year 1,547,733 1,947,562 95,123
------------ ------------- -------------
Cash and cash equivalents,
end of year $ 1,947,562 $ 95,123 $ 555,753
------------ ------------- -------------
------------ ------------- -------------
Supplemental information:
Cash paid for interest $10,176,398 $ 24,699,248 $ 36,451,009
Cash paid for income taxes 251,512 149,751 112,532
Non-cash investing and
financing activities:
Non-cash capital expenditures 350,409 459,786 635,609
See accompanying notes.
-28-
GRANITE BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Financial statement presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts in the prior years have been
reclassified to conform to the 1996 presentation. The Company accounts for its
investment in Datacast, LLC under the equity method of accounting.
Revenue recognition
The Company recognizes revenue from the sale of advertising at the time the
advertisements are aired.
Intangibles
Intangible assets at December 31 are summarized as follows:
1995 1996
----- -----
Goodwill $ 75,192,619 $ 76,202,853
Network affiliations 247,941,641 247,941,641
Broadcast licenses 67,896,861 67,896,861
------------ ------------
391,031,121 392,041,355
Accumulated amortization (25,467,092) (35,181,240)
------------ ------------
$365,564,029 $356,860,115
------------ ------------
------------ ------------
The intangible assets are characterized as scarce assets with long and
productive lives and are being amortized on a straight line basis over forty
years.
The Company continually reevaluates the propriety of the carrying amount of
intangible assets as well as the related amortization period to determine
whether current events and circumstances warrant adjustments to the carrying
value and/or revised estimates of useful lives. This evaluation is based on the
Company's projections of the undiscounted cash flows over the remaining lives of
the amortization period of the related intangible asset. To the extent such
projections indicate that the undiscounted cash flows are not expected to be
adequate to recover the carrying amounts of intangible assets, such carrying
amounts will be written down to their fair market value. At this time, the
Company believes that no significant impairment of intangible assets has
occurred and that no reduction of the estimated useful lives is warranted.
Deferred financing fees
The Company has incurred certain fees in connection with entering into a
bank credit agreement, the sale of 12.75% Debentures (as defined), the sale
of Cumulative Convertible Exchangeable Preferred Stock (as defined) the sale
of 10 3/8% Notes (as defined) and the sale of 9 3/8% Notes (as defined). The
deferred financing fees related to the bank credit agreement are being
amortized over seven years, ten years for the 12.75% Debentures, the 10 3/8%
Notes and the 9 3/8% Notes and twelve years for the Cumulative Convertible
Exchangeable Preferred Stock.
-29-
GRANITE BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 -- Summary of Significant Accounting Policies -- (Continued)
Property and equipment
Property and equipment are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives ranging from three to 32
years.
Film contract rights
Film contract rights are recorded as assets at gross value when the license
period begins and the films are available for broadcasting, are amortized on an
accelerated basis over the estimated usage of the films, and are classified as
current or noncurrent on that basis. Film contract rights payable are
classified as current or noncurrent in accordance with the payment terms of the
various license agreements. Film contract rights are reflected in the
consolidated balance sheet at the lower of unamortized cost or estimated net
realizable value.
At December 31, 1996, the obligation for programming that had not been
recorded because the program rights were not available for broadcasting
aggregated $16,965,469.
Barter transactions
Revenue from barter transactions is recognized when advertisements are
broadcast and merchandise or services received are charged to expense when
received or used.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include funds invested overnight in Eurodollar
deposits.
Net loss per common share
Net loss per common share for each of the three years in the period ended
December 31, 1996 is calculated by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding. The
inclusion of additional shares assuming the exercise of outstanding stock
options and the conversion of convertible preferred stock would have been
antidilutive in all three years.
-30-
GRANITE BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2 -- Acquisitions
On February 1, 1995, the Company acquired substantially all of the assets
of KEYE-TV (formerly known as KBVO-TV), the CBS affiliate serving Austin, Texas
from Austin Television for $54,000,000 in cash and the assumption of certain
liabilities of KEYE-TV.
On June 1, 1995, the Company acquired substantially all of the assets and
certain liabilities of WWMT-TV, the CBS affiliate serving Grand Rapids, Michigan
from Busse Broadcasting Corporation for $98,942,000 in cash (including
$3,942,000 of working capital and other adjustments) and the assumption of
certain liabilities of WWMT-TV.
On June 29, 1995, the Company completed its acquisition of WKBW-TV, the ABC
affiliate serving Buffalo, New York. The Company paid approximately $16,000,000
(including certain related expenses) for the equity interests it did not already
own, assumed approximately $59,000,000 of debt and received working capital of
approximately $6,760,000, of which $3,491,000 was cash.
On January 31, 1997 the Company acquired substantially all the assets used
in the operation of WXON-TV, the WB affiliate serving Detroit, Michigan for
$175,000,000 in cash and the assumption of certain liabilities.
The following table summarizes the unaudited consolidated pro forma results
of operations for the years ended December 31, 1995 and 1996 assuming the
acquisition of WXON-TV, KEYE-TV, WWMT-TV and WKBW-TV had occurred as of January
1, 1995:
1995 1996
------ ------
Net revenue $145,532,000 $147,231,000
Station operating expenses 74,398,000 78,577,000
Income (loss) before extraordinary item
in 1996 5,187,000 (1,544,000)
Loss before extraordinary item per
common share $ (2.95) $ (2.81)
Time brokerage agreement
The Company operates WLAJ-TV, the ABC affiliate serving Lansing,
Michigan, pursuant to a time brokerage agreement. The terms of the agreement
require the Company to pay a monthly fee in exchange for the right to provide
station programming and sell related advertising time. The fee is expensed
as incurred. The agreement terminates if the Company exercises its option to
acquire WLAJ-TV. The agreement to acquire substantially all of the assets
used in the operation of WLAJ-TV is for $19,400,000 in cash and the
assumption of certain liabilities. The Company classifies the fee as interest
expense to the extent interest is imputed based on the purchase price of the
station. In connection with this agreement, the Company agreed to provide a
loan guarantee of up to $12,000,000 in favor of the owner of WLAJ-TV. The
guarantee is collateralized by all of the assets of WLAJ-TV.
-31-
GRANITE BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3-- Property and Equipment
The major classifications of property and equipment are as follows:
December 31,
-------------
1995 1996
------ -----
Land $ 2,527,708 $ 2,527,708
Buildings and improvements. . 14,729,378 16,607,496
Furniture and fixtures . 4,380,475 5,691,019
Technical equipment and other 27,711,903 31,924,360
------------ ------------
49,349,464 56,750,583
Less: Accumulated depreciation. . 17,217,338 23,188,564
------------ ------------
Net property and equipment. . $ 32,132,126 $ 33,562,019
------------ ------------
------------ ------------
Note 4 -- Other Accrued Liabilities
Other accrued liabilities are summarized below:
December 31,
-------------
1995 1996
------ -----
Compensation and benefits . . $ 2,00