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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
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For the fiscal year ended December 31, 1997 Commission file number 0-19728
GRANITE BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3458782
(State of Incorporation) (I.R.S. Employer
Identification No.)
767 Third Avenue, 34th Floor
New York, New York 10017
(212) 826-2530
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (Nonvoting), $.01 par value per share
Cumulative Convertible Exchangeable Preferred Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No /_/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /_/
As of March 10, 1998, 9,536,052 shares of Granite Broadcasting Corporation
Common Stock (Nonvoting) and 1,662,519 shares of Granite Broadcasting
Corporation Cumulative Convertible Exchangeable Preferred Stock were
outstanding. The aggregate market value (based upon the last reported sale price
on the Nasdaq National Market on March 10, 1998) of the shares of Common Stock
(Nonvoting) held by non-affiliates was approximately $104,547,824. The aggregate
market value (based upon the last reported sale price on the Nasdaq National
Market on March 10, 1998) of shares of Cumulative Convertible Exchangeable
Preferred Stock held by non-affiliates was approximately $97,160,610. (For
purposes of calculating the preceding amounts only, all directors and executive
officers of the registrant are assumed to be affiliates.) As of March 10, 1998,
178,500 shares of Granite Broadcasting Corporation Class A Voting Common Stock
were outstanding, all of which were held by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Item 14 of Part IV are incorporated by reference to: Granite
Broadcasting Corporation's Registration Statement No. 33-43770, filed on
November 5, 1991; Granite Broadcasting Corporation's Registration Statement No.
33-52988, filed on October 6, 1992; Granite Broadcasting Corporation's Current
Report on Form 8-K, filed on June 25, 1993; Granite Broadcasting Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, filed on
November 15, 1993; Amendment No. 2 to Granite Broadcasting Corporation's
Registration Statement No. 33-71172, filed on December 16, 1993; Granite
Broadcasting Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, filed on November 14, 1994; Granite Broadcasting
Corporation's Annual Report on Form 10-K for the year ended December 31, 1994,
filed on March 29, 1995; Granite Broadcasting Corporation's Current Report on
Form 8-K, filed on May 19, 1995; Granite Broadcasting Corporation's Current
Report on Form 8-K, filed on July 14, 1995; Granite Broadcasting Corporation's
Registration Statement No. 33-94862, filed on July 21, 1995; Amendment No. 2 to
Granite Broadcasting Corporation's Registration Statement No. 33-94862, filed on
October 6, 1995; Granite Broadcasting Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995, filed on March 28, 1996; Granite
Broadcasting Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, filed on August 13, 1996; Granite Broadcasting Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed on
November 14, 1996; Granite Broadcasting Corporation's Current Report on Form
8-K, filed on December 17, 1996; Granite Broadcasting Corporations' Annual
Report on Form 10-K for the year ended December 31, 1996, filed on March 21,
1997; Amendment No. 1 to Granite Broadcasting Corporation's Registration
Statement No. 333-24907, filed on June 10, 1997; Granite Broadcasting
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
filed on August 8, 1997; Granite Broadcasting Corporation's Current Report on
Form 8-K, filed on October 17, 1997; and Granite Broadcasting Corporation's
Current Report on Form 8-K, filed on March 2, 1998.
PART I
Item 1. Business
Granite Broadcasting Corporation ("Granite" or the "Company"),
a Delaware corporation, is a group broadcasting company founded in 1988 to
acquire and manage network-affiliated television stations and other media and
communications-related properties. The Company's goal is to identify and acquire
properties that management believes have the potential for substantial long-term
appreciation and to aggressively manage such properties to improve their
operating results. The Company currently owns and operates ten
network-affiliated television stations: KNTV(TV), the ABC affiliate serving San
Jose, California and the Salinas-Monterey, California television market
("KNTV"); WTVH-TV, the CBS affiliate serving Syracuse, New York ("WTVH");
KSEE-TV, the NBC affiliate serving Fresno-Visalia, California ("KSEE"); WPTA-TV,
the ABC affiliate serving Fort Wayne, Indiana ("WPTA"); WEEK-TV, the NBC
affiliate serving Peoria-Bloomington, Illinois ("WEEK-TV"); KBJR-TV, the NBC
affiliate serving Duluth, Minnesota and Superior, Wisconsin ("KBJR"); KEYE-TV,
the CBS affiliate serving Austin, Texas ("KEYE"); WWMT-TV, the CBS affiliate
serving Grand Rapids-Kalamazoo-Battle Creek, Michigan ("WWMT"); WKBW-TV, the ABC
affiliate serving Buffalo, New York ("WKBW"); and WDWB-TV (formerly known as
WXON-TV), the WB Network affiliate serving Detroit, Michigan ("WDWB"). KBJR and
WEEK were acquired in separate transactions in October 1988, WPTA was acquired
in December 1989, KNTV was acquired in February 1990, WTVH and KSEE were
acquired in December 1993, KEYE was acquired in February 1995, WWMT and WKBW
were acquired in separate transactions in June 1995 and WDWB was acquired in
January 1997. WLAJ-TV, the ABC affiliate serving Lansing, Michigan ("WLAJ") is
currently being operated by the Company pursuant to a time brokerage agreement
that was entered into in October 1996. The Company owns each of KNTV, WTVH,
KSEE, WPTA, KBJR, KEYE, WWMT, WKBW and WDWB through separate wholly owned
subsidiaries (collectively, the "Subsidiaries"; references herein to the
"Company" or to "Granite" include Granite Broadcasting Corporation and its
subsidiaries). The Company's long-term objective is to acquire additional
television stations and to pursue acquisitions of other media and
communications-related properties in the future.
Recent Developments
Acquisitions
On January 31, 1997, the Company acquired substantially all the
assets used in the operation of WDWB, the WB Network affiliated station serving
Detroit, Michigan (the "WDWB Acquisition"), for approximately $175,000,000 in
cash and the assumption of certain liabilities. On January 8, 1997, the Company
completed the acquisition of WIVR-FM in Eureka, Illinois for $1,000,000 in cash.
The Company also changed the station's call letters to WEEK-FM. The radio
station is run in combination with Granite-owned WEEK-TV, the leading television
station in the Peoria - Bloomington, Illinois television market.
KOFY Acquisition Agreement
On October 3, 1997, the Company entered into a definitive agreement
with Pacific FM Incorporated ("Pacific"), a California corporation, James J.
Gabbert and Michael P. Lincoln to acquire 51% of the outstanding stock of
Pacific, the owner of KOFY-TV, the WB Network affiliated station serving the San
Francisco-Oakland-San Jose, California television market ("KOFY"). At the
closing of this purchase, it is contemplated that the Company will acquire the
remaining 49% of the stock of Pacific. The total purchase price for all the
stock of Pacific will be $143.75 million in cash, subject to certain
adjustments. In addition, the Company will pay $30 million to the principal
shareholders of Pacific for a covenant not to compete in the San Francisco-San
Jose television market for a period of five years from the closing of the
Company's acquisition.
The proposed acquisition is subject to approval by the Federal
Communications Commission (the "FCC") and other customary closing conditions and
is expected to be completed during the third quarter of 1998. Because
Granite already owns a television station with an overlapping service area,
KNTV, the Company has requested a permanent waiver of the FCC's local television
multiple ownership rule to permit Granite to own both KNTV and KOFY.
WWMT and WLAJ Sale Agreement
On February 18, 1998, the Company and certain of the Company's
subsidiaries entered into a definitive agreement with Freedom Communications,
Inc. ("Freedom"), a California corporation, whereby Freedom will acquire the
assets of WWMT and WLAJ for a total purchase price of $170 million in cash,
subject to certain adjustments (the "Asset Sale Agreement"). It is anticipated
that proceeds from the sale will be used to fund part of the purchase price of
KOFY.
Granite acquired all of the assets of WWMT in 1995 for $95 million
and has a contract to acquire all of the assets of WLAJ for $19.4 million.
Granite operates WLAJ pursuant to a time brokerage agreement.
The consummation of the transactions described in the Asset Sale
Agreement is contingent on, among other things, approval by the FCC and
satisfaction of other customary closing conditions. It is contemplated that the
sale will close in the second quarter of 1998.
Other Developments
In April 1996, the Company joined Datacast LLC, a company formed to
establish and operate a national data center and network for the broadcast of
digital data through television station broadcast signals. The other equity
investors in Datacast LLC include Chris-Craft Industries, Inc., Lin Television
Corporation and Schurz Communications Inc. The Company has committed to invest
up to $3,500,000 in Datacast LLC, of which $3,250,000 has been invested to date.
-2-
Company and Industry Overview
The following table sets forth general information for each of the
Company's television stations:
Other
Commercial Expiration
Market Date of Channel/ Network Market Stations Date of
Station Area Acquisition Frequency Affiliation Rank(1) in DMA FCC License
- ------- -------- ----------- --------- ----------- ------- ---------- -----------
WDWB-TV Detroit, MI 01/31/97 20/UHF WB 9 5 10/01/05
WWMT-TV Grand Rapids -
Kalamazoo -
Battle Creek, MI 06/01/95(2) 3/VHF CBS 37 6 10/01/05
WKBW-TV Buffalo, NY 06/29/95 7/VHF ABC 40 4 06/01/99
KNTV(TV) San Jose,
Salinas -
Monterey, CA 02/05/90 11/VHF ABC 52 5(3) 12/01/98
KSEE-TV Fresno-
Visalia, CA 12/23/93 24/UHF NBC 55 9(4) 12/01/98
KEYE-TV Austin, TX 02/01/95 42/UHF CBS 60 6 08/01/98
WTVH-TV Syracuse, NY 12/23/93 5/VHF CBS 72 4 06/01/99
WPTA-TV Fort Wayne, IN 12/11/89 21/UHF ABC 102 4 08/01/05
WLAJ-TV Lansing, MI Pending(2),(5) 53/UHF ABC 105 3 10/01/05
WEEK-TV Peoria -
Bloomington,
IL 10/31/88 25/UHF NBC 110 3 12/01/05
KBJR-TV Duluth, MN -
Superior, WI 10/31/88 6/VHF NBC 134 2 12/01/05
- ----------
(1) "Market rank" refers to the size of the television market or Designated
Market Area ("DMA") as defined by the A.C. Nielsen Company ("Nielsen"),
except for San Jose. KNTV, whose DMA is the Salinas-Monterey television
market, primarily serves San Jose and Santa Clara County (which are part
of the San Francisco-Oakland-San Jose DMA). If Santa Clara County were a
separate DMA, it would rank as the 52nd largest DMA in the United States.
All market rank data is derived from the Nielsen Station Index for
November 1997.
(2) The Company and certain of its subsidiaries have entered into the Asset
Sale Agreement with Freedom, pursuant to which, subject to certain
conditions, Freedom will acquire the assets of WWMT and WLAJ for a total
purchase price of $170 million in cash, subject to certain adjustments.
See "Recent Developments-WWMT and WLAJ Sale Agreement."
(3) Includes KSMS, Salinas-Monterey and KCU, Salinas, both of which broadcast
entirely in Spanish.
(4) Includes KFTV Hanford-Fresno and KMSG, Sanger-Fresno, both of which
broadcast entirely in Spanish.
(5) WLAJ is currently being operated by the Company pursuant to a time
brokerage agreement.
-3-
Commercial television broadcasting began in the United States on a
regular basis in the 1940s. Currently, there are a limited number of channels
available for broadcasting in any one geographic area and the license to operate
a broadcast station is granted by the FCC. Television stations can be
distinguished by the frequency on which they broadcast. Television stations
which broadcast over the very high frequency ("VHF") band of the spectrum
generally have some competitive advantage over television stations that
broadcast over the ultra-high frequency ("UHF") band of the spectrum because the
former usually have better signal coverage and operate at a lower transmission
cost. In television markets in which all local stations are UHF stations, such
as Fort Wayne, Indiana, Peoria-Bloomington, Illinois and Fresno-Visalia,
California, no competitive disadvantage exists.
Television station revenues are primarily derived from local,
regional and national advertising and, to a lesser extent, from network
compensation and revenues from studio rental and commercial production
activities. Advertising rates are based upon a program's popularity among the
viewers an advertiser wishes to attract, the number of advertisers competing for
the available time, the size and demographic make-up of the market served by the
station, and the availability of alternative advertising media in the market
area. Because broadcast television stations rely on advertising revenues,
declines in advertising budgets, particularly in recessionary periods, adversely
affect the broadcast industry, and as a result may contribute to a decrease in
the valuation of broadcast properties.
The Company's Stations
Set forth below are the principal types of television gross revenues
(before agency and representative commissions) received by the Company's
television stations for the periods indicated and the percentage contribution of
each to the gross television revenues of the television stations owned by the
Company.
GROSS REVENUES, BY CATEGORY,
FOR THE COMPANY'S STATIONS
(dollars in thousands)
Years Ended December 31,
----------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------- -------------- ---------------- --------------- ----------------
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
Local/Regional(1)....... $25,416 56.3% $38,802 50.9% $60,969 51.0% $73,491 47.5% $87,412 48.3%
National(2)............. 16,290 36.1 28,548 37.5 48,995 41.0 61,945 40.0 78,833 43.5
Network Compensation(3). 1,286 2.8 2,244 2.9 4,154 3.5 7,289 4.7 7,859 4.3
Political(4)............ 133 0.3 4,060 5.3 1,498 1.3 7,265 4.7 1,036 0.6
Other Revenue(5)........ 2,041 4.5 2,559 3.4 3,849 3.2 4,851 3.1 5,943 3.3
------- ----- ------- ----- -------- ------ -------- ----- -------- -----
Total................... $45,166 100.0% $76,213 100.0% $119,465 100.0% $154,841 100.0% $181,083 100.0%
======= ===== ======= ===== ======== ====== ======== ===== ======== =====
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(1) Represents sale of advertising time to local and regional advertisers or
agencies representing such advertisers and other local sources.
(2) Represents sale of advertising time to agencies representing national
advertisers.
(3) Represents payment by networks for broadcasting network programming.
(4) Represents sale of advertising time to political advertisers.
(5) Represents miscellaneous revenue, including payment for production of
commercials.
Automobile advertising constitutes the Company's single largest
source of gross revenues, accounting for approximately 20% of the Company's
total gross revenues in 1997. Gross revenues from restaurants and
entertainment-related businesses accounted for approximately 13% of the
Company's total gross revenues in 1997. Each other category of advertising
revenue represents less than 5% of the Company's total gross revenues.
-4-
The following is a description of each of the Company's television
stations:
WDWB: Detroit, Michigan
WDWB began operating in 1962 and commenced operating as a WB Network
affiliate in 1995.
Detroit is the 9th largest DMA in the United States with a total of
1,782,000 television households and a population of 4,823,000 according to
Nielsen. Detroit's economy is based on manufacturing, retail and health
services. The largest employers are General Motors, Ford Motor Company,
Chrysler, Detroit Medical Center, Henry Ford Health System and Blue Cross Blue
Shield of Michigan. The average household income in the DMA is $43,374 according
to estimates provided in the BIA Investing in Television 1997 Report (the "BIA
Report").
WWMT: Grand Rapids - Kalamazoo - Battle Creek, Michigan
WWMT began operations in 1950 and is affiliated with CBS.
The Grand Rapids - Kalamazoo - Battle Creek economy is centered
around manufacturing, health services, education and financial services. The
average household income in the DMA was $39,023, according to estimates provided
in the BIA Report. Leading employers in the area include Pharmacia-UpJohn,
Bronson Medical Center, Borgess Medical Center, Butterworth Hospital, St. Mary's
Health Services, Steel Case, Inc., Amway Corporation, Meijer, Inc., James River
Corporation, General Motors Corporation and The Kellogg Company.
WKBW: Buffalo, New York
WKBW began operations in 1958 and is affiliated with ABC.
The Buffalo economy is centered around manufacturing, government,
health services and financial services. The average household income in the DMA
was $33,913, according to estimates provided in the BIA Report. Leading
employers in the area include General Motors, Ford Motor Company, American Axle
and Manufacturing, M&T Bank, Fleet Bank, Roswell Park Cancer Institute, Buffalo
General Hospital, NYNEX, Tops Markets and DuPont.
KNTV: San Jose, California
KNTV began operations in 1955 and is affiliated with ABC.
KNTV is the only network-affiliated station and only VHF station
licensed to serve San Jose, California, the largest city in Northern California
and the eleventh largest city in the United States. Its VHF signal is broadcast
on Channel 11 and covers all of Santa Clara County, which includes an area that
has come to be known as "Silicon Valley." Although the Nielsen rating service
designates KNTV as the ABC affiliate for the Salinas-Monterey market (which is
southwest of and adjacent to San Jose), according to the November 1997 Nielsen
Monterey/Salinas Viewers In Profile Report more than 83% of the station's
audience resides in the San Francisco-Oakland-San Jose television market (the
fifth largest DMA in the country). The Company believes that the majority of
such audience resides in Santa Clara County. If Santa Clara County were a
separate DMA with its 540,050 television households, it would rank as the 52nd
largest DMA in the United States.
Santa Clara County has a diverse and affluent economy. The average
effective buying income by household was $57,028, according to the 1996
Demographics USA Report. The area is home to over 2,800 technological companies
as well as numerous institutions and companies of national reputation. Prominent
corporations located in Santa Clara County include Hewlett-Packard,
Lockheed/Martin, IBM, Apple, Intel, Sun Microsystems, Amdahl, Tandem Computers,
National Semiconductor, Syntex, Conner Peripherals, Varian Associates and Chips
& Technologies. Santa Clara County is also the home of several universities
including
-5-
Stanford University, San Jose State University and Santa Clara University with
enrollments aggregating approximately 51,000 students.
KSEE: Fresno-Visalia, California
KSEE began operations in 1953 and is affiliated with NBC.
Fresno and the San Joaquin Valley is one of the most productive
agricultural areas in the world with over 6,000 square miles planted with more
than 250 different crops. Although farming continues to be the single most
important part of the Fresno area economy, the area now attracts a variety of
service-based industries and manufacturing and industrial operations. No single
employer or industry dominates the local economy. The average income by
household in the DMA was $33,428, according to estimates provided in the BIA
Report. The Fresno-Visalia DMA is also the home of several universities,
including Fresno State University, with enrollment estimated at 40,000.
KEYE: Austin, Texas
KEYE began operations in 1983. The station, formerly a Fox
affiliate, became a CBS affiliate on July 2, 1995.
The Austin economy benefits from having large private sector
employers such as IBM, Motorola, HEB Stores, Advanced Micro Devices, Abbott
Laboratories, Texas Instruments, Dell Computers, 3M Corporation, Applied
Materials and SEMATECH. Approximately 825 high tech firms employ nearly 85,000
people in the area. This fact, plus the terrain of the region's Hill Country,
has resulted in the Austin area being nicknamed "Silicon Hills." Since Austin,
the nation's 27th largest city, is the state capital, as well as home to the
University of Texas, it also provides a substantial amount of public sector
employment opportunities. The average income per household in the DMA was
$41,348, according to estimates provided in the BIA Report. In addition to the
University of Texas, Southwestern University, Saint Edwards University and
Southwest Texas State University are located in the DMA. Total university
enrollment in the DMA is approximately 100,000 students.
WTVH: Syracuse, New York
WTVH began operations in 1948 and is affiliated with CBS.
The Syracuse economy is centered on manufacturing, education and
government. The average income by household in the DMA was $35,285, according to
estimates provided in the BIA Report. Prominent corporations located in the area
include Carrier Corporation, New Venture Gear, Bristol-Myers Squibb,
Crouse-Hinds, Nestle Foods and Lockheed/Martin. The Syracuse DMA is also the
home of several universities, including Syracuse University, Cornell University
and Colgate University, with enrollments aggregating over 50,000 students.
WPTA: Fort Wayne, Indiana
WPTA began operations in 1957 and is affiliated with ABC.
The Fort Wayne economy is centered on manufacturing, government,
insurance, financial services and education. The average income by household in
the DMA was $39,231, according to estimates provided in the BIA Report.
Prominent corporations located in the area include Magnavox, Lincoln National
Life Insurance, General Electric, General Motors, North American Van Lines, GTE,
Dana, Phelps Dodge, ITT, and Tokheim. Fort Wayne is also the home of several
universities, including the joint campus of Indiana University and Purdue
University at Fort Wayne, with enrollments aggregating over 11,000 students.
-6-
WLAJ: Lansing, Michigan
WLAJ began operations in 1990 and is an ABC affiliate.
Lansing is the state capital and its economy is centered around
government employment, education and manufacturing. The largest employers are
General Motors, the State of Michigan, Michigan State University, Meijer Inc.,
Michigan Capital Healthcare, Sparrow Hospital and Lansing Community College. The
average household income in the DMA is $38,948 according to estimates provided
in the BIA Report.
WEEK-TV and WEEK-FM: Peoria-Bloomington, Illinois
WEEK began operations in 1953 and is affiliated with NBC. WEEK-FM,
acquired in January 1997, is run in combination with WEEK-TV.
The Peoria economy is centered on agriculture and heavy equipment
manufacturing but has achieved diversification with the growth of service-based
industries such as conventions, healthcare and higher technology manufacturing.
Prominent corporations located in Peoria include Caterpillar, Bemis, Central
Illinois Light Company, Commonwealth Edison Company, Komatsu-Dresser Industries,
IBM, Trans-Technology Electronics and Keystone Steel & Wire. In addition, the
United States Department of Agriculture's second largest research facility is
located in Peoria, and the area has become a major regional healthcare center.
The economy of Bloomington, on the other hand, is focused on insurance,
education, agriculture and manufacturing. Prominent corporations located in
Bloomington include State Farm Insurance Company, Country Companies Insurance
Company and Diamond-Star Motors Corporation (a subsidiary of Mitsubishi). The
average income by household in the DMA was $40,341, according to estimates
provided in the BIA Report. The Peoria-Bloomington area is also the home of
numerous institutions of higher education including Bradley University, Illinois
Central College, Illinois Wesleyan University, Illinois State University, Eureka
College and the University of Illinois College of Medicine, with enrollments
aggregating over 38,000 students.
KBJR: Duluth, Minnesota and Superior, Wisconsin
KBJR began operations in 1954 and is affiliated with NBC.
The area's primary industries include mining, fishing, food
products, paper, medical, shipping, tourism and timber. The average income by
household in the DMA was $30,421, according to estimates provided in the BIA
Report. Duluth is one of the major ports in the United States out of which iron
ore, coal, limestone, cement, grain, paper and chemicals are shipped. Northwest
Airlines has completed construction of two airplane maintenance facilities in
the Duluth area that management estimates added approximately 1,000 jobs to the
Duluth area's economy. Prominent corporations located in the area include
Minnesota Power, U.S. West, Mesabi & Iron Range Railway Co., Walmart, Jeno
Paulucci International, Lake Superior Industries, Potlatch Corporation, Boise
Cascade, Burlington Northern Railway, Target (Dayton-Hudson Corporation),
ConAgra, International Multifoods, Peavey, Cargill, U.S. Steel, Cleveland-Cliffs
Corporation, NorWest Bank, Shopko, Cub Foods and Advanstar. The Duluth-Superior
area is also the home of numerous educational institutions such as the
University of Minnesota-Duluth, the University of Wisconsin-Superior and the
College of St. Scholastica, with enrollments aggregating over 12,000 students.
Network Affiliation
Whether or not a station is affiliated with one of the four major
networks, NBC, ABC, CBS or Fox (collectively, the "Networks"), has a significant
impact on the composition of the station's revenues, expenses and operations. A
typical Network affiliate receives the significant portion of its programming
each day from the Network. This programming, along with cash payments, is
provided to the affiliate by the Network in exchange for a substantial majority
of the advertising inventory during Network programs. The Network then sells
this advertising time and retains the revenues so generated.
-7-
In contrast, a fully independent station purchases or produces all
of the programming which it broadcasts, resulting in generally higher
programming costs, although the independent station is, in theory, able to
retain its entire inventory of advertising and all of the revenue obtained
therefrom. However, barter and cash-plus-barter arrangements are becoming
increasingly popular. Under such arrangements, a national program distributor
typically retains up to 50% of the available advertising time for programming it
supplies, in exchange for reduced fees for such programming.
Each of the Company's stations other than WDWB is affiliated with a
Network pursuant to an affiliation agreement. KSEE, WEEK and KBJR are affiliated
with NBC; KNTV, WPTA, WKBW and WLAJ are affiliated with ABC; and KEYE, WTVH and
WWMT are affiliated with CBS. The Network affiliation agreements provide for
contract terms of ten years (other than the NBC agreements for which the terms
are seven years). WDWB has an affiliation arrangement with the WB Network, which
is terminable by either party at will.
Under each of the Company's affiliation agreements, the Networks may
increase or decrease network compensation and, under certain circumstances,
terminate the agreement upon advance written notice. Under the Company's
ownership, none of its stations has received a termination notice from its
respective Network.
In substance, each affiliation agreement provides the stations with
the right to broadcast all programs transmitted by the Network with which it is
affiliated. In exchange, the Network has the right to sell a substantial
majority of the advertising time during such broadcast. In addition, for every
hour that the station elects to broadcast Network programming, the Network pays
the station a fee, specified in each affiliation agreement, which varies with
the time of day. Typically, "prime-time" programming (Monday through Saturday
8-11 p.m. and Sunday 7-11 p.m. Eastern Time) generates the highest hourly rates.
Rates are subject to increase or decrease by the Network during the term of each
affiliation agreement, with provisions for advance notice to and right of
termination by the station in the event of a reduction in rates.
Competition
The financial success of the Company's television and radio stations
is dependent on audience ratings and revenues from advertisers within each
station's geographic market. The Company's stations compete for revenues with
other television stations in their respective markets, as well as with other
advertising media, such as newspapers, radio, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail and local cable
systems. Some competitors are part of larger companies with substantially
greater financial resources than the Company.
Competition in the broadcasting industry occurs primarily in
individual markets. Generally, a television broadcasting station in one market
does not compete with stations in other market areas. The Company's television
stations are located in highly competitive markets.
In addition to management experience, factors that are material to a
television station's competitive position include signal coverage, local program
acceptance, Network affiliation, audience characteristics, assigned frequency
and strength of local competition. The broadcasting industry is continuously
faced with technological change and innovation, the possible rise in popularity
of competing entertainment and communications media, changes in labor conditions
and governmental restrictions or actions of federal regulatory bodies, including
the FCC and the Federal Trade Commission, any of which could possibly have a
material adverse effect on the Company's operations and results.
Conventional commercial television broadcasters also face
competition from other programming, entertainment and video distribution
systems, the most common of which is cable television. These other programming,
entertainment and video distribution systems can increase competition for a
broadcasting station by bringing into its market distant broadcasting signals
not otherwise available to the station's audience and also by serving as
distribution systems for non-broadcast programming. Programming is now being
distributed to cable television systems by both terrestrial microwave systems
and by satellite. Other sources of competition include home entertainment
systems (including video cassette recorders and playback systems, video discs
and television
-8-
game devices), multi-point distribution systems, multichannel multi-point
distribution systems, video programming services available through the Internet
and other video delivery systems. The Company's television stations also face
competition from direct broadcast satellite services which transmit programming
directly to homes equipped with special receiving antennas and from video
signals delivered over telephone lines. Satellites may be used not only to
distribute non-broadcast programming and distant broadcasting signals but also
to deliver certain local broadcast programming which otherwise may not be
available to a station's audience.
The broadcasting industry is continuously faced with technological
change and innovation, which could possibly have a material adverse effect on
the Company's operations and results. Commercial television broadcasting may
face future competition from interactive video and data services that provide
two-way interaction with commercial video programming, along with information
and data services that may be delivered by commercial television stations, cable
television, direct broadcast satellites, multi-point distribution systems,
multichannel multi-point distribution systems or other video delivery systems.
In addition, recent actions by the FCC, Congress and the courts all presage
significant future involvement in the provision of video services by telephone
companies. The Telecommunications Act of 1996 lifts the prohibition on the
provision of cable television services by telephone companies in their own
telephone areas subject to regulatory safeguards and permits telephone companies
to own cable systems under certain circumstances. It is not possible to predict
the impact on the Company's television stations of any future relaxation or
elimination of the existing limitations on the ownership of cable systems by
telephone companies. The elimination or further relaxation of the restriction,
however, could increase the competition the Company's television stations face
from other distributors of video programming.
FCC Licenses
Television broadcasting is subject to the jurisdiction of the FCC
under the Communications Act of 1934, as amended (the "Communications Act"). The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and impose
penalties for violation of such regulations. The Telecommunications Act of 1996,
which amends major provisions of the Communications Act, was enacted on February
8, 1996. The FCC has commenced, but not yet completed, implementation of the
provisions of the Telecommunications Act of 1996.
The Communications Act prohibits the assignment of a license or the
transfer of control of a licensee without prior approval of the FCC. In
addition, foreign governments, representatives of foreign governments,
non-citizens, representatives of non-citizens, and corporations or partnerships
organized under the laws of a foreign nation are barred from holding broadcast
licenses. Non-citizens, however, may own up to 20% of the capital stock of a
licensee and up to 25% of the capital stock of a United States corporation that,
in turn, owns a controlling interest in a licensee. A broadcast license may not
be granted to or held by any corporation that is controlled, directly or
indirectly, by any other corporation of which more than one-fourth of the
capital stock is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or
revocation of such license. Under the Telecommunications Act of 1996,
non-citizens may serve as officers and directors of a broadcast licensee and any
corporation controlling, directly or indirectly, such licensee. The Company,
which is the licensee of one of the existing stations, is restricted by the
Communications Act from having more than one-fifth of its capital stock owned by
non-citizens, foreign governments or foreign corporations, but not from having
an officer or director who is a non-citizen.
Television broadcasting licenses are generally granted and renewed
for a period of eight years, but may be renewed for a shorter period upon a
finding by the FCC that the "public interest, convenience and necessity" would
be served thereby. At the time application is made for renewal of a television
license, parties in interest as well as members of the public may apprise the
FCC of the service the station has provided during the preceding license term
and urge the grant or denial of the application. Under the Telecommunications
Act of 1996 as implemented in the FCC's rules, a competing application for
authority to operate a station and replace the
-9-
incumbent licensee may not be filed against a renewal application and considered
by the FCC in deciding whether to grant a renewal application. The statute
modified the license renewal process to provide for the grant of a renewal
application upon a finding by the FCC that the licensee (1) has served the
public interest, convenience, and necessity; (2) has committed no serious
violations of the Communications Act or the FCC's rules; and (3) has committed
no other violations of the Communications Act or the FCC's rules which would
constitute a pattern of abuse. If the FCC cannot make such a finding, it may
deny a renewal application, and only then may the FCC accept other applications
to operate the station of the former licensee. In the vast majority of cases,
broadcast licenses are renewed by the FCC even when petitions to deny are filed
against broadcast license renewal applications. All of the Company's existing
licenses that have come up for renewal have been renewed and are in effect. Such
licenses are subject to renewal at various times during 1998, 1999 and 2005.
Although there can be no assurance that the Company's licenses will be renewed,
the Company is not aware of any facts or circumstances that would prevent the
Company from having its licenses renewed.
FCC regulations govern the multiple ownership of broadcast stations
and other media on a national and local level. The Telecommunications Act of
1996 directs the FCC to eliminate or modify certain rules regarding the multiple
ownership of broadcast stations and other media on a national and local level.
Pursuant to this directive, the FCC has revised its rules to eliminate the limit
on the number of television stations that an individual or entity may own or
control nationally, provided that the audience reach of all television stations
owned does not exceed 35% of all U.S. households. The FCC also has initiated a
rulemaking proceeding, in accordance with the Telecommunications Act of 1996, to
determine whether to retain, eliminate, or modify its limitations on the number
of television stations (currently one in most instances) that an individual or
entity may own within the same geographic market.
Pursuant to the Telecommunications Act of 1996, the FCC has
eliminated the limit on the number of radio broadcast stations that an
individual or entity may own or control nationally. The FCC also has relaxed its
local radio multiple ownership rules governing the common ownership of radio
broadcast stations in the same geographic market. In accordance with the
Telecommunications Act of 1996, the FCC's rules permit the common ownership of
up to eight commercial radio stations, not more than five of which are in the
same service (i.e., AM or FM), in markets with 45 or more commercial radio
stations. In markets with 30 to 44 commercial radio stations, an individual or
entity may own up to seven commercial radio stations, not more than four of
which are in the same service. In markets with 15 to 29 commercial radio
stations, an individual or entity may own up to six commercial radio stations,
not more than four of which are in the same service. In markets with 14 or fewer
commercial radio stations, an individual or entity may own up to five commercial
radio stations, not more than three of which are in the same service, provided
that the commonly owned stations represent no more than 50% of the stations in
the market.
The Telecommunications Act of 1996 does not eliminate the FCC's
rules restricting the common ownership of a radio station and a television
station in the same geographic market ("one-to-a-market rule") and the common
ownership of a daily newspaper and a broadcast station located in the same
geographic market. The statute, however, does relax the FCC's one-to-a-market
rule by authorizing the FCC to extend its waiver policy to stations located in
the 50 largest television markets. As directed by the Telecommunications Act of
1996, the FCC has eliminated its prior restriction on the common ownership of a
cable system and a television network. Although the statute lifts the prior
statutory restriction on the common ownership of a cable television system and a
television station located in the same geographic market, the FCC is not
statutorily required to eliminate its regulatory restriction on such common
ownership. The FCC has initiated a proceeding to solicit comments on retaining,
modifying, or eliminating this regulatory restriction. The Telecommunications
Act of 1996 authorizes the FCC to permit the common ownership of multiple
television networks under certain circumstances. Furthermore, in accordance with
the statute, the FCC has initiated a review of all of its ownership rules to
determine whether they continue to serve the public interest.
Ownership of television licensees generally is attributed to
officers, directors and shareholders who own 5% or more of the outstanding
voting stock of a licensee, except that certain institutional investors who
exert no control or influence over a licensee may own up to 10% of such
outstanding voting stock before attribution results. Under FCC regulations, debt
instruments, non-voting stock and certain limited partnership interests
-10-
(provided the licensee certifies that the limited partners are not "materially
involved" in the media-related activities of the partnership) and voting stock
held by minority shareholders where there is a single majority shareholder
generally will not result in attribution. Under the FCC's multiple and
cross-ownership rules, which have been or will be revised in accordance with the
Telecommunications Act of 1996, an officer or director of the Company or a
holder of the Company's voting common stock who has an attributable interest in
other broadcast stations, a cable television system or a daily newspaper may
violate the FCC regulations depending on the number and location of the other
broadcasting stations, cable television systems or daily newspapers attributable
to such person. In addition, the FCC's cross-interest policy, which precludes an
individual or entity from having an attributable interest in one media property
and a "meaningful" (but not attributable) interest in another media property in
the same area, may be invoked in certain circumstances to reach interests not
expressly covered by the multiple ownership rules. None of the Company's
officers, directors or holders of voting common stock have attributable or
non-attributable interests in broadcasting stations, cable television systems or
daily newspapers that violate the FCC's multiple and cross-ownership rules or
the cross-interest policy.
Irrespective of the FCC rules, the Justice Department and the
Federal Trade Commission (together the "Antitrust Agencies") have the authority
to determine that a particular transaction presents antitrust concerns. The
Antitrust Agencies have recently increased their scrutiny of the television and
radio industries, and have indicated their intention to review matters related
to the concentration of ownership within markets (including local marketing
agreements ("LMAs")) even when the ownership or LMA in question is permitted
under the regulations of the FCC. There can be no assurance that future policy
and rulemaking activities of the Antitrust Agencies will not impact the
Company's operations.
The Telecommunications Act of 1996 authorizes the FCC to issue
additional licenses for digital television ("DTV") services only to Existing
Broadcasters (as defined herein). DTV is a technology that will improve the
technical quality of television service. The Telecommunications Act of 1996
directs the FCC to adopt rules to permit Existing Broadcasters to use their DTV
channels for various purposes, including foreign language, niche, or other
specialized programming. The statute also authorizes the FCC to collect fees
from Existing Broadcasters who use their DTV channels to provide services for
which payment is received. See "Digital Television Service."
In accordance with requirements of the Telecommunications Act of
1996, the FCC has approved a voluntary rating system proposed by the broadcast
industry to identify video programming that contains sexual, violent or such
other material about which parents should be informed prior to viewing by
children. The rating system also indicates the appropriateness of the
programming for children according to age and/or maturity. The rating system
applies to all television programming except news, sports and unedited movies
rated by the Motion Picture Association of America.
In connection with this programming rating system, the FCC also has
established technical requirements of equipping new television receivers with a
device, termed a "V-chip," which will permit parents to block programming with a
common rating designation from their television sets. By July 1, 1999, one half
of all new television receiver models with picture screens 13 inches or greater
will be required to be equipped with this "V-chip." By January 1, 2000, the
V-chip will be required in all qualifying new receivers.
The Cable Television Consumer Protection and Competition Act
The Cable Television Consumer Protection and Competition Act of 1992
(the "Cable Act") and the FCC's implementing regulations give television
stations the right to control the use of their signals on cable television
systems. Under the Cable Act, at three year intervals beginning in June 1993,
each television station is required to elect whether it wants to avail itself of
must-carry rights or, alternatively, to grant retransmission consent. If a
television station elects to exercise its authority to grant retransmission
consent, cable systems are required to obtain the consent of that television
station for the use of its signal and could be required to pay the television
station for such use. The Cable Act further requires mandatory cable carriage of
all qualified local television stations electing their must-carry rights or not
exercising their retransmission rights. Under the FCC's rules, television
stations were required to make their election between must-carry and
retransmission consent status by
-11-
October 1, 1996, for the period from January 1, 1997 through December 31, 1999.
Television stations that failed to make an election by the specified deadline
were deemed to have elected must-carry status for the relevant three year
period. Each of the Company's stations has either elected its must-carry rights
or entered into retransmission consent agreements with substantially all cable
systems in its DMA. KNTV has elected to exercise its must-carry rights in both
the Salinas-Monterey DMA and Santa Clara County. The Company's other stations
have elected to require retransmission consent in substantially all cases.
Approximately 60% of the households in the geographic areas with respect to
which the Company's stations have elected to exercise their retransmission
rights subscribe to cable television.
Digital Television Service
The FCC has adopted rules authorizing DTV service and intends to
adopt other rules to implement the new service. In 1996, the FCC adopted a
transmission standard for DTV which is consistent with a consensus agreement
voluntarily developed by a broad cross-section of parties, including the
broadcasting, equipment manufacturing and computer industries. This digital
standard should improve the quality of both the audio and video signals of
television stations. The FCC has "set aside" channels within the existing
television spectrum for DTV and limited initial DTV eligibility to existing
television stations and certain applicants for new television stations
("Existing Broadcasters"). The FCC has adopted a DTV table of allotments as well
as service and licensing rules to implement the service. The DTV allotment table
provides a channel for DTV operations for each Existing Broadcaster and is
intended to enable Existing Broadcasters to replicate their existing service
areas. The affiliates of CBS, NBC, ABC and Fox in the ten largest U.S.
television markets are required to initiate commercial DTV service with a
digital signal by May 1, 1999. Affiliates of these networks located in the 11th
through the 30th largest U.S. television markets must begin DTV operation by
November 1, 1999. All other commercial stations are required to begin DTV
broadcasts by May 1, 2002. All of the company-owned stations must meet the May
1, 2002 construction deadline. By 2006, broadcasters will have to convert to DTV
service, terminate their existing analog service and surrender their present
analog channel to the FCC. The FCC has begun issuing construction permits for
DTV operations to broadcast licensees. None of the Company's stations have yet
sought FCC authorization for DTV operation.
Due to increased equipment requirements, implementation of DTV
service will impose substantial additional costs on television stations. It is
also possible that advances in technology may permit Existing Broadcasters to
enhance the picture quality of existing systems without the need to implement
DTV service. The Company does not know the effect the authorization of DTV
service will have on the company's business or capital expenditure requirements.
The FCC has proposed other rules to implement DTV service. The FCC
proposes to impose certain fees on DTV licensees for the transmission of
non-broadcast services (e.g., paid subscription services) over their DTV
spectrum. The FCC also has announced its intention to initiate rulemaking
proceedings soon to examine: (1) whether, and the extent to which, "must carry"
obligations should be applied to DTV service; (2) the extent to which additional
public interest obligations should be imposed on DTV licensees; and (3) various
DTV tower siting issues.
Proposed Legislation and Regulations
The FCC currently has under consideration and the Congress and the
FCC may in the future consider and adopt new or modify existing laws,
regulations and policies regarding a wide variety of matters that could,
directly or indirectly, affect the operation, ownership, and profitability of
the Company's broadcast properties, result in the loss of audience share and
advertising revenues for the Company's stations, and affect the ability of the
Company to acquire additional stations or finance such acquisitions. Such
matters include: (i) spectrum use or other fees on FCC licensees; (ii) the FCC's
equal employment opportunity rules and other matters relating to minority and
female involvement in the broadcasting industry; (iii) rules relating to
political broadcasting and advertising; (iv) technical and frequency allocation
matters; (v) changes in the FCC's cross-interest, multiple ownership and
cross-ownership rules and policies; (vi) changes to broadcast technical
requirements; (vii) changes to the standards governing the evaluation and
regulation of television programming directed towards children, and
-12-
violent and indecent programming; and (vii) restrictions on the advertisement of
certain alcoholic products. The Company cannot predict whether such changes will
be adopted or, if adopted, the effect that such changes would have on the
business of the Company.
As an example of the above proposed changes, the FCC has initiated
rulemaking proceedings to solicit comments on its multiple ownership,
attribution and minority ownership rules. More particularly, the FCC has
initiated proceedings requesting comment on: (i) narrowing the geographic area
where common ownership restrictions would be triggered by limiting it to
overlapping "Grade A" contours rather than "Grade B" contours and by permitting
(or granting waivers or exceptions for) certain UHF or UHF/VHF station
combinations; (ii) relaxing the rules prohibiting cross-ownership of radio and
television stations in the same market to allow certain combinations where there
remain alternative outlets and suppliers to ensure diversity; (iii) treating
television LMAs the same as radio LMAs, which would currently preclude certain
television LMAs where the programmer owns or has an attributable interest in
another television station in the same market; (iv) establishing a
grandfathering policy for certain television LMAs in the event the FCC decides
to treat interests in such LMAs as attributable; and (v) treating a company's
interest in a joint sales agreement for a television station as an attributable
interest for purposes of the FCC's ownership rules. The FCC also has a
rulemaking proceeding pending where it seeks comment on whether it should relax
attribution and other rules to facilitate greater minority and female ownership.
This proceeding currently is being held in abeyance due to uncertainty created
by a 1995 Supreme Court decision which narrowed the legal basis for affirmative
action programs. The Telecommunications Act of 1996 requires the FCC to review
the broadcast ownership rules every two years and to repeal or modify any rules
that are determined to no longer be in the public interest. As a result of this
mandate, the FCC recently initiated an inquiry to review all of its broadcast
ownership rules. The Company cannot predict the outcome of the FCC's rulemaking
proceedings or how FCC changes in its multiple and cross-ownership rules, made
in accordance with the Telecommunications Act of 1996, will affect the Company's
business.
The FCC also has initiated a notice of inquiry proceeding seeking
comment on whether the public interest would be served by establishing limits on
the amount of commercial matter broadcast by television stations. No prediction
can be made at this time as to whether the FCC will impose any limits on
commercials at the conclusion of its deliberation. The imposition of limits on
the commercial matter broadcast by television stations may have an adverse
effect on the Company's revenues.
Seasonality
The Company's operating revenues are generally lower in the first
calendar quarter and generally higher in the fourth calendar quarter than in the
other two quarters, due in part to increases in retail advertising in the fall
months in preparation for the holiday season, and in election years due to
increased political advertising.
Employees
The Company and its subsidiaries currently employ approximately
1,160 persons, of whom approximately 235 are represented by three unions
(including 11 bargaining units) pursuant to contracts expiring in 1998, 1999 and
2000 (and two of which are expired but which the Company is currently
renegotiating) at the Company's stations. The Company believes its relations
with its employees are good.
Certain sections of this Form 10-K, including "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain various forward looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which represent the
Company's expectations or beliefs concerning future events. The forward looking
statements include, without limitation, the renewal of the Company's FCC
licenses and the Company's ability to meet its future liquidity needs. The
Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements. Such factors include, without limitation, general
economic conditions, competition in the markets in which the Company's stations
are located, technological change and innovation in the broadcasting industry
and proposed legislation.
-13-
Item 2. Properties
The Company's principal executive offices are located in New York,
New York. The lease agreement, for approximately 6,800 square feet of office
space in New York, expires January 31, 2011.
The types of properties required to support each of the Company's
stations include offices, studios, transmitter sites and antenna sites. A
station's studios are generally housed with its offices in downtown or business
districts. The transmitter sites and antenna sites are generally located so as
to provide maximum market coverage.
-14-
The following table contains certain information describing the
general character of the Company's properties:
Metropolitan Owned or Expiration
Station Area and Use Leased Approximate Size of Lease
- ------- ------------ -------- ---------------- ----------
KNTV San Jose, California
Office and Studio Owned 26,469 sq. feet -
Tower Site Leased 2,080 sq. feet 9/30/02
Low Power
Transmission Site Leased 100 sq. feet 1/1/01(1)
WTVH Syracuse, New York
Office and Studio Owned 41,500 sq. feet -
Onondaga, New York
Tower Site Owned 2,300 sq. feet -
KSEE Fresno, California
Office and Studio Owned 32,000 sq. feet -
Bear Mountain, Fresno
County, California
Tower Site Leased 9,300 sq. feet 3/22/34
WPTA Fort Wayne, Indiana
Office, Studio and
Tower Site Owned 18,240 sq. feet -
WEEK Peoria, Illinois
Office, Studio and
Tower Site Owned 20,000 sq. feet -
Bloomington, Illinois
Studio and Sales Office Leased 617 sq. feet 12/31/97(2)
KBJR Duluth, Minnesota,
Superior, Wisconsin
Office and Studio Owned 15,749 sq. feet -
Tower Site Owned 3,125 sq. feet -
KEYE Austin, Texas
Office and Studio Owned 14,000 sq. feet -
Tower Site Leased 1,600 sq. feet 5/1/98
WWMT Kalamazoo, Michigan
Office and Studio Owned 45,000 sq. feet -
Gun Lake, Michigan
Tower Site Owned 3,580 sq. feet -
WKBW Buffalo, New York
Office and Studio Owned 32,000 sq. feet -
Colden, New York
Tower Site Owned 3,406 sq. feet -
WDWB Southfield, Michigan
Office Leased 8,850 sq. feet 5/31/99
Southfield, Michigan
Studio and Tower Site Leased(3) 30,000 sq. feet 9/30/06
- ----------
(1) Assuming exercise of all of the Company's renewal options under such
lease.
(2) This lease is in effect on a month-to-month basis and is currently being
renegotiated by the Company.
(3) The Company owns a 3,400 square foot building on the property.
-15-
Item 3. Legal Proceedings
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
-16-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock (Nonvoting) is traded over-the-counter on the
Nasdaq National Market under the symbol GBTVK. As of March 10, 1998, the
approximate number of record holders of Common Stock (Nonvoting) was 152.
The range of high and low prices for the Common Stock (Nonvoting) for each
full quarterly period during 1996 and 1997 is set forth in Note 13 to the
Consolidated Financial Statements in Item 8 hereof. At March 10, 1998, the
closing price of the Common Stock (Nonvoting) was $12 per share.
The Company's publicly traded Cumulative Convertible Exchangeable
Preferred Stock, par value $.01 per share (the "Cumulative Convertible
Exchangeable Preferred Stock") is traded over-the-counter on the Nasdaq National
Market under the symbol GBTVP. The range of high and low prices for each full
quarterly period during 1996 and 1997, is set forth in Note 13 to the
Consolidated Financial Statements in Item 8 hereof. As of March 10, 1998, the
closing price for the Cumulative Convertible Exchangeable Preferred Stock was
$59.75 per share.
There is no established public trading market for the Company's Class A
Voting Common Stock, par value $.01 per share (the "Voting Common Stock;" the
Voting Common Stock and the Common Stock (Nonvoting) are referred to herein
collectively as the "Common Stock"). As of March 10, 1998, the number of record
holders of Voting Common Stock was 2.
The Company has declared and paid quarterly cash dividends at a quarterly
rate of $.4844 per share on the Cumulative Convertible Exchangeable Preferred
Stock each quarter since its issuance and anticipates continuing to pay such
dividends. The Company has, however, never declared or paid a cash dividend on
its Common Stock and does not anticipate paying a dividend on its Common Stock
in the foreseeable future. The payment of cash dividends on Common Stock is
subject to certain limitations under the Indentures governing the Company's
10-3/8% Senior Subordinated Notes due May 15, 2005 and 9-3/8% Senior
Subordinated Notes due December 1, 2005, respectively, and is restricted under
the Company's credit agreement (the "Credit Agreement"). The Company is also
prohibited from paying dividends on any Common Stock until all accrued but
unpaid dividends on the Cumulative Convertible Exchangeable Preferred Stock and
the Company's Series A Convertible Preferred Stock, par value $.01 per share
(the "Series A Preferred Stock"), are paid in full. All outstanding shares of
Series A Preferred Stock were converted into Common Stock (Nonvoting) in August
1995. Accrued dividends on the Series A Preferred Stock, which totaled $262,844
at December 31, 1997, are payable on the later of December 31, 1999 or the date
on which such dividends may be paid under the Company's existing debt
instruments. If unpaid, dividends on outstanding shares of Cumulative
Convertible Exchangeable Preferred Stock will accrue at an annual rate of
$1.9375 per share.
-17-
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with the
consolidated financial statements and notes thereto included at Item 8 herein.
The selected consolidated financial data for the years ended December 31, 1993,
1994, 1995, 1996 and 1997 are derived from the Company's audited Consolidated
Financial Statements.
The acquisitions by the Company of its operating properties during the
periods reflected in the following selected financial data materially affect the
comparability of such data from one period to another.
Years Ended December 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
Statement of Operations Data: (Dollars in thousands except per share data)
Net revenue ............................................ $ 37,499 $ 62,856 $ 99,895 $ 129,164 $ 153,512
Station operating expenses ............................. 22,790 37,764 55,399 72,089 83,729
Time brokerage agreement fees .......................... -- -- -- 150 600
Depreciation ........................................... 2,398 3,420 4,514 6,144 5,718
Amortization ........................................... 3,359 3,873 7,592 9,737 13,824
Corporate expense ...................................... 1,375 2,162 3,132 4,800 6,639
Non-cash compensation .................................. 123 282 363 496 986
--------- --------- --------- --------- ---------
Operating income ....................................... 7,454 15,355 28,895 35,748 42,016
Other expenses ......................................... 479 309 798 1,034 1,167
Equity in net loss (income) of investee ................ -- -- (439) 995 1,531
Interest expense, net .................................. 10,977 10,707 27,026 36,765 38,986
Non-cash interest expense .............................. 505 842 1,738 2,087 2,182
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item (4,507) 3,497 (228) (5,133) (1,850)
(Provision) benefit for income tax ..................... 472 (450) (555) (761) (1,616)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ................ (4,035) 3,047 (783) (5,894) (3,466)
Extraordinary loss on extinguishment of debt ........... (1,007) -- -- (2,891) (5,569)
--------- --------- --------- --------- ---------
Net income (loss) ...................................... $ (5,042) $ 3,047 $ (783) $ (8,785) $ (9,035)
========= ========= ========= ========= =========
Net loss attributable to common shareholders ........... $ (5,278) $ (688) $ (4,368) $ (12,310) $ (31,207)
========= ========= ========= ========= =========
Basic and diluted loss before extraordinary item
per common share ..................................... $ (0.98) $ (0.15) $ (0.74) $ (1.09) $ (2.93)
========= ========= ========= ========= =========
Basic and diluted net loss per common share ............ $ (1.21) $ (0.15) $ (0.74) $ (1.43) $ (3.57)
========= ========= ========= ========= =========
Weighted average common shares outstanding ............. 4,365 4,498 5,920 8,612 8,765
December 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
Total assets ........................................... $ 191,517 $ 189,881 $ 452,221 $ 452,563 $ 633,614
Total debt ............................................. 99,000 99,250 341,000 351,561 392,779
Redeemable preferred stock ............................. 49,139 49,171 45,488 45,488 207,700
Stockholders' equity (deficit) ......................... 12,075 11,729 8,868 (3,135) (33,257)
-18-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The consolidated financial statements of the Company reflect significant
increases between the years ended December 31, 1997 and 1996 in substantially
all line items. The principal reasons for such increases are the acquisition of
WDWB, the WB affiliate serving Detroit, Michigan, on January 31, 1997, the
operation of WLAJ, the ABC affiliate serving Lansing, Michigan, under a time
brokerage agreement which commenced in October 1996.
The Company's revenues are derived principally from local and national
advertising and, to a lesser extent, from network compensation for the broadcast
of programming and revenues from studio rental and commercial production
activities. The primary operating expenses involved in owning and operating
television stations are employee salaries, depreciation and amortization,
programming and advertising and promotion. Amounts referred to in the following
discussion have been rounded to the nearest thousand.
The following table sets forth certain operating data for the three years
ended December 31, 1995, 1996 and 1997:
Year ended December 31
---------------------------------------
1995 1996 1997
---- ---- ----
Operating income .............. $28,896,000 $35,748,000 $42,016,000
Add:
Time brokerage agreement fees -- 150,000 600,000
Depreciation and amortization 12,105,000 15,881,000 19,542,000
Corporate expense ........... 3,132,000 4,800,000 6,639,000
Non-cash compensation ....... 363,000 496,000 986,000
----------- ----------- -----------
Broadcast cash flow ........... $44,496,000 $57,075,000 $69,783,000
=========== =========== ===========
"Broadcast cash flow" means operating income plus time brokerage agreement
fees, depreciation, amortization, corporate expense and non-cash compensation.
The Company has included broadcast cash flow data because such data are commonly
used as a measure of performance for broadcast companies and are also used by
investors to measure a company's ability to service debt. Broadcast cash flow is
not, and should not be used as an indicator or alternative to operating income,
net loss or cash flow as reflected in the consolidated financial statements, is
not a measure of financial performance under generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income"
which is effective for fiscal periods beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. The Company believes that this Statement will not have an
effect on the manner in which it currently reports its financial information.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information" which is
also effective for fiscal periods beginning after December 15, 1997. SFAS No.
131 establishes standards for reporting information about operating segments and
for related disclosures about products, services, geographic areas and major
customers. The Company has not yet made a determination of the impact, if any,
that SFAS No. 131 will have on the manner in which it reports its financial
information.
-19-
Years ended December 31, 1996 and 1997
Net revenue for the year ended December 31, 1997 totaled $153,512,000, an
increase of $24,348,000, or 19% compared to net revenue of $129,164,000 for the
year ended December 31, 1996. Of the increase, $19,287,000 resulted from the
inclusion of eleven months of operations of WDWB and an additional nine months
of operations of WLAJ. The remaining increase was primarily due to increases in
local and national advertising revenue as well as incremental revenue from the
Company's Internet ventures. Such increases exceeded the anticipated reduction
in political advertising revenue during a non-election year.
Station operating expenses for the year ended December 31, 1997 totaled
$83,729,000, an increase of $11,640,000 or 16% compared to $72,089,000 for the
same period a year earlier. Of the increase, $7,868,000 was due to the inclusion
of eleven months of operations of WDWB and an additional nine months of
operations of WLAJ. The remaining increase was primarily due to increased news,
sales and administrative expenses.
Depreciation and amortization increased $3,661,000 or 23% for the twelve
months ended December 31, 1997 as compared to the prior year primarily due to
the acquisition of WDWB in January of 1997. Corporate expense increased
$1,839,000, or 38% during the year ended December 31, 1997 compared to the same
period a year earlier, primarily due to higher administrative costs associated
with the expansion of the Company's corporate office to manage its expanded
station group. Non-cash compensation expense increased $490,000 or 99% during
the year ended December 31, 1997 compared to the same period a year earlier due
to the granting of additional awards payable in Common Stock (Nonvoting) to
certain executive employees under the Company's Management Stock Plan and to
members of the Company's Board of Directors under the Company's Non-Employee
Directors Stock Plan, which was adopted on April 29, 1997.
As a result of the factors discussed above, operating income increased
$6,268,000 or 18% during the year ended December 31, 1997 compared to 1996.
The equity in net loss of investee of $1,532,000 and $995,000 for the
years ended December 31, 1997 and 1996, respectively, resulted from the Company
recognizing its pro rata share of the losses of Datacast, LLC under the equity
method of accounting.
Net interest expense was $38,986,000 compared to $36,765,000 a year
earlier, an increase of 6%. This increase was primarily due to higher levels of
outstanding indebtedness as a result of the acquisition of WDWB, offset in part,
by the results of the Company's strategic plan to reduce its cost of borrowing.
During the first quarter of 1997, the Company purchased $19,405,000 principal
amount of its 9 3/8% Senior Subordinated Notes, due December 1, 2005 (the "9
3/8% Notes"), at a discount. During the third quarter of 1997, the Company
exercised its option to redeem the entire outstanding $60,000,000 principal
amount of its 12.75% Senior Subordinated Debentures, due September 1, 2002 (the
"12.75% Debentures"), at a redemption price of 106.375%. The Company replaced
all of this subordinated debt with bank debt of a lower rate, thereby reducing
its cost of borrowing.
During 1997, the Company incurred an extraordinary loss of $5,569,000 on
the early extinguishment of debt. See "--Liquidity and Capital Resources."
Net loss totaled $9,036,000 during the year ended December 31, 1997
compared to net loss of $8,786,000 during the same period a year earlier, an
increase of $250,000. This change is primarily due to the changes in the line
items discussed above.
Years ended December 31, 1995 and 1996
Net revenue for the year ended December 31, 1996 totaled $129,164,000, an
increase of $29,269,000, or 29% compared to net revenue of $99,895,000 for the
year ended December 31, 1995. Of this increase, $21,262,000 resulted from the
inclusion of one additional month of operations of KEYE, five additional months
of operations of WWMT and six additional months of operations of WKBW in 1996.
The remaining increase was
-20-
primarily a result of increased local and national advertising, political
spending and increased network compensation.
Station operating expenses for the year ended December 31, 1996 totaled
$72,089,000, an increase of $16,690,000, or 30% compared to station operating
expenses of $55,399,000 in the prior year. Of this increase, $10,648,000 was due
to the inclusion of one additional month of operating expenses of KEYE, five
additional months of operating expenses of WWMT and six additional months of
operating expenses of WKBW. The remaining increase was primarily due to higher
programming expenses and increased news expenses associated with the launch of a
news operation at KEYE.
Depreciation and amortization increased by $3,776,000, or 31% during the
year ended December 31, 1996 compared to 1995 primarily due to the inclusion of
one additional month of operations of KEYE, five additional months of operations
of WWMT and six additional months of operations of WKBW. Corporate expense
increased $1,668,000, or 53% during the year ended December 31, 1996 compared to
1995, primarily due to higher administrative costs associated with the expansion
of the Company's corporate office to manage its expanded station group. Non-cash
compensation expense increased $133,000 during the year ended December 31, 1996
compared to 1995 due to the granting of additional awards payable in Common
Stock (Nonvoting) to certain executive employees under the Company's Management
Stock Plan.
As a result of the factors discussed above, operating income increased
$6,852,000 or 24% during the year ended December 31, 1996 compared to 1995.
The equity in net loss of investee of $995,000 for the year ended December
31, 1996 resulted from the Company recognizing its pro rata share of the losses
of Datacast LLC accounted for under the equity method of accounting. The equity
in net income of investee of $439,000 for the year ended December 31, 1995
resulted from the Company recognizing its pro rata share of the earnings of
Queen City III Limited Partnership, the ultimate parent of WKBW, under the
equity method of accounting. On June 29, 1995, the Company acquired the
remaining interest in Queen City III Limited Partnership.
Net interest expense totaled $36,765,000 during the year ended December
31, 1996, an increase of $9,739,000, or 36% compared to net interest expense of
$27,026,000 during the year ended December 31, 1995, primarily due to higher
levels of outstanding indebtedness as a result of the acquisitions of WWMT and
WKBW in June of 1995.
During 1996, the Company incurred an extraordinary loss of $2,891,000 on
the early extinguishment of debt.
Net loss totaled $8,786,000 during the year ended December 31, 1996
compared to net loss of $783,000 during 1995, an increase of $8,003,000. This
change was primarily due to the changes in the line items discussed above.
Liquidity and Capital Resources
In October 1996, the Company entered into agreements with the owner of
WLAJ, including a time brokerage agreement pursuant to which the Company
operates WLAJ and an agreement to acquire substantially all the assets used in
the operation of WLAJ for approximately $19,400,000 in cash and the assumption
of certain liabilities. In connection with these agreements, the Company agreed
to provide a loan guarantee of up to $12,000,000 in favor of the owner of WLAJ.
On January 31, 1997, the Company acquired substantially all of the assets
of WDWB for $175,000,000 and the assumption of certain liabilities. The Company
financed the acquisition through the sale of 150,000 shares of its 12-3/4%
Cumulative Exchangeable Preferred Stock (the "12-3/4% Cumulative Exchangeable
Preferred Stock") at $1,000 per share and borrowings of $27,500,000 under the
Company's bank credit agreement (the "Credit Agreement").
-21-
In March 1997, the Company purchased $19,405,000 principal amount of its
9-3/8% Notes at a discount. In September 1997, the Company exercised its option
to redeem the entire outstanding $60,000,000 principal amount of its 12.75%
Debentures at a redemption price of 106.375% of the principal amount thereof
plus accrued interest, for an aggregate consideration of $67,650,000. The
Company used borrowings under the Credit Agreement to fund these redemptions,
thereby reducing its cost of borrowing. In connection with the repurchase of its
9-3/8% Notes and its 12.75% Debentures, the Company recognized an extraordinary
loss, after the write-off of a portion of related deferred financing fees, of
$5,569,000 for the year ended December 31, 1997.
On October 3, 1997, the Company entered into a definitive agreement to
acquire KOFY, the WB Network affiliated television station serving San
Francisco-Oakland-San Jose, California, the nation's fifth largest television
market, for $173,750,000. On February 19, 1998, the Company announced that it
had entered into a definitive agreement with Freedom Communications, Inc.,
whereby Freedom will acquire the assets of WWMT, the CBS affiliate serving Grand
Rapids-Kalamazoo-Battle Creek, Michigan and WLAJ, the ABC affiliate serving
Lansing, Michigan for $170,000,000, payable in cash at the closing of the
transaction. It is anticipated that proceeds from the sale will be used to fund
part of the purchase price of KOFY. The Company has sufficient net operating
loss carryforwards for federal tax purposes to offset the gain that will be
recognized on the sale of WWMT and WLAJ, however, the Company anticipates having
to pay federal alternative minimum taxes and certain other state taxes in
connection with the sale.
The Company's Credit Agreement allows for revolving credit borrowings of
$200,000,000 and permits borrowings of up to $300,000,000 in the aggregate. The
revolving credit facility can be used to fund future acquisitions of broadcast
stations and for general corporate purposes. The Company was in technical
default of a financial covenant at September 30, 1997 and December 31, 1997,
which has been waived by the lenders. On February 17, 1998, the Company and its
lenders entered into an amendment to modify this covenant. As of February 28,
1998, subject to compliance with financial covenants, the Company had
$60,000,000 of the revolving credit facility borrowings available for
acquisitions and working capital purposes.
Cash flows provided by operating activities were $10,345,000 during the
year ended December 31, 1997, compared to $13,291,000 during the year ended
December 31, 1996, and $8,806,000 during the year ended December 31, 1995. The
decrease from 1996 to 1997 was primarily a result of an increase in net
operating assets and higher cash interest expense, offset in part by higher
operating cash flow. The increase from 1995 to 1996 resulted primarily from
higher broadcasting flow offset, in part, by higher cash interest expense.
Cash flows used in investing activities were $186,499,000 during the year
ended December 31, 1997, compared to $14,395,000 during the year ended December
31, 1996, and $236,343,000 during the year ended December 31, 1995. The increase
in cash flows used in investing activities from 1996 to 1997 related primarily
to the acquisition of WDWB. The decrease in cash flows used in investing
activities from 1995 to 1996 related primarily to the acquisition of KEYE, WWMT
and WKBW in 1995.
Cash flows provided by financing activities were $177,769,000 during the
year ended December 31, 1997, compared to $1,565,000 during the year ended
December 31, 1996, and $225,685,000 during the year ended December 31, 1995. The
increase from 1996 to 1997 resulted primarily from a net increase in bank
borrowings, proceeds from the 12-3/4% Cumulative Exchangeable Preferred Stock
offering and a decrease in payments for deferred financing fees offset, in part,
by a net increase in repurchase of subordinated debt. The decrease from 1995 to
1996 resulted primarily from a decrease in net bank borrowings offset, in part,
by a decrease in payments for deferred financing fees.
The computer applications which the Company utilizes in its operations are
not complex. Any modification of the Company's software that may be needed in
order to handle the upcoming change in the century is covered under the
software's licensing agreement. The Company has determined that there will be no
material costs incurred to modify its applications in order to handle the
upcoming change in the century.
-22-
The Company believes that internally generated funds from operations, and
borrowings under its revolving working capital facility, if necessary, will be
sufficient to satisfy the Company's cash requirements for its existing
operations for the next twelve months and for the foreseeable future thereafter.
-23-
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors and Stockholders
Granite Broadcasting Corporation
We have audited the accompanying consolidated balance sheets of Granite
Broadcasting Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a) of the Granite Broadcasting Corporation Form 10-K for the
fiscal year ended December 31, 1997. These financial statements and the
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Granite
Broadcasting Corporation at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 6, 1998
-24-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1995 1996 1997
------------- ------------- -------------
Net revenue .......................................... $ 99,894,627 $ 129,164,353 $ 153,511,540
Station operating expenses ........................... 55,398,930 72,089,368 83,728,786
Time brokerage agreement fees ........................ -- 150,000 600,000
Depreciation ......................................... 4,513,919 6,144,193 5,717,989
Amortization ......................................... 7,590,885 9,737,136 13,824,248
Corporate expense .................................... 3,131,943 4,799,984 6,639,159
Non-cash compensation expense ........................ 363,384 495,819 985,634
------------- ------------- -------------
Operating income ................................... 28,895,566 35,747,853 42,015,724
Other (income) expenses:
Equity in net (income) loss of investee ............ (439,033) 995,019 1,531,542
Interest expense, net .............................. 27,026,680 36,765,306 38,985,979
Non-cash interest expense .......................... 1,738,559 2,086,639 2,181,686
Other .............................................. 797,576 1,034,351 1,167,144
------------- ------------- -------------
Loss before income taxes and extraordinary item .... (228,216) (5,133,462) (1,850,627)
Provision for income taxes ......................... 554,884 761,000 1,616,212
------------- ------------- -------------
Loss before extraordinary item ....................... (783,100) (5,894,462) (3,466,839)
Extraordinary loss ................................... -- (2,891,250) (5,569,119)
------------- ------------- -------------
Net loss ......................................... $ (783,100) $ (8,785,712) $ (9,035,958)
============= ============= =============
Net loss attributable to common shareholders ......... $ (4,368,497) $ (12,310,993) $ (31,207,468)
============= ============= =============
Per common share:
Basic and diluted loss before extraordinary item $ (0.74) $ (1.09) $ (2.93)
Basic and diluted extraordinary loss ........... -- (0.34) (0.64)
------------- ------------- -------------
Basic and diluted net loss ................... $ (0.74) $ (1.43) $ (3.57)
============= ============= =============
Weighted average common shares outstanding ........... 5,920,294 8,611,606 8,764,705
See accompanying notes.
-25-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
ASSETS 1996 1997
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 555,753 $ 2,170,927
Accounts receivable, less allowance for doubtful accounts
($391,910 in 1996 and $408,290 in 1997) ................ 27,057,451 35,308,464
Film contract rights ..................................... 6,276,660 10,097,262
Other current assets ..................................... 9,784,966 10,958,742
------------- -------------
TOTAL CURRENT ASSETS ............................. 43,674,830 58,535,395
PROPERTY AND EQUIPMENT, NET ................................ 33,562,019 36,004,876
FILM CONTRACT RIGHTS AND OTHER NONCURRENT ASSETS ........... 4,284,578 7,041,000
DEFERRED FINANCING FEES, less accumulated amortization
($4,049,724 in 1996 and $4,747,664 in 1997) .............. 14,181,662 10,213,314
INTANGIBLE ASSETS, NET ..................................... 356,860,115 521,819,428
------------- -------------
$ 452,563,204 $ 633,614,013
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable ......................................... $ 4,016,964 $ 3,885,239
Accrued interest ......................................... 6,071,378 4,387,546
Other accrued liabilities ................................ 4,497,534 5,682,202
Film contract rights payable and other current liabilities 9,578,365 13,779,691
------------- -------------
TOTAL CURRENT LIABILITIES ......................... 24,164,241 27,734,678
LONG-TERM DEBT ............................................. 351,560,900 392,779,025
FILM CONTRACT RIGHTS PAYABLE ............................... 3,383,428 6,905,486
DEFERRED TAX LIABILITY AND OTHER
NONCURRENT LIABILITIES ................................... 31,102,272 31,751,733
COMMITMENTS
REDEEMABLE PREFERRED STOCK ................................. 45,487,500 207,699,808
STOCKHOLDERS' DEFICIT:
Common stock: 41,000,000 shares authorized consisting of
1,000,000 shares of Class A Common Stock, $.01 par
value, and 40,000,000 shares of Common Stock
(Nonvoting), $.01 par value; 178,500 shares of Class A
Common Stock and 8,676,157 shares of Common Stock
(Nonvoting) (8,499,716 shares at December 31, 1996)
issued and outstanding ................................. 86,782 88,546
Additional paid-in capital ............................... 45,547,145 24,529,712
Accumulated deficit ...................................... (45,375,910) (54,411,868)
Less: Unearned compensation ............................. (2,506,279) (2,529,232)
Treasury stock .................................... -- (47,000)
Note receivable from officer ...................... (886,875) (886,875)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT ..................... (3,135,137) (33,256,717)
------------- -------------
$ 452,563,204 $ 633,614,013
============= =============
See accompanying notes.
-26-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995, 1996 and 1997
Class A Common Series B Series C
Common Stock Preferred Preferred
Stock (Nonvoting) Stock Stock
------------ ------------ ------------ ------------
Balance at December 31, 1994 ................... $ 1,785 $ 43,966 $ 4,633 $ 10,079
Accretion of and dividends on Series A
Redeemable Preferred Stock ...................
Conversion of Series A Redeemable Preferred
Stock and Series B and C Preferred
Stock into Common Stock (Nonvoting) .......... 36,069 (4,633) (10,079)
Dividend on Cumulative Convertible
Exchangeable Preferred Stock and
Adjustable Rate Preferred Stock ..............
Exercise of stock options ...................... 1,574
Issuance of Common Stock (Nonvoting) ........... 573
Grant of stock award under Management Stock Plan
Stock expense related to Management Stock Plan .
Net loss .......................................
------------ ------------ ------------ ------------
Balance at December 31, 1995 ................... 1,785 82,182 -- --
Dividend on Cumulative Convertible
Exchangeable Preferred Stock .................
Exercise of stock options ...................... 2,008
Issuance of Common Stock (Nonvoting) ........... 807
Grant of stock award under Management Stock Plan
Stock expense related to Management Stock Plan .
Net loss .......................................
------------ ------------ ------------ ------------
Balance at December 31, 1996 ................... 1,785 84,997 -- --
Dividends on redeemable preferred stock ........
Accretion of offering costs related to
Cumulative Exchangeable Preferred Stock ......
Exercise of stock options ...................... 124
Conversion of redeemable preferred stock
into Common Stock (Nonvoting) ................ 650
Issuance of Common Stock (Nonvoting) ........... 990
Repurchase of redeemable preferred stock .......
Grant of stock award under Management Stock Plan
Stock expense related to Management Stock Plan .
Net loss .......................................
------------ ------------ ------------ ------------
Balance at December 31, 1997.................... $ 1,785 $ 86,761 $ -- $ --
============ ============ ============ ============
Additional Note
Paid-in (Accumulated Unearned Receivable
Capital Deficit) Compensation From Officer
------------ ------------ ------------ ------------
Balance at December 31, 1994 ................... $ 48,688,435 $(35,807,098) $ (1,213,104) $ --
Accretion of and dividends on Series A
Redeemable Preferred Stock ................... (35,116)
Conversion of Series A Redeemable Preferred
Stock and Series B and C Preferred
Stock into Common Stock (Nonvoting) .......... 1,200,518
Dividend on Cumulative Convertible
Exchangeable Preferred Stock and
Adjustable Rate Preferred Stock .............. (3,550,281)
Exercise of stock options ...................... 31,376
Issuance of Common Stock (Nonvoting) ........... (573)
Grant of stock award under Management Stock Plan 640,750 (640,750)
Stock expense related to Management Stock Plan . (110,907) 363,384
Net loss ....................................... (783,100)
------------ ------------ ------------ ------------
Balance at December 31, 1995 ................... 46,864,202 (36,590,198) (1,490,470) --
Dividend on Cumulative Convertible
Exchangeable Preferred Stock ................. (3,525,281)
Exercise of stock options ...................... 888,805 (886,875)
Issuance of Common Stock (Nonvoting) ........... (807)
Grant of stock award under Management Stock Plan 1,511,628 (1,511,628)
Stock expense related to Management Stock Plan . (191,402) 495,819
Net loss ....................................... (8,785,712)
------------ ------------ ------------ ------------
Balance at December 31, 1996 ................... 45,547,145 (45,375,910) (2,506,279) (886,875)
Dividends on redeemable preferred stock ........ (21,729,672)
Accretion of offering costs related to
Cumulative Exchangeable Preferred Stock ...... (441,838)
Exercise of stock options ...................... 58,164
Conversion of redeemable preferred stock
into Common Stock (Nonvoting) ................ 324,350
Issuance of Common Stock (Nonvoting) ........... (990)
Repurchase of redeemable preferred stock .......
Grant of stock award under Management Stock Plan 1,008,587 (1,008,587)
Stock expense related to Management Stock Plan . (236,034) 985,634
Net loss ....................................... (9,035,958)
------------ ------------ ------------ ------------
Balance at December 31, 1997.................... $ 24,529,712 $(54,411,868) $ (2,529,232) $ (886,875)
============ ============ ============ ============
Total
Treasury Stockholders'
Stock Equity (Deficit)
------------ ----------------
Balance at December 31, 1994 ................... $ -- $ 11,728,696
Accretion of and dividends on Series A
Redeemable Preferred Stock ................... (35,116)
Conversion of Series A Redeemable Preferred
Stock and Series B and C Preferred
Stock into Common Stock (Nonvoting) .......... 1,221,875
Dividend on Cumulative Convertible
Exchangeable Preferred Stock and
Adjustable Rate Preferred Stock .............. (3,550,281)
Exercise of stock options ...................... 32,950
Issuance of Common Stock (Nonvoting) ........... --
Grant of stock award under Management Stock Plan --
Stock expense related to Management Stock Plan . 252,477
Net loss ....................................... (783,100)
------------ ------------
Balance at December 31, 1995 ................... -- 8,867,501
Dividend on Cumulative Convertible
Exchangeable Preferred Stock ................. (3,525,281)
Exercise of stock options ...................... 3,938
Issuance of Common Stock (Nonvoting) ........... --
Grant of stock award under Management Stock Plan --
Stock expense related to Management Stock Plan . 304,417
Net loss ....................................... (8,785,712)
------------ ------------
Balance at December 31, 1996 ................... -- (3,135,137)
Dividends on redeemable preferred stock ........ (21,729,672)
Accretion of offering costs related to
Cumulative Exchangeable Preferred Stock ...... (441,838)
Exercise of stock options ...................... 58,288
Conversion of redeemable preferred stock
into Common Stock (Nonvoting) ................ 325,000
Issuance of Common Stock (Nonvoting) ........... --
Repurchase of redeemable preferred stock ....... (47,000) (47,000)
Grant of stock award under Management Stock Plan --
Stock expense related to Management Stock Plan . 749,600
Net loss ....................................... (9,035,958)
------------ ------------
Balance at December 31, 1997.................... $ (47,000) $(33,256,717)
============ ============
See accompanying notes.
-27-
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
1995 1996 1997
------------- ------------- -------------
Cash flows from operating activities:
Net loss ..................................................... $ (783,100) $ (8,785,712) (9,035,958)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary loss ......................................... -- 2,891,250 5,569,119
Amortization of intangible assets .......................... 7,590,885 9,737,136 13,824,248
Depreciation ............................................... 4,513,919 6,144,193 5,717,989
Non-cash compensation expense .............................. 363,384 495,819 985,634
Non-cash deferred income taxes ............................. 1,115,000 975,000 1,730,561
Non-cash interest expense .................................. 1,738,559 2,086,639 2,181,686
Deferred income taxes ...................................... (824,116) (589,000) (536,349)
Equity in net loss (income) of investee .................... (439,033) 995,019 1,531,542
Change in assets and liabilities net of effects from
acquisitions of stations:
Increase in accounts receivable ............................ (7,528,139) (870,872) (8,251,013)
Increase (decrease) in accrued liabilities ................. 2,307,778 1,473,236 (629,972)
Increase (decrease) in accounts payable .................... 2,689,051 (1,268,655) (131,725)
Increase in film contract rights and other noncurrent assets (3,448,429) (517,279) (4,981,012)
Increase in film contract rights payable
and other liabilities ..................................... 3,222,796 1,193,223 4,086,757
Increase in other assets ................................... (1,712,859) (668,776) (1,716,398)
------------- ------------- -------------
Net cash provided by operating activities ..................... 8,805,696 13,291,221 10,345,109
------------- ------------- -------------
Cash flows from investing activities:
Deposit for station acquisition and other related costs ..... -- (5,957,000) (5,960,000)
Investment in Datacast, LLC ................................. -- (1,500,000) (1,500,000)
Payment for acquisitions of stations, net of cash acquired .. (228,660,507) -- (173,164,089)
Capital expenditures ........................................ (7,682,188) (6,938,477) (5,874,633)
------------- ------------- -------------
Net cash used in investing activities ..................... (236,342,695) (14,395,477) (186,498,722)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from bank loan ..................................... 174,250,000 34,000,000 138,500,000
Retirement of senior subordinated notes ..................... -- (15,500,000) (82,897,588)
Repayment of bank borrowings ................................ (107,500,000) (117,500,000) (18,000,000)
Redemption of Adjustable Rate Preferred Stock ............... (2,000,000) -- --
Payment of deferred financing fees .......................... (10,537,110) (5,363,771) (210,873)
Proceeds from senior subordinated notes ..................... 175,000,000 109,450,000 --
Proceeds from Preferred Stock Offering, net ................. -- -- 143,889,789
Dividends paid .............................................. (3,561,280) (3,525,281) (3,523,828)
Other financing activities, net ............................. 32,950 3,938 11,287
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Net cash provided by financing activities ................. 225,684,560 1,564,886 177,768,787
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Net (decrease) increase in cash and cash equivalents .......... (1,852,439) 460,630 1,615,174
Cash and cash equivalents, beginning of year .................. 1,947,562 95,123 555,753
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Cash and cash equivalents, end of year ........................ $ 95,123 $ 555,753 $ 2,170,927
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Supplemental information:
Cash paid for interest ...................................... $ 24,699,248 $ 36,451,009 $ 40,711,506
Cash paid for income taxes .................................. 149,751 112,532 193,000
Non-cash investing and financing activities:
Non-cash capital expenditures ............................. 459,786 635,609 668,747
Stock dividend ............................................ -- -- 13,009,715
Oth