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UNITED STATES
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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER:
000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
----------------
Maryland 52-1494660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 WEST 41ST STREET
BALTIMORE, MARYLAND 21211
(Address of principal executive offices)
(410) 467-5005
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Class A Common Stock, par value $.01 per share Series D
Preferred Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be files 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 files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sale price of $14.50 per share as of March 23, 1999, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $695.2 million.
As of March 23, 1999, there were 47,941,885 shares of Class A Common stock, $.01
par value; 48,630,231 shares of Class B Common Stock, $.01 par value; 39,181
shares of Series B Preferred Stock, $.01 par value, convertible into 284,952
shares of Class A Common Stock; and 3,450,000 shares of Series D Preferred
Stock, $.01 par value, convertible into 7,561,644 shares of Class A Common Stock
of the Registrant issued and outstanding.
In addition, 2,000,000 shares of $200 million aggregate liquidation value of 11
5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., are issued and outstanding.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the 1999 Annual Meeting of Shareholders are incorporated by
reference into Part III.
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PART I
FORWARD-LOOKING STATEMENTS
The matters discussed in this report include forward-looking statements.
When used in this report, the words "intends to," "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties.
Actual results in the future could differ materially and adversely from those
described in the forward-looking statements as a result of various important
factors, including the impact of changes in national and regional economies,
successful integration of acquired television and radio stations (including
achievement of synergies and cost reductions), pricing fluctuations in local and
national advertising, volatility in programming costs, the availability of
suitable acquisitions on acceptable terms and the other risk factors set forth
in Sinclair Broadcast Group, Inc.'s (referred to herein as the "Company,"
"Sinclair," or "SBG") prospectus filed with the Securities and Exchange
Commission on April 19, 1998, pursuant to rule 424(b)(5). The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
ITEM 1. BUSINESS
The Company is a diversified broadcasting company that owns or provides
programming services to more television stations than any other commercial
broadcasting group in the United States. The Company currently owns, or provides
programming services pursuant to Local Marketing Agreements ("LMAs") to, 57
television stations, has pending acquisitions of four additional television
stations, and has entered into an agreement to sell two television stations. The
Company believes it is also one of the top ten radio groups in the United States
when measured by the total number of radio stations owned or programmed pursuant
to LMAs. The Company owns, or programs pursuant to LMAs, 54 radio stations, two
of which the Company has exercised options to acquire, and five of which the
Company holds for sale.
The 57 television stations the Company owns or programs pursuant to LMAs
are located in 36 geographically diverse markets, with 33 of the stations in the
top 51 television designated market areas ("DMAs") in the United States. The
Company's television station group is diverse in network affiliation with 20
stations affiliated with Fox Broadcasting Company ("Fox"), 16 with The WB
Television Network ("WB"), eight with United Paramount Television Network
Partnership ("UPN"), six with ABC, three with NBC and one with CBS. Three
stations operate as independents.
The Company's radio station group is also geographically diverse with a
variety of programming formats including country, urban, news/talk/sports,
progressive rock and adult contemporary. Of the 54 stations owned or provided
programming services by the Company, 18 broadcast on the AM band and 36 on the
FM band. The Company owns between three and nine stations in all of the radio
markets it serves.
The Company has undergone rapid and significant growth over the course of
the last eight years. Since 1991, the Company has increased the number of
stations it owns or provides services to from three television stations to 57
television stations and 54 radio stations. From 1991 to 1998, net broadcast
revenues and Adjusted EBITDA (as defined herein) increased from $39.7 million to
$672.8 million, and from $15.5 million to $331.3 million, respectively.
The Company is a Maryland corporation formed in 1986. The Company's
principal offices are located at 2000 West 41st Street, Baltimore, Maryland
21211, and its telephone number is (410) 467-5005.
1
TELEVISION BROADCASTING
The Company owns and operates, provides programming services to, or has
agreed to acquire the following television stations:
NUMBER OF
COMMERCIAL EXPIRATION
MARKET STATIONS IN STATION DATE OF
MARKET RANK(A) STATIONS STATUS(B) CHANNEL AFFILIATION THE MARKET(C) RANK(D) FCC LICENSE
- ------------------------------ --------- ---------- ----------- --------- ------------- --------------- --------- ---------------
Tampa, Florida ............... 14 WTTA LMA 38 IND(h)(q) 7 7 2/1/05
Minneapolis/St. Paul,
Minnesota ................... 15 KMWB O&O 23 WB 6 6 4/1/06
Pittsburgh, Pennsylvania ..... 19 WPGH O&O 53 FOX 5 4 8/1/99
WCWB LMA 22 WB 5 8/1/99
Sacramento, California ....... 20 KOVR O&O 13 CBS 6 3 12/1/06
St. Louis, Missouri .......... 21 KDNL O&O 30 ABC 5 4 2/1/06
Baltimore, Maryland .......... 24 WBFF O&O 45 FOX 5 4 10/1/04
WNUV LMA 54 WB 5 10/1/04
Indianapolis, Indiana ........ 25 WTTV LMA(e) 4 WB 8 5 8/1/05
WTTK LMA(e)(g) 29 WB 5 8/1/05
Raleigh-Durham,
North Carolina .............. 29 WLFL O&O 22 WB 7 4 ` 12/1/04
WRDC LMA 28 UPN 5 12/1/04
Nashville, Tennessee ......... 30 WZTV LMA(m) 17 FOX 6 4 8/1/05
WUXP LMA 30 UPN 5 8/1/05
Milwaukee, Wisconsin ......... 31 WCGV O&O 24 UPN 6 5 12/1/05
WVTV LMA 18 WB 6 12/1/05
Cincinnati, Ohio ............. 32 WSTR O&O 64 WB 5 5 10/1/05
Kansas City, Missouri ........ 33 KSMO O&O 62 WB 8 5 2/1/06
Columbus, Ohio ............... 34 WSYX O&O 6 ABC 5 4 10/1/05
WTTE LMA 28 FOX 3 10/1/05
Asheville, North Carolina
and Greenville/
Spartanburg/Anderson,
South Carolina .............. 35 WLOS O&O 13 ABC 6 3 12/1/04
WFBC LMA 40 IND(h)(q) 5 12/1/04
San Antonio, Texas ........... 37 KABB O&O 29 FOX 7 4 8/1/98(f)
KRRT LMA 35 WB 6 8/1/98(f)
Birmingham, Alabama .......... 39 WTTO O&O 21 WB 6 5 4/1/05
WDBB LMA(i) 17 WB 5 4/1/05
WABM LMA 68 UPN 6 4/1/05
Norfolk, Virginia ............ 40 WTVZ O&O 33 WB 6 4 10/1/04
Buffalo, New York ............ 42 WUTV LMA(m) 29 FOX 5 4 6/1/99(f)
WNEQ Pending 23 (o) 6/1/99(f)
Oklahoma City,
Oklahoma .................... 45 KOCB O&O 34 WB 5 5 6/1/98(f)
KOKH LMA 25 FOX 4 6/1/06
Greensboro/Winston-Salem,
Salem/Highpoint,
North Carolina .............. 47 WXLV LMA(m) 45 ABC 7 4 12/1/04
WUPN LMA 48 UPN 5 12/1/04
Dayton, Ohio ................. 54 WKEF LMA(p) 22 NBC 4 3 10/1/05
WRGT LMA 45 FOX 4 10/1/05
Las Vegas, Nevada ............ 56 KVWB O&O 21 WB 8 5 10/1/06
KFBT LMA 33 IND(h) 8 10/1/06(f)
Charleston and Huntington,
West Virginia ............... 58 WCHS O&O 8 ABC 4 3 10/1/04
WVAH LMA 11 FOX 4 10/1/04
Richmond, Virginia ........... 61 WRLH LMA(m) 35 FOX 5 4 10/1/04
Mobile, Alabama and
Pensacola, Florida .......... 62 WEAR O&O 3 ABC 6 2 2/1/05
WFGX LMA 35 WB 6 2/1/05
Flint/Saginaw/Bay City,
Michigan .................... 64 WSMH O&O 66 FOX 4 4 10/1/05
Lexington, Kentucky .......... 67 WDKY O&O 56 FOX 5 4 8/1/05
Des Moines, Iowa ............. 70 KDSM O&O 17 FOX 4 4 2/1/06
Syracuse, New York ........... 74 WSYT O&O 68 FOX 5 4 6/1/99(f)
WNYS LMA 43 UPN 5 6/1/99(f)
Paducah, Kentucky/
Cape Girardeau,
Missouri .................... 76 KBSI O&O 23 FOX 5 4 2/1/06
WDKA LMA 49 UPN 5 (n)
2
NUMBER OF
COMMERCIAL EXPIRATION
MARKET STATIONS IN STATION DATE OF
MARKET RANK(A) STATIONS STATUS(B) CHANNEL AFFILIATION THE MARKET(C) RANK(D) FCC LICENSE
- ------------------------------- --------- ---------- ------------ -------- ------------- --------------- --------- --------------
Rochester, New York ........... 77 WUHF LMA 31 FOX 4 4 6/1/99(f)
Portland, Maine ............... 80 WGME Pending(k) 13 CBS 5 2 4/1/99(f)
Madison, Wisconsin ............ 84 WMSN LMA(m) 47 FOX 4 4 12/1/05
Tri-Cities, Tennessee ......... 92 WEMT LMA(p) 39 FOX 5 4 8/1/05
Springfield, Massachusetts .... 104 WGGB Pending(k) 40 ABC 4 2 4/1/99(f)
Tyler-Longview, Texas ......... 107 KETK O&O(l) 56 NBC 3 2 8/1/06
KLSB LMA(l) 19 NBC (j) 8/1/06
Peoria/Bloomington, Illinois .. 110 WYZZ O&O 43 FOX 4 4 12/1/05
Tallahassee, Florida .......... 114 WTWC Pending(k) 40 NBC 4 4 2/1/05
Charleston, South
Carolina ..................... 120 WMMP O&O 36 UPN 5 5 12/1/04
WTAT LMA 24 FOX 4 12/1/04
- ----------
(a) Rankings are based on the relative size of a station's DMA among the 211
generally recognized DMAs in the United States as estimated by Nielsen.
(b) "O&O" refers to stations owned and operated by the Company, "LMA" refers
to stations to which the Company provides programming services pursuant to
an LMA and "Pending" refers to stations the Company has agreed to acquire.
See "-- 1998 Acquisitions."
(c) Represents the number of television stations designated by Nielsen as
"local" to the DMA, excluding public television stations and stations
which do not meet the minimum Nielsen reporting standards (weekly
cumulative audience of at least 2.5%) for the Sunday-Saturday, 6:00 a.m.
to 2:00 a.m. time period.
(d) The rank of each station in its market is based upon the November 1998
Nielsen estimates of the percentage of persons tuned to each station in
the market from 6:00 a.m. to 2:00 a.m., Sunday-Saturday.
(e) Non-License Assets acquired from River City Broadcasting, L.P. ("River
City") and the Company has an option to acquire the License Assets. Will
become owned and operated by the Company upon FCC approval of transfer of
License Assets and closing of acquisition of License Assets.
(f) License renewal application pending.
(g) WTTK simulcasts all of the programming aired on WTTV and the station rank
applies to the combined viewership of these stations.
(h) "IND" or "Independent" refers to a station that is not affiliated with any
of ABC, CBS, NBC, Fox, WB or UPN.
(i) WDBB simulcasts the programming broadcast on WTTO.
(j) KLSB simulcasts the programming broadcast of KETK.
(k) These stations will be acquired in connection with the Guy Gannett
Acquisition.
(l) An agreement has been entered into to sell KETK and transfer the LMA for
KLSB.
(m) The FCC License Assets for these stations are currently owned by Sullivan
Broadcasting Company II, Inc. and the Company intends to close on these
assets upon FCC approval.
(n) This station began broadcast operations in August 1997 pursuant to program
test authority and does not yet have a license. This station has not yet
established a rank.
(o) This station is currently a non-commercial station and is not ranked by
Nielsen.
(p) This station will become owned and operated by the Company upon FCC
approval of transfer of License Assets and closing of acquisition of
License Assets.
(q) These stations are expected to become an affiliate of the WB in 1999.
Operating Strategy
The Company's television operating strategy includes the following key
elements:
Attracting Viewership
- ---------------------
The Company seeks to attract viewership and expand its audience share
through selective, high-quality programming.
Popular Programming. The Company seeks to obtain, at attractive prices,
popular syndicated programming that is complementary to the station's network
affiliation. The Company also believes that an important factor in attracting
viewership to its stations is their network affiliations with Fox, WB, ABC, CBS,
NBC and UPN. These affiliations enable the Company to attract viewers by virtue
of the quality first-run original programming provided by these networks and the
networks' promotion of such programming. The Company focuses on obtaining
popular syndicated programming for key programming periods (generally 6:00 p.m.
to 8:00 p.m.) for broadcast on its Fox, WB and UPN affiliates. Examples of this
programming include "Friends," "Frasier," "3rd Rock From the Sun," "The
Simpsons," "Drew Carey" and "Seinfeld." In addition to network programming, the
Company's network
3
affiliates broadcast news magazine, talk show, and game show programming such as
"Hard Copy," "Entertainment Tonight," "Regis and Kathie Lee," "Roseanne," "Rosie
O'Donnel," "Wheel of Fortune" and "Jeopardy."
Local News. The Company believes that the production and broadcasting of
local news can be an important link to the community and an aid to the station's
efforts to expand its viewership. In addition, local news programming can
provide access to advertising sources targeted specifically to local news. The
Company carefully assesses the anticipated benefits and costs of producing local
news prior to introduction at a Company station because a significant investment
in capital equipment is required and substantial operating expenses are incurred
in introducing, developing and producing local news programming. The Company
currently provides local news programming at 25 of its television stations
located in 21 separate markets. The possible introduction of local news at the
other Company stations is reviewed periodically and the Company has recently
expanded its news programming in some of the markets in which it programs a
second station pursuant to an LMA. The Company can produce news programming in
these markets at relatively low cost per hour of programming and the programming
serves the local community by providing additional news outlets in these
markets. The Company's policy is to institute local news programming at a
specific station only if the expected benefits of local news programming at the
station are believed to exceed the associated costs after an appropriate
start-up period.
Popular Sporting Events. The Company attempts to capture a portion of
advertising dollars designated to sports programming in selected DMAs. The
Company's WB and UPN affiliated and independent stations generally face fewer
restrictions on broadcasting live local sporting events than do their
competitors that are affiliates of the major networks and Fox since affiliates
of the major networks and Fox are subject to certain prohibitions against
preemptions of network programming. The Company has been able to acquire the
local television broadcast rights for certain sporting events, including NBA
basketball, Major League Baseball, NFL football, NHL hockey, ACC basketball, Big
Ten football and basketball, and SEC football. The Company seeks to expand its
sports broadcasting in DMAs as profitable opportunities arise. In addition, the
Company's stations that are affiliated with Fox, ABC, NBC and CBS broadcast
certain Major League Baseball games, NFL football games and NHL hockey games as
well as other popular sporting events.
Counter-Programming. The Company's programming strategy on its Fox, WB, UPN
and independent stations also includes "counter-programming," which consists of
broadcasting programs that are alternatives to the types of programs being shown
concurrently on competing stations. This strategy is designed to attract
additional audience share in demographic groups not served by concurrent
programming on competing stations. The Company believes that implementation of
this strategy enables its stations to achieve competitive rankings in households
in the 18-49 and 25-54 demographics and to offer greater diversity of
programming in each of its DMAs.
Control of Operating and Programming Costs
- ------------------------------------------
By employing a disciplined approach to managing programming acquisition and
other costs, the Company has been able to achieve operating margins that the
Company believes are among the highest in the television broadcast industry. The
Company has sought and will continue to seek to acquire quality programming for
prices at or below prices paid in the past. As an owner or provider of
programming services to 57 stations in 36 DMAs reaching approximately 23.5% of
U.S. television households (without giving effect to the Guy Gannett
Acquisition), the Company believes that it is able to negotiate favorable terms
for the acquisition of programming. Moreover, the Company emphasizes control of
each of its stations' programming and operating costs through program-specific
profit analysis, detailed budgeting, tight control over staffing levels and
detailed long-term planning models.
4
Attract and Retain High Quality Management
- ------------------------------------------
The Company believes that much of its success is due to its ability to
attract and retain highly skilled and motivated managers, both at the corporate
and local station levels. A portion of the compensation provided to general
managers, sales managers and other station managers is based on their achieving
certain operating results. The Company also provides its corporate and station
managers with deferred compensation plans offering options to acquire Class A
Common Stock.
Community Involvement
- ---------------------
Each of the Company's stations actively participates in various community
activities and offers many community services. The Company's activities include
broadcasting programming of local interest and sponsorship of community and
charitable events. The Company also encourages its station employees to become
active members of their communities and to promote involvement in community and
charitable affairs. The Company believes that active community involvement by
its stations provides its stations with increased exposure in their respective
DMAs and ultimately increases viewership and advertising support.
Establish LMAs
- --------------
The Company believes that it can attain significant growth in operating
cash flow through the utilization of LMAs. By expanding its presence in certain
of its markets in which it already owns a station, the Company can improve its
competitive position with respect to a demographic sector. In addition, by
providing programming services to an additional station in a market, the Company
is able to realize significant economies of scale in marketing, programming,
overhead and capital expenditures. The Company provides programming services
pursuant to an LMA to an additional station in 21 of the 36 television markets
in which the Company owns or programs another station.
Innovative Local Sales and Marketing
- ------------------------------------
The Company believes that it is able to attract new advertisers to its
stations and increase its share of existing customers' advertising budgets by
creating a sense of partnership with those advertisers. The Company develops
such relationships by training its sales forces to offer new marketing ideas and
campaigns to advertisers. These campaigns often involve the sponsorship by
advertisers of local promotional events that capitalize on the station's local
identity and programming franchises. In seven of the Company's markets, the
Company owns both television and radio stations. In these markets, the Company
can offer an advertiser an efficient means to reach its customer base. The
Company seeks to increase its share of an advertisers business by
cross-marketing radio and television time. Through its strong local sales and
marketing focus, the Company seeks to capture an increasing share of its
revenues from local sources, which are generally more stable than national
advertising.
Programming and Affiliations
The Company continually reviews its existing programming inventory and
seeks to purchase the most profitable and cost-effective syndicated programs
available for each time period. In developing its selection of syndicated
programming, the Company balances the cost of available syndicated programs with
their potential to increase advertising revenue and the risk of their reduced
popularity during the term of the program contract. The Company seeks to
purchase only those programs with contractual periods that permit programming
flexibility and which complement a station's overall programming and
counter-programming strategy. Programs that can perform successfully in more
than one time period are more attractive due to the long lead time and
multi-year commitments inherent in program purchasing.
Fifty-four of the 57 television stations owned or provided programming
services by the Company currently operate as affiliates of Fox (20 stations), WB
(16 stations), ABC (six stations), NBC (three stations), UPN (eight stations),
or CBS (one station). The networks produce and distribute programming in
exchange for each station's commitment to air the programming at specified times
and for commercial announcement time during the programming. In addition,
networks other than Fox, WB and UPN pay each affiliated station a fee for each
network-sponsored program broadcast by the station.
5
On August 21, 1996, the Company entered into an agreement with Fox (the
"Fox Agreement") which, among other things, provides that the affiliation
agreements between Fox and eight stations then owned or provided programming
services by the Company would be amended to have new five-year terms commencing
on the date of the Fox Agreement. The eight affected stations are: WPGH-TV in
Pittsburgh, WBFF-TV in Baltimore, KABB-TV in San Antonio, WTTE-TV in Columbus,
WSMH-TV in Flint, KDSM-TV in Des Moines, WDKY-TV in Lexington and WYZZ-TV in
Peoria. Fox has the option to extend the affiliation agreements for additional
five-year terms and must extend all of the affiliation agreements if it extends
any (except that Fox may selectively renew affiliation agreements if any station
has breached its affiliation agreement). The Fox Agreement also provides that,
during the term of the affiliation agreements, the Company will have the right
to purchase, for fair market value, any station Fox acquires in any of the
foregoing markets if Fox determines to terminate the affiliation agreement with
the Company's station in that market and operate the station being acquired by
Fox as a Fox affiliate.
The Fox-affiliated stations acquired, to be acquired or being programmed by
the Company as a result of the Sullivan Acquisition and Max Media Acquisition
continue to carry Fox programming notwithstanding the fact that their
affiliation agreements have expired. The Company is in negotiations with Fox to
secure long-term affiliation agreements. While Fox completes its revision of its
standard-form Station Affiliation Agreement, Fox has prepared to enter into
90-day rolling affiliation agreements with these stations.
On July 4, 1997, the Company entered into an agreement with WB (the "WB
Agreement"), pursuant to which the Company affiliated certain of its stations
with the WB for a ten year term expiring January 15, 2008. Under the terms of
the WB Agreement (as modified by the subsequent letter agreement entered into by
the Company and WB on May 18, 1998), WB agreed to pay the Company $64 million in
aggregate amount in monthly installments during the first eight years commencing
on January 16, 1998 in consideration for entering into affiliation agreements
with WB.
RADIO BROADCASTING
The Company owns, provides programming or sales services to, or has agreed
to acquire the following radio stations:
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S STATION PRIMARY IN PRIMARY DATE
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED (A) REVENUE (B) FORMAT TARGET (C) TARGET (D) LICENSE
- ---------------------------- ------------- --------------------------- -------------- -------------- -----------
St. Louis, Missouri ........ 18
KPNT-FM Alternative Rock Adults 18-34 5 2/1/05
KXOK-FM (e) Classic Rock Adults 25-54 8 2/1/05
WVRV-FM Modern Adult Contemporary Adults 18-34 10 12/1/04
WRTH-AM Adult Standards Adults 35-64 19 2/1/05
WIL-FM Country Adults 25-54 1 2/1/05
KIHT-FM 70s Rock Adults 25-54 13 2/1/05
Kansas City, Missouri ...... 29
KCFX-FM 70s Rock Adults 25-54 3 2/1/05
KQRC-FM Active Rock Adults 18-34 2 6/1/05
KCIY-FM Smooth Jazz Adults 25-54 9 2/1/05
KXTR-FM (p) Classical Adults 25-54 14 2/1/05
KUPN-AM (p) Classical Adults 25-54 14 6/1/05
Milwaukee, Wisconsin ....... 33
WEMP-AM Religious Adults 35-64 N/A 12/1/04
WMYX-FM Adult Contemporary Adults 25-54 6 12/1/04
WXSS-FM Contemporary Hit Radio Women 18-49 7 12/1/04
New Orleans, Louisiana ..... 39
6
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S STATION PRIMARY IN PRIMARY DATE
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED (A) REVENUE (B) FORMAT TARGET (C) TARGET (D) LICENSE
- ------------------------------ ------------- --------------------------- -------------- -------------- ---------------
WLMG-FM Adult Contemporary Women 25-54 3 6/1/04
WWL-AM News/Talk/Sports Adults 35-64 1 6/1/04
WSMB-AM Talk/Sports Adults 35-64 18 6/1/04
WEZB-FM (f) Contemporary Hit Radio Women 18-49 7 6/1/04
WLTS-FM (g) Adult Contemporary Women 25-54 4 6/1/04
WTKL-FM (g) Oldies Adults 25-54 5 6/1/04
Memphis, Tennessee ........... 40
WRVR-FM Soft Adult Contemporary Women 25-54 3 8/1/04
WJCE-AM Urban Oldies Women 25-54 14 8/1/04
WOGY-FM Country Adults 25-54 11 8/1/04
Norfolk, Virginia ............ 42
WVKL-FM (h)(i) 60s Oldies Adults 25-54 6 10/1/03
WPTE-FM Modern Adult Contemporary Adults 18-34 3 10/1/03
WWDE-FM Adult Contemporary Women 25-54 2 10/1/03
WNVZ-FM Contemporary Hit Radio Adults 18-34 6 10/1/03
WGH-AM (i) Sports Talk Adults 25-54 15 10/1/03
WGH-FM (i) Country Adults 25-54 4 10/1/03
WFOG-FM (i) Soft Adult Contemporary Women 25-54 9 10/1/03
Buffalo, New York ............ 41
WMJQ-FM Adult Contemporary Women 25-54 4 6/1/06
WKSE-FM Contemporary Hit Radio Women 18-49 1 6/1/06
WBEN-AM News/Talk/Sports Adults 35-64 4 6/1/06
WWKB-AM Sports Adults 35-64 16 6/1/06
WGR-AM News/Talk Adults 25-54 7 6/1/98 (j)
WWWS-AM Urban Oldies Adults 25-54 14 6/1/06
Greensboro/Winston
Salem/High Point, North
Carolina .................... 52
WMQX-FM Oldies Adults 25-54 6 12/1/03
WQMG-FM Urban Adult Contemporary Adults 25-54 1 12/1/03
WJMH-FM Urban Adults 18-34 1 12/1/03
WEAL-AM Gospel Adults 35-64 10 12/1/03
Asheville, North Carolina/
Greenville/Spartanburg,
South Carolina .............. 61
WFBC-FM Contemporary Hit Radio Women 18-49 3 12/1/03
WORD-AM (q) News/Talk Adults 35-64 7 12/1/03
WYRD-AM (q) News/Talk Adults 35-64 7 12/1/03
WSPA-AM Full Service/Talk Adults 35-64 15 12/1/03
WSPA-FM Soft Adult Contemporary Women 25-54 1 12/1/03
WOLI-FM (k) Oldies Adults 25-54 10 12/1/03
WOLT-FM (k) Oldies Adults 25-54 10 12/1/03
Wilkes-Barre/Scranton,
Pennsylvania ................ 68
WGGI-FM (l) Country Adults 25-54 4 8/1/06
WKRZ-FM (m) Contemporary Hit Radio Adults 18-49 1 8/1/06
WGGY-FM (l) Country Adults 25-54 4 8/1/06
WILK-AM (n) News/Talk/Sports Adults 35-64 7 8/1/06
WGBI-AM (n) News/Talk/Sports Adults 35-64 7 8/1/06
WSHG-FM (o) Soft Hits Women 25-54 9 8/1/06
WILP-AM (n) News/Talk/Sports Adults 35-64 7 8/1/06
WWFH-FM (o) Soft Hits Women 25-54 9 8/1/06
WKRF-FM (m) Contemporary Hit Radio Adults 18-49 1 8/1/06
- ----------
(a) Actual city of license may differ from the geographic market served.
(b) Ranking of the principal radio market served by the station among all U.S.
radio markets by 1997 aggregate gross radio broadcast revenue according to
Duncan's Radio Market Guide -- 1998 Edition.
(c) Due to variations that may exist within programming formats, the primary
demographic target of stations with the same programming format may be
different.
7
(d) All information concerning ratings and audience listening information is
derived from the Fall 1998 Arbitron Metro Area Ratings Survey (the "Fall
1998 Arbitron"). Arbitron is the generally accepted industry source for
statistical information concerning audience ratings. Due to the nature of
listener surveys, other radio ratings services may report different
rankings; however, the Company does not believe that any radio ratings
service other than Arbitron is accorded significant weight in the radio
broadcast industry. "Station Rank in Primary Demographic Target" is the
ranking of the station among all radio stations in its market that are
ranked in its target demographic group and is based on the station's
average persons share in the primary demographic target in the applicable
Metro Survey Area. Source: Average Quarter Hour Estimates, Monday through
Sunday, 6:00 a.m. to midnight, Fall 1998 Arbitron.
(e) The Company has entered into an agreement to acquire the assets of the
station from WPNT, Inc. The consummation of the acquisition will occur
following FCC consent.
(f) A petition for reconsideration of the grant of this station's license
renewal is pending.
(g) The Company programs the stations pursuant to an LMA and has an option to
acquire the assets of the stations from Phase II Broadcasting.
(h) EEO reporting conditions were placed on this station's license renewals
for 1997, 1998 and 1999.
(i) These stations are owned by (or in the case of WFOG will be owned by) the
Norfolk Trust, Ralph E. Becker, Trustee. The Company is limited to four
FMs in this market under FCC rules and intends to sell WFOG, WGH (AM)/FM
to a third party and to acquire WVKL from the Trust.
(j) License renewal application pending.
(k) The Company provides sales services pursuant to a JSA and has exercised an
option to acquire WOLI-FM and WOLT-FM.
(l) WGGY-FM and WGGI-FM simulcast their programming.
(m) WKRZ-FM and WKRF-FM simulcast their programming.
(n) WILK-AM, WGBI-AM and WILP-AM simulcast their programming.
(o) WSHG-FM and WWFH-FM simulcast their programming.
(p) KXTR-FM and KUPN-AM simulcast their programming.
(q) WORD-AM and WYRD-AM simulcast their programming.
Radio Operating Strategy
The Company's radio strategy is to operate a cluster of radio stations in
selected geographic markets throughout the country. In each geographic market,
the Company employs broadly diversified programming formats to appeal to key
demographic groups within the market. The Company seeks to strengthen the
identity of each of its stations through its programming and promotional
efforts, and emphasizes that identity to a far greater degree than the identity
of any local radio personality.
The Company believes that its strategy of appealing to diverse demographic
groups in selected geographic markets allows it to reach a larger share of the
overall advertising market while realizing economies of scale and avoiding
dependence on one demographic or geographic market. The Company realizes
economies of scale by combining sales and marketing forces, back office
operations and general management in each geographic market. At the same time,
the geographic diversity of its portfolio of radio stations helps lessen the
potential impact of economic downturns in specific markets and the diversity of
target audiences served helps lessen the impact of changes in listening
preferences. In addition, the geographic and demographic diversity allows the
Company to avoid dependence on any one or any small group of advertisers.
The Company's group of radio stations includes the top billing station
group in four markets and one of the top three billing station groups in each of
its markets other than Milwaukee. The group has duopolies in all the markets it
operates in and owns television stations in seven of the ten radio markets.
Depending on the programming format of a particular station, there are a
predetermined number of advertisements broadcast each hour. The Company
determines the optimum number of advertisements available for sale during each
hour without jeopardizing listening levels (and the resulting ratings). Although
there may be shifts from time to time in the number of advertisements available
for sale during a particular time of day, the total number of advertisements
available for sale on a particular station normally does not vary significantly.
Any change in net radio broadcasting revenue, with the exception
8
of those instances where stations are acquired or sold, is generally the result
of pricing adjustments made to ensure that the station effectively uses
advertising time available for sale, an increase in the number of commercials
sold or a combination of these two factors.
Large, well-trained local sales forces are maintained by the Company in
each of its radio markets. The Company's principal goal is to utilize its sales
efforts to develop long-standing customer relationships through frequent direct
contacts, which the Company believes provides it with a competitive advantage.
Additionally, our super-duopolies and cross-ownership of TV and radio stations
permit the Company to offer creative advertising packages to local, regional and
national advertisers. Each radio station owned or programmed by the Company also
engages a national independent sales representative to assist it in obtaining
national advertising revenues. These representatives obtain advertising through
national advertising agencies and receive a commission from the radio station
based on its gross revenue from the advertising obtained.
BROADCASTING ACQUISITION STRATEGY
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
was signed into law. The 1996 Act represented the most sweeping overhaul of the
country's telecommunications laws since the Communications Act of 1934, as
amended (the "Communications Act"). The 1996 Act relaxed the broadcast ownership
rules and simplified the process for renewal of broadcast station licenses.
The enactment of the 1996 Act offered the Company a unique opportunity to
build a large and diversified broadcasting company. Additionally, the Company
believes that, as one of the consolidators of the industry it has been able to
gain additional influence with program suppliers, television networks, other
vendors, and alternative delivery media.
In implementing its acquisition strategy, the Company seeks to identify and
pursue favorable station or group acquisition opportunities primarily in the
15th to 75th largest DMAs and Metro Service Areas ("MSAs"). In assessing
potential acquisitions, the Company examines opportunities to improve revenue
share, audience share and/or cost control. Additional factors considered by the
Company in a potential acquisition include geographic location, demographic
characteristics and competitive dynamics of the market. The Company also
considers the opportunity for cross-ownership of television and radio stations
and the opportunity it may provide for cross-promotion and cross-selling.
Beginning in the third quarter of 1998, the Company adjusted its
acquisition strategy to reduce its pace of acquisitions and begin to identify
and negotiate the sale of certain stations that may not be consistent with the
Company's strategic plan. The Company adjusted its acquisition strategy for the
following reasons. First, the Company intends to focus on and improve the
performance of its core station operations. By selling non-strategic stations,
management can better concentrate its resources on the core stations. Second,
the Company believes that it is appropriate at this time to reduce the financial
leverage employed in its business. The Company will continue to evaluate the
extent of the reduction in its financial leverage, but any related goals or
targets could be changed at any time.
Since the 1996 Act became effective, the Company has acquired, obtained
options to acquire or has acquired the right to program or provide sales
services to, 46 television and 61 radio stations for an aggregate consideration
of approximately $3.4 billion. The terms of the acquisitions and dispositions
entered into or completed in 1998 are described below.
9
1998 ACQUISITIONS AND DISPOSITIONS
Heritage Acquisition. In July 1997, the Company entered into a purchase
agreement to acquire certain assets of the radio and television stations of
Heritage for approximately $630 million (the "Heritage Acquisition"). The
Company completed all of the acquisitions under this agreement by July 1998,
acquiring three radio stations in the New Orleans, Louisiana market and
simultaneously disposing of two of those stations (see the Centennial
Disposition below). Pursuant to the Heritage Acquisition, and after giving
effect to the STC Disposition, Entercom Disposition and Centennial Disposition
the Company has acquired or is providing programming services to three
television stations in two separate markets and 11 radio stations in four
separate markets.
1998 STC Disposition. In February 1998, the Company entered into
agreements to sell to STC Broadcasting of Vermont, Inc. ("STC") two television
stations and the Non-License Assets and rights to program a third television
station, all of which were acquired in the Heritage Acquisition. In April 1998,
the Company closed on the sale of the non-license assets of the three television
stations in the Burlington, Vermont and Plattsburgh, New York market for
aggregate consideration of approximately $70.0 million. During the third quarter
of 1998, the Company sold the license assets of these stations for a sales price
of $2.0 million.
Montecito Acquisition. In February 1998, the Company entered into an
agreement to acquire all of the capital stock of Montecito Broadcasting
Corporation ("Montecito") for approximately $33 million (the "Montecito
Acquisition"). Montecito owns all of the issued and outstanding stock of Channel
33, Inc. which owns and operates KFBT-TV in Las Vegas, Nevada. Currently, the
Company is a guarantor of Montecito indebtedness of approximately $33.0 million.
The Company cannot acquire Montecito unless and until FCC rules permit the
Company to own the broadcast license for more than one station in the Las Vegas
market, or unless the Company no longer owns the broadcast license for KVWB-TV
in Las Vegas. At any time the Company, at its option, may transfer the rights to
acquire the stock of Montecito. In April 1998 the Company began programming
KMWB-TV pursuant to an LMA.
WSYX Acquisition and Sale of WTTE License Assets. In April 1998, the
Company exercised its option to acquire the non-license assets of WSYX-TV in
Columbus, Ohio from River City Broadcasting, LP ("River City") for an option
exercise price and other costs of approximately $228.6 million. In August 1998,
the Company exercised its option to acquire the WSYX License Assets for an
option exercise price of $2.0 million. The Company acquired the options in 1996
in connection with its acquisitions of other assets of River City.
Simultaneously with the WSYX Acquisition, the Company sold the WTTE License
Assets to Glencairn for a sales price of $2.3 million and entered into an LMA
with Glencairn to program WTTE. In connection with the sale of the WTTE License
Assets, the Company recognized a $2.3 million gain.
SFX Disposition. In May 1998, the Company completed the sale of three radio
stations to SFX Broadcasting, Inc. for aggregate consideration of approximately
$35.0 million (the "SFX Disposition"). The radio stations sold are located in
the Nashville, Tennessee market. In connection with the disposition, the Company
recognized a $5.2 million gain on the sale.
Lakeland Acquisition. In May 1998, the Company acquired 100% of the stock
of Lakeland Group Television, Inc. ("Lakeland") for cash payments of
approximately $53.0 million (the "Lakeland Acquisition"). In connection with
the Lakeland Acquisition, the Company now owns television station KMUB-TV in
Minneapolis/St. Paul, Minnesota.
Entercom Disposition. In June 1998, the Company completed the sale of seven
radio stations acquired in the Heritage acquisition. The seven stations are
located in the Portland, Oregon and Rochester, New York markets and were sold
for aggregate consideration of approximately $126.9 million.
Sullivan Acquisition. In July 1998, the Company acquired 100% of the stock
of Sullivan Broadcast Holdings, Inc. and Sullivan Broadcasting Company II, Inc.
for cash payments of approximately $951.1 million (the "Sullivan Acquisition").
The Company financed the acquisition by utilizing indebtedness under the 1998
Bank Credit Agreement. In connection with the acquisition, the Company has
acquired the right to program 12 additional television stations in 10 separate
markets. In a subsequent closing, which is expected to occur during 1999, the
Company will acquire the stock of a company that owns the
10
license assets of six of the stations. In addition, the Company has entered into
new LMA agreements with respect to six of the stations and will continue to
program two of the television stations pursuant to existing LMA agreements.
Max Media Acquisition. In July 1998, the Company directly or indirectly
acquired all of the equity interests of Max Media Properties LLC, for $252.2
million (the "Max Media Acquisition"). The Company financed the acquisition by
utilizing existing cash balances and indebtedness under the 1998 Bank Credit
Agreement. In connection with the acquisition, the Company now owns or provides
programming services to nine additional television stations in six separate
markets and seven radio stations in two separate markets.
Centennial Disposition. In July 1998, the Company completed the sale of the
assets of radio stations WRNO-FM, KMEZ-FM and WBYU-AM in New Orleans, Louisiana
to Centennial Broadcasting for $16.1 million in cash and recognized a loss on
the sale of $2.9 million. The Company acquired KMEZ-FM in connection with the
River City Acquisition in May of 1996 and acquired WRNO-FM and WBYU-AM in New
Orleans from Heritage Media Group, Inc. ("Heritage") in July 1998. The Company
was required to divest WRNO-FM, KMEZ-FM and WBYU-AM to meet certain regulatory
ownership guidelines.
Greenville Acquisition. In July 1998, the Company acquired three radio
stations in the Greenville/Spartansburg market from Keymarket Radio of South
Carolina, Inc. for a purchase price consideration involving the forgiveness of
approximately $8.0 million of indebtedness to Sinclair. Concurrently with the
acquisition, the Company acquired an additional two radio stations in the same
market from Spartan Broadcasting for a purchase price of approximately $5.2
million.
Radio Unica Disposition. In July 1998, the Company completed the sale of
KBLA-AM in Los Angeles, California to Radio Unica, Corp. for approximately
$21.0 million in cash. In connection with the disposition, the Company
recognized an $8.4 million gain.
PENDING ACQUISITIONS AND DISPOSITIONS
Buffalo Acquisition. In August 1998, the Company entered into an agreement
with Western New York Public Broadcasting Association to acquire the television
station WNEQ in Buffalo, NY for a purchase price of $33 million in cash (the
"Buffalo Acquisition"). The Company expects to close the sale upon FCC approval
and the termination of the applicable waiting period under the HSR Act. In
addition, the sale is contingent upon FCC approval of the change of the station
from a non-commercial channel to a commercial channel.
St. Louis Radio Acquisition. In August 1998, the Company entered into an
agreement to acquire radio station KXOK-FM in St. Louis, Missouri for a purchase
price of $14.1 million in cash. The purchase price is subject to be increased or
decreased, depending upon whether or not closing occurs within 210 days of the
agreement. The Company expects to close the purchase upon FCC approval.
Guy Gannett Acquisition. In September 1998, the Company agreed to acquire
from Guy Gannett Communications its television broadcasting assets for a
purchase price of $317 million in cash (the "Guy Gannett Acquisition"). As a
result of this transaction, the Company will acquire seven television stations
in six markets. The FCC must approve the Guy Gannet Acquisition, which the
Company expects to complete in the second quarter of 1999. The Company expects
to finance the acquisition with a combination of bank borrowings and the use of
cash proceeds resulting from the Company's planned disposition of certain
broadcast assets.
Ackerley Disposition. In September 1998, the Company agreed to sell WOKR-TV
in Rochester, New York to the Ackerley Group, Inc. for a sales price of $125
million (the "Ackerley Disposition"). The Company previously entered into an
agreement to acquire WOKR-TV as part of the Guy Gannett Acquisition. The FCC
must approve the disposition, which the Company expects to close in the second
quarter of 1999.
CCA Disposition. In February 1999, the Company entered into an agreement to
sell to Communications Corporation of America ("CCA") the non-license assets of
KETK-TV and KLSB-TV in Tyler-Longview, Texas for a sales price of $36 million
(the "CCA Disposition"). In addition, CCA has an option to acquire the license
assets of KETK-TV for an option purchase price of $2 million. The Company
expects to close the transaction in the second quarter of 1999.
11
1999 STC Disposition. In March 1999, the Company entered into an agreement
to sell to STC the television stations WICS-TV in the Springfield, Illinois
market, WICD-TV in the Champaign, Illinois market and KGAN-TV in the Cedar
Rapids, Iowa market. The stations are being sold to STC for a sales price of
$81.0 million and are being acquired by the Company in connection with the Guy
Gannett Acquisition.
On going Discussions. In furtherance of its acquisition strategy, the
Company routinely reviews, and conducts investigations of potential television
and radio station acquisitions. In addition, the Company has announced that it
intends to enter into agreements to sell non-strategic television and radio
stations. When the Company believes a favorable opportunity exists, the Company
seeks to enter into discussions with the owners of stations or potential buyers
regarding the possibility of an acquisition, disposition or station swap. At any
given time, the Company may be in discussions with one or more parties. The
Company is currently in negotiations with various parties relating to the
disposition of television and radio properties which would be disposed of for
aggregate consideration of approximately $60 million. There can be no assurance
that any of these or other negotiations will lead to definitive agreement or if
agreements are reached that any transactions would be consummated.
LOCAL MARKETING AGREEMENTS
The Company believes that it is able to increase its revenues and improve
its margins by providing programming services to stations in selected DMAs and
MSAs where the Company already owns a station. In certain instances, single
station operators and stations operated by smaller ownership groups do not have
the management expertise or the operating efficiencies available to the Company
as a multi-station broadcaster. The Company seeks to identify such stations in
selected markets and to provide such stations with programming services pursuant
to LMAs. In addition to providing the Company with additional revenue
opportunities, the Company believes that these LMA arrangements have assisted
certain stations whose operations may have been marginally profitable to
continue to air popular programming and contribute to diversity of programming
in their respective DMAs and MSAs.
In cases where the Company enters into LMA arrangements in connection with
a station whose acquisition by the Company is pending FCC approval, the Company
(i) obtains an option to acquire the station assets essential for broadcasting a
television or radio signal in compliance with regulatory guidelines, generally
consisting of the FCC license, transmitter, transmission lines, technical
equipment, call letters and trademarks, and certain furniture, fixtures and
equipment (the "License Assets") and (ii) acquires the remaining assets (the
"Non-License Assets") at the time it enters into the option. Following
acquisition of the Non-License Assets, the License Assets continue to be owned
by the owner-operator and holder of the FCC license, which enters into an LMA
with the Company. After FCC approval for transfer of the License Assets is
obtained, the Company exercises its option to acquire the License Assets and
become the owner-operator of the station, and the LMA arrangement is terminated.
USE OF DIGITAL TELEVISION TECHNOLOGY
The Company believes that television broadcasting may be enhanced
significantly by the development and increased availability of digital
broadcasting service technology. This technology has the potential to permit the
Company to provide viewers multiple channels of digital television over each of
its existing standard channels, to provide certain programming in a high
definition television format ("HDTV") and to deliver various forms of data,
including data on the Internet, to home and business computers. These additional
capabilities may provide the Company with additional sources of revenue although
the Company may be required to incur significant additional costs in connection
therewith. The Company is currently considering plans to provide HDTV
programming, to provide multiple channels of television including the provision
of additional broadcast programming and transmitted data on a subscription
basis, and to continue its current TV program channels on its allocated digital
television ("DTV") channels. The Company does not believe the adoption of an
HDTV format will provide any significant economic benefits to the Company. The
FCC granted authority for the Company to conduct experimental DTV multicasting
operations in Baltimore, Maryland. In June 1998, the Company successfully linked
the bandwidths of the two Baltimore television stations it owns or programs,
demonstrating the ability to provide multiple channel options. The test
demonstrated that either manufacturers must make improvements in digital
receivers or the DTV frequency standards must be improved to achieve broadcast
parity with the analog signal.
12
The 1996 Act allows the FCC to charge a spectrum fee to broadcasters who
use the digital spectrum to offer subscription-based services, and the FCC has
ruled that broadcasters shall be required to pay a fee of 5% of gross revenues
on all subscription services. The Company cannot predict what future actions the
FCC or Congress might take with respect to DTV, nor can it predict the effect of
the FCC's present DTV implementation plan or such future actions on the
Company's business. DTV technology currently is available in some of the top ten
viewing markets. A successful transition from the current analog broadcast
format to a digital format may take many years. There can be no assurance that
the Company's efforts to take advantage of the new technology will be
commercially successful.
FEDERAL REGULATION OF TELEVISION AND RADIO BROADCASTING
The ownership, operation and sale of television and radio stations are
subject to the jurisdiction of the FCC, which acts under authority granted by
the Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and operating
power of stations; issues, renews, revokes and modifies station licenses;
regulates equipment used by stations; adopts and implements regulations and
policies that directly or indirectly affect the ownership, operation and
employment practices of stations; and has the power to impose penalties for
violations of its rules or the Communications Act.
The following is a brief summary of certain provisions of the
Communications Act, the 1996 Act and specific FCC regulations and policies.
Reference should be made to the Communications Act, the 1996 Act, FCC rules and
the public notices and rulings of the FCC for further information concerning the
nature and extent of federal regulation of broadcast stations.
License Grant and Renewal. Television and radio stations operate pursuant
to broadcasting licenses that are granted by the FCC for maximum terms of eight
years and are subject to renewal upon application to the FCC. During certain
periods when renewal applications are pending, petitions to deny license
renewals can be filed by interested parties, including members of the public.
The FCC will generally grant a renewal application if it finds: (i) that the
station has served the public interest, convenience and necessity; (ii) that
there have been no serious violations by the licensee of the Communications Act
or the rules and regulations of the FCC; and (iii) that there have been no other
violations by the licensee of the Communications Act or the rules and
regulations of the FCC that, when taken together, would constitute a pattern of
abuse.
All of the stations that the Company currently owns and operates or
provides programming services to pursuant to LMAs, or intends to acquire or
provide programming services pursuant to LMAs in connection with pending
acquisitions, are presently operating under regular licenses, which expire as to
each station on the dates set forth under "Television Broadcasting" and "Radio
Broadcasting," above. Although renewal of license is granted in the vast
majority of cases even when petitions to deny are filed, there can be no
assurance that the licenses of such stations will be renewed.
Ownership Matters
- -----------------
GENERAL
The Communications Act prohibits the assignment of a broadcast license or
the transfer of control of a broadcast licensee without the prior approval of
the FCC. In determining whether to permit the assignment or transfer of control
of, or the grant or renewal of, a broadcast license, the FCC considers a number
of factors pertaining to the licensee, including compliance with various rules
limiting common ownership of media properties, the "character" of the licensee
and those persons holding "attributable" interests therein, and compliance with
the Communications Act's limitations on alien ownership.
To obtain the FCC's prior consent to assign a broadcast license or transfer
control of a broadcast licensee, appropriate applications must be filed with the
FCC. If the application involves a "substantial change" in ownership or control,
the application must be placed on public notice for a period of approximately 30
days during which petitions to deny the application may be filed by interested
parties, including members of the public. If the application does not involve a
"substantial change" in ownership or control, it is a "pro forma" application.
The "pro forma" application is not subject to petitions to deny
13
or a mandatory waiting period, but is nevertheless subject to having informal
objections filed against it. If the FCC grants an assignment or transfer
application, interested parties have approximately 30 days from public notice of
the grant to seek reconsideration or review of the grant. Generally, parties
that do not file initial petitions to deny or informal objections against the
application face difficulty in seeking reconsideration or review of the grant.
The FCC normally has approximately an additional 10 days to set aside such grant
on its own motion. When passing on an assignment or transfer application, the
FCC is prohibited from considering whether the public interest might be served
by an assignment or transfer to any party other than the assignee or transferee
specified in the application.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding, or through subsidiaries controlling, broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or 10%
or more of such stock in the case of insurance companies, investment companies
and bank trust departments that are passive investors) are generally
attributable, except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. The FCC has a pending rulemaking proceeding
that, among other things, seeks comment on whether the FCC should modify its
attribution rules by (i) raising the attribution stock benchmark from 5% to 10%;
(ii) raising the attribution stock benchmark for passive investors from 10% to
20%; (iii) restricting the availability of the single majority shareholder
exemption; and (iv) attributing certain interests such as non-voting stock, debt
and certain holdings by limited liability corporations in certain circumstances.
More recently, the FCC has solicited comment on proposed rules that would (i)
treat an otherwise nonattributable equity or debt interest in a licensee as an
attributable interest where the interest holder is a program supplier or the
owner of a broadcast station in the same market and the equity and/or debt
holding is greater than a specified benchmark; (ii) treat a licensee of a
television station which, under an LMA, brokers more than 15% of the time on
another television station serving the same market, as having an attributable
interest in the brokered station; and (iii) in certain circumstances, treat the
licensee of a broadcast station that sells advertising time on another station
in the same market pursuant to a JSA as having an attributable interest in the
station whose advertising is being sold. The Company cannot predict the outcome
of this proceeding or how it will affect the business. However, if the proposal
were adopted without excluding existing LMAs and JSAs, the proposals could
require the Company to dispose or otherwise alter its LMA and JSA relationships.
Under its "cross-interest" policy, the FCC considers certain "meaningful"
relationships among competing media outlets in the same market, even if the
ownership rules do not specifically prohibit the relationship. Under this
policy, the FCC may consider significant equity interests combined with an
attributable interest in a media outlet in the same market, joint ventures, and
common key employees among competitors. The cross-interest policy does not
necessarily prohibit all of these interests, but requires that the FCC consider
whether, in a particular market, the "meaningful" relationships between
competitors could have a significant adverse effect upon economic competition
and program diversity. Heretofore, the FCC has not applied its cross-interest
policy to LMAs and JSAs between broadcast stations. In its ongoing rulemaking
proceeding concerning the attribution rules, the FCC has sought comment on,
among other things, (i) whether the cross-interest policy should be applied only
in smaller markets, and (ii) whether non-equity financial relationships such as
debt, when combined with multiple business interrelationships such as LMAs and
JSAs, raise concerns under the cross-interest policy. Moreover, in its most
recent proposals in its ongoing attribution rulemaking proceeding, the FCC has
proposed treating television LMAs, television and radio JSAs, and presently
nonattributable debt or equity interests as attributable interests in certain
circumstances without regard to the cross-interest policy. The Company cannot
predict the outcome of this rulemaking.
The Communications Act prohibits the issuance of broadcast licenses to, or
the holding of a broadcast license by, any corporation of which more than 20% of
the capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country (collectively,
"Aliens"). The Communications Act also authorizes the FCC, if the FCC determines
that it would be in the public interest, to prohibit the issuance of a broadcast
license to, or the holding of a broadcast license by, any corporation directly
or indirectly
14
controlled by any other corporation of which more than 25% of the capital stock
is owned of record or voted by Aliens. The Company has been advised that the FCC
staff has interpreted this provision to require a finding that such grant or
holding would be in the public interest before a broadcast license may be
granted to or held by any such corporation and that the FCC staff has made such
a finding only in limited circumstances. The FCC has issued interpretations of
existing law under which these restrictions in modified form apply to other
forms of business organizations, including partnerships. As a result of these
provisions, the licenses granted to Subsidiaries of the Company by the FCC could
be revoked if, among other restrictions imposed by the FCC, more than 25% of the
Company's stock were directly or indirectly owned or voted by Aliens. The
Company and the Subsidiaries are domestic corporations, and the members of the
Smith family (who together hold over 90% of the common voting rights of the
Company) are all United States citizens. The Amended and Restated Articles of
Incorporation of the Company (the "Amended Certificate") contain limitations on
Alien ownership and control that are substantially similar to those contained in
the Communications Act. Pursuant to the Amended Certificate, the Company has the
right to repurchase Alien-owned shares at their fair market value to the extent
necessary, in the judgment of the Board of Directors, to comply with the Alien
ownership restrictions.
TELEVISION
National Ownership Rule. Pursuant to the 1996 Act no individual or entity
may have an attributable interest in television stations reaching more than 35%
of the national television viewing audience. Historically, VHF stations have
shared a larger portion of the market than UHF stations. Therefore, only half of
the households in the market area of any UHF station are included when
calculating whether an entity or individual owns television stations reaching
more than 35% of the national television viewing audience. All but seven of the
stations owned and operated by the Company, or to which the Company provides
programming services, are UHF. Upon completion of all pending acquisitions and
dispositions, the Company will reach approximately 14% of U.S. television
households using the FCC's method of calculation.
Duopoly Rule. On a local level, the television "duopoly" rule generally
prohibits a single individual or entity from having an attributable interest in
two or more television stations with overlapping Grade B service areas. While
the 1996 Act did not eliminate the TV duopoly rule, it did direct the FCC to
initiate a rulemaking proceeding to determine whether to retain, modify, or
eliminate the rule. The FCC has pending a rulemaking proceeding in which it has
proposed, among other options, to modify the television duopoly rule to permit
the common ownership of television stations in different DMAs, so long as the
Grade A signal contours of the stations do not overlap. Pending resolution of
its rulemaking proceeding, the FCC has adopted an interim waiver policy that
permits the common ownership of television stations in different DMAs with no
overlapping Grade A signal contours, conditioned on the final outcome of the
rulemaking proceeding. The FCC has also sought comment on whether common
ownership of two television stations in a market should be permitted (i) where
one or more of the commonly owned stations is UHF, (ii) where one of the
stations is in bankruptcy or has been off the air for a substantial period of
time and (iii) where the commonly owned stations have very small audience or
advertising shares, are located in a very large market, and/or a specified
number of independently owned media voices would remain after the acquisition.
The Company cannot predict the outcome of the proceeding in which such changes
are being considered.
Local Marketing Agreements. A number of television stations, including
certain of the Company's stations, have entered into what have commonly been
referred to as local marketing agreements or LMAs. While these agreements may
take varying forms, pursuant to a typical LMA, separately owned and licensed
television stations agree to enter into cooperative arrangements of varying
sorts, subject to compliance with the requirements of antitrust laws and with
the FCC's rules and policies. Under these types of arrangements, separately
owned stations could agree to function cooperatively in terms of programming,
advertising sales, etc., subject to the requirement that the licensee of each
station maintain independent control over the programming and operations of its
own station. One typical type of LMA is a programming agreement between two
separately owned television stations serving a common service area, whereby the
licensee of one station programs substantial portions of the broadcast day on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during such
program segments. Such arrangements are an extension of the concept of "time
brokerage" agreements,
15
under which a licensee of a station sells blocks of time on its station to an
entity or entities which program the blocks of time and which sell their own
commercial advertising announcements during the time periods in question. The
staff of the FCC's Mass Media Bureau has held that LMAs are not contrary to the
Communications Act, provided that the licensee of the station which is being
substantially programmed by another entity maintains complete responsibility for
and control over programming and operations of its broadcast station and assures
compliance with applicable FCC rules and policies.
At present, FCC rules permit television station LMAs, and the licensee of a
television station brokering time on another television station is not
considered to have an attributable interest in the brokered station. However, in
connection with its ongoing rulemaking proceeding regarding the television
duopoly rule, the FCC has proposed to adopt rules providing that the licensee of
a television station which brokers more than 15% of the time on another
television station serving the same market would be deemed to have an
attributable interest in the brokered station for purposes of the national and
local multiple ownership rules. If a brokered station is deemed to be
attributable, the presence of a station brokered by the owner of another station
in the market would violate the FCC's duopoly rule.
The TV duopoly rule currently prevents the Company from acquiring the
licenses of television stations with which it has LMAs in those markets where
the Company owns a television station. As a result, if the FCC were to adopt
rules that would make such interests attributable without modifying its current
prohibitions against the ownership of more than one television station in a
market, the Company could be prohibited from entering into such arrangements
with other stations in markets in which it owns television stations and could be
required to terminate existing LMA arrangements. The FCC has proposed that LMAs
in force prior to November 5, 1996 would be permitted to continue until the
original term of the agreement expires. Of the Company's 22 LMAs in markets
where the Company owns or is expected to acquire another station, 15 were
entered into after adoption of the 1996 Act (and two additional LMAs were
assumed by the Company after adoption of the Act) and 12 were entered into after
November 5, 1996 (and the license rights under one additional LMA were assumed
by a third party after November 5, 1996). However, the FCC currently is
reviewing its LMA policy, and while Congress, pursuant to the 1996 Act, stated
that existing LMAs should generally be grandfathered, the Company cannot predict
whether any of its LMAs will be grandfathered. The Company could be required to
terminate even those LMAs that were in effect prior to the date of enactment of
the 1996 Act or prior to November 5, 1996. In such an event, the Company could
be required to pay termination penalties under certain of such LMAs. Further, if
the FCC were to find, in connection with any of the Company's LMAs, that the
owners/licensees of the stations with which the Company has LMAs failed to
maintain control over their operations as required by FCC rules and policies,
the licensee of the LMA station and/or the Company could be fined or set for
hearing, the outcome of which could be a monetary forfeiture or, under certain
circumstances, loss of the applicable FCC license. The Company is unable to
predict the ultimate outcome of possible changes to these FCC rules and the
impact such FCC rules may have on its broadcasting operations.
RADIO
National Ownership Rule. Pursuant to the 1996 Act, there are no limits on
the number of radio stations a single individual or entity may own nationwide.
Local Ownership Rules. Pursuant to the 1996 Act, the limits on the number
of radio stations one entity may own locally are as follows: (i) in a market
with 45 or more commercial radio stations, an entity may own up to eight
commercial radio stations, not more than five of which are in the same service
(AM or FM); (ii) in a market with between 30 and 44 (inclusive) commercial radio
stations, an entity may own up to seven commercial radio stations, not more than
four of which are in the same service; (iii) in a market with between 15 and 29
(inclusive) commercial radio stations, an entity may own up to six commercial
radio stations, not more than four of which are in the same service; and (iv) in
a market with 14 or fewer commercial radio stations, an entity may own up to
five commercial radio stations, not more than three of which are in the same
service, except that an entity may not own more than 50% of the stations in such
market. These numerical limits apply regardless of the aggregate audience share
of the stations sought to be commonly owned. FCC ownership rules continue to
permit an entity to own one FM and one AM station in a local market regardless
of market size. Irrespective of FCC rules governing radio ownership, however,
the DOJ and the Federal
16
Trade Commission have the authority to determine, and in certain recent radio
transactions have determined, that a particular transaction presents antitrust
concerns. Moreover, in certain recent cases the FCC has publicly announced that
it will independently examine issues of market concentration notwithstanding a
transaction's compliance with the numerical station limits. The FCC has also
indicated that it may propose further revisions to its radio multiple ownership
rules.
Local Marketing Agreements. As in television, a number of radio stations
have entered into LMAs. The FCC's multiple ownership rules specifically permit
radio station LMAs to be entered into and implemented, so long as the licensee
of the station which is being programmed under the LMA maintains complete
responsibility for and control over programming and operations of its broadcast
station and assures compliance with applicable FCC rules and policies. For the
purposes of the multiple ownership rules, in general, a radio station being
programmed pursuant to an LMA by an entity is not considered an attributable
ownership interest of that entity unless that entity already owns a radio
station in the same market. However, a licensee that owns a radio station in a
market, and brokers more than 15% of the time on another station serving the
same market (i.e. a station whose principal community contour overlaps that of
the owned market), is considered to have an attributable ownership interest in
the brokered station for purposes of the FCC's multiple ownership rules. As a
result, in a market in which the Company owns a radio station, the Company would
not be permitted to enter into an LMA with another local radio station which it
could not own under the local ownership rules, unless the Company's programming
constituted 15% or less of the other local station's programming time on a
weekly basis. The FCC's rules also prohibit a broadcast licensee from
simulcasting more than 25% of its programming on another station in the same
broadcast service (i.e., AM-AM or FM-FM) through a time brokerage or LMA
arrangement where the brokered and brokering stations serve substantially the
same area.
Joint Sales Agreements. A number of radio (and television) stations have
entered into cooperative arrangements commonly known as joint sales agreements,
or JSAs. While these agreements may take varying forms, under the typical JSA, a
station licensee obtains, for a fee, the right to sell substantially all of the
commercial advertising on a separately-owned and licensed station in the same
market. The typical JSA also customarily involves the provision by the selling
licensee of certain sales, accounting, and "back office" services to the station
whose advertising is being sold. The typical JSA is distinct from an LMA in that
a JSA (unlike an LMA) normally does not involve programming.
The FCC has determined that issues of joint advertising sales should be
left to enforcement by antitrust authorities, and therefore does not generally
regulate joint sales practices between stations. Currently, stations for which a
licensee sells time under a JSA are not deemed by the FCC to be attributable
interests of that licensee. However, in connection with its ongoing rulemaking
proceeding concerning the attribution rules, the FCC is considering whether JSAs
should be considered attributable interests or within the scope of the FCC's
cross-interest policy, particularly when JSAs contain provisions for the supply
of programming services and/or other elements typically associated with LMAs. If
JSAs become attributable interests as a result of changes in the FCC rules, the
Company may be required to terminate any JSA it might have with a radio station
which the Company could not own under the FCC's multiple ownership rules.
OTHER OWNERSHIP MATTERS
There remain in place after the 1996 Act a number of additional
cross-ownership rules and prohibitions pertaining to licensees of television and
radio stations. FCC rules, the Communications Act, or both generally prohibit an
individual or entity from having an attributable interest in both a television
station and a radio station, a daily newspaper, or a cable television system
that is located in or serves the same market area.
Antitrust Regulation. The DOJ and the Federal Trade Commission have
increased their scrutiny of the television and radio industry since the adoption
of the 1996 Act, and have indicated their intention to review matters related to
the concentration of ownership within markets (including LMAs and JSAs) even
when the ownership or LMA or JSA in question is permitted under the laws
administered by the FCC or by FCC rules and regulations. For instance, the DOJ
has for some time taken the position that
17
an LMA entered into in anticipation of a station's acquisition with the proposed
buyer of the station constitutes a change in beneficial ownership of the station
which, if subject to filing under the HSR Act, cannot be implemented until the
waiting period required by that statute has ended or been terminated.
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally prohibits a single
individual or entity from having an attributable interest in a television
station and a radio station serving the same market. However, in each of the 25
largest local markets in the United States, provided that there remain at least
30 separately owned television and radio stations in the particular market after
the acquisition in question, the FCC has traditionally employed a policy that
presumptively allows waivers of the one to a market rule to permit the common
ownership of one AM, one FM and one TV station in the market. The 1996 Act
directs the FCC to extend this policy to each of the top 50 markets. Moreover,
the FCC has pending a rulemaking proceeding in which it has solicited comment on
the implementation of this policy and whether the one to a market rule should be
eliminated altogether. The Company has pending several requests for waivers of
the one to a market rule in connection with (1) its applications to acquire a
television station in the Sullivan Acquisition in a market where the Company
owns radio stations and (2) its application to acquire a radio station from
WPNT, Inc. in a market where the Company owns a television station.
However, the FCC does not apply its presumptive waiver policy in cases
involving the common ownership of one television station, and two or more radio
stations in the same service (AM or FM), in the same market. Pending its ongoing
rulemaking proceeding to reexamine the one to a market rule, the FCC has stated
that it will consider waivers of the rule in such instances on a case-by-case
basis, considering (i) the public service benefits that will arise from the
joint operation of the facilities such as economies of scale, cost savings and
programming and service benefits; (ii) the types of facilities involved; (iii)
the number of media outlets owned by the applicant in the relevant market; (iv)
the financial difficulties of the stations involved; and (v) the nature of the
relevant market in light of the level of competition and diversity after joint
operation is implemented. Waiver requests involving the common ownership of more
than two same service radio stations in the same market generally are granted,
but are temporary and conditioned on the outcome of the rulemaking proceeding.
The Company obtained such temporary, conditional waivers of the one to a market
rule in connection with its acquisition of the Heritage radio stations in the
Kansas City and St. Louis markets, in connection with its acquisition of the Max
Media radio stations in the Norfolk market, and in connection with its
acquisition of Keymarket and Spartan Broadcasting stations in the
Greenville/Spartanburg market.
In its ongoing rulemaking proceeding to reexamine the one to a market rule,
the FCC has proposed the following options for modifying the rule in the event
it is not eliminated: (i) extending the presumptive waiver policy to any
television market in which a specified number of independently owned voices
would remain after common ownership of a television station and one or more
radio stations is effectuated; (ii) extending the presumptive waiver policy to
entities that seek to own more than one FM and/or one AM radio station; (iii)
reducing the minimum number of independently owned voices that must remain after
a transaction is effectuated; and (iv) modifying the five-factor case-by-case
test for waivers.
Local Television/Cable Cross-Ownership Rule. While the 1996 Act eliminates
a previous statutory prohibition against the common ownership of a television
broadcast station and a cable system that serve the same local market, the 1996
Act leaves the current FCC rule in place. The legislative history of the Act
indicates that the repeal of the statutory ban should not prejudge the outcome
of any FCC review of the rule.
Broadcast Network/Cable Cross-Ownership Rule. The 1996 Act directs the FCC
to eliminate its rules which formerly prohibited the common ownership of a
broadcast network and a cable system, subject to the provision that the FCC
revise its rules as necessary to ensure carriage, channel positioning, and
non-discriminatory treatment of non-affiliated broadcast stations by cable
systems affiliated with a broadcast network. In March 1996, the FCC issued an
order implementing this legislative change.
Broadcast/Daily Newspaper Cross-Ownership Rule. The FCC's rules prohibit
the common ownership of a radio or television broadcast station and a daily
newspaper in the same market. The 1996 Act does not eliminate or modify this
prohibition. In October 1996, however, the FCC initiated a rulemaking proceeding
to determine whether it should liberalize its waiver policy with respect to
cross-ownership of a daily newspaper and one or more radio stations in the same
market.
18
Dual Network Rule. The 1996 Act directs the FCC to repeal its rule which
formerly prohibited an entity from operating more than one television network.
In March 1996, the FCC issued an order implementing this legislative change.
Under the modified rule, a network entity is permitted to operate more than one
television network, provided, however, that ABC, CBS, NBC, and/or Fox are
prohibited from merging with each other or with another network television
entity such as WB or UPN.
Expansion of the Company's broadcast operations on both a local and
national level will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Concomitantly, any further relaxation of
the FCC's ownership rules may increase the level of competition in one or more
of the markets in which the Company's stations are located, more specifically to
the extent that any of the Company's competitors may have greater resources and
thereby be in a superior position to take advantage of such changes.
Must-Carry/Retransmission Consent
- ---------------------------------
Pursuant to the Cable Act of 1992, television broadcasters are required to
make triennial elections to exercise either certain "must-carry" or
"retransmission consent" rights in connection with their carriage by cable
systems in each broadcaster's local market. By electing the must-carry rights, a
broadcaster demands carriage on a specified channel on cable systems within its
Area of Dominant Influence, in general as defined by the Arbitron 1991-92
Television Market Guide. These must-carry rights are not absolute, and their
exercise is dependent on variables such as (i) the number of activated channels
on a cable system; (ii) the location and size of a cable system; and (iii) the
amount of programming on a broadcast station that duplicates the programming of
another broadcast station carried by the cable system. Therefore, under certain
circumstances, a cable system may decline to carry a given station.
Alternatively, if a broadcaster chooses to exercise retransmission consent
rights, it can prohibit cable systems from carrying its signal or grant the
appropriate cable system the authority to retransmit the broadcast signal for a
fee or other consideration. In October 1996, the Company elected must-carry or
retransmission consent with respect to each of its non-Fox affiliated stations
based on its evaluation of the respective markets and the position of the
Company's owned or programmed station(s) within the market. The Company's
stations continue to be carried on all pertinent cable systems, and the Company
does not believe that its elections have resulted in the shifting of its
stations to less desirable cable channel locations. The Company's stations
affiliated with Fox granted Fox their proxies to negotiate retransmission
consent with the cable systems. The agreements negotiated by Fox extend only
through May of 1999. Therefore, subject to Fox's approval, the Company will need
to negotiate retransmission consent agreements for these Fox-affiliated stations
to attain carriage on those relevant cable systems for the balance of this
triennial period (i.e., through December 31, 1999). For subsequent elections
beginning with the election to be made by October 1, 1999, the must-carry market
will be the station's DMA, in general as defined by the Nielsen DMA Market and
Demographic Rank Report of the prior year.
The FCC has initiated a rulemaking proceeding to consider whether to apply
must-carry rules to require cable companies to carry both the analog and digital
signals of local broadcasters during the DTV transition period between 2002 and
2006 when television stations will be broadcasting both signals. If the FCC does
not require DTV must-carry, cable customers in the Company's broadcast markets
may not receive the station's digital signal, which could have an adverse affect
on the Company.
Syndicated Exclusivity/Territorial Exclusivity
- ----------------------------------------------
The FCC has imposed syndicated exclusivity rules and expanded existing
network nonduplication rules. The syndicated exclusivity rules allow local
broadcast television stations to demand that cable operators black out
syndicated non-network programming carried on "distant signals" (i.e., signals
of broadcast stations, including so-called "superstations," which serve areas
substantially removed from the cable system's local community). The network
non-duplication rules allow local broadcast network television affiliates to
require that cable operators black out duplicating network programming carried
on distant signals. However, in a number of markets in which the Company owns or
programs stations affiliated with a network, a station that is affiliated with
the same network in a nearby market is carried on cable systems in the Company's
market. This is not in violation of the FCC's network nonduplication rules.
However, the carriage of two network stations on the same cable system could
result in a decline of viewership adversely affecting the revenues of the
Company owned or programmed station.
19
Restrictions on Broadcast Advertising
- -------------------------------------
Advertising of cigarettes and certain other tobacco products on broadcast
stations has been banned for many years. Various states restrict the advertising
of alcoholic beverages. Congressional committees have recently examined
legislation proposals which may eliminate or severely restrict the advertising
of beer and wine. Although no prediction can be made as to whether any or all of
the present proposals will be enacted into law, the elimination of all beer and
wine advertising would have an adverse effect upon the revenues of the Company's
stations, as well as the revenues of other stations which carry beer and wine
advertising.
The FCC has imposed commercial time limitations in children's television
programming pursuant to legislation. In television programs designed for viewing
by children of 12 years of age and under, commercial matter is limited to 12
minutes per hour on weekdays and 10.5 minutes per hour on weekends. In granting
renewal of the license for WBFF-TV, the FCC imposed a fine of $10,000 on the
Company alleging that the station had exceeded these limitations. The Company
has appealed this fine and the appeal is pending. In granting renewal of the
license for WTTV-TV and WTTK-TV, stations that the Company programs pursuant to
an LMA, the FCC imposed a fine of $15,000 on WTTV-TV and WTTK-TV's licensee
alleging that the stations had exceed these limitations.
The Communications Act and FCC rules also place restrictions on the
broadcasting of advertisements by legally qualified candidates for elective
office. Among other things, (i) stations must provide "reasonable access" for
the purchase of time by legally qualified candidates for federal office; (ii)
stations must provide "equal opportunities" for the purchase of equivalent
amounts of comparable broadcast time by opposing candidates for the same
elective office; and (iii) during the 45 days preceding a primary or primary
run-off election and during the 60 days preceding a general or special election,
legally qualified candidates for elective office may be charged no more than the
station's "lowest unit charge" for the same class of advertisement, length of
advertisement, and daypart. Recently, both the President of the United States
and the Chairman of the FCC have called for rules that would require broadcast
stations to provide free airtime to political candidates. The Company cannot
predict the effect of such a requirement on its advertising revenues.
Programming and Operation
- -------------------------
General. The Communications Act requires broadcasters to serve the "public
interest." The FCC has relaxed or eliminated many of the more formalized
procedures it had developed in the past to promote the broadcast of certain
types of programming responsive to the needs of a station's community of
license. FCC licensees continue to be required, however, to present programming
that is responsive to their communities' issues, and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming may be considered by the FCC when it evaluates renewal
applications of a licensee, although such complaints may be filed at any time
and generally may be considered by the FCC at any time. Stations also must pay
regulatory and application fees, and follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisement of contests and lotteries,
obscene and indecent broadcasts, and technical operations, including limits on
radio frequency radiation. Certain of the FCC's rules that required licensees to
develop and implement affirmative action programs designed to promote equal
employment opportunities and the annual submission of reports to the FCC with
respect to those matters were found unconstitutional by the U.S. Court of
Appeals. The FCC has initiated a rulemaking to revise these rules.
Children's Television Programming. Pursuant to rules adopted in 1996
television stations are required to broadcast a minimum of three hours per week
of "core" children's educational programming, which the FCC defines as
programming that (i) has serving the educational and informational needs of
children 16 years of age and under as a significant purpose; (ii) is regularly
scheduled, weekly and at least 30 minutes in duration; and (iii) is aired
between the hours of 7:00 a.m. and 10:00 p.m. Furthermore, "core" children's
educational programs, in order to qualify as such, are required to be identified
as educational and informational programs over the air at the time they are
broadcast, and are required to be identified in the children's programming
reports required to be placed in stations' public inspection files.
Additionally, television stations are required to identify and provide
information concerning "core" children's programming to publishers of program
guides and listings.
20
Television Violence. The 1996 Act contains a number of provisions relating
to television violence. First, pursuant to the 1996 Act, the television industry
has developed a ratings system which the FCC has approved. Furthermore, also
pursuant to the 1996 Act, the FCC has adopted rules requiring certain television
sets to include the so-called "V-chip," a computer chip that allows blocking of
rated programming. Under these rules, half of television receiver models with
picture screens 13 inches or greater will be required to have the "V-chip," by
July 1, 1999, and all such models will be required to have the "V-chip" by
January 1, 2000. In addition, the 1996 Act requires that all television license
renewal applications filed after May 1, 1995 contain summaries of written
comments and suggestions received by the station from the public regarding
violent programming.
Closed Captioning. The FCC has adopted rules that require generally that
(i) 100% of all new programming first published or exhibited on or after January
1, 1998 must be closed captioned within eight years, and (ii) 75% of "old"
programming which first aired prior to January 1, 1998 must be closed captioned
within 10 years, subject to certain exemptions.
Digital Television
- ------------------
The FCC has taken a number of steps to implement DTV broadcasting service
in the United States. In December 1996, the FCC adopted a DTV broadcast standard
and, in April 1997, adopted decisions in several pending rulemaking proceedings
that establish service rules and a plan for implementing DTV. The FCC adopted a
DTV Table of Allotments that provides all authorized television stations with a
second channel on which to broadcast a DTV signal. The FCC made slight revisions
to the DTV rules and table of allotments in acting upon a number of appeals in
the DTV proceeding. The FCC has attempted to provide DTV coverage areas that are
comparable to stations' existing service areas. The FCC has ruled that
television broadcast licensees may use their digital channels for a wide variety
of services such as high-definition television, multiple standard definition
television programming, audio, data, and other types of communications, subject
to the requirement that each broadcaster provide at least one free video channel
equal in quality to the current technical standard and further subject to the
requirement that broadcasters pay a fee of 5% of gross revenues on all DTV
subscription services.
DTV channels will generally be located in the range of channels from
channel 2 through channel 51. The FCC is requiring that affiliates of ABC, CBS,
Fox and NBC in the top 10 television markets begin digital broadcasting by May
1, 1999, that affiliates of these networks in markets 11 through 30 begin
digital broadcasting by November 1999 and that all other stations begin digital
broadcasting by May 1, 2002. The majority of the Company's stations are required
to commence digital operations by May 1, 2002. Applications for such facilities
are required to be filed by November 1, 1999. The Company has already filed
these applications for five of its stations and plans to begin broadcasting
digital signals at four of its stations in Baltimore, Sacramento, St. Louis and
Pittsburgh by the end of 1999. The FCC's plan calls for the DTV transition
period to end in the year 2006, at which time the FCC expects that television
broadcasters will cease non-digital broadcasting and return one of their two
channels to the government, allowing that spectrum to be recovered for other
uses. Under the Balanced Budget Act, however, the FCC is authorized to extend
the December 31, 2006 deadline for reclamation of a television station's
non-digital channel if, in any given case: (i) one or more television stations
affiliated with ABC, CBS, NBC or Fox in a market is not broadcasting digitally,
and the FCC determines that such stations have "exercised due diligence" in
attempting to convert to digital broadcasting; or (ii) less than 85% of the
television households in the station's market subscribe to a multichannel video
service (cable, wireless cable or direct-to-home broadcast satellite television
("DBS")) that carries at least one digital channel from each of the local
stations in that market; or (iii) less than 85% of the television households in
the market can receive digital signals off the air using either a set-top
converter box for an analog television set or a new DTV television set. The
Balanced Budget Act also directs the FCC to auction the non-digital channels by
September 30, 2002 even though they are not to be reclaimed by the government
until at least December 31, 2006. The Balanced Budget Act also permits
broadcasters to bid on the non-digital channels in cities with populations
greater than 400,000, provided the channels are used for DTV. Thus, it is
possible a broadcaster could own two channels in a market. The FCC has initiated
separate proceedings to consider the surrender of existing television channels
and how these frequencies will be used after they are eventually recovered from
broadcasters. Additionally, the FCC has initiated a separate proceeding to
consider to what extent the cable must-carry requirements will apply to DTV
signals.
21
Implementation of digital television will improve the technical quality of
television signals received by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference. The FCC's DTV allotment plan allows
present UHF stations that move to DTV channels considerably less signal power
than present VHF stations that move to UHF DTV channels. While the 1998 orders
of the FCC present current UHF stations with some options to overcome this
disparity, it is unknown whether the Company will benefit from such options.
Additionally, the DTV transmission standard adopted by the FCC may not allow
certain stations to provide a DTV signal of adequate strength to be reliably
received by certain viewers using inside television set antennas. Implementation
of digital television will also impose substantial additional costs on
television stations because of the need to replace equipment and because some
stations will need to operate at higher utility costs and there can be no
assurance that the Company's television stations will be able to increase
revenue to offset such costs. The Company is currently considering plans to
provide HDTV, to provide multiple channels of television including the provision
of additional broadcast programming and transmitted data on a subscription
basis, and to continue its current TV program channels on its allocated DTV
channels. The 1996 Act allows the FCC to charge a spectrum fee to broadcasters
who use the digital spectrum to offer subscription-based services. The FCC ruled
that broadcasters are subject to the requirement to pay a fee of 5% of gross
revenues on all subscription services. The FCC is also considering imposing new
public interest requirements on television licensees in exchange for their
receipt of DTV channels. In addition, Congress has held hearings on
broadcasters' plans for the use of their digital spectrum.A governmental
commission was appointed to consider whether additional public service
obligations should be imposed on television broadcasters. The commission issued
its report in December 1998 making several non-binding recommendations,
including that broadcasters voluntarily provide five minutes of free air time
per evening to political candidates for thirty days prior to an election. The
Company cannot predict the impact of such recommendations or what future actions
the FCC might take with respect to DTV, nor can it predict the effect of the
FCC's present DTV implementation plan or such future actions on the Company's
business.
Proposed Changes
- ----------------
The Congress and the FCC have under consideration, and in the future may
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation, ownership
and profitability of the Company's broadcast stations, result in the loss of
audience share and advertising revenues for the Company's broadcast stations,
and affect the ability of the Company to acquire additional broadcast stations
or finance such acquisitions. In addition to the changes and proposed changes
noted above, such matters may include, for example, the license renewal process,
spectrum use fees, political advertising rates, potential restrictions on the
advertising of certain products (beer, wine and hard liquor, for example), and
the rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations. Other matters that could affect the Company's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry, such as direct radio
and television broadcast satellite service, the continued establishment of
wireless cable systems and low power television stations, digital television and
radio technologies, the Internet and the advent of telephone company
participation in the provision of video programming service.
Other Considerations
- --------------------
The foregoing summary does not purport to be a complete discussion of all
provisions of the Communications Act or other congressional acts or of the
regulations and policies of the FCC. For further information, reference should
be made to the Communications Act, other congressional acts, and regulations and
public notices promulgated from time to time by the FCC. There are additional
regulations and policies of the FCC and other federal agencies that govern
political broadcasts, public affairs programming, equal employment opportunity,
and other matters affecting the Company's business and operations.
22
ENVIRONMENTAL REGULATION
Prior to the Company's ownership or operation of its facilities, substances
or waste that are or might be considered hazardous under applicable
environmental laws may have been generated, used, stored or disposed of at
certain of those facilities. In addition, environmental conditions relating to
the soil and groundwater at or under the Company's facilities may be affected by
the proximity of nearby properties that have generated, used, stored or disposed
of hazardous substances. As a result, it is possible that the Company could
become subject to environmental liabilities in the future in connection with
these facilities under applicable environmental laws and regulations. Although
the Company believes that it is in substantial compliance with such
environmental requirements, and has not in the past been required to incur
significant costs in connection therewith, there can be no assurance that the
Company's costs to comply with such requirements will not increase in the
future. The Company presently believes that none of its properties have any
condition that is likely to have a material adverse effect on the Company's
financial condition or results of operations.
COMPETITION
The Company's television and radio stations compete for audience share and
advertising revenue with other television and radio stations in their respective
DMAs or MSAs, as well as with other advertising media, such as newspapers,
magazines, outdoor advertising, transit advertising, yellow page directories,
direct mail and local cable and wireless cable systems. Some competitors are
part of larger organizations with substantially greater financial, technical and
other resources than the Company.
Television Competition. Competition in the television broadcasting industry
occurs primarily in individual DMAs. Generally, a television broadcasting
station in one DMA does not compete with stations in other DMAs. The Company's
television statio