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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1998 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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 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 22, 1999, 11,735,195 shares of Granite Broadcasting Corporation
Common Stock (Nonvoting) and 1,243,156 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 22, 1999) of the shares of Common Stock
(Nonvoting) held by non-affiliates was approximately $76,151,369. The aggregate
market value (based upon the last reported sale price on the OTC Bulletin Board
on March 22, 1999) of shares of Cumulative Convertible Exchangeable Preferred
Stock held by non-affiliates was approximately $42,759,010. (For purposes of
calculating the preceding amounts only, all directors and executive officers of
the registrant are assumed to be affiliates.) As of March 22, 1999, 178,500
shares of Granite Broadcasting Corporation Class A Voting Common Stock were
outstanding, all of which were held by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Item 14 of Part IV are incorporated by reference to: Granite
Broadcasting Corporation's Registration Statement No. 33-43770, filed on
November 5, 1991; Granite Broadcasting Corporation's Current Report on Form 8-K,
filed on June 25, 1993; Granite Broadcasting Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993, filed on November 15, 1993;
Amendment No. 2 to Granite Broadcasting Corporation's Registration Statement No.
33-71172, filed on December 16, 1993; Granite Broadcasting Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994, filed on March 29,
1995; Granite Broadcasting Corporation's Current Report on Form 8-K, filed on
July 14, 1995; Granite Broadcasting Corporation's Registration Statement No.
33-94862, filed on July 21, 1995; Amendment No. 2 to Granite Broadcasting
Corporation's Registration Statement No. 33-94862, filed on October 6, 1995;
Granite Broadcasting Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995, filed on March 28, 1996; Granite Broadcasting Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, filed on
August 13, 1996; Granite Broadcasting Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996, filed on March 21, 1997; Granite
Broadcasting Corporation's Current Report on Form 8-K, filed on October 17,
1997; Granite Broadcasting Corporation's Current Report on Form 8-K, filed on
March 2, 1998; Granite Broadcasting Corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, filed on May 1, 1998; Granite Broadcasting
Corporation's Registration Statement No. 333-56327, filed on June 8, 1998;
Granite Broadcasting Corporation's Current Report on Form 8-K, filed on July 1,
1998; and Granite Broadcasting Corporation's Current Report on From 8-K, filed
on August 13, 1998.
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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"); WKBW-TV, the ABC affiliate
serving Buffalo, New York ("WKBW"); WDWB-TV, the WB Network affiliate serving
Detroit, Michigan ("WDWB") and KBWB-TV (formerly known as KOFY-TV), the WB
Network affiliate serving San Francisco-Oakland-San Jose, California ("KBWB").
KBJR and WEEK were acquired in separate transactions in October 1988. WPTA was
acquired in December 1989, KNTV was acquired in February 1990, WTVH and KSEE
were acquired in December 1993, KEYE was acquired in February 1995. WKBW was
acquired in June 1995, WDWB was acquired in January 1997 and KBWB was acquired
in July 1998. The Company owns each of its television stations through separate
wholly owned subsidiaries (collectively, the "subsidiaries"; references herein
to the "Company" or to "Granite" include Granite Broadcasting Corporation and
its subsidiaries). The Company's long-term objective is to acquire additional
television stations and to pursue acquisitions of other media and
communications-related properties in the future.
RECENT DEVELOPMENTS
WWMT AND WLAJ DISPOSITION
On July 15, 1998, the Company completed the disposition of WWMT-TV, the CBS
affiliate serving Grand Rapids-Kalamazoo-Battle Creek, Michigan ("WWMT"), to
Freedom Communications, Inc. ("Freedom") for $150,540,000 in cash. On August 17,
1998, the Company exercised its option to purchase WLAJ-TV, the ABC affiliate
serving Lansing, Michigan ("WLAJ"), for $19,500,000 in cash and simultaneously
sold the station to Freedom for $18,950,000 in cash. In connection with the sale
of WWMT and WLAJ, the Company recognized a pre-tax gain for financial statement
purposes of $57,776,000.
KBWB ACQUISITION
On July 20, 1998, the Company completed the acquisition of KBWB by acquiring
the stock of Pacific FM Incorporated ("Pacific"), the owner of KBWB. The total
purchase price for all of the stock of Pacific was $143,150,000. In addition,
the Company paid $30,000,000 to the principal shareholders of Pacific for a
covenant not to compete in the San Francisco-Oakland-San Jose television market
for a period of five years from the closing. The acquisition was financed with
the proceeds from the Company's sale of WWMT and with borrowings under the
Company's bank credit agreement. In approving the Company's acquisition of KBWB,
the Federal Communications Commission (the "FCC") granted the Company a
nine-month waiver of its current duopoly rule, enabling the Company to continue
to operate KNTV in San Jose, California for nine months after the closing of the
acquisition of KBWB. The Company has filed a petition for reconsideration of
this ruling, requesting a permanent waiver of the duopoly rule or,
alternatively, an interim duopoly waiver conditioned upon the outcome of the
FCC's pending television ownership rulemaking proceeding. Chronicle Publishing
Company, licensee of KRON-TV, San Francisco, California, has filed an opposition
to the Company's petition for reconsideration. The Company also has filed a
request to extend its nine month temporary waiver of the duopoly rule which
expires on April 20, 1999 until nine months after the effective date of any FCC
order in the pending television ownership rulemaking proceeding. Chronicle has
filed an opposition to the Company's extension request.
In connection with the purchase of KBWB, the WB Network agreed to enter into
a ten-year affiliation agreement with the Company, instead of with another
television station in the San Francisco market, in return for total
consideration of $31,572,000. The Company paid $14,847,000 to the WB Network
during 1998 and will pay the remaining $16,725,000 over a five year period. The
remaining payment is shown at its net present value on the Company's balance
sheet.
POTENTIAL SALE OF KEYE
The Company is currently evaluating proposals for the sale of KEYE. Proceeds
from the sale of the station would be used to reduce the Company's indebtedness,
thereby providing the Company with additional flexibility to improve its capital
structure and lower its cost of capital.
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 though television station broadcast signals. The other equity
investors in Datacast LLC include Chris-Craft Industries, Inc., Lin Television
Corporation and Schurtz Communications Inc. The Company invested $3,500,000 in
Datacast LLC, all of which was written-off as of June 30, 1998 as the Company
recognized its pro rata share of Datacast LLC's losses. The investors in
Datacast LLC have discontinued funding the venture and have agreed to its wind
down. In the first quarter of 1999, the Company incurred a charge of
approximately $133,000, representing its pro rata portion of costs to wind down
the operations of Datacast LLC.
COMPANY AND INDUSTRY OVERVIEW
The following table sets fourth general information for each of the
Company's television stations:
OTHER
COMMERCIAL EXPIRATION
MARKET DATE OF CHANNEL/ NETWORK MARKET STATIONS DATE OF
SECTION AREA ACQUISITION FREQUENCY AFFILIATION RANK(1) IN DMA FCC LICENSE
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KBWB-TV.................. San Francisco-
Oakland-
San Jose, CA 07/20/98 20/UHF WB 5 14(2) 12/01/06
WDWB-TV.................. Detroit, MI 01/31/97 20/UHF WB 9 8 10/01/05
WKBW-TV.................. Buffalo, NY 06/29/95 7/VHF ABC 42 5 06/01/99
KNTV(TV)................. San Jose,
Salinas-
Monterey, CA 02/05/90 11/VHF ABC 49 5(3) 12/01/06
KSEE-TV.................. Fresno-
Visalia, CA 12/23/93 24/UHF NBC 55 10(4) 12/01/06
KEYE-TV.................. Austin, TX 02/01/95(5) 42/UHF CBS 60 5 08/01/06
WTVH-TV.................. Syracuse, NY 12/23/93 5/VHF CBS 74 4 06/01/99
2
OTHER
COMMERCIAL EXPIRATION
MARKET DATE OF CHANNEL/ NETWORK MARKET STATIONS DATE OF
SECTION AREA ACQUISITION FREQUENCY AFFILIATION RANK(1) IN DMA FCC LICENSE
- ------------------------- ---------------- ----------- ----------- ----------- ----------- --------------- ------------
WPTA-TV.................. Fort Wayne, IN 12/11/89 21/UHF ABC 103 3 08/01/05
WEEK-TV.................. Peoria-
Bloomington, IL 10/31/88 25/UHF NBC 110 4 12/01/05
KBJR-TV.................. Duluth, MN-
Superior, WI 10/31/88 6/VHF NBC 135 2 12/01/05
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1 "Market rank" refers to the size of the television market or Designated
Market Area ("DMA") as defined by the A.C. Nielsen Company ("Nielsen"),
except for San Jose. KNTV, whose DMA is the Salinas-Monterey television
market, primarily serves San Jose and Santa Clara County (which are part of
the San Francisco-Oakland-San Jose DMA). If Santa Clara County were a
separate DMA, it would rank as the 49th largest DMA in the United States.
All market rank data is derived from the Nielsen Station Index for November
1998.
2 Includes KDTV, San Francisco and KSTS, San Jose, both of which broadcast
entirely in Spanish.
3 Includes KSMS, Salinas-Monterey and KCU, Salinas, both of which broadcast
entirely in Spanish.
4 Includes KFTV, Hanford-Fresno and KMSG, Sanger-Fresno, both of which
broadcast entirely in Spanish.
5 The Company is currently evaluating proposals for the sale of KEYE. See
"Recent Developments-- Potential Sale of KEYE."
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.
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GROSS REVENUES, BY CATEGORY,
FOR THE COMPANY'S STATIONS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
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1994 1995 1996 1997 1998
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AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Local/Regional (1)............ $38,802 50.9% $ 60,969 51.0% $ 73,491 47.5% $ 87,412 48.3% $ 89,144 46.0%
National (2).................. 28,548 37.5 48,995 41.0 61,945 40.0 78,833 43.5 76,446 39.4
Network Compensation (3)...... 2,244 2.9 4,154 3.5 7,289 4.7 7,859 4.3 6,715 3.5
Political (4)................. 4,060 5.3 1,498 1.3 7,265 4.7 1,036 0.6 15,752 8.1
Other Revenue (5)............. 2,559 3.4 3,849 3.2 4,851 9.1 5,943 3.3 5,877 3.0
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total......................... $76,213 100.0% $119,465 100.0% $154,841 100.0% $181,083 100.0% $193,934 100.0%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
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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 17% of the Company's total gross
revenues in 1998. Gross revenues from restaurants and entertainment-related
businesses accounted for approximately 12% of the Company's total gross revenues
in 1998. Each other category of advertising revenue represents less than 5% of
the Company's total gross revenues.
The following is a description of each Company's television stations:
KBWB: SAN FRANCISCO-OAKLAND-SAN JOSE, CALIFORNIA
KBWB began operations in 1968 and commenced operating as a WB Network
affiliate in 1995.
The San Francisco-Oakland-San Jose economy is centered around apparel,
banking and finance, bioscience, engineering and architecture, film and TV
production, health care, high technology, manufacturing, multimedia,
telecommunications, tourism and wineries. The average household income in the
DMA was $52,739, according to estimates provided in the BIA Investing in
Television 1998 Market Report (the "BIA Report"). Leading employers in the area
include Safeway Supermarkets, Hewlett-Packard, Seagate Technology, The Gap,
Intel, Chevron, Oracle, Kaiser-Permanente and Levi-Strauss. The San
Francisco-Oakland-San Jose DMA is also the home of several universities,
including the University of California Berkeley, San Francisco State University,
San Jose State University, Stanford University, California State
University-Hayward, Santa Clara University and the University of San Francisco,
with enrollment estimated at 122,000.
WDWB: DETROIT, MICHIGAN
WDWB began operating in 1962 and commenced operating as a WB Network
affiliate in 1995.
Detroit is the 9th largest DMA in the United States with a total of
1,847,000 television households and a population of 4,982,000 according to
Nielsen. Detroit's economy is based on manufacturing, retail and health
services. The largest employers are General Motors, Ford Motor Company,
Daimler-Chrysler,
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Detroit Medical Center, Henry Ford Health System and Blue Cross Blue Shield of
Michigan. The average household income in the DMA is $46,235 according to
estimates provided in the BIA Report.
WKBW: BUFFALO, NEW YORK
WKBW began operations in 1958 and is affiliated with ABC.
The Buffalo economy is centered around manufacturing, government, health
services and financial services. The average household income in the DMA was
$35,307, 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 1998 Nielsen
Monterey/Salinas Viewers In Profile Report more than 72% of the station's
audience resides in Santa Clara County. If Santa Clara County were a separate
DMA with its estimated 566,830 television households, it would rank as the 49th
largest DMA in the United States.
Santa Clara County has a diverse and affluent economy. The average effective
buying income by household was $64,014, according to the 1998 Demographics USA
Report. The area is home to over 2,800 technological companies as well as
numerous institutions and companies of national reputation. Prominent
corporations located in Santa Clara County include Hewlett-Packard,
Lockheed/Martin, IBM, Apple, Intel, Sun Microsystems, Amdahl, Tandem Computers,
National Semiconductor, Syntex, Conner Peripherals, Varian Associates and Chips
& Technologies. Santa Clara County is also the home of several universities
including Stanford University, San Jose State University and Santa Clara
University with enrollments aggregating approximately 51,000 students.
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 $33,737, 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
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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
$43,228, 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 $36,386, 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
$40,963, 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.
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 $42,824, 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.
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The area's primary industries mining, fishing, food products, paper,
medical, shipping, tourism and timber. The average income by household in the
DMA was $31,453, according to estimates provided in the BIA Report. Duluth is
one of the major ports in the United States out of which iron ore, coal,
limestone, cement, grain, paper and chemicals are shipped. Prominent
corporations located in the area include Northwest Airlines, Minnesota Power,
U.S. West, Mesabi & Iron Range Railway Co., Walmart, Jeno Paulucci
International, Lake Superior Industries, Potlatch Corporation, Boise Cascade,
Burlington Northern Railway, Target (Dayton-Hudson Corporation), ConAgra,
International Multifoods, Peavey, Cargill, U.S. Steel, Cleveland-Cliffs
Corporation, NorWest, Shopko, Cub Foods and Advanstar. The Duluth-Superior area
is also the home of numerous educational institutions such as the University of
Minnesota-Duluth, the University of Wisconsin-Superior and the College of St.
Scholastica, with enrollments aggregating over 12,000 students.
NETWORK AFFILIATION
Whether or not a station is affiliated with one of the major networks, NBC,
ABC, CBS, Fox (the "Traditional Networks") or the Warner Brothers Network (the
"WB Network") or United Paramount Networks ("UPN" and collectively with the WB
Network and the Traditional Networks, the "Networks"), has a significant impact
on the composition of the station's revenues, expenses and operations. A typical
Traditional Network affiliate receives the significant portion of its
programming each day from the Network. This programming, along with cash
payments, is provided to the affiliate by the Traditional Network in exchange
for a substantial majority of the advertising inventory during Network programs.
The Traditional Network then sells this advertising time and retains the
revenues so generated. A typical WB Network or UPN affiliate receives prime time
programming from the Network pursuant to arrangements agreed upon by the
affiliate and the Network.
In contrast, a fully independent station purchases or produces all of the
programming that it broadcasts, resulting in generally higher programming costs,
although the independent station is, in theory, able to retain its entire
inventory of advertising and all of the revenue obtained therefrom. However,
barter and cash-plus-barter arrangements are becoming increasingly popular.
Under such arrangements, a national program distributor typically 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 and WKBW are affiliated with ABC; KEYE and WTVH are affiliated
with CBS; and KBWB is affiliated with the WB Network. WDWB has an affiliation
arrangement with the WB Network.
In substance, each Traditional Network affiliation agreement provides the
Company's station with the right to broadcast all programs transmitted by the
Network with which it is affiliated. In exchange, the Network has the right to
sell a substantial majority of the advertising time during such broadcast. In
addition, for every hour that the station elects to broadcast Traditional
Network programming, the Network pays the station a fee, specified in each
affiliation agreement, which varies with the time of day. Typically, the
"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.
Under each WB Network affiliation arrangement, the Company's station
receives "prime-time" programming from the WB Network. KBWB pays an affiliation
fee for the programming it receives pursuant to its affiliation agreement.
The Network affiliation agreements provide for contract terms of ten years
(other than the NBC agreements for which the terms are seven years). Under each
of the Company's affiliation agreements, the Networks may, under certain
circumstances, terminate the agreement upon advance written notice. The
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Company's Network affiliation arrangement with WDWB is terminable by either
party at will. The Company and the WB Network are currently negotiating an
affiliation agreement for WDWB, which will provide the terms under which WDWB
will receive future WB Network programming. Under the Company's ownership, none
of its stations has received a termination notice from its respective Network.
COMPETITION
The financial success of the Company's television 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, the Internet, direct mail and
local cable systems. Some competitors are part of larger companies with
substantially greater financial resources than the Company.
Competition in the broadcasting industry occurs primarily in individual
markets. Generally, a television broadcasting station in one market does not
compete with stations in other market areas. The Company's television stations
are located in highly competitive markets.
In addition to management experience, factors that are material to a
television station's competitive position include signal coverage, local program
acceptance, Network affiliation, audience characteristics, assigned frequency
and strength of local competition. The broadcasting industry is continuously
faced with technological change and innovation, the possible rise in popularity
of competing entertainment and communications media, changes in labor conditions
and governmental restrictions or actions of federal regulatory bodies, including
the FCC and the Federal Trade Commission, any of which could possibly have a
material adverse effect on the Company's operations and results.
Conventional commercial television broadcasters also face competition from
other programming, entertainment and video distribution systems, the most common
of which is cable television. These other programming, entertainment and video
distribution systems can increase competition for a broadcasting station by
bringing into its market distant broadcasting signals not otherwise available to
the station's audience and also by serving as distribution systems for
non-broadcast programming. Programming is now being distributed to cable
television systems by both terrestrial microwave systems and by satellite. Other
sources of competition include home entertainment systems (including video
cassette recorders and playback systems, video discs and television game
devices), the Internet, multi-point distribution systems, multichannel
multi-point distribution systems, video programming services available through
the Internet and other video delivery systems. The Company's television stations
also face competition from direct broadcast satellite services which transmit
programming directly to homes equipped with special receiving antennas and from
video signals delivered over telephone lines. Satellites may be used not only to
distribute non-broadcast programming and distant broadcasting signals but also
to deliver certain local broadcast programming which otherwise may not be
available to a station's audience.
The broadcasting industry is continuously faced with technological change
and innovation, which could possibly have a material adverse effect on the
Company's operations and results. Video compression techniques, now in use with
direct broadcast satellites and in development for cable, are expected to permit
greater numbers of channels to be carried within existing bandwidth. These
compression techniques, as well as other technological developments, are
applicable to all video delivery systems, including over-the-air broadcasting,
and have the potential to provide vastly expanded programming to highly targeted
audiences. Reduction in the cost of creating additional channel capacity could
lower entry barriers for new channels and encourage the development of
increasingly specialized niche programming. This ability to reach very narrowly
defined audiences may alter the competitive dynamics for advertising
expenditures. The Company is unable to predict the effect that technological
changes will have on the Company. Commercial television broadcasting may face
future competition from interactive video and data services that provide two-way
interaction with commercial video programming, along with information and data
8
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 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 area 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 license 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 license and
up to 25% of the capital stock of a United States corporation that, in turn,
owns a controlling interest in a license. 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 is restricted by the Communications Act from having
more than one-fourth of its capital stock owned by non-citizens, foreign
governments or foreign corporations, but not from having an officer or director
who is a non-citizen.
Television broadcasting licenses 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 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
9
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. Presently pending before the FCC are applications to renew the licenses
of WTVH and WKBW. The remaining licenses are subject to renewal at various times
during 2005 and 2006. 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 (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
10
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.
Pursuant to the Balanced Budget Act of 1997, the FCC has adopted competitive
bidding procedures to select among mutually exclusive applications for licenses
for new commercial broadcast stations and major modifications to existing
broadcast facilities.
The Satellite Home Viewer Act ("SHVA") protects television broadcasters'
rights to control the distribution of their network and non-network programming,
while simultaneously permitting satellite carriers to provide network broadcast
programming to "unserved" satellite subscribers (i.e., those viewers who are
unable to receive over-the-air broadcast network programming of at least Grade B
signal intensity). The FCC recently completed an examination of its rules
implementing the SHVA. While retaining the use of the Grade B signal intensity
standard for defining an "unserved" satellite subscriber, the FCC recently
revised the method for measuring the presence of a Grade B intensity signal at
an individual household to aid in predicting whether a specific household is
"unserved." The FCC's action is
11
the subject of reconsideration petitions. The Company cannot predict the outcome
of the appeals of this FCC decision.
A Miami federal district court recently enforced broadcasters' copyright
rights under the SHVA by issuing two nationwide injunctions which required
satellite carriers to terminate network television service to as many as one
million satellite subscribers by February 28, 1999 and to more than one million
additional satellite subscribers by April 30, 1999. In March of 1999, DirecTV,
Inc. and the four major broadcast networks and their affiliates agreed to settle
in the pending lawsuit. Under the settlement agreement, current DirecTV
subscribers who are predicted to receive a signal of Grade A intensity will lose
receipt of CBS, Fox, ABC and NBC signals on June 30, 1999. Current DirecTV
subscribers who are predicted to receive a signal of Grade B intensity will lose
ABC, CBS, Fox and NBC signals on December 31, 1999.
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 are
required to make their election between must-carry and retransmission consent
status by October 1, 1999, for the period from January 1, 2000 through December
31, 2002. Television stations that fail to make an election by the specified
deadline are deemed to have elected must-carry status for the relevant three
year period. For the three year period ending December 31, 1999, 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.
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. Three of the Company's stations. WDWB, KBWB and KNTV, have filed
applications requesting FCC authorization to begin construction of DTV
facilities.
12
Due to additional equipment requirements, implementation of DTV service will
impose substantial additional costs on television stations. It is also possible
that advances in technology may permit Existing Broadcasters to enhance the
picture quality of existing systems without the need to implement DTV service in
a high definition format. The Company does not know the effect the authorization
of DTV service will have on the Company's business or capital expenditure
requirements.
The FCC has adopted rules that will require the Company to pay a fee of 5%
of the gross revenues received from any ancillary or supplemental uses of the
DTV spectrum for which the Company charges subscription fees or other specified
compensation. No fees will be due for commercial advertising revenues received
from free over-the-air broadcasting services. The FCC also has initiated a
rulemaking proceeding to examine: (1) whether, and to what extent, cable "must
carry" obligations should be applied to DTV signals; and (2) various DTV tower
siting issues. The Commission has announced that it may also initiate a
rulemaking proceeding to examine whether additional public interest obligations
should be imposed on DTV licenses.
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 violent and indecent programming; (viii) restrictions on
the advertisement of certain alcoholic products; (ix) an examination of whether
the cable must-carry requirements mandates carriage of both analog and digital
television signals; and (x) an examination of legislation and FCC rules
governing the ability of viewers to receive local and distant television network
programming directly via satellite. 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) modifying the television
"duopoly" rule by 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
13
the public interest. As a result of this mandate, the FCC has an inquiry pending
to review all of its broadcast ownership rules. The Company cannot predict the
outcome of the FCC's rulemaking proceedings or how certain FCC changes in its
multiple and cross-ownership rules, made in accordance with the
Telecommunications Act of 1996, will affect the Company's business. Relaxation
of the television duopoly rule to permit, for example, the common ownership of
certain UHF or UHF/VHF stations with overlapping "Grade A and B contours" may
enable the Company to own jointly stations KBWB and KNTV.
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.
There are bills that have been introduced in the House and Senate to modify
the SHVA. These bills provide for various modifications in the SHVA, including
the establishment of circumstances under which satellite subscribers can
continue to receive distant network programming, the extent to which direct
broadcast satellite operators may provide distant network programming to
customers, and requirements for DBS operators to provide local broadcast signals
to their subscribers. At this time, the Company cannot predict whether any of
these bills will be adopted or, if adopted, the effect that such changes would
have on the business of the Company.
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 1,050
persons, of whom approximately 278 are represented by three unions pursuant to
contracts expiring in 1999, 2000, 2001 and 2002 (and one of which is currently
expired but which the Company is currently renegotiating) at the Company's
stations. The Company believes its relations with its employees are good.
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, Californa
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 (2)
KBJR Duluth, Minnesota, Superior, Wisconsin
Office and Studio Owned 20,000 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 5/30/03
KBWB San Francisco, California
Office and Studio Leased 25,777 sq. feet 8/31/02
Tower Site Leased 2,750 sq. feet 2/28/05
WKBW Buffalo, New York
Office and Studio Owned 32,000 sq. feet --
Colden, New York
Tower Site Owned 3,406 sq. feet --
WDWB Southfield, Michigan
Office Leased 8,850 sq. feet 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.
(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
On April 28, 1998, the holders of all of the Company's Voting Common Stock,
par value $.01 per share, adopted resolutions by written consent in lieu of a
special meeting amending the Granite Broadcasting Corporation Management Stock
Plan (a copy of the Management Stock Plan was filed as exhibit 10.15 to the
Company's Registration Statement No. 333-56327 filed with the Securities and
Exchange Commission on June 8, 1998).
On May 11, 1998, the holders of all of the Company's Voting Common Stock
adopted resolutions by written consent in lieu of a special meeting amending the
Company's bylaws (a copy of the amendment to the bylaws is filed as exhibit 3.4
hereto).
On May 11, 1998, the holders of all of the Company's Voting Common Stock
adopted resolutions by written consent in lieu of an annual meeting appointing
Ernst & Young LLP as independent auditors of the Company and electing W. Don
Cornwell, Stuart J. Beck, James L. Greenwald, Martin F. Beck, Edward Dugger III,
Thomas R. Settle, Charles J. Hamilton, Jr., Mikael Salovaara, Robert E. Selwyn,
Jr. and Vickee Jordan Adams as directors of the Company.
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 22, 1999, the
approximate number of record holders of Common Stock (Nonvoting) was 158.
The range of high and low prices for the Common Stock (Nonvoting) for each
full quarterly period during 1997 and 1998 is set forth in Note 15 to the
Consolidated Financial Statement in Item 8 hereof. At March 22, 1999, the
closing price of the Common Stock (Nonvoting) was $7.00 per share.
The Company's publicly traded Cumulative Convertible Exchangeable Preferred
Stock, par value $.01 per share (the "Cumulative Exchangeable Preferred Stock")
is traded on the OTC Bulletin Board under the symbol GBTVP. The range of high
and low prices for each full quarterly period during 1997 and 1998 is set forth
in Note 15 to the Consolidated Financial Statements in Item 8 hereof. As of
March 22, 1999, the closing price for the Cumulative Convertible Exchangeable
Preferred Stock was $35.00 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 22, 1999, 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, 9 3/8% Subordinated Notes
due December 1, 2005 and the 8 7/8% Senior Subordinated Notes due May 15, 2008,
respectively, and is restricted under the Company's credit agreement (the
"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, 1998, 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, 1994,
1995, 1996, 1997 and 1998 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
----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenue.......................................... $ 62,856 $ 99,895 $ 129,164 $ 153,512 $ 161,104
Station operating expenses........................... 37,764 55,399 72,089 83,729 89,812
Time brokerage agreement fees........................ -- -- 150 600 428
Depreciation......................................... 3,420 4,514 6,144 5,718 5,388
Amortization......................................... 3,873 7,592 9,737 13,824 18,493
Corporate expense.................................... 2,162 3,132 4,800 6,639 8,179
Non-cash compensation................................ 282 363 496 986 978
---------- ---------- ---------- ---------- ----------
Operating income..................................... 15,355 28,895 35,748 42,016 37,827
Other expenses....................................... 309 798 1,034 1,167 1,381
Equity in net loss (income) of investee.............. -- (439) 995 1,531 973
Gain on sale of stations............................. -- -- -- -- (57,776)
Gain from insurance claim............................ -- -- -- -- (2,159)
Interest expense, net................................ 10,707 27,026 36,765 38,986 38,896
Non-cash interest expense............................ 842 1,738 2,087 2,182 2,095
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary
item................................................ 3,497 (228) (5,133) (1,850) 54,417
Provision for income tax............................. (450) (555) (761) (1,616) (10,250)
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item.............. 3,047 (783) (5,894) (3,466) 44,167
Extraordinary loss net of tax benefits in 1998 of
$950................................................ -- -- (2,891) (5,569) (1,761)
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 3,047 $ (783) $ (8,785) $ (9,035) $ 42,406
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) attributable to common
shareholders........................................ $ (688) $ (4,368) $ (12,310) $ (31,207) $ 16,896
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER COMMON SHARE:
Basic income (loss) before extraordinary item...... $ (0.15) $ (0.74) $ (1.09) $ (2.93) $ 1.80
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic net income (loss)............................ $ (0.15) $ (0.74) $ (1.43) $ (3.57) $ 1.63
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common shares outstanding......... 4,498 5,920 8,612 8,765 10,358
Net income (loss) attributable to common
shareholders--assuming dilution..................... $ (688) $ (4,368) $ (12,310) $ (31,207) $ 19,776
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER COMMON SHARE:
Diluted income (loss) before extraordinary item.... $ (0.15) $ (0.74) $ (1.09) $ (2.93) $ 1.27
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted net income (loss).......................... $ (0.15) $ (0.74) $ (1.43) $ (3.57) $ 1.17
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common share outstanding--
Assuming dilution................................ 4,498 5,920 8,612 8,765 16,967
DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
SELECTED BALANCE SHEET DATA:
Total assets......................................... $ 189,881 $ 452,221 $ 452,563 $ 633,614 $ 781,974
Total debt........................................... 99,250 341,000 351,561 392,779 426,399
Redeemable preferred stock........................... 49,171 45,488 45,488 207,700 216,351
Stockholders' equity (deficit)....................... 11,729 8,868 (3,135) (33,257) (1,470)
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain sections of this Form 10-K, including "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contain various "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, which represent the Company's
expectations or belief concerning future events. The "forward-looking
statements" include, without limitation, the renewal of the Company's FCC
licenses, the Company's ability to meet its future liquidity needs and
disclosure concerning year 2000 issues (including anticipated costs and dates by
which the Company expects to complete certain actions). The Company cautions
that these statements are further qualified by important factors that could
cause actual results to differ materially from those in the "forward-looking
statements". Such factors include, without limitation, general economic
conditions, competition in the markets in which the Company's stations are
located, technological change and innovation in the broadcasting industry and
proposed legislation.
INTRODUCTION
Comparisons of the Company's consolidated financial statements between the
years ended December 31, 1998 and 1997 have been affected by the acquisition of
KBWB, which occurred on July 20, 1998, the sale of WWMT, which occurred on July
15, 1998, and the sale of WLAJ, which occurred on August 17, 1998. The principal
reasons for the increases between the years ended December 31, 1997 and 1996
were the acquisition of WDWB, which occurred on January 31, 1997, and the
operation of WLAJ 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 principal 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 set forth certain operating data for the three years
ended December 31. 1996, 1997 and 1998:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
Operation income.................................................... $ 35,748,000 $ 42,016,000 $ 37,827,000
Add:
Time brokerage agreement fees..................................... 150,000 600,000 428,000
Depreciation and amortization..................................... $ 15,881,000 $ 19,542,000 $ 23,881,000
Corporate expenses................................................ 4,800,000 6,639,000 8,179,000
Non-cash compensation............................................. 496,000 986,000 978,000
------------- ------------- -------------
Broadcast cash flow................................................. $ 57,075,000 $ 69,783,000 $ 71,293,000
"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. 131 "Disclosures About Segments of
an Enterprise and Related Information"
19
which is 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 adopted the new requirements in 1998. The adoption
does not have an effect on the financial statement disclosures for the Company.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net revenue for the year ended December 31, 1998 totaled $161,104,000, an
increase of $7,592,000, or 5% compared to net revenue of $153,512,000 for the
year ended December 31, 1997. Of this increase, $1,193,000 was due to the
inclusion of one additional month of operations of WDWB. The remaining increase
was primarily due to increases in local and national advertising revenue driven
largely by first quarter Olympic spending at the Company's CBS affiliated
stations, heavy political spending and the impact of the acquisition of KBWB,
offset, in part, by the dispositions of WWMT and WLAJ.
Station operating expenses for the year ended December 31, 1998 totaled
$89,812,000, an increase of $6,083,000 or 7% compared to $83,729,000 for the
same period a year earlier. Of this increase, $733,000 was due to the inclusion
of one additional month of operations of WDWB. The remaining increase was
primarily due to increased news, programming, promotion and sales expenses and
the inclusion of operating expenses of KBWB, offset, in part by, the
dispositions of WWMT and WLAJ.
Depreciation and amortization increased $4,339,000 or 22% for the twelve
months ended December 31, 1998 as compared to the prior year primarily due to
the acquisition of KBWB and the inclusion of one additional month of operations
of WDWB, offset, in part, by the disposition of WWMT and WLAJ. Corporate expense
increased $1,540,000, or 23% during the year ended December 31, 1998 compared to
the same period a year earlier, primarily due to higher administrative costs
associated with the expansion of the Company's corporate office.
Other expenses increased $214,000 or 18% during the year ended December 31,
1998 as compared to the same period a year earlier primarily due to costs
incurred in connection with the relocation of several employees in 1998.
The equity in net loss of investee of $973,000 and $1,532,000 for the years
ended December 31, 1998 and 1997, respectively, resulted from the Company
recognizing its pro rata share of the losses of Datacast, LLC under the equity
method of accounting. As of June 30, 1998, the Company has written off its
entire investment. The investors in Datacast, LLC have discontinued funding the
venture and have agreed to its wind down. In the first quarter of 1999, the
Company incurred a charge of approximately $133,000, representing its pro rata
portion of costs to wind down the operations of Datacast, LLC.
The gain on insurance settlement resulted from insurance proceeds (the "KBJR
Insurance Proceeds") the Company received in excess of the net book value of
assets that were destroyed in a fire at KBJR. The Company will recognize
additional gains in 1999 as further insurance proceeds are received upon
replacement of the destroyed assets.
Net interest expense remained flat for the year ended December 31, 1998
compared to the prior year despite higher levels of outstanding indebtedness as
a result of the Company's strategic plan to reduce its cost of borrowing. During
the first quarter of 1997, the Company repurchased $19,405,000 principal amount
of its 9 3/8% Senior Subordinated Notes due December 1, 2005 (the "9 3/8%
Notes") at a discount. In September 1997, the Company redeemed the entire
outstanding amount of its $60,000,000 principle amount 12.75% Senior
Subordinated Debentures, due September 1, 2002 (the "12.75% Debentures") at a
redemption price of 106.375%. This debt was replaced with credit agreement
borrowings with a lower rate of interest. During the second quarter of 1998, the
Company completed an offering of $175,000,000 of its 8 7/8% Senior Subordinated
Debentures, due May 15, 2008 (the "8 7/8% Notes"). The proceeds of the offering
were used to repay all of the Company's then outstanding borrowings under its
then existing bank credit agreement and to repurchase $22,960,000 principle
amount of its 10 3/8% Senior Subordinated Notes,
20
due May 15, 2005 (the "10 3/8% Notes") at a repurchase price of 105.75%. During
the third quarter of 1998, the Company used lower rate Credit Agreement
borrowings to repurchase an additional $9,500,000 principal amount of the
10 3/8% Notes at a repurchase price of 101.50%. During the fourth quarter, the
Company used lower rate bank borrowings to repurchase an additional $46,100,000
principal amount of its subordinated debt at discounts ranging from 89% to 95%.
In connection with the sale of WWMT and WLAJ, the Company recognized a
pre-tax gain for financial statement purposes of $57,776,000 during the third
quarter of 1998. The Company has sufficient net operating loss carryforwards to
offset regular federal taxes on the gain. However, the tax provision for 1998
includes a cash tax of approximately $1,689,000 consisting of federal
alternative minimum taxes and state income taxes.
In connection with the repurchase of subordinated debt throughout the year,
the Company incurred an extraordinary loss, net of taxes, during the year ended
December 31, 1998 of $1,761,000 relating to premiums paid and the write-off of
deferred financing costs, offset, in part, by the repurchases made at a discount
in the fourth quarter. In connection with the redemption of the 12.75%
Debentures and the repurchase of $19,405,000 principal amount of its 9 3/8%
Notes, the Company recognized an extraordinary loss during the year ended
December 31, 1997 of $5,569,000 related to net premiums paid and the write-off
of the related deferred financing fees.
YEARS ENDED DECEMBER 31, 1997 AND 1996
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 in 1997. 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 increase 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.
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% Notes,
21
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% 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, as described above. During 1996, the Company
incurred a net extraordinary loss of $2,891,000 resulting from the write-off of
deferred financing fees in connection with the repayment of the then outstanding
term loan and the repurchase of $2,000,000 principal amount and $13,500,000
principal amount of its 10 3/8% and 9 3/8% Notes, respectively.
LIQUIDITY AND CAPITAL RESOURCES
In May 1998, the Company completed an offering of $175,000,000 principal
amount of the 8 7/8% Notes at a discount, resulting in proceeds to the Company
of $174,482,000. The proceeds of this offering were used to repay all of the
then outstanding borrowings under the Company's then existing bank credit
agreement and to repurchase $22,960,000 of its 10 3/8% Notes at a repurchase
price of 105.75%.
On June 10, 1998, the Company amended and restated its bank credit agreement
(as amended and restated, the "Credit Agreement") which, among other things,
allows for revolving credit borrowings of $260,000,000 and permits borrowings of
up to an additional $240,000,000 on an uncommitted basis. The Credit Agreement
can be used to fund future acquisitions of broadcast stations and for general
working capital purposes. As of March 23, 1999, the Company amended the Credit
Agreement to revise the maximum consolidated total debt to consolidated cash
flow ratio covenant contained therein. As of March 23, 1999, the Company had
$78,169,000 of borrowings outstanding under the Credit Agreement and the ability
to borrow in compliance with the financial covenants thereunder an additional
$21,497,000 for acquisitions and working capital purposes.
On July 15, 1998, the Company completed the disposition of WWMT to Freedom
Communications, Inc. for $150,540,000 in cash. On August 17, 1998, the Company
exercised its option to purchase WLAJ for $19,500,000 in cash and simultaneously
sold the station to Freedom for $18,950,000 in cash. The Company recognized a
pre-tax gain for financial statement reporting purposes on the sale of these
stations of $57,776,000. The Company has sufficient net operating loss
carryforwards to offset regular federal taxes on the gain. However, the 1998 tax
provision includes a cash tax of approximately $1,689,000 consisting of federal
alternative minimum taxes and and state income taxes.
On July 20, 1998, the Company completed the acquisition of KBWB by acquiring
the stock of Pacific FM Incorporated, the owner of KBWB. The total purchase
price for all of the stock of Pacific was $143,150,000. In addition, the Company
paid $30,000,000 to the principal shareholders of Pacific for a covenant not to
compete in the San Francisco-Oakland-San Jose television market for a period of
five years from the closing. The acquisition was financed with the proceeds from
the Company's sale of WWMT and with borrowings under the Credit Agreement. In
approving the Company's acquisition of KBWB, the FCC granted the Company a
nine-month waiver of its current duopoly rule, enabling the Company to continue
to operate KNTV in San Jose, California for nine months after the closing of the
acquisition of KBWB. The Company has filed a petition for reconsideration of
this ruling, requesting a permanent waiver of the duopoly rule or,
alternatively, an interim duopoly waiver conditioned upon the outcome of the
FCC's pending television ownership rulemaking proceeding. Chronicle Publishing
Company, licensee of KRON-TV, San Francisco, California has filed an opposition
to the Company's petition for reconsideration. The Company also has filed a
request to extend its nine month temporary waiver of the duopoly rule which
expires on April 20, 1999 until nine months after the effective date of any FCC
order in the pending television ownership rulemaking proceeding. Chronicle has
filed an opposition to the Company's extension request.
22
In connection with the purchase of KBWB, the WB Network agreed to enter into
a ten-year affiliation agreement with the Company instead of another television
station in the San Francisco market in return for total consideration of
$31,572,000. The Company paid $14,847,000 to the WB Network during 1998 and will
pay the remaining $16,725,000 over a five year period. The remaining payment is
shown at its net present value on the Company's balance sheet.
In September 1998, the Company repurchased $9,500,000 of its 10 3/8% Notes
at a repurchase price of 101.5%. In October 1998, the Company repurchased
$6,120,000 of its 10 3/8% Notes, $17,905,000 of its 9 3/8% Notes and $22,075,000
of its 8 7/8% Notes at discounts ranging from 89% to 95%. This high yield debt
was replaced with lower rate Credit Agreement borrowings.
Cash flows provided by operating activities were $19,027,000 during the year
ended December 31, 1998 compared to cash flows provided by operating activities
of $10,345,000 and $13,291,000 during the years ended December 31, 1997 and
1996, respectively. The increase from 1997 to 1998 was primarily due to a less
significant increase in net operating assets, an increase in broadcast cash flow
and a decrease in cash interest payments. The decrease from 1996 to 1997 was
primarily a result of an increase in net operating assets and higher cash
interest expense in 1997, offset in part by higher operating cash flow.
Cash flows used in investing activities were $43,825,000 during the year
ended December 31, 1998 compared to $186,499,000 and $14,395,000 during the
years ended December 31, 1997 and 1996, respectively. The decrease from 1997 to
1998 was primarily a result of the sale of WWMT in 1998, offset, in part, by
payments made in connection with securing the WB Network affiliation agreement
relating to KBWB in 1998. The increase from 1996 to 1997 related primarily to
the acquisition of WDWB in 1997. The Company anticipates that future
requirements for capital expenditures will include those incurred during the
ordinary course of business, which include costs associated with the
implementation of digital television technology and costs associated with the
Year 2000 issue (as identified below).
Cash flows provided by financing activities were $23,390,000 during the year
ended December 31, 1998 compared to $177,769,000 and $1,565,000 during the years
ended December 31, 1997 and 1996, respectively. The decrease from 1997 to 1998
resulted primarily from a decrease in net bank borrowings, an increase in
payments of deferred financing fees and the issuance of the 12 3/4% Cumulative
Exchangeable Preferred Stock in 1997, offset in part, by the issuance of the
8 7/8% Notes and a decrease in the amount of subordinated debt retired during
1998. The increase from 1996 to 1997 resulted primarily from an increase in net
bank borrowings, proceeds from the 12 3/4% Cumulative Exchangeable Preferred
Stock in 1997 and a decrease in payments of deferred financing fees offset, in
part, by a net increase in repurchases of subordinated debt.
The Company believes that internally generated funds from operations and
borrowings under the Credit Agreement will be sufficient to satisfy the
Company's cash requirements for its existing operations for the next twelve
months and for the foreseeable future thereafter. The Company expects that any
future acquisitions of television stations would be financed through funds
generated from operations and additional debts and equity financings.
YEAR 2000
The Company is preparing for the impact of the Year 2000 on its business, as
well as on the businesses of its customers, suppliers and business partners. The
"Year 2000 Issue" is the result of computer programs that were written using two
digits rather than four to define the applicable year. Any of the computer
programs and/or hardware used by the Company that have date-sensitive software
or embedded chips may recognize a date using "00" as the year 1900 rather than
the year 2000. The Year 2000 Issue could result in system failure or
miscalculations in the operations at the Company's broadcast and corporate
locations. The disruption of operations could include, among other things, a
temporary inability to originate and transmit broadcast programming and
commercials, process financial information or engage in other
23
normal business activity. The Company may also be exposed to risks from third
parties with which the Company interacts who fail to adequately address their
own Year 2000 Issues.
STATE OF READINESS
The Company has developed a multiple phase approach to identify and evaluate
its state of Year 2000 readiness for both its information technology (IT) and
non-IT systems. The first phase was to develop a Company-wide, uniform strategy
for addressing the Year 2000 Issue and to assess the Company's current state of
Year 2000 readiness. This included an internal review at each location of all IT
and non-IT systems for potential Year 2000 Issues. The Company has completed
this review and has identified the systems that need to be updated or replaced
to ensure Year 2000 compliance. Based on these system evaluations, the Company
has determined that it will be required to modify or replace portions of its
software and certain hardware so that its systems will properly utilize dates
beyond December 31, 1999. The primary systems that are being addressed are the
master control automation systems, IBM AS/400, the computer used to process
sales, traffic, accounts receivable, accounts payable and the general ledger,
and systems with embedded chips, including telephone and security systems.
The next phase was to develop uniform test plans and test methodologies. The
Company has begun to test and update its systems, and expects that all testing
will be completed by August 1999.
The Company has retained an independent consulting firm with experience in
the broadcasting industry to review the Company's Year 2000 procedures and
guidelines. The Company expects that the independent consultant will complete
its review by the end of April 1999.
Although the Company has not yet completed all necessary phases of its Year
2000 program, it believes that it has an effective program in place to resolve
its critical internal Year 2000 issues in a timely manner.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Company will incur capital expenditures and incremental expenses to
bring current systems into compliance. Total incremental expenses have not had a
material impact on the Company's financial condition to date and are not at
present, based on known facts, expected to have a material impact on the
Company's financial condition. The Company estimates the total cost of upgrading
equipment will be approximately $700,000, of which approximately $150,000 has
been incurred through December 31, 1998. All Year 2000 expenditures are made out
of each location's operation budget. There are no IT projects that have been
delayed due to Year 2000 efforts.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
While the Company believes its efforts will provide reasonable assurance
that material disruption will not occur due to internal Year 2000 failures, the
possibility of disruption, especially from third parities, still exists. The
Company's operations are vulnerable to system experienced by the network program
providers, certain satellite services, software and hardware providers, local
and long distance telephone providers, power companies, financial services
providers and others upon whom the Company relies for supporting services. In an
effort to determine its vulnerabilities to third-party Year 2000 failures, the
Company currently is requesting Year 2000 compliance data from all of its
suppliers and vendors. The Company will use this information in an attempt to
identify whether any of these parties has a Year 2000 issue that may materially
impact the Company's operations, liquidity, capital resources or certain other
functions. The Company does not, however, control the systems of other
companies, and cannot assure that these systems will be timely converted and, if
not converted, would not have an adverse effect on the Company's business
operations. In the event that the Company and/or its significant vendors or
suppliers do not complete their Year 2000 compliance efforts, the Company could
experience disruptions in its operations, including a
24
temporary inability to engage in normal broadcast or business activities.
Disruptions in the economy generally resulting from Year 2000 issues also could
affect the Company.
CONTINGENCY PLANS
The Company is developing a contingency plan to address system failures that
are critical to conduct its business. These plans include, but are not limited
to, increases in overtime salaries and/or increases in personnel to operate
systems that would ordinarily be operated by a computer. The Company expects to
have its contingency plan completed by September 1999.
YEAR 2000 FORWARD-LOOKING STATEMENTS
The foregoing Year 2000 discussion contains "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934. Such
statements including without limitation, anticipated costs and the dates by
which the Company expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all relevant IT and non-IT systems, results of Year 2000
testing, adequate resolution of Year 2000 Issues by businesses and other third
parties who are service providers, suppliers or customers of the Company,
unanticipated system costs, the adequacy of and ability to develop and implement
contingency plans and similar uncertainties. The "forward-looking statements"
made in the foregoing Year 2000 discussion speak only as of the date on which
such statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS 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, 1998 and 1997, 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, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a) of the Granite Broadcasting Corporation Form 10K for the fiscal year
ended December 31, 1998. 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 significiant 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, 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 19, 1999
26
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- --------------
Net revenue..................................................... $ 129,164,353 $ 153,511,540 $ 161,104,371
Station operating expenses...................................... 72,089,368 83,728,786 89,811,723
Time brokerage agreement fees................................... 150,000 600,000 427,810
Depreciation.................................................... 6,144,193 5,717,989 5,387,800
Amortization.................................................... 9,737,136 13,824,248 18,493,235
Corporate expense............................................... 4,799,984 6,639,159 8,179,232
Non-cash compensation expense................................... 495,819 985,634 977,502
-------------- -------------- --------------
Operating income.............................................. 35,747,853 42,015,724 37,827,069
Other (income) expenses:
Equity in net loss of investee................................ 995,019 1,531,542 973,439
Interest expense, net......................................... 36,765,306 38,985,979 38,895,358
Non-cash interest expense..................................... 2,086,639 2,181,686 2,095,115
Gain on sale of stations...................................... -- -- (57,775,928)
Gain from insurance claim..................................... -- -- (2,158,961)
Other......................................................... 1,034,351 1,167,144 1,381,443
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Income (loss) before income taxes and extraordinary item...... (5,133,462) (1,850,627) 54,416,603
Provision for income taxes.................................... 761,000 1,616,212 10,250,000
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Income (loss) before extraordinary item......................... (5,894,462) (3,466,839) 44,166,603
Extraordinary loss, net of tax benefit in 1998 of $950,000...... (2,891,250) (5,569,119) (1,761,002)
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Net income (loss)............................................. $ (8,785,712) $ (9,035,958) $ 42,405,601
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Net income (loss) attributable to common shareholders........... $ (12,310,993) $ (31,207,468) $ 16,895,727
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Per common share:
Basic income (loss) before extraordinary item................. $ (1.09) $ (2.93) $ 1.80
Basic extraordinary loss...................................... (0.34) (0.64) (0.17)
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Basic net income (loss)..................................... $ (1.43) $ (3.57) $ 1.63
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Weighted average common shares outstanding...................... 8,611,606 8,764,705 10,358,371
Net income (loss) attributable to common shareholders-- assuming
dilution...................................................... $ (12,310,993) $ (31,207,468) $ 19,775,599
Per common share:
Diluted income (loss) before extraordinary item............... $ (1.09) $ (2.93) $ 1.27
Diluted extraordinary loss.................................... (0.34) (0.64) (0.10)
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Diluted net income (loss)..................................... $ (1.43) $ (3.57) $ 1.17
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Weighted average common shares outstanding--assuming dilution... 8,611,606 8,764,705 16,966,501
See accompanying notes.
27
GRANITE BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
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1997 1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 2,170,927 $ 762,392
Accounts receivable, less allowance for doubtful accounts
($408,290 in 1997 and $424,290 in 1998)...................................... 35,308,464 32,830,227
Film contract rights........................................................... 10,097,262 9,671,443
Other current assets........................................................... 10,958,742 9,627,807
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TOTAL CURRENT ASSETS....................................................... 58,535,395 52,891,869
PROPERTY AND EQUIPMENT, NET...................................................... 36,004,876 33,040,152
FILM CONTRACT RIGHTS AND OTHER NONCURRENT ASSETS................................. 7,041,000 7,286,039
DEFERRED FINANCING FEES, less accumulated amortization
($4,747,664 in 1997 and $3,636,134 in 1998).................................... 10,213,314 11,086,733
INTANGIBLE ASSETS, NET........................................................... 521,819,428 677,669,324
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$ 633,614,013 $ 781,974,117
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