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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 2001 Commission file number: 0-25042
Young Broadcasting Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3339681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
599 Lexington Avenue
New York, New York 10022
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 754-7070
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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:
Class A Common Stock, $.001 Par Value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
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 definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock of registrant held by
non-affiliates of the registrant as of March 18, 2002 was approximately
$491,399,706.
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Number of shares of Common Stock outstanding as of March 18, 2002:
17,386,463 shares of Class A Common Stock and 2,261,666 shares of Class B
Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K
Document in which incorporated
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Registrant's Proxy Statement relating to Part III
the 2002 Annual Meeting of Stockholders
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YOUNG BROADCASTING INC.
FORM 10-K
Table of Contents
Page
PART I ----
Item 1. Business............................................................... 1
Item 2. Properties............................................................. 23
Item 3. Legal Proceedings...................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders.................... 26
Item 4A. Executive Officers of the Registrant................................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.. 28
Item 6. Selected Financial Data................................................ 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............. 40
Item 8. Financial Statements and Supplementary Data............................ 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 65
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 65
Item 11. Executive Compensation................................................. 65
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 65
Item 13. Certain Relationships and Related Transactions......................... 65
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... 65
SIGNATURES.......................................................................... 69
i
FORWARD LOOKING STATEMENTS
FORWARD LOOKING STATEMENTS ARE ALL STATEMENTS, OTHER THAN STATEMENTS OF
HISTORICAL FACTS, INCLUDED IN THIS DOCUMENT. THE FORWARD LOOKING STATEMENTS
CONTAINED IN THIS REPORT CONCERN, AMONG OTHER THINGS, CERTAIN STATEMENTS UNDER
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, AND ARE
SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS, INCLUDING THE IMPACT OF
CHANGES IN NATIONAL AND REGIONAL ECONOMIES, PRICING FLUCTUATIONS IN LOCAL AND
NATIONAL ADVERTISING AND VOLATILITY IN PROGRAMMING COSTS.
PART I
Item 1. Business.
All market rank, rank in market, station audience rating and share, and
television household data in this report are from the Nielsen Station Index
Viewers and Profile dated November 2001, as prepared by A.C. Nielsen Company
("Nielsen"). Nielsen data provided herein refers solely to the United States
television markets. As used herein, the "Company" means Young Broadcasting Inc.
and, where the context requires, its subsidiaries (the "Subsidiaries").
General
The Company owns and operates twelve television stations in geographically
diverse markets and a national television sales representation firm, Adam Young
Inc. Six of the stations are affiliated with American Broadcasting Companies,
Inc. ("ABC"), three are affiliated with CBS Inc. ("CBS"), one is affiliated
with National Broadcasting Company, Inc. ("NBC"), and two are independent
stations. Each of the Company's stations is owned and operated by a direct or
indirect Subsidiary. The Company is presently the eighth largest ABC network
affiliate group in terms of households reached. KCAL, Los Angeles, California
("KCAL"), is the only independent VHF television station operating in the Los
Angeles market, which is ranked as the second-largest television market in
terms of population and the largest in terms of estimated television revenue.
KRON-TV, San Francisco, California ("KRON"), is the Company's independent VHF
station operating in the San Francisco market, which is ranked as the fifth
largest television market in terms of population (see Recent Developments
below).
The Company is a Delaware corporation that was founded in 1986 by Vincent
Young and his father, Adam Young. Vincent Young, the Company's Chairman, has
over 25 years of experience in the television broadcast industry, and Adam
Young has over 50 years of experience in the industry. Ronald Kwasnick, the
Company's President, has over 25 years of experience in the industry.
The Company's principal offices are located at 599 Lexington Avenue, New
York, New York 10022, and its telephone number is (212) 754-7070.
Recent Developments
Pending Sale of KCAL. On February 12, 2002, the Company agreed to sell the
assets of KCAL to CBS Broadcasting Inc. in an all cash transaction valued at
approximately $650 million. This transaction is expected to close in mid-year
2002, and is subject to Federal Communications Commission review.
1
Expiration of KRON Affiliation Agreement With NBC. KRON became an
independent station as of January 1, 2002 after its affiliation agreement with
NBC expired, in accordance with its terms, on December 31, 2001. The Company
expects to incur increased programming costs as a result of KRON becoming an
independent station.
Senior Notes. On December 7, 2001, the Company completed a private offering
of $250.0 million principal amount of its 81/2% Senior Notes due 2008 (the
"Senior Notes"). The Senior Notes were initially offered to qualified
institutional buyers under Rule 144A and to persons outside the United States
under Regulation S. The Company used substantially all of the net proceeds of
approximately $243.1 million to repay a portion of outstanding indebtedness
under the Company's senior credit facilities and to pay fees related to the
offering. On January 31, 2002, the Company filed a registration statement with
the Securities and Exchange Commission (the "SEC") with respect to an offer to
exchange the Senior Notes for notes of the Company with substantially identical
terms of the Senior Notes, except that the new notes will not contain terms
with respect to transfer restrictions. The registration statement has not been
declared effective by the SEC as of March 22, 2002.
Consent Solicitation. On November 27, 2001, the holders of a majority in
principal amount of the Company's 9% senior subordinated notes due 2006
consented to proposed amendments to the indenture governing the 9% senior
subordinated notes. These amendments, among other things, provide the Company
with the flexibility to incur additional debt, including the Senior Notes. The
amendments became effective upon the issuance of the Senior Notes. The Company
paid consenting holders $25.00 in cash for each $1,000 principal amount of the
9% senior subordinated notes held by such consenting holders.
Amendments to Senior Credit Facilities. On November 21, 2001, the Company
amended interest and financial covenants contained in its senior credit
facilities. These amendments, among other things, eliminated the total leverage
covenant through June 30, 2004, introduced a senior secured leverage covenant
through March 31, 2002, revised the interest coverage and fixed charge
covenants and permitted the issuance of the Senior Notes. These amendments also
provided for certain covenant relief through the remaining term of the
Company's senior credit facilities (see "Liquidity and Capital Resources").
Public Offering. On June 26, 2001, the Company completed an underwritten
public offering of 3 million shares of its Class A common stock at a price per
share of $36.00. The net proceeds of the offering was $103.5 million and all
such net proceeds were used by the Company to repay indebtedness outstanding
under its senior credit facilities.
Operating Strategy
The Company continually seeks to increase its revenue and broadcast cash
flow (as defined). The Company's operating strategy focuses on increasing the
cash flow of its stations through advertising revenue growth and strict control
of programming and operating costs. The components of this strategy include the
following:
Targeted Marketing. The Company seeks to increase its revenue and broadcast
cash flow by expanding existing relationships with local and national
advertisers and attracting new advertisers through targeted marketing
techniques and carefully tailored programming. The Company works closely with
advertisers to develop campaigns that match specifically targeted audience
segments with the advertisers' overall marketing strategies. With this
information, the Company regularly refines its programming mix among network,
syndicated and locally-produced shows in a focused effort to attract audiences
with demographic characteristics desirable to advertisers. The Company's
success in increasing local advertising revenue is also attributable, in part,
to the upgrading of its local sales staff, performance-based compensation
arrangements and the implementation of systems of performance accountability.
Each station also benefits from the ongoing exchange of ideas and experiences
with the other stations.
2
The Company's stations utilize a variety of marketing techniques to increase
advertising revenue, including the following:
. Vendor Marketing. The Company's "vendor marketing" program has
experienced a great deal of success in the Company's markets. Under this
program, a station will contact the vendors of a particular store chain
and arrange for the vendors to purchase advertising for the store chain
in exchange for the store's commitment to purchase additional products
from the vendors. The result is that both the vendors' products and the
store chain are advertised, with the vendors collectively bearing the
cost of the advertisement.
. Live Remotes. Stations obtain premium advertising dollars by utilizing
live remotes on location at the offices or facilities of an advertiser.
The station will use its own staff and broadcasting equipment and, as a
result, the expense to the station is relatively low. Live advertisements
are broadcast continually over the course of a period of the day and tend
to show immediate results with viewers being attracted to the live
television event taking place within their community.
. Research. Each station designates personnel to research the amount of
advertising dollars expended in other media (such as radio, newspapers
and magazines) by advertisers within its market. The station will then
target individual advertisers seeking the same demographic groups sought
by the station for particular dayparts and will illustrate to the
advertisers the advantages of television advertising over other media
which do not target specific demographic groups.
An important element in determining advertising rates is the station's
rating and share among a particular demographic group which the advertiser may
be targeting. The Company believes that its success is attributable to its
ability to reach desirable demographic groups with the programs it broadcasts.
Strong Local Presence. Each station seeks to achieve a distinct local
identity principally through the quality of its local news programming and by
targeting specific audience groups with special programs and marketing events.
Each station's local news franchise is the foundation of the Company's strategy
to strengthen audience loyalty and increase revenue and broadcast cash flow for
each station. Strong local news generates high viewership and results in higher
ratings both for programs preceding and following the news.
Strong local news product helps differentiate local broadcast stations from
cable system competitors, which generally do not provide this service. The cost
of producing local news programming generally is lower than other sources of
programming and the amount of local news programming can be increased for very
modest incremental increases in cost. Moreover, such programming can be
increased or decreased on very short notice, providing the Company with greater
programming flexibility.
In each of its markets, the Company develops additional information-oriented
programming designed to expand the Company's hours of commercially valuable
local news and other news programming with relatively small increases in
operating expenses. In addition to local news, each station utilizes special
programming and marketing events, such as prime time programming of local
interest or sponsored community events, to strengthen community relations and
increase advertising revenue. The Company places a special emphasis on
developing and training its local sales staff to promote involvement in
community affairs and stimulate the growth of local advertising sales.
Programming. The Company continually reviews its existing programming
inventory and seeks to purchase the most profitable and cost-effective
syndicated programs available for each time period. In developing its selection
of syndicated programming, management balances the cost of available syndicated
programs; their potential to increase advertising revenue and the risk of
reduced popularity during the term of the program contract. The Company seeks
to purchase only those programs with contractual periods that permit
programming flexibility and which complement a station's overall programming
strategy and counter competitive programming. Programs that can perform
successfully in more than one time period are more attractive due to the long
lead time and multi-year commitments inherent in program purchasing.
3
Cost Controls. Each station emphasizes strict control of its programming
and operating costs as an essential factor in increasing broadcast cash flow.
The Company relies primarily on its in-house production capabilities and
seeks to minimize its use of outside firms and consultants. The Company's size
benefits each station in negotiating favorable terms with programming suppliers
and other vendors. In addition, each station reduces its overhead costs by
utilizing the group benefits provided by the Company for all of the stations,
such as insurance and other employee group benefit plans. Through its strategic
planning and annual budget processes, the Company continually seeks to identify
and implement cost savings opportunities at each of its stations. The Company
closely monitors the expenses incurred by each of the stations and continually
reviews the performance and productivity of station personnel. The Company has
been successful in controlling its costs without sacrificing revenue through
efficient use of its available resources.
Acquisition Strategy
The Company believes that its ability to manage costs effectively while
enhancing the quality provided to station viewers gives the Company an
important advantage in acquiring and operating new stations. In assessing
acquisitions, the Company targets stations for which it has identified line
item expense reductions that can be implemented upon acquisition. The Company
emphasizes strict controls over operating expenses as it expands a station's
revenue base with the goal of improving a station's broadcast cash flow.
Typical cost savings arise from reducing staffing levels, substituting more
cost-effective employee benefit programs, reducing dependence on outside
consultants and research firms and reducing travel and other non-essential
expenses. The Company also develops specific proposals for revenue enhancement
utilizing management's significant experience in local and national advertising.
The Company plans to pursue favorable acquisition opportunities, as they
become available. The Company is regularly presented with opportunities to
acquire television stations which it evaluates on the basis of its acquisition
strategy. The Company does not presently have any agreements to acquire any
television stations and its ability to incur debt to finance acquisitions is
currently limited by the terms of the senior credit facilities and its
indentures. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The Stations
The Company's stations are geographically diverse, which minimizes the
impact of regional economic downturns. Two stations are located in the west
region (KCAL-Los Angeles, California and KRON-San Francisco, California), five
stations are located in the Midwest region (WBAY-Green Bay, Wisconsin,
KWQC-Quad Cities, KELO-Sioux Falls, South Dakota, WLNS-Lansing, Michigan and
WTVO-Rockford, Illinois), four stations are in the southeast region
(WKRN-Nashville, Tennessee, WRIC-Richmond, Virginia, WATE-Knoxville, Tennessee,
and KLFY-Lafayette, Louisiana), and one station is in the northeast region
(WTEN-Albany, New York).
4
Six of the Company's twelve stations are affiliated with ABC, three are
affiliated with CBS, one is affiliated with NBC and two are independent
stations. The Company believes that this network diversity reduces the
potential impact of a ratings decline experienced by a particular network. KCAL
is the only independent VHF television station operating in the Los Angeles
market. KRON is the only independent VHF television station with significant
ratings, operating in the San Francisco market. The following table sets forth
general information based on Nielsen data as of November 2001 for each of the
Company's stations:
Commercial Station
Market Television Network Stations in Rank In In-Market Year
Rank(1) Households(2) Channel Affiliation DMA(3) Market(4) Share(5) Acquired
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KCAL (Los Angeles, CA).. 2 5,303,490 9 IND 12 7 8 1996
KRON (San Francisco, CA) 5 2,426,010 4 IND (NBC)(6) 16 1 22 2000
WKRN (Nashville, TN).... 30 879,030 2 ABC 6 3 21 1989
WTEN (Albany, NY)....... 57 514,770 10(7) ABC 6 3 21 1989
WRIC (Richmond, VA)..... 58 504,990 8 ABC 5 3 25 1994
WATE (Knoxville, TN).... 62 478,190 6 ABC 5 3 21 1994
WBAY (Green Bay, WI).... 69 406,340 2 ABC 6 2 26 1994
KWQC (Quad Cities)...... 92 304,350 6 NBC 5 1 46 1996
WLNS (Lansing, MI)...... 111 238,340 6 CBS 6 1 33 1986
KELO (Sioux Falls, SD).. 112 237,790 11(8) CBS 5 1 53 1996
KLFY (Lafayette, LA).... 124 212,500 10 CBS 5 1 47 1988
WTVO (Rockford, IL)..... 132 176,060 17 ABC 5 3 22 1988
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(1) Refers to the size of the television market or Designated Market Area
("DMA") as used by Nielsen.
(2) Refers to the number of television households in the DMA as estimated by
Nielsen.
(3) Represents the number of television stations ("reportable stations")
designated by Nielsen as "local" to the DMA, excluding public television
stations and stations which do not meet minimum Nielsen reporting standards
(weekly cumulative audience of less than 2.5%) for reporting in the Sunday
through Saturday, 7:00 a.m. to 1:00 a.m. period ("sign-on to sign-off").
Does not include national cable channels. The number of reportable stations
may change for each reporting period. "Weekly cumulative audience" measures
the total number of different households tuned to a station at a particular
time during the week. "Share" references used elsewhere herein measure the
total daily households tuned to a station at a particular time during the
week.
(4) Station's rank relative to other reportable stations, based upon the DMA
rating as reported by Nielsen sign-on to sign-off during November 2001.
(5) Represents an estimate of the share of DMA households viewing television
received by a local commercial station in comparison to other local
commercial stations in the market ("in-market share"), as measured sign-on
to sign-off. KRON's affiliation with NBC ended on December 31, 2001, when
their affiliation agreement expired.
(7) WTEN has a satellite station, WCDC (Adams, Massachusetts), Channel 19,
operating under a separate license from the FCC.
(8) KELO has three satellite stations, KDLO (Florence, South Dakota), Channel
3, KPLO (Reliance, South Dakota), Channel 6, and KCLO (Rapid City, South
Dakota), Channel 15, each of which operates under a separate license from
the FCC. KCLO operates in a separate DMA from that of KELO and the other
two satellites, wherein it ranks 172.
The following is a description of each of the Company's stations:
KCAL, Los Angeles, California. The Company acquired KCAL from KCAL
Broadcasting, Inc., a subsidiary of The Walt Disney Company, on November 22,
1996. KCAL has the distinction of being one of the first commercial stations in
the country. KCAL's first broadcast was on December 23, 1931. It is now the
only independent VHF station in the Los Angeles market. Los Angeles is the
second largest DMA with an estimated 5,303,490 television households and the
country's largest television market in terms of estimated advertising dollars
spent on the medium. There are twelve reportable stations in the DMA. For the
November 2001 ratings period, KCAL was tied for seventh in rank after the local
ABC, NBC, CBS, WB, Fox and UPN affiliates, with an overall sign-on to sign-off
in-market share of 7.6%.
5
KCAL is a prominent news provider in the market, presenting 33.5 hours of
such programming each week and more than 13 half-hour specials. In 1995, the
station won the prestigious Edward R. Morrow Award as the "Best Local Newscast
in the Country." In 1996, KCAL was honored with nine Golden Mikes, including
Best 30 Minute Newscast and Best Daytime newscast, ten Emmy, five Radio
Television News Directors awards, ten New York Film Festival Awards, 17
Associated Press Awards and 31 Los Angeles Press Club Awards. In 1997, KCAL won
five Golden Mikes. In 1998, KCAL won eight Emmys and four Golden Mikes. In
1999, KCAL won two Emmys for live sports coverage and two Golden Mikes for news
coverage. In 2000, KCAL won nine Emmys for news and sports coverage, including
"Best Hour-Long Newscast"--more than any other Los Angeles station. KCAL also
won three Golden Mikes for its coverage in 2000. KCAL's coverage of politics
including the Democratic National Convention in Los Angeles was a high point of
2000 coverage. Since 1991, KCAL has been the most honored local station in Los
Angeles for news.
KCAL is also the broadcast station of choice for premier local sports
franchises with over 130 major televised sporting events each year. KCAL has
won numerous Emmy Awards and currently has agreements with the Los Angeles
Lakers (three and a half years remaining), Anaheim Angels (four years
remaining), Mighty Ducks of Anaheim (three and a half years remaining), and the
Los Angeles Galaxy (one year remaining). The station also has agreements to
broadcast the Los Angeles Marathon, the John Wooden Classic and the Los Angeles
Triathlon. These contracts enable KCAL to offer advertisers year-round sports
packages aimed at very attractive audience categories. The station's syndicated
programs include People's Court, Inside Edition, Family Feud, Judge Joe Brown,
Judge Mathis, Crossing Over, Change of Heart and Elimidate.
As the largest market in the country's largest state, Los Angeles enjoys a
diverse industry makeup ranging from entertainment and manufacturing to
international trade and financial services. In addition to Los Angeles County,
KCAL reaches Orange, Santa Barbara and other counties in Southern California.
Orange County alone has ranked fifth, nationally, in both population and
population growth over the last five years. According to Investing in
Television Market Report 2001 (4th Edition), published by BIA Publications,
Inc. (the "BIA Guide"), the average household income in the Los Angeles market
in 2000 was $49,261, with an effective buying income projected to grow at an
annual rate of 2.8% through 2005. Historically, there has been a close
correlation between retail sales and expenditures on broadcast television
advertising in a given market. According to the BIA Guide, retail sales growth
for the Los Angeles market is projected to average 5.2% annually through 2005.
On February 12, 2002, the Company agreed to sell the assets of KCAL to CBS
Broadcasting Inc. in an all cash transaction valued at approximately $650
million. This transaction is expected to close in mid-year 2002, and is subject
to Federal Communications Commission review and the expiration of antitrust
waiting period.
KRON, San Francisco, California. The Company acquired KRON from The
Chronicle Publishing Company on June 26, 2000. KRON is a VHF television station
in the San Francisco Bay Area, the fifth largest television revenue market in
the country, based on television households. KRON was an NBC affiliate since it
was first granted an FCC license in 1949. KRON became an independent station as
of January 1, 2002 after its affiliation agreement with NBC expired on December
31, 2001 in accordance with its terms. The Company expects to incur increased
programming costs as a result of KRON becoming an independent station.
The San Francisco Bay Area, referred to as the San Francisco-Oakland-San
Jose DMA, is an attractive market for advertisers given its size, demographics
and powerful economy. The San Francisco Bay Area is comprised of eleven
counties that border or lie in close proximity to San Francisco and includes
the major cities of San Francisco, San Jose and Oakland as well as Silicon
Valley. The San Francisco Bay Area has a total population of approximately 6.8
million with approximately 2.5 million television households. The San Francisco
Bay Area population is particularly affluent with a per household annual
average income of approximately $61,572, which ranks first in the nation. The
California economy ranks as the 5th largest in the world.
6
KRON has traditionally distributed its news content through as many local
outlets as possible to increase the public awareness of KRON's news programs.
By having its news product on a variety of distribution outlets, KRON seeks to
attract viewers to its regular newscasts and thereby increase its ratings and
advertising base.
KRON maintains strong relationships with most of the major studios and has
successfully negotiated competitive programming contracts with several of them.
This has enabled KRON to secure such hit shows as Entertainment Tonight,
Frasier and Judge Judy under favorable terms through the 2003-2004 season.
KRON's plan is to become a hyper-local television station. This will be
accomplished with a significant expansion of local news programming, continued
expansion of other local programming, as well as the acquisition of quality
syndicated programming. News expansion will be a significant factor in the new
schedule. While continuing in the existing traditional time slots, local news
production had doubled the previous amount of news programming. Syndicated
programming has been secured for other dayparts including long-term renewals of
Entertainment Tonight, Frasier, Judge Judy, and Judge Joe Brown. The station
has also acquired Dr. Phil, Inside Edition and X-Files. These programs will be
supplemented by strong local programming such as Bay Area Backroads and Bay
Cafe. KRON will also continue a monthly series of outstanding documentaries and
specials under the umbrella of "KRON 4 Presents."
WKRN, Nashville, Tennessee. WKRN was acquired by the Company from
Knight-Ridder Broadcasting, Inc. in June 1989, began operations in 1953 and is
affiliated with ABC. The Nashville market is the 30th largest DMA, with an
estimated 879,030 television households. There are six reportable stations in
the DMA. For the November 2001 ratings period, WKRN was rated third after the
CBS and NBC affiliates, with an overall sign-on to sign-off in-market share of
21%. The station's syndicated programs include Live with Regis and Kelly,
Rosie, Judge Judy, Wheel of Fortune and the sitcom, Friends.
Despite a challenging sales environment, the station has outperformed the
market for the first three quarters of 2001. Additionally, the quality and
ratings of the station's newscasts have improved dramatically in recent years.
News 2 has won the prestigious Peabody Award for investigative journalism and
has been nominated for 30 Emmys including Best Newscast and News Excellence.
WKRN won the 2002 Mid-South Emmy for News Excellence.
Nashville is the capital of Tennessee and the center of local, state and
federal government with three of its five largest employers being government
related. Prominent corporations located in the area include Dell Computer,
Nissan, Saturn, Columbia/HCA, Shoney's, Bell South and Gaylord Entertainment.
Nashville is the home of several universities, including Vanderbilt and
Tennessee State. According to the BIA Guide, the average household income in
the Nashville market in 2000 was $46,212, with effective buying income
projected to grow at an annual rate of 6.2% through 2005. Historically, there
has been a close correlation between retail sales and expenditures on broadcast
television advertising in a given market. According to the BIA Guide, retail
sales growth for the Nashville market is projected to average 7.0% annually
through 2005.
WKRN is a prime example of the Company's strategy to achieve a strong local
presence and has been recently nominated for Nashville's Corporate Donor of the
Year for its commitment to community activities. Public Service involvement
ranges from raising food for the hungry, to raising funds for The Ronald
McDonald House, to focusing on the issues and concerns of children through its
"Kids to Kids" campaign and "One for the Community" fund raising effort.
ABC affiliates in Bowling Green, Kentucky and Jackson, Tennessee have
overlapping signals with WKRN on the north and west edges of the DMA, resulting
in some loss of viewers in those areas. The Company believes this overlap is in
part responsible for the lower station share compared to the NBC and CBS
affiliates.
7
WTEN, Albany, New York. WTEN was acquired by the Company from Knight-Ridder
Broadcasting, Inc. in October 1989, began operations in 1953 and is affiliated
with ABC. WTEN added a satellite station, WCDC-TV Channel 19, in Adams,
Massachusetts in 1963 to serve more adequately the eastern edge of the market.
WCDC-TV was acquired concurrently with WTEN. (All references to WTEN include
WCDC-TV).
The Albany market (which includes Schenectady and Troy) is the 57th largest
DMA, with an estimated 514,770 television households. There are seven
reportable stations in the DMA, three of which broadcast in the VHF spectrum.
During the November 2001 ratings period, WTEN was third in the ratings, with a
sign-on to sign-off in-market share of 21%, compared to 33% for WNYT, the NBC
affiliate, 30% for WRGB, the CBS affiliate, 12% for WXXA, the Fox affiliate, 0%
for WYPX, the PAX station, and 4% for WEWB, the WB affiliate, which signed on
as of September 1999. The station's syndicated programs include Wheel of
Fortune, Jeopardy, Rosie, and Judge Judy. WTEN has won numerous awards in
recent years for both local news and public affairs programming.
Albany is the capital of New York. The largest employers are the New York
State government, the State University of New York and the General Electric
Company. Other prominent corporations located in the area include Lockheed
Martin, Chubb Corp, State Farm Insurance, Key Corp. and Quad Graphics. These
employers, which are dependent upon a well-educated and skilled labor force to
remain competitive in their industries, are able to draw upon the nation's
largest concentration per capita of professionals with doctoral and
post-doctoral degrees. According to the BIA Guide, the average household income
in the Albany market in 2000 was $43,571, with effective buying income
projected to grow at an annual rate of 2.6% through 2005. Retail sales growth
in this market is also projected by the BIA Guide to average 4.7% annually
during the same period.
The station has focused on its local newscasts, selective syndicated program
acquisitions and client marketing programs to maximize revenues. Selective use
of sales marketing programs has generated over $1.6 million of new incremental
revenue in 2001.
WRIC, Richmond, Virginia. WRIC was acquired by the Company in November 1994
from Nationwide Communications Inc. ("Nationwide"), began operations in 1955
and is affiliated with ABC. The Richmond market (which also includes
Petersburg, Virginia) is the 58th largest DMA, with an estimated 504,990
television households. There are five reportable commercial television stations
in the DMA, three of which are VHF stations. For the November 2001 ratings
period, WRIC was in third place in the ratings, eight points behind WWBT, the
NBC affiliate, and one point behind WTVR, the CBS affiliate, with a sign-on to
sign-off in-market share of 25% compared to 33% for WWBT and 26% for WTVR. The
station's syndicated programming includes Wheel of Fortune, Oprah, Jeopardy,
Maury Povich, and Jerry Springer. WRIC has won numerous awards in recent years
from state journalism organizations for its news operations.
Richmond is the capital of Virginia and home to numerous colleges and
universities, including the University of Richmond, Virginia Commonwealth
University (VCU) and the Medical College of Virginia. Capital One is the
largest employer in the market, employing 8,642 residents. According to the BIA
Guide, the average household income in the Richmond market in 2000 was $45,728
with effective buying income projected to grow at an annual rate of 4.2%
through 2005. Retail sales growth is also projected by the BIA Guide to average
3.4% annually during the same period.
WATE, Knoxville, Tennessee. WATE was acquired by the Company in November
1994 from Nationwide, began operations in 1953 and is also affiliated with ABC.
The Knoxville, Tennessee market is the 62nd largest DMA, with an estimated
478,190 television households. There are five reportable stations in the DMA,
three of which are VHF stations. During the November 2001 ratings period, WATE
ranked third, with a sign-on to sign-off in-market share of 21%. The station's
syndicated programming includes Inside Edition, Access Hollywood, Judge Judy,
Oprah, Millionaire and Rosie. WATE has won numerous awards in recent years
8
from state journalism organizations, including Emmy Awards from the Tennessee
Chapter of NATAS. In 2000, WATE also received three Edward R. Murrow regional
awards for writing, use of video and sports reporting, as well as two American
Cancer Society regional honors. In 2001, the station was nominated for two
Regional Emmy Awards.
According to the BIA Guide, the average household income in the Knoxville
market in 2000 was $39,299 with effective buying income projected to grow at an
annual rate of 5.3% through 2005. Retail sales growth is also projected by the
BIA Guide to average 6.3% annually during the same period.
WBAY, Green Bay, Wisconsin. WBAY, the third station acquired by the Company
in November 1994 from Nationwide, began operations in 1953 and is also
affiliated with ABC. The Green Bay market (which also includes Appleton,
Wisconsin) is the 69th largest DMA, with an estimated 406,340 television
households. There are six reportable stations in the DMA, four of which are VHF
stations. For the November 2001 ratings period, WBAY was second in the ratings
with a sign-on to sign-off in-market share of 26%. The station's syndicated
programming includes Home Improvement, Friends, Martha Stewart, Rosie,
Millionaire, Dr. Phil and Spin City.
WBAY has won many state and regional awards for excellence from Associated
Press, the Milwaukee Press Club and most recently the Wisconsin Broadcasters
Association first place award for best spot news coverage in medium size
markets and a Mid-West Regional Emmy for promotion production.
WBAY sponsors public service campaigns for Children First, Toys for Tots,
Scouting for Food, A Taste of Wine and Cheese and The Brett Favre Challenge
which raise over $250,000 for the Boys and Girls Club of Green Bay, Families of
Distinction, which recognizes role model area families and is an important fund
raiser for the local YMCA, and many others. WBAY has produced and aired for the
past 47 years the telethon for local Cerebral Palsy Inc. Last year's telethon
raised $750,000 for the organization.
The station's primary focus is local news. That includes early morning
(5AM-7AM), Noon, 5PM, 6PM, 10PM and weekends.
According to the BIA Guide, the average household income in the Green Bay
market in 2000 was $43,113, with effective buying income projected to grow at
an annual rate of 4.5% through 2005. Retail sales growth is also projected by
the BIA Guide to average 5.0% annually during the same period.
KWQC, Quad Cities. The Company acquired KWQC from Broad Street Television,
L.P. on April 15, 1996. The station began operations in 1949 and is affiliated
with NBC. The Davenport market, referred to as the Quad Cities Market, is the
92nd largest DMA serving an estimated 304,350 television households in eastern
Iowa and western Illinois. There are five reportable stations in the DMA, three
of which are VHF. During the November 2001 ratings period, KWQC retained its
number one position in the market with a sign-on to sign-off in-market share of
46%. The station has retained the number one position for over fifteen years
and continues to expand news programming and increase market share. The
station's syndicated programming includes Oprah, Jeopardy, Wheel of Fortune,
Martha Stewart, Hollywood Squares and Inside Edition.
KWQC places a strong emphasis on local news and community related events and
broadcasts. The station annually produces several news specials in addition to
providing 25 hours of local news and information programming per week. KWQC is
involved in a variety of community events including Race For The Cure, Toys For
Tots, Festival of Trees, The Student Hunger Drive, the United Way Drive, Bix 7
Race and Women's Lifestyle Fair.
John Deere Corporation and Eagle Country Markets are both headquartered in
the Quad Cities. Other major employers include the Rock Island Arsenal, Alcoa,
Trinity Medical Center, Oscar Mayer, Ralston Purina, J.I. Case and Modern
Woodman. Riverboat gambling has brought three boats to the market that have
increased the
9
tourism business. The market has also experienced an increase in convention
business. According to the BIA Guide, the average household income in the Quad
Cities market in 2000 was $42,667, with effective buying income projected to
grow at an annual rate of 3.8% through 2005. Retail sales growth is also
projected by the BIA Guide to average 4.9% annually during the same period.
WLNS, Lansing, Michigan. WLNS, which was acquired by the Company from Backe
Communications, Inc. in September 1986, began operations in 1950 and is
affiliated with CBS. The Lansing market is the 111th largest DMA, with an
estimated 238,340 television households. WLNS is one of only two VHF network
affiliates in the DMA. During the November 2001 ratings period, WLNS was the
highest-rated station out of six reportable stations in its DMA, with a sign-on
to sign-off in-market share of 33%. The station's syndicated programming
includes Rosie, Entertainment Tonight, Hollywood Squares, Dr. Phil and Montel
Williams.
WLNS-TV attributes its long success to a commitment to local news and
community service, which has been unmatched in the Lansing market. Newscenter 6
broadcasts 24 hours per week of local news, including two hours from 5 a.m. to
7 a.m. weekdays, plus the only midday local newscast in the market. The
station's 6 p.m. newscast remains the area's single most viewed television
newscast. A WLNS trademark through the years has been the ability to develop
innovative partnerships as a means to address vital community issues. In 1999,
WLNS and Farm Bureau Insurance collaborated to purchase Lansing's only Doppler
radar which brought real time weather information to the market for the first
time, and has been credited with providing emergency warnings to tens of
thousands of people before the National Weather Service could act. In 2000,
Newscenter 6 and Ingham Regional Medical Center formed Partners in Health, a
unique multi-media approach to providing consumers with health and medical
information including the use of sophisticated video streaming techniques on
the Internet demonstrating advances in surgical procedures. Since 1993, WLNS-TV
has partnered with Crimestoppers to broadcast information about unsolved crimes
and offer information to help viewers avoid becoming victims of crime. The
WLNS-Crimestoppers effort has resulted in the arrest of many fugitive felons
and solved several major crimes over the years. That program has also recently
expanded to include the station's web site.
The economy of Lansing is dominated by three employers, the State of
Michigan, General Motors and Michigan State University, giving Lansing an
advantage over other Michigan cities whose economies rely more heavily on, and
are more prone to the cyclical nature of, the domestic automobile industry.
Lansing is the capital of Michigan and its various government agencies employ
an aggregate of approximately 15,500 people. General Motors has approximately
12,000 employees. Michigan State University has over 12,000 employees with a
student enrollment of over 42,000. Other significant industry sectors in the
area are plastics, non-electrical machinery, fabricated metal products, food
processing and printing. Companies represented in these groups include
Owens-Brockway, John Henry Co. and Dart Container. According to the BIA Guide,
the average household income in the Lansing market in 2000 was $43,219, with
effective buying income projected to grow at an annual rate of 3.0% through
2005. Retail sales growth in this market is also projected by the BIA Guide to
average 2.7% annually during the same period.
KELO, Sioux Falls, South Dakota. The Company acquired KELO from a
subsidiary of Midcontinent Media, Inc. on May 31, 1996. The station began
operations in 1953 and is affiliated with CBS. KELO added satellite station
KDLO, Channel 3, in Florence, South Dakota in 1955 to serve the northern South
Dakota area, and added satellite station KPLO, Channel 6, in Reliance, South
Dakota in 1957 to serve the central South Dakota area. In 1988, KCLO, Channel
15, then operating as a translator facility, was added as a satellite station
of KELO in Rapid City, South Dakota. KELO fully serves two DMAs, as Rapid City
is a separate contiguous DMA. (All references to KELO include KDLO and KPLO.
The following information pertains only to the Sioux Falls DMA.)
The Sioux Falls market is the 112th largest DMA serving an estimated 237,790
television households encompassing counties in Minnesota, Iowa and Nebraska, as
well as 51 counties within South Dakota. There are
10
five reportable stations in the DMA, three of which are VHF. During the
November 2001 ratings period, KELO was first in the market with a sign-on to
sign-off in-market share of 48%, significantly ahead of the ABC, NBC and FOX
affiliates, who had 26%, 14% and 12%, respectively. KELO's newscast finished
ahead of each of the competing stations for every weekday and weekend newscast
time period. Recognizing the importance of local news, the station presents
live newscasts seven times daily, with notable ratings and sales success. The
station's revenue market share in 2001 was 49%. The projected market share in
2002 is 51%. The station's syndicated programming includes Rosie, Entertainment
Tonight, Oprah and Hollywood Squares.
The largest employers in the market are Sioux Valley Hospital & Health
Systems and Citibank. Sioux Falls is the largest city in South Dakota, with a
population of 127,900. According to the BIA Guide, the average household income
in the Sioux Falls market in 2000 was $44,363, with effective buying income
projected to grow at an annual rate of 5.5% through 2005. Retail sales growth
is also projected by the BIA Guide to average 4.2% annually during the same
period.
KLFY, Lafayette, Louisiana. KLFY was acquired by the Company from Texoma
Broadcasters, Inc. in May 1988, began operations in 1955 as the market's first
television station and is affiliated with CBS. KLFY is one of only two
network-affiliated VHF stations serving the Lafayette market. The third
commercial station in the market is a Fox affiliate operating on a UHF channel
and a fourth Station, KLAF, is a lower power station affiliated with the UPN
and Warner Brothers Network. The market is dominated by KLFY and the local ABC
affiliate. The signals from the NBC affiliates in Lake Charles, Baton Rouge and
Alexandria, Louisiana are available to households in the DMA. Since 1994, the
NBC affiliate in Lake Charles is selling advertising in the Lafayette market
with minimal success.
The Lafayette market is the 124th largest DMA, with an estimated 212,510
television households. KLFY ranks first in the November 2001 ratings period
with an overall sign-on to sign-off in-market share of 55%, and has ranked
first in those viewership measurements consistently for prior ratings periods.
KLFY leads its competition in audience share in all major Nielsen dayparts.
KLFY is ranked number one during prime-time (7:00 p.m.-10:00 p.m.,
Monday-Saturday and 6:00 p.m.-10:00 p.m., Sunday), the most sought after
advertiser demographic time period, with an in-market share of 46%. The
station's syndicated programs include The Maury Povich Show, Entertainment
Tonight, Rosie, Sally Jessy Raphael, Home Improvement, Extra, Dr. Phil,
Millionaire and Living Better.
Historically, KLFY has placed a strong emphasis on local news and
community-related broadcasts. Each weekday begins with a 180-minute live
production of "Passe Partout," a family-oriented program offering early morning
news, weather, sports and interviews on subjects relevant to local residents.
For the November 2001 ratings period, this program received a 6:00-7:00 a.m.
in-market share of 56%. The first 30 minutes of "Passe Partout" are broadcast
in French for the large French-speaking Cajun population in the area; the
balance is in English. KLFY also has won numerous awards in recent years from
state journalism organizations, including the 1995, 1998, 2000 and 2001
"Station of the Year" award from the Louisiana Broadcasters Association.
KLFY has made community involvement an important part of its operations. The
12:00 noon news show is called "Meet Your Neighbor" and, in addition to an
emphasis on local news reporting, is a platform for community service segments.
In addition to ongoing commitments to blood drives, food and clothing drives, a
big brother/big sister program and animal adoptions, the station has been the
motivating force behind some unusual projects. "Wednesday's Child" is a
nationally recognized weekly segment featuring a child in need of adoption, and
the effort has had a significant success rate in placing children. The station
has over the past 15 years raised over 3,500 tons of food for the hungry with
its annual "Food for Families" all-day live remote from 18 locations in the
DMA. It has an annual "Coats for Kids" campaign to clothe needy children and
has raised over $13 million for the Muscular Dystrophy Association's ("MDA")
annual telethon. For its efforts, the station has received awards from state
and national service organizations, including the MDA's special recognition
award and Media of the Year awards from the Louisiana Special Olympics and the
Black Advisory Adoption Committee.
11
According to the BIA Guide, the average household income in the Lafayette
market in 2000 was $37,100, with effective buying income projected to grow at
an annual rate of 5.4% through 2005. Retail sales growth in this market is also
projected by the BIA Guide to average 5.3% annually during the same period.
WTVO, Rockford, Illinois. WTVO, the ABC affiliate in Rockford, Illinois
began operations in 1953 under the ownership of Winnebago Television
Corporation. The Company purchased Winnebago Television Corporation in
September 1988. WTVO switched its affiliation from NBC to ABC, effective as of
August 14, 1995.
The Rockford market is the 132nd largest DMA, with an estimated 176,060
television households. There are five reportable stations in the DMA, of which
one is a VHF station and the others, including WTVO, are UHF stations. In the
November 2001 ratings period, WTVO was number three in the market, with a
sign-on to sign-off in-market share of 22%, compared to 29% and 33% for the CBS
and NBC affiliates, respectively. The station's syndicated programs include
Sally Jessy Raphael, Rosie, Hollywood Squares, Judge Judy, Dr. Phil,
Millionaire and Extra. The station produces local interest programs such as
Spotlight 17, Friday Football Blitz and Friday Basketball Blitz.
WTVO's DMA encompasses a five-county area of northern Illinois, northwest of
Chicago. Rockford is the second largest city in Illinois. Over 1,000
manufacturing firms employ a total of over 50,000 persons in the Rockford area,
specializing in machine tool, automotive, aerospace, and consumer product
industries. Prominent manufacturers in the area include Hamilton-Sundstrand
Corporation, the area's largest employer, Ingersoll Milling Machine Company and
Daimler/Chrysler Corporation's Neon facility. UPS has constructed a $60.0
million Midwestern freight hub at Rockford. According to the BIA Guide, the
average household income in the Rockford market in 2000 was $45,378, with
effective buying income projected to grow at an annual rate of 3.2% through
2005. Retail sales growth in this market is also projected by the BIA Guide to
average 3.8% annually during the same period.
Industry Background
General. 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. Television stations can
be distinguished by the frequency on which they broadcast. Television stations
broadcast over the very high frequency ("VHF") band (channels 2-13) of the
spectrum generally have some competitive advantage over television stations
which broadcast over the ultra-high frequency ("UHF") band (channels above 13)
of the spectrum because the former usually have better signal coverage and
operate at a lower transmission cost. However, the improvement of UHF
transmitters and receivers, the complete elimination from the marketplace of
VHF-only receivers and the expansion of cable television systems have reduced
the VHF signal advantage. Any disparity between VHF and UHF is likely to
diminish even further in the coming era of digital television. See--"Federal
Regulation of Television Broadcasting" below.
The Market for Television Programming. Television station revenue is
primarily derived from local, regional and national advertising and, to a
lesser extent, from network compensation and revenue from studio rental and
commercial production activities. Advertising rates are based upon a variety of
factors, including 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 makeup of the market served by the station, and the
availability of alternative advertising media in the market area. Rates are
also determined by a station's overall ratings and share in its market, as well
as the station's ratings and share among particular demographic groups which an
advertiser may be targeting. Because broadcast television stations rely on
advertising revenue, declines in advertising budgets, particularly in
recessionary periods, adversely affect the broadcast industry, and as a result
may contribute to a decrease in the revenue of broadcast television stations.
12
All television stations in the country are grouped by Nielsen, a national
audience measuring service, into approximately 210 generally recognized
television markets that are ranked in size according to various formulae based
upon actual or potential audience. Each DMA is determined as an exclusive
geographic area consisting of all counties in which the home-market commercial
stations receive the greatest percentage of total viewing hours. Nielsen
periodically publishes data on estimated audiences for the television stations
in the various television markets throughout the country. The estimates are
expressed in terms of the percentage of the total potential audience in the
market viewing a station (the station's "rating") and of the percentage of the
audience actually watching television (the station's "share"). Nielsen provides
such data on the basis of total television households and selected demographic
groupings in the market. Nielsen uses two methods of determining a station's
ability to attract viewers. In larger geographic markets, ratings are
determined by a combination of meters connected directly to select television
sets and weekly diaries of television viewing, while in smaller markets only
weekly diaries are completed. The Los Angeles, San Francisco, Richmond and
Nashville markets are metered.
Whether a station is affiliated with one of the four major networks (NBC,
ABC, CBS or Fox) has a significant impact on the composition of the station's
revenue, expenses and operations. A typical network affiliate receives the
majority of its programming each day from the network. This programming, along
with cash payments ("network compensation"), is provided to the affiliate by
the network in exchange for a substantial majority of the advertising time
during network programs. The network then sells this advertising time and
retains the revenue. The affiliate retains the revenue from time sold during
breaks in and between network programs and programs the affiliate produces or
purchases from non-network sources. A station may also be affiliated with one
of three newer national networks (UPN, WB and PAX TV). These newer networks
provide their affiliates with programming in much the same manner as the major
networks, although they generally supply less than that of the major networks.
Fully independent stations such as KCAL and KRON purchase or produce all of
the programming which they broadcast, resulting in generally higher programming
costs than those of major-network affiliates in the same market. However, under
increasingly popular barter arrangements, a national program distributor may
receive advertising time in exchange for programming it supplies, with the
station paying a reduced fee or no cash fee at all for such programming.
Because the major networks regularly provide first-run programming during prime
time viewing hours, their affiliates generally (but do not always) achieve
higher audience shares, but have substantially less inventory of advertising
time to sell during those hours than independent stations, since the major
networks use almost all of their affiliates' prime time inventory for network
shows. The independent station is, in theory, able to retain its entire
inventory of advertising and all of the revenue obtained therefrom. The
independent station's smaller audiences and greater inventory during prime time
hours generally result in lower advertising rates charged and more advertising
time sold during those hours, as compared with major affiliates' larger
audiences and limited inventory, which generally allow the major-network
affiliates to charge higher advertising rates for prime time programming. By
selling more advertising time, the independent station typically achieves a
share of advertising revenue in its market greater than its audience ratings.
Broadcast television stations compete for advertising revenue primarily with
other broadcast television stations, and to a lesser extent, with radio
stations and cable system operators serving the same market. Traditional
network programming, generally achieves higher audience levels than syndicated
programs aired by independent stations. However, since greater amounts of
advertising time are available for sale by independent stations, they typically
achieve a share of the television market advertising revenue greater than their
share of the market's audience. Public broadcasting outlets in most communities
compete with commercial broadcasters for viewers.
Developments in the Television Market. Through the 1970s, network
television broadcasting enjoyed virtual dominance in viewership and television
advertising revenue, because network-affiliated stations competed only with
each other in most local markets. Beginning in the 1980s, however, this level
of dominance
13
began to change as more local stations were authorized by the Federal
Communications Commission ("FCC") and marketplace choices expanded with the
growth of independent stations and cable television services. See "--Federal
Regulation of Television Broadcasting" below.
Cable television systems, which grew at a rapid rate beginning in the early
1970s, were initially used to retransmit broadcast television programming to
paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant competitor
for viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than
any major broadcast network. With the increase in cable penetration in the
1980s, the advertising share of cable networks has increased. Notwithstanding
such increases in cable viewership and advertising, over-the-air broadcasting
remains the dominant distribution system for mass market television
advertising. Basic cable penetration (the percentage of television households
which are connected to a cable system) in the Company's television markets
ranges from 61% to 78%.
In acquiring programming to supplement network programming, network
affiliates compete with independent stations and Fox affiliates in their
markets. Cable systems generally do not compete with local stations for
programming. Although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local television
stations, such programs would not likely have been acquired by such stations in
any event. In the past, the cost of programming increased dramatically,
primarily because of an increase in the number of new independent stations and
a shortage of desirable programming. Recently, however, program prices have
stabilized as a result of increases in the supply of programming.
Competition
Competition in the television industry takes place on several levels:
competition for audience, competition for programming (including news) and
competition for advertisers. Additional factors that are material to a
television station's competitive position include signal coverage and assigned
frequency. The broadcasting industry is continually faced with technological
change and innovation, the possible rise in popularity of competing
entertainment and communications media, and governmental restrictions or
actions of federal regulatory bodies, including the FCC and the Federal Trade
Commission, any of which could have a material effect on the Company's
operations.
Audience. Stations compete for audience on the basis of program popularity,
which has a direct effect on advertising rates. A majority of the daily
programming on the Company's stations is supplied by the network with which
each station is affiliated. In those periods, the stations are totally
dependent upon the performance of the network programs in attracting viewers.
There can be no assurance that such programming will achieve or maintain
satisfactory viewership levels in the future. Non-network time periods are
programmed by the station with a combination of self-produced news, public
affairs and other entertainment programming, including news and syndicated
programs purchased for cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the past
decade, have also emerged as viable competitors for television viewership
share. Each of AOL-Time Warner, Inc., Paramount Communications, Inc. and Paxson
Communications Corporation have recently launched a television network and
entered into affiliation agreements with certain independent commercial
television stations. The programming made available by these new networks is
presently limited, as compared to the major networks, but could increase in
light of recent ownership changes (AOL's acquisition of Time Warner and
Viacom's acquisition of CBS), combined with Viacom's pre-existing ownership of
Paramount Communications, Inc. The Company is unable to predict the effect, if
any, that such networks will have on the future results of the Company's
operations.
14
In addition, the development of methods of television transmission of video
programming other than over-the-air broadcasting, and in particular the growth
of cable television, has significantly altered competition for audience in the
television industry. These other transmission methods 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 a distribution system for non-broadcast programming originated on the cable
system. Through the 1970s, network television broadcasting enjoyed virtual
dominance in viewership and television advertising revenue because
network-affiliated stations competed only with each other in most local
markets. Although cable television systems were initially used to retransmit
broadcast television programming to paid subscribers in areas with poor
broadcast signal reception, significant increases in cable television
penetration occurred throughout the 1970s and 1980s in areas that did not have
signal reception problems. As the technology of satellite program delivery to
cable systems advanced in the late 1970s, development of programming for cable
television accelerated dramatically, resulting in the emergence of multiple,
national-scale program alternatives and the rapid expansion of cable television
and higher subscriber growth rates. Historically, cable operators have not
sought to compete with broadcast stations for a share of the local news
audience. Recently, however, certain cable operators have elected to compete
for such audiences, and the increased competition could have an adverse effect
on the Company's advertising revenue.
Other sources of competition include home entertainment systems (including
video cassette recorder and playback systems, videodisks and television game
devices), "wireless cable" service, satellite master antenna television
systems, low power television stations, television translator stations and,
most recently, direct broadcast satellite video distribution services which
transmit programming directly to homes equipped with special receiving antennas.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now being used with
current cable channels or direct broadcast satellites, reduce the bandwidth
required for television signal transmission. 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 is expected
to alter the competitive dynamics for advertising expenditures. The Company is
unable to predict the effect that these or other technological changes will
have on the broadcast television industry or the future results of the
Company's operations.
Programming. Competition for programming involves negotiating with national
program distributors or syndicators which sell first-run and rerun packages of
programming. The stations compete against in-market broadcast station
competitors for exclusive access to off-network reruns (such as Friends) and
first-run product (such as Entertainment Tonight) in their respective markets.
Cable systems generally do not compete with local stations for programming,
although various national cable networks from time to time have acquired
programs that would have otherwise been offered to local television stations.
Competition for exclusive news stories and features is also endemic in the
television industry.
Network owners Disney (ABC), AOL Time Warner (WB), News Corp (Fox) and
Viacom (CBS and UPN) also own or control a major production studio. Outside
production studios are the primary source of programming for the networks. It
is uncertain whether in the future, such programming, which is generally
subject to short-term agreements between the studios and the networks, will be
moved to commonly-owned networks.
Advertising. Advertising rates are based upon the size of the market in
which the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic makeup of the market served by the station, the
availability of alternative advertising media in the market area, aggressive
and knowledgeable sales forces, and development of projects,
15
features and programs that tie advertiser messages to programming. In addition
to competing with other media outlets for audience share, the Company's
stations also compete for advertising revenue, which comprise the primary
source of revenue for the Subsidiaries. The Company's stations compete for such
advertising revenue with other television stations in their respective markets,
as well as with other advertising media, such as newspapers, radio stations,
magazines, outdoor advertising, transit advertising, yellow page directories,
direct mail and local cable systems. Competition for advertising dollars in the
broadcasting industry occurs primarily within individual markets. Generally, a
television broadcasting station in the market does not compete with stations in
other market areas. The Company's television stations are located in highly
competitive markets.
Network Affiliation Agreements
Each of the Company's network-affiliated stations is affiliated with its
network pursuant to an affiliation agreement (an "Affiliation Agreement").
WKRN, WTEN, WRIC, WATE, WBAY and WTVO are affiliated with ABC. KELO, WLNS and
KLFY are affiliated with CBS. The Quad Cities Station (KWQC) is affiliated with
NBC.
In October 1994, the Company and ABC entered into new Affiliation Agreements
for five of the Company's ABC-affiliated stations. Effective August 14, 1995,
the Company switched the affiliation of its then sole NBC affiliate to ABC. In
addition, in September 1994, the Company and CBS entered into new Affiliation
Agreements for all of the Company's CBS-affiliated stations. Such Affiliation
Agreements with ABC and CBS provide for contract terms of ten years. The
Affiliation Agreement with NBC for the Quad Cities Station provides for a
ten-year term, with an expiration date of November 1, 2004. On April 3, 1996,
the Company and CBS entered into new Affiliation Agreements for KELO and each
of its satellite stations which expire on October 2, 2006.
Each Affiliation Agreement is automatically renewed for successive terms
subject to either party's right to terminate at the end of any term after
giving proper notice thereof. Under the Affiliation Agreements, the networks
also possess, under certain circumstances (such as a transfer of control or
adverse changes in signal, operating hours or other mode of operation), the
right to terminate the Affiliation Agreement on prior written notice ranging
between 15 and 45 days depending on the Affiliation Agreement. In addition, ABC
has the right upon 60 days prior notice to terminate the Affiliation Agreement
with respect to an ABC-affiliated station in a particular market if it acquires
a different station within such market.
Each Affiliation Agreement provides the affiliated 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 broadcasts. In addition, for each hour that the
station elects to broadcast network programming, the network pays the station a
fee, specified in each Affiliation Agreement, which varies with the time of
day. Typically, "prime-time" programming (Monday through Saturday from 8:00
p.m.-11:00 p.m., Eastern time, and Sunday from 7:00 p.m.-11:00 p.m., Eastern
time) generates the highest hourly rates. Management believes that programming
costs are generally lower for network affiliates than for independent
television stations and prime-time network programs generally achieve higher
ratings than non-network programs. Management believes that the Company's
relationship with the networks is excellent and that all of its stations are
highly valued affiliates.
As the Company expected, KRON has become an independent station and it is
likely that KRON will experience increased programming costs and generate lower
broadcast cash flow, which may adversely affect the Company's operating results.
As independent stations, KCAL and KRON purchase or produce all of their
programming, resulting in proportionally higher programming costs for the
stations. In this regard, KCAL and KRON retain their entire inventory of
advertising and all of the revenue obtained therefrom. Furthermore, KCAL and
KRON enter into barter arrangements whereby program distributors may receive
advertising time in exchange for the programming they provide.
16
FEDERAL REGULATION OF TELEVISION BROADCASTING
Existing Regulation
Television broadcasting is subject to the jurisdiction of the FCC under the
Communications Act of 1934, as amended (the "Communications Act"), most
recently amended in significant respects by the Telecommunications Act of 1996
(the "1996 Act"). The Communications Act empowers the FCC, among other things:
to determine the frequencies, location and power of broadcast stations; to
issue, modify, renew and revoke station licenses; to approve the assignment or
transfer of control of broadcast licenses; to regulate the equipment used by
stations; to adopt and implement regulations and policies concerning the
ownership and operation of television stations; and to impose penalties for
violations of the Communications Act or FCC regulations. The FCC has also
adopted children's programming regulations for television broadcasters that
effectively require most television broadcasters to air at least three hours
per week of programming designed to meet the educational and informational
needs of children age 16 and younger. Failure to observe these or other rules
and policies can result in the imposition of various sanctions, including
monetary forfeitures or, for particularly egregious violations, the revocation
of a license. The Company's business will be dependent upon its continuing
ability to hold television broadcasting licenses from the FCC.
License Renewals
As a result of the 1996 Act, broadcast licenses are now generally granted or
renewed for terms of eight years, though licenses may be renewed for a shorter
period upon a finding by the FCC that the "public interest, convenience and
necessity" would be served thereby. The FCC prohibits the assignment of a
license or the transfer of control of a broadcasting licensee without prior FCC
approval. The Company must apply for renewal of each broadcast license. At the
time an application is made for renewal of a license, parties in interest may
file petitions to deny, and such parties, as well as other members of the
public, may comment upon the service the station has provided during the
preceding license term and urge denial of the application. The FCC is required
to hold evidentiary, trial-type hearings on renewal applications if a petition
to deny renewal of such license raises a "substantial and material question of
fact" as to whether the grant of the renewal application would be inconsistent
with the public interest, convenience and necessity. The FCC must grant the
renewal application if after notice and an opportunity for a hearing, it finds
that the incumbent has served the public interest and has not committed any
serious violation of FCC requirements. If the incumbent fails to meet that
standard, and if it does not show other mitigating factors warranting a lesser
sanction, the FCC has the authority to deny the renewal application and
consider a competing application. While broadcast licenses are typically
renewed by the FCC, even when petitions to deny are filed against renewal
applications, there can be no assurance that the licenses for the Company's
television stations will be renewed at their expiration dates or, if renewed,
that the renewal terms will be for the maximum eight-year period. The
non-renewal or revocation of one or more of the Company's primary FCC licenses
could have a material adverse effect on its operations. The main station
licenses for the Company's television stations expire on the following dates:
WRIC, October 1, 2004; KLFY, June 1, 2005; WKRN, August 1, 2005, WATE, August
1, 2005; WLNS, October 1, 2005; WBAY, December 1, 2005; WTVO, December 1, 2005;
KWQC, February 1, 2006; KCLO, April 1, 2006; KELO, April 1, 2006; KDLO and KPLO
(satellites of KELO), April 1, 2006; KCAL, December 1, 2006; KRON, December 1,
2006; WTEN, June 1, 2007; WCDC, WTEN's satellite station, April 1, 2007.
Multiple Ownership Restrictions
The Communications Act and FCC rules and regulations also regulate broadcast
ownership. The FCC has promulgated rules that, among other matters, limit the
ability of individuals and entities to own or have an official position or
ownership interest, known as an attributable interest, above a specific level
in broadcast stations as well as other specified mass media entities. As
detailed below, in August 1999, the FCC substantially revised a number of its
multiple ownership and attribution rules. Although these rules became effective
November 16, 1999, they may still be modified in subsequent proceedings. In
three separate orders, the FCC revised its rules regarding restrictions on
television ownership, radio-television cross-ownership, and attribution
17
of broadcast ownership interests. The three orders resolved several long
pending rule-making proceedings and responded, in part, to certain directives
in the 1996 Act, where Congress liberalized the radio ownership rules and
directed the FCC to consider certain additional deregulatory measures for
television. On January 19, 2001, the FCC released separate orders on
reconsideration, largely affirming the 1999 decisions. Certain changes to
various rules were, however, adopted. The FCC's key broadcast ownership rules,
inclusive of the recent reconsideration orders, are summarized below.
Local Television Ownership
The FCC's TV "duopoly" rule permits parties to own TV stations located in
separate designated market areas ("DMAs") without regard to signal contour
overlap. In addition, the rule permits parties to own up to two television
stations in the same DMA so long as at least eight independently owned and
operated full-power television stations remain in the market at the time of
acquisition and at least one of the two stations is not among the top
four-ranked stations in the market based on audience share. Furthermore,
without regard to numbers of remaining independently owned TV stations, the FCC
will permit common ownership of television stations located within the same DMA
so long as certain signal contours of the stations involved do not overlap.
Satellite stations that simply rebroadcast the programming of a "parent"
station continue to be exempt from the duopoly rule if located in the same
designated market area as the "parent" station. The duopoly rule also applies
to same-market Local Marketing Agreements ("LMAs") involving more than 15% of
the brokered station's program time, although certain LMAs were exempted from
the TV duopoly rule for a limited period of time of either two or five years,
depending on the date of the adoption of the LMA. Further, the FCC may grant a
waiver of the TV duopoly rule if one of the two television stations is a
"failed" or "failing" station, or the proposed transaction would result in the
construction of a new television station. In its January 19, 2001
reconsideration order, which largely affirmed the new duopoly rules, the FCC
modified the rules to require that, in order for a television station to count
toward the minimum number of independent stations necessary for FCC approval of
a proposed duopoly, its Grade B signal contour must overlap the Grade B signal
contour of at least one of the TV stations involved in the proposed
combination. The FCC rules permitting duopolies within a single DMA under
certain conditions have been appealed to the federal appellate court for the
D.C. Circuit. In light of this appeal, the court stayed the portion of the
rules requiring divestiture in cases of existing duopolies that fail to qualify
under the rules.
National Television Ownership Cap
On the national level, the 1996 Act raised the national audience coverage
restriction on television station ownership from 25% to 35% of the national
audience. Accordingly, one party may not have an attributable interest in
television stations which reach more than 35% of all United States television
households. Under the FCC's rules, if entities have attributable interests in
two stations in the same market, the FCC will count the audience reach of that
market only once for purposes of applying the national cap.
In a decision announced on February 19, 2002, the federal appellate court
for the D.C. Circuit vacated the FCC's determination in May 2000 to retain the
national ownership cap, ordering the FCC to conduct further proceedings on the
issue. In doing so, the court seemingly placed a high burden on the FCC to
justify retention of the rule unchanged. In addition to further proceedings
before the FCC, it is possible that there will be additional appeals or action
by Congress. A decision ultimately striking down the cap, or relaxing the rule
in some significant fashion, would allow the major networks and other station
groups to increase their ownership of local broadcast stations.
Cable/Television Cross Ownership
The cable/television cross-ownership rule effectively prohibits joint
ownership of a broadcast television station and a cable system in the same
market. In a decision announced February 19, 2002, the federal appellate court
for the D.C. Circuit vacated the FCC's determination in May 2000 not to repeal
or modify this rule. The
18
court's order does not call for further agency proceedings, but instead
specifically directs the FCC "to repeal the . . . rule forthwith." It is
unclear whether any further judicial proceedings may be initiated in connection
with this action.
Newspaper/Broadcast Cross-Ownership
The newspaper/broadcast cross-ownership rule, adopted by the FCC as part of
a series of broadcast ownership restrictions in the 1970s, generally prohibits
one entity from owning both a commercial broadcast station and a daily
newspaper in situations in which the predicted or measured contours of the
station encompass entirely the community in which the newspaper is published.
The FCC recently released a Notice of Proposed Rule-making to reconsider these
restrictions. The FCC has asked for comments on a wide variety of options,
including retention of the rule in its current form, modifying geographic
coverage areas, modifying media entities covered by the rule, applying a market
concentration or market voice count test or eliminating the rule completely.
Radio-Television Cross-Ownership
The so-called "one-to-a-market" rule has until recently prohibited common
ownership or control of a radio station, whether AM, FM or both, and a
television station in the same market, subject to waivers in some
circumstances. The FCC's current radio-television cross-ownership rule allows
radio/television combinations utilizing a graduated test based on the number of
independently owned media voices in the local market. In the largest
markets--i.e., markets with at least 20 independently owned media voices--a
single entity can own up to one television station and seven radio stations or,
if permissible under the TV duopoly rule, two television stations and six radio
stations. If the number of independently owned media voices is less than 20 but
at least 10, the number of radio stations that can be owned by a television
licensee in the same market drops to 4. If the media voices number less than
10, a television licensee can only own 1 radio station in the same market. In
its January 19, 2001 reconsideration order, the FCC, again largely affirming
its rule, modified the one-to-a-market rule to provide that in determining the
number of voices in the market, independently owned and operating, full-power
TV stations must not only be located in the same DMA as the TV station(s) at
issue, but the television station to be counted must also have a Grade B signal
contour that overlaps with the Grade B contour of the TV station(s) at issue.
Attribution of Ownership
Under the FCC's attribution rules, a direct or indirect purchaser of various
types of the Company's securities could violate FCC regulations or policies if
that purchaser owned or acquired an "attributable" interest in other media
properties in the same area as stations owned by the Company in a manner
prohibited by the FCC. Under the FCC's rules, an "attributable" interest for
purposes of applying the Commission's broadcast ownership rules generally
includes:
. equity and/or debt interests, which combined exceed 33% of a licensee's
total assets, if the interest holder supplies more than 15% of the
licensee's total weekly programming, or also holds an attributable
interest in a same-market media entity, whether TV, radio, cable or daily
newspaper (the "equity/debt plus" standard);
. 5% or greater voting stock interest. It should be noted that, in a
reconsideration order released January 19, 2001, the FCC eliminated its
single majority shareholder exemption. Under that exemption, otherwise
attributable interests up to 49% were non-attributable if the licensee
was controlled by a single majority shareholder and the interest holder
was not otherwise attributable under the foregoing "equity/debt plus"
standard. In eliminating the exemption, the FCC grandfathered minority
interests in a company with a single majority shareholder if the interest
was acquired before December 14, 2000 (the adoption date of the order).
Such grandfathering is permanent until the interest is assigned or
transferred. In March 2001, the D.C. Circuit remanded the FCC's decision
to eliminate the single
19
majority shareholder exemption with respect to cable ownership. In light
of the D.C. Circuit's remand, and given the relation between the rules
governing cable and broadcast ownership, the FCC issued a September 2001
Order suspending the elimination of the single majority shareholder
exemption with respect to both broadcast and cable ownership pending the
resolution of further proceedings;
. 20% or greater voting stock interest, if the holder is a qualified
passive investor;
. any equity interest in a limited liability company or limited
partnership, unless properly "insulated" from management activities; and
. all officers and directors (or general partners) of a licensee and its
direct or indirect parent.
At the time the Commission modified its broadcast attribution rules in
August 1999, all non-conforming interests acquired before November 7, 1996 were
permanently grandfathered and thus do not constitute attributable ownership
interests. Any non-conforming interests acquired after that date were required
to be brought into compliance by August 5, 2000.
Alien Ownership Restrictions
The Communications Act restricts the ability of foreign entities to own or
hold interests in broadcast licensees. Foreign governments, representatives of
foreign governments, non-citizens, representatives of non-citizens and
corporations or partnerships organized under the laws of a foreign nation
(collectively, "aliens") are barred from holding broadcast licenses. Aliens may
directly or indirectly own up to one-fifth of the capital stock of a licensee.
In addition, a broadcast license may not be granted to or held by any
corporation that is controlled, directly or indirectly, by any other
corporation more than one-fourth of whose capital stock is owned or voted by
aliens, if the FCC finds that the public interest will be served by the refusal
or revocation of such license. The FCC has interpreted this provision of the
Communications Act to require an affirmative public interest finding before a
broadcast license may be granted to or held by any such corporation, and the
FCC has made such affirmative findings only in limited circumstances. As a
result of these provisions, the Company, as a holding company for its various
television station license subsidiaries, cannot have more than 25% of its
capital stock owned or voted by aliens.
Satellite Transmission of Local Television Signals
In November 1999, Congress enacted the Satellite Home Viewer Improvement Act
of 1999 ("SHVIA"), which established a copyright licensing system for limited
distribution of television network programming to direct broadcast satellite
("DBS") viewers and directed the FCC to initiate rule-making proceedings to
implement the new system. SHVIA also extended the current system of satellite
distribution of distant network signals to unserved households (i.e., those
that do not receive a Grade B signal form a local network affiliate).
In its rule-making proceedings, the FCC established a market-specific
requirement for mandatory carriage of local television stations, similar to
that applicable to cable systems, for those markets in which a satellite
carrier chooses to provide any local signal, beginning January 1, 2002.
Stations in affected markets were required to make must-carry elections by July
1, 2001. The July 1, 2001 elections are effective from January 1, 2002 to
December 31, 2005.
The DBS industry challenged SHVIA and the FCC's DBS must-carry rules in
court. In December 2001, the federal appellate court for the Fourth Circuit
upheld the federal law that requires DBS carriers to carry the signals of all
local television stations in markets where they elect to carry any local
signals. The ruling means that, starting January 1, 2002, DBS operators were
required to carry all local television stations in the local markets they
currently serve unless they opt to discontinue local service to those markets.
The court also upheld an FCC rule that permits DBS operators to offer all local
television stations on a single tier or an a-la-carte basis.
20
Proposed Legislation and Regulation
The United States Congress and the FCC currently have under consideration,
and may in the future adopt, new laws, regulations and policies regarding a
wide variety of matters which could, directly or indirectly, affect the
operation and ownership of the Company's broadcast properties. The Company is
unable to predict the outcome of future federal legislation or the impact of
any such laws or regulations on its operations.
The 1992 Cable Act
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). Some of its
provisions, such as signal carriage and retransmission consent, have a direct
effect on television broadcasting. Under these provisions, television
broadcasters, on a cable system-by-system basis, must make a choice once every
three years whether to proceed under the "must carry" rules or to waive that
right to mandatory but uncompensated carriage and, instead, to negotiate a
grant of retransmission consent to permit individual cable systems to carry
their signals in exchange for some form of consideration.
The 1992 Cable Act was amended in several important respects by the 1996
Act. Most notably, the 1996 Act repeals the cross-ownership ban between cable
and telephone entities and the FCC's former video dial tone rules (permitting
telephone companies to enter the video distribution services market under
several new regulatory options). The 1996 Act also (a) eliminated the broadcast
network/cable cross-ownership limitation and (b) lifted the statutory ban on
TV/cable cross-ownership within the same market area (but did not eliminate the
separate FCC regulatory restriction on TV/cable cross-ownership). However, as
noted above, a federal appellate court decision vacated the separate FCC
TV/Cable cross-ownership restriction on February 19, 2002.
Digital Television Service
The FCC has taken a number of steps to implement digital television
broadcasting service in the United States. It has adopted a digital television
table of allotments that provided all authorized television stations with a
second channel on which to broadcast a digital television signal. In doing so,
it has attempted to provide digital television coverage areas that are
comparable to stations' existing service areas. The FCC has also ruled that
television broadcast licensees may use their digital channels for a wide
variety of services such as high-definition television, multiple channels of
standard definition television programming, audio, data, and other types of
communications, subject to the requirement that each broadcaster provide at
least one free video channel equal in quality to the current technical standard.
Digital television channels will generally be located in the range of
channels from channel 2 through channel 51. The FCC required affiliates of ABC,
CBS, Fox and NBC in the top 10 television markets (including KRON) to begin
digital broadcasting by May 1, 1999. Many other stations, including KCAL-TV,
the Company's independent station in Los Angeles, California, have also begun
digital broadcasting. Affiliates of the four major networks in the top 30
markets were required to begin digital broadcasting by November 1, 1999, and
all other commercial broadcasters, including all of the Company's remaining
stations, must do so by May 1, 2002. On January 19, 2001, the FCC issued a
Report and Order reviewing the digital television transition and resolving
certain issues concerning the conversion of broadcast television from analog to
digital. Among other things, the FCC affirmed the 8-VSB modulation system of
the DTV transmission standard, ordered commercial DTV stations to provide, by
December 31, 2004, a stronger signal to their communities of license than the
DTV service contour they were initially required to provide, and instituted
procedures for processing mutually exclusive DTV service area expansion
applications. On November 15, 2001, the FCC released an Order on
Reconsideration in which it modified several other rules it had adopted
previously in the January 19, 2001 Report and Order. Among other things, the
FCC said that it would extend the May 2002 DTV construction deadline on a
case-by-case basis, upon a detailed showing by a broadcaster that it will be
unable to meet the deadline for reasons beyond its control, such as equipment
delivery delays, zoning problems, and financial hardship. KRON, KCAL (see
above) and two of the Company's other stations have already completed the
build-out of their DTV
21
facilities. Several other of the Company's stations are reasonably close to
completion and all remaining stations have a firm plan for completion in place.
Nevertheless, the Company has recently filed applications with the FCC seeking
extensions of the May 2002 construction deadline for several of its remaining
stations. There can be no guarantee that the FCC will grant these extension
requests. If a station does not begin broadcasting by the deadline and is not
granted an extension by the FCC, it will be required to cease operation when
stations are required to abandon analog broadcasts. In its Order on
Reconsideration, the FCC also temporarily deferred several deadlines it had
adopted in its earlier Report and Order. Specifically, the FCC temporarily
deferred the deadlines for broadcasters to provide a DTV signal that replicates
their analog service area, to build maximized DTV facilities, and to choose
their permanent post-transition DTV channel. Further, the Order on
Reconsideration allows broadcasters to request special temporary authority to
construct initial minimal DTV facilities (i.e., facilities that only cover
their cities of license) while retaining interference protection for their
allotted and maximized facilities. Finally, the FCC's Order on Reconsideration
allows commercial broadcasters subject to the May 1, 2002 deadline to initially
operate their DTV stations on a reduced schedule that requires digital
broadcasting during prime time hours only.
The FCC's plan calls for the digital television transition period to end in
the year 2006, at which time the FCC expects that television broadcasters will
cease non-digital broadcasting and return one of their two channels to the
government, allowing that spectrum to be recovered for other uses. Under the
Balanced Budget Act, however, the FCC is authorized to extend the December 31,
2006 deadline for reclamation of a television station's non-digital channel if,
in any given market, one or more television stations affiliated with ABC, CBS,
NBC or Fox is not broadcasting digitally, and the FCC determines that such
stations have "exercised due diligence" in attempting to convert to digital
broadcasting; or less than 85% of the television households in the station's
market subscribe to a multichannel video service that carries at least one
digital channel from each of the local stations in that market, and less than
85% of the television households in the market can receive digital signals off
the air using either a set-top converter box for an analog television set or a
new digital television set.
On January 23, 2001, the FCC released a report and order and further notice
of proposed rule-making concerning the cable carriage of digital television
broadcast signals. Among other things, the FCC concluded that (i) a
digital-only television station can immediately assert its right to carriage on
a local cable system; and (ii) a broadcaster that returns its analog spectrum
and converts to digital operations must be carried by local cable systems. The
FCC concluded, however, that additional information is needed to determine
whether dual carriage of a broadcaster's analog and digital signal is warranted
during the transition period. In asking for further comment on this issue, the
agency announced its tentative conclusion that, although neither forbidden nor
mandated by the Communications Act, dual carriage obligations would appear to
impose an unconstitutional burden on a cable operator's First Amendment rights.
The FCC is also considering whether rules for carriage of digital television
signals by cable system operators should also apply to direct broadcast
satellite operators.
The FCC also determined that, for those digital stations eligible for
must-carry, only a single programming stream and other program-related material
was required to be carried by a cable operator. To the extent a broadcaster
transmits more than one programming stream over its digital signal, it would be
allowed to choose which of its multiplexed signals was to be carried. In
addition, cable operators would not be required to carry any ancillary or
supplementary services transmitted by the broadcaster. The FCC also determined
the manner in which a cable operator's digital channel capacity will be
calculated; determined the signal strength necessary for a digital television
station to provide a good quality signal to a cable operator's principal
headend for purposes of must-carry eligibility; concluded that cable operators
would be permitted to remodulate digital broadcast signals; concluded that
cable operators would not be required to provide subscribers with a set-top box
capable of processing digital television signals for display on analog sets;
and found that there is no need to implement channel positioning requirements
for digital television signals like those that exist for analog signals. In
addition, the FCC concluded that, although digital television signals generally
must be available to subscribers on a basic service tier, cable operators
subject to effective competition were not required to carry any broadcast
must-carry signals on the basic service tier. The agency also addressed issues
regarding retransmission consent agreements concerning the carriage of a
digital television signal.
22
In its further notice of proposed rule-making, the FCC, among other things,
requested comment on the necessity of a dual carriage requirement to hasten the
digital transition and the return of the analog spectrum and the proper scope
of the definition of "program-related" material, as it relates to the
requirement that cable operators carry material that is associated with a
broadcaster's primary video stream.
The implementation of digital television will impose substantial additional
costs on television stations because of the need to replace equipment and
because some stations will need to operate at higher utility costs and there
can be no assurance that television stations will be able to increase revenue
to offset such costs. The FCC is also considering imposing new public interest
requirements on television licensees in exchange for their receipt of digital
television channels. In addition, the Communications Act allows the FCC to
charge a spectrum fee to broadcasters who use the digital spectrum to offer
subscription-based services. The FCC has adopted rules that require
broadcasters to pay a fee of 5% of gross revenues received from ancillary or
supplementary uses of the digital spectrum for which they charge subscription
fees, excluding revenues from the sale of commercial time. The Company is
unable to predict what future actions the FCC might take with respect to
digital television, nor can it predict the effect of the FCC's present digital
television implementation plan or such future actions on its business. The
Company will incur significant expense in the conversion to digital television
and is unable to predict the extent or timing of consumer demand for any such
digital television services.
Non-FCC Regulation
Television broadcast stations may be subject to a number of other federal
regulations, as well as numerous state and local laws, that can either directly
or indirectly impact their operations. Included in this category are rules and
regulations of the Federal Aviation Administration affecting tower height,
location and marking, plus federal, state and local environmental and land use
restrictions.
The foregoing does not purport to be a complete summary of all the
provisions of the Communications Act or of the regulations and policies of the
FCC thereunder. Proposals for additional or revised regulations and
requirements are either pending before or considered by Congress and federal
regulatory agencies from time to time. Also, various of the foregoing matters
are now, or may become, the subject of court litigation, and the Company cannot
predict the outcome of any such litigation or the impact on its broadcast
business.
Employees
As of December 31, 2001, the Company employed 1,453 full-time employees and
224 part-time employees. The Company considers its relations with its employees
to be good. As of December 31, 2001, approximately 336 of the Company's
employees were represented by collective localized bargaining agreements at
various stations with four different unions: IBEW, AFTRA, IATSE and the
Directors Guild of America.
Item 2. Properties.
The Company's principal executive offices are located at 599 Lexington
Avenue, New York, New York 10022. The Company leases approximately 9,546 square
feet of space in New York (the "Master Lease"). The Master Lease expires in the
year 2009.
23
The types of properties required to support television 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 in elevated areas so
as to provide maximum market coverage. The following table contains certain
information describing the general character of the Company's properties.
Station Metropolitan Area and Use Owned or Leased Approximate Size
------- ------------------------- --------------- ----------------
KCAL Los Angeles, California
Office and studio Owned 33,000 sq. ft.
Office and studio Leased 16,198 sq. ft.
Transmission tower site Leased 60,000 sq. ft.
KRON San Francisco, California
Office and studio Owned 95,100 sq. ft.
Transmission tower site Leased 1,800 sq. ft.
WKRN Nashville, Tennessee
Office and studio Owned 43,100 sq. ft.
Land Owned 2.72 acres
Transmission tower site Owned 49.33 acres
WTEN Albany, NY
Office and studio Owned 39,736 sq. ft.
Land Owned 2.56 acres
New Scotland, NY
Transmission tower site
--Land Owned 5.38 acres
--Building Owned 2,800 sq. ft.
Mt. Greylock, Adams, MA
Transmission tower site
--Land Leased 15,000 sq. ft.
--Building Owned 2,275 sq. ft.
WRIC Richmond, VA
Office and studio Owned 34,000 sq. ft.
Land Owned 4 acres
Petersburg, VA
Transmission site Lease of space --
on tower
Chesterfield Co., VA(1)
Transmitter building Owned 900 sq. ft.
WATE Knoxville, TN
Office and studio Owned 34,666 sq. ft.
Land Owned 2.65 acres
Knox County, TN
Transmission tower site Owned 9.57 acres
House Mountain, TN
Prospective tower site Owned 5 acres
WBAY Green Bay, WI
Office and studio Owned 90,000 sq. ft.
Land Owned 1.77 acres
DePere, WI
Transmission tower site Owned 3.54 acres
Appleton, WI
Office Leased 1,506 sq. ft.
24
Station Metropolitan Area and Use Owned or Leased Approximate Size
------- ------------------------- --------------- ----------------
KWQC Davenport, Iowa
Office and Studio Owned 59,786 sq. ft.
Land Owned 1.82 acres
Bettendorf, Iowa
Transmission tower site Owned 37.7 acres
KELO Sioux Falls, South Dakota
Office and studio Owned 28,000 sq. ft.
Land Owned 47.4 acres
Transmission tower site Owned 58.23 acres
Auxiliary transmission tower site Leased 26.42 acres
Reliance, South Dakota
Transmission tower site Owned 5.83 acres
Rapid City, South Dakota
Office and studio Leased 3,555 sq. ft.
Transmission tower site Owned 1 acre
Murdo, South Dakota
Transmission tower site Leased 1 acre
Philip, South Dakota
Transmission tower site Leased 8.23 acres
Wall, South Dakota
Transmission tower site Leased 4 acres
Doppler Radar Tower Leased 1,225 sq. ft.
Beresford, South Dakota
Transmission tower site Leased 2.1 acres
Doppler Radar tower site Leased 0.02 acres
Diamond Lake, South Dakota
Transmission tower site Owned 1 acre
DeSmet, South Dakota
Transmission tower site Owned 0.55 acres
Garden City, South Dakota
Transmission tower site Owned 1 acre
Auxiliary transmission tower site Owned 1 acre
Farmer, South Dakota
Transmission tower site Owned 1 acre
Mt. Vernon, South Dakota
Transmission tower site Owned 1 acre
White Lake, South Dakota
Transmission tower site Owned 1 acre
New Underwood, South Dakota
Transmission tower site Leased 200 sq. ft.
Huron, South Dakota
Doppler Radar tower site Leased 480 sq. ft.
WLNS Lansing, Michigan
Office and studio Owned 19,000 sq. ft.
Land Owned 4.75 acres
Meridian, Michigan
Transmission tower site Owned 40 acres
Watertown, Michigan
Doppler Radar tower site Leased 6.2 acres
25
Station Metropolitan Area and Use Owned or Leased Approximate Size
------- ------------------------- --------------- ----------------
KLFY Lafayette, Louisiana
Office and studio Owned 24,337 sq. ft.
Land Owned 3.17 acres
Maxie, Louisiana
Transmission tower site Leased 8.25 acres
Proposed transmission tower site Owned 142 acres
WTVO Rockford, Illinois
Office and studio Owned 15,200 sq. ft.
Land Owned 14.4 acres
- --------
(1) Station owns tower structure and related building, with non-exclusive
easement for access to underlying property, which is owned by a third party.
Item 3. Legal Proceedings.
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the Company's opinion, the outcome of such
proceedings and litigation currently pending will not materially affect the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 4A. Executive Officers of the Registrant.
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Vincent J. Young.... 54 Chairman and Director
Adam Young.......... 88 Treasurer and Director
Ronald J. Kwasnick.. 55 President and Director
James A. Morgan..... 53 Executive Vice President--
Chief Financial Officer
Secretary and Director
Deborah A. McDermott 47 Executive Vice President--Operations
Vincent J. Young has been the Chairman and a director of the Company since
its inception in 1986. Mr. Young co-founded the Company with Adam Young.
Vincent Young is also a director and the Chairman of each of the corporate
Subsidiaries. Vincent Young is the son of Adam Young.
Adam Young has been the Treasurer and a director of the Company since its
inception. Mr. Young is also a director and an executive officer of each of the
corporate Subsidiaries. Mr. Young founded Adam Young Inc. in 1944 and has been
active in television station representation since that time. Prior to the
formation of the Company, Mr. Young owned minority interests in two radio
stations, and a 30% interest in a television station in Youngstown, Ohio. Mr.
Young served on the Board of Directors of the Television Advertising Bureau
from 1977 to 1979 and has twice been President of the Station Representative
Association, initially from 1955 through 1957, then from 1978 through 1980.
Ronald J. Kwasnick has been the President of the Company since its inception
and became a director in December 1994. From 1986 to 1989, Mr. Kwasnick was
also the General Manager of WLNS, the Company's station in the Lansing,
Michigan market. Mr. Kwasnick joined the Company in 1986, after working as
Executive
26
Vice President/Television for Adams Communications since 1984, where he served
as General Manager of a group of network-affiliated television stations. From
1980 to 1984, he was the General Manager and President of WILX in Lansing,
Michigan. Prior to that, he spent ten years working in various television sales
management positions.
James A. Morgan joined the Company as its Executive Vice President--Chief
Financial Officer in March 1993, became the Secretary of the Company in
September 1994 and became a director in May 1998. Mr. Morgan is also the
Executive Vice President and Secretary of each of the corporate Subsidiaries.
From 1984 until he joined the Company, he was a director and Senior Investment
Officer at J.P. Morgan Capital Corporation involved in investing the firm's own
capital in various leveraged and early growth stage companies.
Deborah A. McDermott became the Executive Vice President--Operations of the
Company in May 1996, and was General Manager of WKRN, the Company's ABC network
affiliate serving the Nashville, Tennessee market, from 1990 to 1996. From 1986
to 1989, when WKRN was acquired by the Company, and thereafter through February
1990, she was Station Manager of that station.
All executive officers serve at the discretion of the Board of Directors.
27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol YBTVA. The following table sets forth the range of
the high and low closing sales prices of the Class A Common Stock for the
periods indicated as reported by Nasdaq:
Quarters Ended High Low
-------------- ------ ------
March 31, 2000......................... $50.00 $19.00
June 30, 2000.......................... 25.69 18.38
September 30, 2000..................... 37.19 26.06
December 31, 2000...................... 35.94 24.75
March 31, 2001......................... $37.25 $29.38
June 30, 2001.......................... 40.54 30.88
September 30, 2001..................... 33.48 12.40
December 31, 2001...................... 22.22 14.35
At February 28, 2002, there were approximately 46 and 40 stockholders of
record of the Company's Class A and Class B Common Stock, respectively. The
number of record holders of Class A Common Stock does not include beneficial
owners holding shares through nominee names.
Dividend Policy
The Company has never paid a dividend on its Common Stock and does not
expect to pay dividends on its Common Stock in the foreseeable future. The
terms of the Company's senior credit facilities and the indentures governing
the Company's outstanding senior notes and senior subordinated notes
(collectively, the "Indentures") restrict the Company's ability to pay cash
dividends on its Common Stock. Under the senior credit facilities, the
Company's ability to pay dividends on its Common Stock is limited. See
"Management's Discussion and Analysis-Liquidity and Capital Resources." Under
the Indentures, the Company is not permitted to pay any dividends on its Common
Stock unless at the time of, and immediately after giving effect to, the
dividend no default would result under the Indentures and the Company would
continue to have the ability to incur indebtedness. In addition, under the
Indentures, the dividend may not exceed an amount equal to the Company's cash
flow less a multiple of the Company's interest expense, plus the net proceeds
of the sale by the Company of additional capital stock.
28
Item 6. Selected Financial Data
The following table presents selected consolidated financial data of the
Company for the five years ended December 31, 2001, which have been derived
from the Company's audited consolidated financial statements.
The information in the following table should be read in conjunction with
"Management's Discussion and Analysis" and the Consolidated Financial
Statements and the notes thereto included elsewhere herein. The Company has not
paid dividends on its capital stock during any of the periods presented below.
Year Ended December 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
Statement of Operations Data: (dollars in thousands, except per share amounts)
Net revenue (1)..................................... $ 263,535 $ 277,052 $ 280,659 $ 372,685 $ 368,173
Operating expenses, including selling, general and
administrative expenses............................ 106,708 116,712 114,974 149,773 172,473
Amortization of program license rights.............. 38,279 33,014 47,690 57,655 59,523
Depreciation and amortization....................... 46,941 49,472 47,983 55,232 61,769
Corporate overhead.................................. 7,150 7,860 8,227 12,010 9,934
Non-cash compensation paid in common stock (2)...... 967 1,146 19,102 1,321 1,468
Merger related costs................................ -- 1,444 -- -- --
----------- ----------- ----------- ----------- -----------
Operating income.................................... 63,490 67,404 42,683 96,694 63,006
Interest expense, net............................... (64,103) (62,617) (62,981) (95,843) (112,754)
Non-cash interest expense, net...................... -- -- -- -- (3,773)
Gain on sale of station............................. -- -- -- 15,651 --
Non-cash change in fair value swap.................. 2,295
Other (expenses) income, net........................ (493) (788) (1,244) (1,013) 48
----------- ----------- ----------- ----------- -----------
(Loss) income before provision for income taxes and
extraordinary item................................. (1,106) 3,999 (21,542) 15,489 (51,178)
Provision for income taxes.......................... -- -- -- (1,500) --
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary item............. (1,106) 3,999 (21,542) 13,989 (51,178)
Extraordinary loss on extinguishment of debt........ (9,243) -- -- -- (12,437)
----------- ----------- ----------- ----------- -----------
Net (loss) income................................... $ (10,349) $ 3,999 $ (21,542) $ 13,989 (63,615)
=========== =========== =========== =========== ===========
Basic (loss) income per common share before
extraordinary item................................. $ (0.08) $ 0.28 $ (1.59) $ 0.92 $ (2.81)
Basic net (loss) income per common share............ $ (0.74) $ 0.28 $ (1.59) $ 0.92 $ (3.50)
Basic shares used in earnings per share calculation. 13,989,969 14,147,522 13,588,108 15,157,243 18,185,945
Other Financial Data:
Cash flow provided by operating activities.......... $ 41,025 $ 54,292 $ 36,398 $ 80,762 $ 24,982
Cash flow used in investing activities.............. $ (11,757) $ (34,154) $ (7,887) $ (645,115) $ (14,768)
Cash flow (used in) provided by financing activities $ (34,621) $ (21,127) $ (26,222) $ 566,977 $ (13,853)
Payments for program license liabilities............ $ 38,610 $ 33,337 $ 46,678 $ 53,623 $ 54,433
Broadcast cash flow (3)............................. $ 118,217 $ 127,003 $ 119,007 $ 169,289 $ 141,267
Broadcast cash flow margin.......................... 44.9% 45.8% 42.4% 45.4% 38.4%
Operating cash flow (4)............................. $ 111,067 $ 119,143 $ 110,780 $ 157,279 $ 131,333
Capital expenditures................................ $ 9,034 $ 7,524 $ 9,360 $ 17,213 $ 10,727
Balance Sheet Data (as of end of Period):
Total assets........................................ $ 845,966 $ 825,668 $ 818,670 $ 1,554,368 $ 1,543,015
Long-term debt (including current portion).......... $ 657,672 $ 658,224 $ 650,510 $ 1,276,285 $ 1,225,348
Stockholders' equity................................ $ 59,846 $ 46,865 $ 30,659 $ 103,094 $ 134,768
- --------
(1) Net revenue is total revenue net of agency and national representation
commissions.
(2) Represents non-cash charges for the employer matching contribution to the
defined contribution plan in 1997, 1998, 1999, 2000 and 2001 of shares of
Class A Common Stock. In 1999, approximately $18.3 million relates to the
extension of the expiration date of stock options granted in 1994 and 1995.
(3) "Broadcast cash flow" is defined, by the Company, as operating income
before income taxes and interest expense, plus depreciation and
amortization (including amortization of program license rights), non-cash
29
compensation, merger related costs and corporate overhead, less payments for
program license liabilities. Other television broadcasting companies may
measure broadcast cash flow in a different manner. The Company has included
broadcast cash flow data because such data are commonly used as a measure of
performance for broadcast companies and are also used by investors to
measure a company's ability to service debt. Broadcast cash flow is not, and
should not be used as, an indicator or alternative to operating income, net
income or cash flow as reflected in the Consolidated Financial Statements,
is not intended to represent funds available for debt service, dividends,
reimbursement or other discretionary uses, 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.
(4) "Operating cash flow" is defined, by the Company, as operating income
before income taxes and interest expense, plus depreciation and
amortization (including amortization of program license rights) and
non-cash compensation, less payments for program license liabilities. Other
television broadcasting companies may measure operating cash flow in a
different manner. The Company has included operating cash flow data because
such data are used by investors to measure a company's ability to service
debt and are used in calculating the amount of additional indebtedness that
the Company may incur in the future under the Indentures. Operating cash
flow does not purport to represent cash provided by operating activities 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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
The operating revenue of the Company's stations are derived primarily from
advertising revenue and, to a much lesser extent, from compensation paid by the
networks to the stations for broadcasting network programming. The stations'
primary operating expenses are for employee compensation, news gathering,
production, programming and promotion costs. A high proportion of the operating
expenses of the stations are fixed.
Advertising is sold for placement within and adjoining a station's network
and locally originated programming. Advertising is sold in time increments and
is priced primarily on the basis of a program's popularity among the specific
audience an advertiser desires to reach, as measured principally by periodic
audience surveys. In addition, advertising rates are affected by the number of
advertisers competing for the available time, the size and demographic makeup
of the market served by the station and the availability of alternative
advertising media in the market area. Rates are highest during the most
desirable viewing hours, with corresponding reductions during other hours. The
ratings of a local station affiliated with a national television network can be
affected by ratings of network programming.
Most advertising contracts are short-term, and generally run only for a few
weeks. Approximately 61% of the 2001 annual gross revenue of the Company's
stations was generated from local advertising, which is sold by a station's
sales staff directly to local accounts. The remainder of the advertising
revenue primarily represents national advertising, which is sold by Adam Young
Inc. ("AYI"), a national advertising sales representative, which was merged
into the Company in February 1998. The stations generally pay commissions to
advertising agencies on local, regional and national advertising.
The advertising revenue of the Company's stations are generally highest in
the second and fourth quarters of each year, due in part to increases in
consumer advertising in the spring and retail advertising in the period leading
up to, and including, the holiday season. In addition, advertising revenue is
generally higher during even numbered election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter.
30
The Company defines "broadcast cash flow" as operating income before income
taxes and interest income and expense, plus depreciation and amortization
(including amortization of program license rights), non-cash compensation and
corporate overhead, less payments for program license liabilities. Other
television broadcasting companies may measure broadcast cash flow in a
different manner. The Company has included broadcast cash flow data because
such data are commonly used as a measure of performance for broadcast companies
and are also used by investors to measure a company's ability to service debt.
Broadcast cash flow is not, and should not be used as, an indicator or
alternative to operating income, net income or cash flow as reflected in the
Consolidated Financial Statements, is not intended to represent funds available
for debt service, dividends, reinvestment or other discretionary uses, is not a
measure of financial performance under generally accepted accounting principles
and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
The following table sets forth certain operating data for the years ended
December 31, 1999, 2000 and 2001:
Year Ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
(dollars in thousands)
Operating Income................................. $ 42,683 $ 96,694 $ 63,006
Add:
Amortization of program license rights........ 47,690 57,655 59,523
Depreciation and amortization................. 47,983 55,232 61,769
Corporate overhead............................ 8,227 12,010 9,934
Non-cash compensation paid in common stock.... 19,102 1,321 1,468
Less:
Payments for program license liabilities...... (46,678) (53,623) (54,433)
-------- -------- --------
Broadcast Cash Flow.............................. $119,007 $169,289 $141,267
======== ======== ========
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results
of operations is based on the Company's consolidated financial statements
prepared in accordance with U.S generally accepted accounting principles. The
Company's financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. The Company believes that the following are some of
the more critical judgment areas in the application of accounting policies that
currently affect its financial position and results of operations.
The Company's critical accounting policy with respect to revenue recognition
is its determination as to the collectibility of account receivable from
advertisers. The nature of the business does not lend itself to a concentration
of receivables from individual customers. Experience has been that customer
defaults are significantly lower than the Company's accrual of bad debt expense
and that the allowance for doubtful accounts has been adequate to cover the
likely exposure to such defaults.
The Company's accounting for long-lived program assets requires judgment as
to the likelihood that such assets will generate sufficient revenue to cover
the associated expense. Many of the Company's program commitments are for
syndicated shows which are produced by syndicators to be aired on a first run
basis. Such shows do not generally stay in production if they do not attract a
significant audience. If the syndicator cancels a show, the Company's liability
for future payments is eliminated. Accordingly, the Company has generally not
experienced significant write-downs from programming commitments.
The Company's critical accounting for the impairment of property, plant and
equipment and intangible assets is assessing the recoverability by making
assumptions regarding estimated future cash flows and other
31
factors to determine the fair value of the respective assets. If these
estimates or related assumptions materially change in the future, the Company
may be required to record impairment charges not previously recorded for these
assets. At December 31, 2001, the Company had $106.4 million in net property,
plant and equipment and $1,218.8 million in broadcast licenses and other
intangibles, primarily goodwill and FCC licenses. During 2001, the Company did
not record any impairment losses related to property, plant and equipment or
broadcast licenses and other intangibles.
Television Revenue
Set forth below are the principal types of television revenue received by
the Company's stations for the periods indicated and the percentage
contribution of each to the Company's total revenue, as well as agency and
national sales representative commissions:
Year Ended December 31,
-------------------------------------- ------------------
1999 2000 2001
------------------ ------------------ ------------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
Revenue (dollars in thousands)
Local......................... $212,558 65.0% $253,727 58.2 $259,204 60.5%
National...................... 93,796 28.7 131,680 30.2 139,888 32.6
Network compensation.......... 12,400 3.8 15,255 3.5 18,921 4.4
Political..................... 3,411 1.0 28,433 6.5 2,939 0.7
Production and other.......... 5,027 1.5 6,976 1.6 7,771 1.8
-------- ----- -------- ----- -------- -----
Total..................... 327,192 100.0 436,071 100.0 428,723 100.0
Agency and sales representative
Commissions.................. (46,533)(1) (14.2) (63,386)(1) (14.5) (60,550)(1) (14.1)
-------- ----- -------- ----- -------- -----
Net Revenue.................... $280,659 85.8% $372,685 85.5% 368,173 85.9%
======== ===== ======== ===== ======== =====
- --------
(1) National sales commission paid to AYI eliminated for consolidation purposes
were $4.0 million, $5.1 million and $4.3 million for the years ended
December 31, 1999, 2000 and 2001, respectively.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000.
Net revenue for the year ended December 31, 2001 was $368.2 million, a
decrease of $4.5 million, or 1.2%, compared to $372.7 million for the year
ended December 31, 2000. The economic recession in the United States and the
resulting decreased advertising spending in several industries, such as
automobile and dot-com, resulted in reductions in the Company's gross local and
national revenues of 8.1% and 16.6%, respectively, excluding the disposition of
WKBT-TV and acquisition of KRON-TV. Approximately $5.0 million of the decrease
in net revenue for the year ended 2001 was attributable to commercial-free news
programming after the September 11th terrorist attacks. Political revenue for
the year ended December 31, 2001 was $2.9 million, a decrease of $25.5 million.
The decrease in political revenue was attributable to 2000 being a national
election year with more state and local elections, while 2001 had only limited
state and local elections. Network compensation for the year ended December 31,
2001 was $18.9 million, compared to $15.3 million for the year ended December
31, 2000, an increase of $3.6 million, or 23.5%, all of which was attributable
to the acquisition of KRON-TV.
Operating expenses, including selling, general and administrative expenses,
for the year ended December 31, 2001 were $172.5 million, compared to $149.8
million for the year ended December 31, 2000, an increase of $22.7 million, or
15.2%, with the acquisition of KRON-TV accounting for $21.6 million of such
increase.
Amortization of program license rights for the year ended December 31, 2001
was $59.5 million, compared to $57.7 million for the year ended December 31,
2000, an increase of $1.8 million, or 3.1%, with KRON-TV accounting for $6.0
million of this increase. Approximately $3.5 million of the decrease, net of
KRON-TV, was attributable to the reduction in the number of Los Angeles Lakers
and Clippers games televised during 2001 compared to 2000.
32
Depreciation of property and equipment and amortization of intangible assets
was $61.8 million for the year ended December 31, 2001, compared with $55.2
million for the comparable period in 2000, an increase of $6.6 million, or 12%.
KRON accounted for $11.6 million of such increase. The decrease, net of
KRON-TV, was primarily attributable to equipment and intangibles becoming fully
depreciated or amortized at several stations.
The Company made payments for program license liabilities of $54.4 million
during the year ended December 31, 2001, compared to $53.6 million for the year
ended December 31, 2000, an increase of $810,000 or 1.5%. KRON accounted for
$6.3 million of this increase. The decrease, net of KRON, was primarily
attributable to the reduction in the number of Los Angeles Lakers and Clippers
games televised during 2001 compared to 2000.
Corporate overhead for the year ended December 31, 2001 was $9.9 million,
compared to $12.0 million for the comparable period in 2000, a decrease of $2.1
million or 17.5%. Approximately $1.9 million of this decrease was attributable
to a one-time bonus granted by the Board of Directors to certain members of
management upon the close of the KRON-TV acquisition in 2000.
Non-cash compensation was $1.5 million for the year ended December 31, 2001,
compared to $1.3 million for the year ended December 31, 2000, an increase of
$148,000.
Interest expense for the year ended December 31, 2001 was $112.8 million,
compared to $95.8 million for the same period in 2000, an increase of $17.0
million, or 17.7%. The increase was primarily attributable to higher debt
levels associated with the KRON-TV acquisition.
The Company recorded $3.8 million of non-cash interest expense for the year
ended December 31, 2001, relating to the amortization of other comprehensive
loss in connection with its swap transactions entered into in 2000 and
terminated in June 2001. The Company also recorded for the year ended December
31, 2001 a mark-to-market non-cash change in fair value of approximately $2.3
million for its current outstanding economic hedges (see "Liquidity and Capital
Resources").
The Company recorded an extraordinary loss of $12.4 million in the first
quarter of 2001 relating to the redemption of senior subordinated notes and the
repayment of a portion of the senior credit facility (see "Liquidity and
Capital Resources").
As a result of the factors discussed above, the net loss for the Company was
$63.6 million for the year ended December 31, 2001, compared with net income of
$14.0 million for the year ended December 31, 2000, a decrease of $77.6 million.
Broadcast cash flow for the year ended December 31, 2001 was $141.3 million,
compared with $169.3 million for the year ended December 31, 2000, a decrease
of $28.0 million, or 16.5%. Broadcast cash flow margins (broadcast cash flow
divided by net revenue) for the year ended December 31, 2001 decreased to 38.4%
from 45.4% for the same period in 2000.
Year Ended December 31, 2000 compared to Year Ended December 31, 1999.
Net revenue for the year ended December 31, 2000 were $372.7 million, an
increase of $92.0 million, or 32.8%, compared to $280.7 million for the year
ended December 31, 1999, with KRON-TV accounting for $81.0 million of such
increase. Local and national revenue were down 0.4% and 3.3%, respectively in
2000, compared to 1999, excluding revenue relating to KRON-TV. Political
revenue for the year ended December 31, 2000 was $28.4 million, an increase of
$25.0 million, with KRON-TV accounting for $5.8 million of such increase. The
increase in political revenue was attributable to 2000 being a national
election year with more state and local elections, while 1999 had only limited
state and local elections.
33
Operating expenses, including selling, general and administrative expenses
for the year ended December 31, 2000 were $149.8 million, compared to $115.0
million, for the year ended December 31, 1999, an increase of $34.8 million, or
30.3%. KRON-TV accounted for $27.3 million of such increase. Approximately $1.9
million of this increase was attributable to New Media/Internet expenses
related to sales on the stations' Internet sites. In addition, approximately
$1.4 million of the 2000 increase is related to an expense reduction program
for 2001.
Amortization of program license rights for the year ended December 31, 2000
was $57.7 million, compared to $47.7 million for the year ended December 31,
1999, an increase of $10.0 million, or 21.0%. KRON-TV accounted for $4.8
million of this increase. The remaining portion of this increase is
attributable to the increase in the number of Los Angeles Lakers and Clippers
games televised during 2000 compared to 1999; offset by the reduction of
Anaheim Angels games aired in 2000 compared to 1999.
Depreciation of property and equipment and amortization of intangible assets
was $55.2 million for the year ended December 31, 2000, compared with $48.0
million for the comparable period in 1999, an increase of $7.2 million, or 15%.
Depreciation and amortization at KRON-TV was $11.8 million. The decrease, net
of KRON-TV, was primarily attributable to equipment at the three stations
acquired in 1994, that had five-year depreciable lives, becoming fully
depreciated.
The Company made payments for program license liabilities of $53.6 million
during the year ended December 31, 2000, compared to $46.7 million for the year
ended December 31, 1999, an increase of $6.9 million or 14.8%. KRON-TV
accounted for $4.2 million of this increase. The increase in the Los Angeles
Lakers and Clippers games televised, offset by the reduction in Anaheim Angels
games televised, accounted for all of the remaining increase.
Corporate overhead for the year ended December 31, 2000 was $12.0 million,
compared to $8.2 million for the comparable period in 1999, an increase of $3.8
million or 46.3%. Approximately $1.9 million of this increase was attributable
to a one-time bonus granted by the Board of Directors to certain members of
management upon the close of the KRON-TV acquisition. The remaining increase
was the result of increased personnel and administrative costs.
Non-cash compensation was $1.3 million for the year ended December 31, 2000,
compared to $19.1 million for the year ended December 31, 1999, a decrease of
$17.8 million. The Company recorded a non-cash compensation charge of $18.3
million in the third quarter of 1999 for extending the expiration date of stock
options granted in 1994 and 1995.
Interest expense for the year ended December 31, 2000 was $95.8 million,
compared to $63.0 million for the same period in 1999, an increase of $32.8
million, or 52.1%. The increase was primarily attributable to higher debt
levels associated with the KRON-TV acquisition.
On February 29, 2000, the Company sold WKBT-TV for approximately $24.0
million and recorded a gain on the sale of approximately $15.7 million. A state
tax provision of $1.5 million was recorded in the first quarter of 2000, as a
result of this gain.
As a result of the factors discussed above, the net income for the Company
was $14.0 million for the year ended December 31, 2000, compared with a net
loss of $21.5 million for the year ended December 31, 1999, an increase of
$35.5 million.
Broadcast cash flow for the year ended December 31, 2000 was $169.3 million,
compared with $119.0 million for the year ended December 31, 1999, an increase
of $50.3 million, or 42.3%. Broadcast cash flow margins (broadcast cash flow
divided by net revenue) for the year ended December 31, 2000 decreased to 45.4%
from 42.4% for the same period in 1999.
34
Pro Forma
The following unaudited pro forma information gives effect to the
acquisition of KRON-TV and BayTV (including adjustments to amortization of
intangible assets, debt financing costs and depreciation of property and
equipment) as if it had been effected on January 1, 2000. The year ended
December 31, 2001 is the Company's actual results of operations including
KRON-TV and BayTV. The pro forma information for the year ended December 31,
2000 does not purport to represent what the Company's results of operations
would have been if such transaction had been effected at such date and does not
purport to project results of operations of the Company in any future period.
Years Ended
December 31,
---------------------
2000/(1)/ 2001
--------- --------
Unaudited
Pro Forma Actual
--------- --------
(dollars in thousands
Net revenue(2)................................................... $446,734 $368,173
Operating expenses, including selling, general and administrative
expenses....................................................... 182,177 172,473
Amortization of program license rights........................... 63,187 59,523
Depreciation and amortization.................................... 69,913 61,769
Corporate overhead............................................... 12,010 9,934
Non-cash compensation paid in common stock....................... 1,321 1,468
-------- --------
Operating income................................................. $118,126 $ 63,006
======== ========
Broadcast cash flow(3)........................................... $205,265 $141,267
Broadcast cash flow margin....................................... 45.9% 38.4%
Operating cash flow(4)........................................... $193,255 $131,333
- --------
(1) Pro forma adjustments reflect the amortization of intangible assets
associated with the KRON and BayTV acquisition over a 40 year period and
increased annual depreciation resulting from the newly acquired property
and equipment depreciated over new estimated useful lives. In addition,
these adjustments reflect the amortization expense of the new debt
financing costs related to the new Senior Credit Facility.
(2) Net revenue is total revenue net of agency and national representation
commissions.
(3) "Broadcast cash flow" is defined, by the Company, as operating income
before income taxes and interest income and expense, plus depreciation and
amortization (including amortization of program license rights), non-cash
compensation and corporate overhead, less payments for program license
liabilities. Other television broadcasting companies may measure broadcast
cash flow in a different manner. The Company has included broadcast cash
flow data because such data are commonly used as a measure of performance
for broadcast companies and are also used by investors to measure a
company's ability to service debt. Broadcast cash flow is not, and should
not be used as, an indicator or alternative to operating income, net income
or cash flow as reflected in the Consolidated Financial Statements, is not
intended to represent funds available for debt service, dividends,
reinvestment or other discretionary uses, 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.
(4) "Operating cash flow" is defined, by the Company, as operating income
before income taxes and interest income and expense, plus depreciation and
amortization (including amortization of program license rights) and
non-cash compensation, less payments for program license liabilities. Other
television broadcasting companies may measure operating cash flow in a
different manner. The Company has included operating cash flow data because
such data are used by investors to measure a company's ability to service
debt and are used in calculating the amount of additional indebtedness that
the Company may incur in the future under the Indentures. Operating cash
flow does not purport to represent cash provided by operating activities as
reflected in the Consolidated Financial Statements, is not a measure of
financial performance
35
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.
Liquidity and Capital Resources
Cash provided by operations for the year ended December 31, 2001 was $25.0
million as compared to cash provided by operations of $80.8 million in 2000.
The weakness in television advertising, caused by the economic recession in the
United States, reduced the Company's revenues and operating income, net of the
KRON-TV acquisition, resulting in reductions of cash flows from operating
activities for the year ended December 31, 2001, as compared to the year ended
December 31, 2000. During the fourth quarter of 2000, trade accounts payable
balances increased, causing a timing difference and a $12.0 million decrease in
trade accounts payable for the year ended December 31, 2001, as compared to
2000. During the first quarter of 2001, the Company paid approximately $17.2
million of interest accrued at December 31, 2000, resulting in a decrease of
accrued expenses in 2001 of $16.5 million, as compared to 2000. The reduced
revenues resulting from the economic recession in the United States caused the
Company's accounts receivable to decrease by $19.6 million for the year ended
December 31, 2001, compared to a decrease in accounts receivable of $2.4
million for the year ended December 31, 2000.
KRON and KCAL together contributed approximately 56.8% of the Company's
broadcast cash flow for the year ended December 31, 2001. The Company expects
that the performance of KRON will have a larger proportionate impact on its
operating results and cash flows following the completion of its sale of KCAL
(see "Business--Recent Developments"). Consequently, the Company will be
particularly susceptible to economic conditions in the San Francisco
advertising market. The general San Francisco market continues to be sharply
lower in the first quarter of 2002 as compared to 2001 and the Company is
unable to predict with any certainty when the San Francisco market will improve.
Cash used in investing activities for the years ended December 31, 2001 and
2000 was $14.8 million and $645.1 million, respectively. Investing activities
occurring in 2000 but not in 2001 were the purchase of KRON-TV for $650.0
million in cash, net of the $24.0 million in proceeds from the sale of WKBT-TV,
both during the first half of 2000. During 2001 and 2000, the Company had been
and is continuing to develop significant capital expenditures for building
digital transmission facilities as required by Federal Communications
Commission regulations. The timing of these projects have been constrained by
regulatory approvals, equipment availability, construction crew availability
and weather conditions. During 2001, the Company paid $10.7 million for capital
expenditures, including $5.3 million related to the digital conversion. During
2000, the Company paid $17.2 million for capital expenditures, including $7.5
million related to the digital conversion and a new tower at the Company's
station in Louisiana for digital transmission. In 2001, the Company made a
concerted effort to preserve cash by not replacing equipment unless absolutely
necessary, and this practice has continued into 2002. Additionally, deposits
for the Company increased $4.0 million for the year ended December 31, 2001, as
compared to $1.9 million for the year ended December 31, 2000. Included in the
2001 and 2000 deposits were construction-in-progress balances of $11.6 million
and $8.0 million, respectively, which was primarily for the Company's stations'
conversion to digital.
Cash used in financing activities for the year ended December 31, 2001 was
$13.9 million compared to cash provided by financing activities for the year
ended December 31, 2000 of $567.0 million. On March 1, 2001, the Company
completed the sale of the March 2001 Notes (as defined) and received proceeds
of $500.0 million principal amount and a premium of approximately $8.4 million
(see below). The Company used approximately $254.4 million of the net proceeds
from the March 2001 Notes to redeem all of its 11 3/4% Senior Subordinated
Notes due 2004 and its 10 1/8% Senior Subordinated Notes due 2005, including
accrued interest and redemption premiums. The Company used the remaining net
proceeds, approximately $253.6 million, to repay a portion of its outstanding
indebtedness under the Company's senior credit facilities. On June 26, 2001,
the Company completed an underwritten public offering of 3 million shares of
its Class A common stock at a price per share of $36.00. In the third quarter
of 2001, the net proceeds of this offering, $103.5 million, were used by the
Company to repay indebtedness outstanding under its senior credit facilities.
On December 7, 2001, the Company
36
completed the sale of the Senior Notes (as defined) and received net proceeds
of $243.1 million (see below). The Company used the net proceeds from the
Senior Notes offering to repay a portion of its outstanding indebtedness under
the Company's senior credit facilities, including redemption premiums, and to
pay fees related to the Senior Notes. Concurrent with the closing of the Senior
Notes, the Company placed $41.4 million in an escrow account, for the benefit
of the holders of the Senior Notes, to pay the first four semi-annual interest
payments on the Senior Notes. Financing activities for the year ended December
31, 2000 include principal payments under the senior credit facility of $124.3
million. In June 2000, the Company borrowed approximately $708.6 million under
its senior credit facility, to purchase KRON-TV, pay down its previous senior
credit facility and pay fees relating to the KRON-TV acquisition. In the year
ended December 31, 2000, the Company repurchased and retired 881,631 shares of
its Class A common stock for $30.0 million.
On June 26, 2000, the Company entered into a new senior credit facility
which provides for borrowings of up to an aggregate of $600.0 million (the "New
Senior Credit Facility") in the form of an amortizing term loan facility in the
amount of $125.0 million ("Term A") that matures on November 30, 2005, and an
amortizing term loan facility in the amount of $475.0 million ("Term B") that
matures on December 31, 2006. In addition, on June 26, 2000, the Company
amended and restated its existing senior credit facility (as amended, the
"Amended and Restated Credit Facility"), to provide for borrowings of up to an
aggregate of $200.0 million, in the form of a $50.0 million term loan and a
revolving credit facility in the amount of $125.0 million, both of which mature
on November 30, 2005. The New Senior Credit facility and the Amended and
Restated Credit Facility are referred to collectively as the "Senior Credit
Facility."
Pursuant to the Senior Credit Facility, the Company is prohibited from
making investments or advances to third parties exceeding $15.0 million unless
the third party becomes a guarantor of the Company's obligation. In addition,
the Company may utilize the undrawn amounts under the revolving portion of the
Senior Credit Facility to retire or prepay subordinated debt, subject to the
limitations set forth in the indentures.
Interest under the Senior Credit Facility is payable at the LIBOR rate, "CD
Rate" or "Base Rate." In addition to the index rates, the Company pays a
floating percentage tied to the Company's ratio of total debt to operating cash
flow.
Each of the Subsidiaries has guaranteed the Company's obligations under the
Senior Credit Facility. The Senior Credit Facility is secured by the pledge of
all the stock of the Subsidiaries and a first priority lien on all of the
assets of the Company and its Subsidiaries.
The Senior Credit Facility requires the Company to maintain certain
financial ratios. In order to allow more long-term financial flexibility and
liquidity, on November 21, 2001, the Company effected Amendment No. 4 to its
Senior Credit Facility. This amendment increased the index rates ranging, in
the case of LIBOR rate loans, from 1.75% based upon a ratio under 5.0:1, to
3.50% based upon a 7.0:1 or greater ratio for the Term A advances and revolver
facility; and 3.75% for the Term B advances. Effective with the issuance of the
Senior Notes, the Company is not required to maintain a total debt to operating
cash flow ratio until June 30, 2004, when the commencing ratio will be 7.35x,
the Company is required to maintain a senior debt to operating cash flow ratio
ranging from 3.50x to 4.00x, and the Company is required to maintain until
December 31, 2006 a senior secured debt to operating cash flow ratio ranging
from 1.75x to 2.00x. Additionally, the Company is required to maintain an
operating cash flow to total cash interest expense ratio ranging from 1.20x to
1.40x and is required to maintain an operating cash flow minus capital
expenditures to pro forma debt service ratio of no less than 1.10x at any time.
Such ratios must be maintained as of the last day of the quarter for each of
the periods. Pursuant to Amendment No. 4, the revolving credit portion of the
loan facility was reduced to $100.0 million.
The Senior Credit Facility requires the Company to apply on April 30 of each
year 50% to 75% (depending upon the level of the Company's debt to operating
cash flow ratio at the end of such year) of its "Excess Cash Flow" for the
preceding completed fiscal year, beginning with Fiscal Year 2001, to reduce
outstanding debt in proportion to the outstanding principal amount of such
advances. The Senior Credit Facility also contains a number of customary
covenants including, among others, limitations on investments and advances,
mergers and sales of assets, liens on assets, affiliate transactions and
changes in business.
37
On March 1, 2001, the Company completed a private offering of $500.0 million
principal amount of its 10% Senior Subordinated Notes due 2011 (the "March 2001
Notes"). The March 2001 Notes were sold by the Company at a premium of
approximately $8.4 million. The Company used approximately $254.4 million of
the net proceeds to redeem all of its 11 3/4% Senior Subordinated Notes due
2004 and its 10 1/8% Senior Subordinated Notes due 2005, including accrued
interest and redemption premiums. The Company used the remaining net proceeds,
approximately $253.6 million to repay a portion of its outstanding indebtedness
under the Company's Senior Credit Facility. On September 28, 2001, the Company
exchanged the March 2001 Notes for notes with substantially identical terms as
the March 2001 Notes, except that the new notes do not contain terms with
respect to transfer restrictions.
On June 26, 2001, the Company completed an underwritten public offering of 3
million shares of its Class A common stock at a price per share of $36.00. The
net proceeds of this offering was $103.5 million and all such net proceeds were
used by the Company to repay indebtedness outstanding under its Senior Credit
Facility.
On December 7, 2001, the Company completed a private offering of $250.0
million principal amount of its 8 1/2% Senior Notes due 2008 (the "Senior
Notes"). The Senior Notes were initially offered to qualified institutional
buyers under Rule 144A and to persons outside the United States under
Regulation S. The Company used all of the net proceeds of approximately $243.1
million to repay a portion of its outstanding indebtedness under its Senior
Credit Facility, including redemption premiums, and to pay fees related to the
Senior Notes. On January 31, 2002, the Company filed a registration statement
with the SEC with respect to an offer to exchange the Senior Notes for notes of
the Company with substantially identical terms of the Senior Notes, except the
new notes will not contain terms with respect to transfer restrictions. The
registration statement has not been declared effective by the SEC as of March
22, 2002.
Concurrent with the closing of the Senior Notes, the Senior Notes indenture
required the Company to place into an escrow account, for the benefit of the
holders of the Senior Notes, an amount sufficient to pay the first four
interest payments on the Senior Notes (the "Escrow Account"). The Escrow
Account of $41.4 million was funded by the Company from borrowings under its
Senior Credit Facility. The Company entered into an escrow agreement, to
provide, among other things, that funds may be disbursed from the Escrow
Account only to pay interest on the Senior Notes (or, if a portion of the
Senior Notes has been retired by the Company, funds representing the interest
payment on the retired Senior Notes will be released to the Company as long as
no default exists under the indenture), and, upon certain repurchases or
redemptions thereof, to pay principal of and premium, if any, thereon. All
funds placed in the Escrow Account were invested on December 7, 2001 in
Treasury Bills, Treasury Principal Strips and Treasury Interest Strips with
maturity dates in correlation with the interest payments for the first two
years.
The Company's total debt at December 31, 2001 was approximately $1,225.3
million, consisting of $145.7 million outstanding under the Senior Credit
Facility, $825.0 million of Senior Subordinated Notes, $250.0 million of Senior
Notes and $4.6 million of capital leases. In addition, at December 31, 2001,
the Company had an additional $80.0 million of unused available borrowings
under the revolving credit portion of the Senior Credit Facility.
On June 27, 2001, the Company entered into interest rate swap agreements for
a total notional amount of $100.0 million with two commercial banks who are
also lenders under the Senior Credit Facility. The swap's effective date was
September 4, 2001 and expires on March 1, 2011. The Company pays a floating
interest rate based upon a six month LIBOR rate and the Company receives
interest from the commercial banks, at a fixed rate of 10.0%. The net interest
rate differential paid or received will be recognized as an adjustment to
interest expense. The new interest swaps are accounted for at market value and
are considered economic hedges. The Company received approximately $14.0
million at the inception of the new swap agreements, which was used to pay the
outstanding liability upon the termination of the old cash flow hedges, and
recorded a new swap liability. The Company recorded $3.8 million of non-cash
interest expense relating to the amortization of the old swap liability. The
new swap liability is being adjusted to fair value on a quarterly basis as a
charge to current period interest expense over the term of the swap which began
on September 4, 2001.
38
On June 6, 2000, the Company entered into an interest rate swap agreement
for a notional amount of $272.0 million with two commercial banks who are also
lenders under the senior credit facilities. The swap's effective date is
January 2, 2002 and expires on July 2, 2003. The Company will pay a fixed
interest rate of 7.2625% and the Company will receive interest, from the
commercial banks, based upon a three month LIBOR rate. The net interest rate
differential to be paid or received will be recognized as an adjustment to
interest expense. This swap was terminated on June 27, 2001 (see above).
On July 3, 2000, the Company entered into an interest rate swap agreement
for a notional amount of $206.0 million with a commercial bank who is also a
lender under the senior credit facilities. The swap's effective date was July
3, 2000 and expires on January 3, 2002. The Company pays a fixed interest rate
of 7.0882% and the Company received interest, from the commercial bank, based
upon a six month LIBOR rate. The net interest rate differential to be paid or
received has been recognized as an adjustment to interest expense. This swap
was terminated on June 27, 2001 (see above).
The amount remaining in other comprehensive income from the terminated swaps
will be amortized to earnings over what would have been the life of the swaps.
It is anticipated that the Company will be able to meet the working capital
needs of its stations, scheduled principal and interest payments under the
Senior Credit Facility and the Company's Senior Notes and Senior Subordinated
Notes and capital expenditures, from cash on hand, cash flows from operations
and funds available under the senior credit facilities.
On November 27, 2001, the holders of a majority in principal amount of the
Company's 9% senior subordinated notes due 2006 consented to proposed
amendments to the indenture governing the 9% senior subordinated notes. These
amendments, among other things, provided the Company with flexibility to incur
additional debt, including the Senior Notes. The amendments became effective
upon the issuance of the Senior Notes. The Company paid consenting holders
$25.00 in cash for each $1,000 principal amount of the 9% senior subordinated
notes held by such consenting holders.
Income Taxes
The Company files a consolidated federal income tax return and such state or
local tax returns as are required. As of December 31, 2001, the Company had
approximately $303.5 million of net operating loss ("NOL") carryforwards which
are subject to annual limitations imposed by Internal Revenue Code Section 382.
See Note 9 to Notes to Consolidated Financial Statements.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized, but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company applied the new rules on accounting for goodwill and other
intangible assets on January 1, 2002. Application of the non-amortization
provisions of this new standard is expected to result in an increase in net
income of approximately $36.5 million per year. The Company expects to complete
its review for impairment of goodwill and certain other intangibles under the
new standard by the end of the second quarter of 2002. The effect of such
review for impairment cannot presently be determined, however, no assurance can
be given that an impairment charge upon finalization of the evaluation will not
be necessary. If such a charge is required, it will be recorded as a cumulative
effect of an accounting change, net of any applicable tax benefits.
39
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("FAS 143"), effective for fiscal years beginning after June 15,
2002. This standard provides the accounting for the cost of legal obligations
associated with the retirement of long-lived assets. FAS 143 requires that
companies recognize the fair value of a liability for asset retirement
obligations in the period in which the obligations are incurred and capitalize
that amount as a part of the book value of the long-lived asset. That cost is
then depreciated over the remaining life of the underlying long-lived asset.
The Company is currently evaluating the impact that this new standard will have
on future results of operations and financial position.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets ("FAS 144"), effective for fiscal years beginning
after December 15, 2001. This standard supersedes Financial Accounting
Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of, and provides a single accounting model for long-lived
assets to be disposed of. This standard significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. This distinction is
important because assets to be disposed of are stated at the lower of their
fair values or carrying amounts and depreciation is no longer recognized. The
new rules will also supersede the provisions of APB Opinion 30, Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, with regard to reporting the effects of a disposal of a segment
of a business and will require expected future operating losses from
discontinued operations to be displayed in discontinued operations in the
period in which the losses are incurred, rather than as of the measurement date
as presently required by APB 30. Other than the accounting impact in connection
with the sale of KCAL in 2002, the Company does not expect that the adoption of
FAS 144 will have a material impact on their operations or financial position.
The Company applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The Company's senior credit facilities, with approximately $145.7 million
outstanding as of December 31, 2001, bears interest at floating rates.
Accordingly, the Company is exposed to potential losses related to changes in
interest rates.
The Company's Senior Notes of approximately $250.0 million as of December
31, 2001 have fixed rates of interest of 8 1/2% maturing in 2008.
The Company's senior subordinated notes of approximately $825.0 million
outstanding as of December 31, 2001 are general unsecured obligations of the
Company and subordinated in right of payment to all senior debt, including all
indebtedness of the Company under the Senior Credit Facility and the Senior
Notes. The senior subordinated notes have fixed rates of interest ranging from
8 3/4% to 10% and are ten-year notes, maturing in various years commencing 2006.
The Company does not enter into derivatives or other financial instruments
for trading or speculative purposes; however, in order to manage its exposure
to interest rate risk, the Company entered into derivative financial
instruments in June 2001. These derivative financial instruments are interest
rate swap agreements that expire in 2011.
40
Item 8. Financial Statements and Supplemental Schedule.
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors................................................................. 42
Consolidated Balance Sheets as of December 31, 2000 and 2001................................... 43
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001..... 44
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 2000 and
2001......................................................................................... 45
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001..... 46
Notes to Consolidated Financial Statements..................................................... 47
Schedule II--Valuation and Qualifying Accounts................................................. 64
41
Report of Independent Auditors
Board of Directors and Stockholders
Young Broadcasting Inc.
We have audited the accompanying consolidated balance sheets of Young
Broadcasting Inc. and Subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Young Broadcasting Inc. and Subsidiaries at December 31, 2000 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 7, 2002
42
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2000 2001
-------------- --------------
Assets
Current assets:
Cash and cash equivalents (Note 2)..................................... $ 5,576,009 $ 1,936,794
Trade accounts receivable, less allowance for doubtful accounts of
$2,628,000 in 2000 and $2,385,000 in 2001............................ 97,704,449 78,230,696
Escrow account--current (Note 6)....................................... -- 21,418,943
Current portion of program license rights (Notes 2 and 4).............. 31,467,537 33,025,269
Prepaid expenses....................................................... 7,506,103 9,478,196
-------------- --------------
Total current assets............................................... 142,254,098 144,089,898
Property and equipment, less accumulated depreciation and amortization of
$154,493,991 in 2000 and $178,451,145 in 2001 (Notes 2 and 11).......... 119,483,399 106,398,927
Program license rights, excluding current portion (Notes 2 and 4)......... 1,814,832 3,510,817
Escrow account (Note 6)................................................... -- 20,358,775
Deposits and other assets................................................. 30,868,372 28,366,681
Broadcasting licenses and other intangibles, less accumulated amortization
of $159,850,583 in 2000 and $192,757,215 in 2001 (Note 2)............... 1,252,546,918 1,218,792,889
Deferred charges, less accumulated amortization of $17,019,904 in 2000 and
$8,054,830 in 2001 (Note 2)............................................. 7,400,330 21,497,029
-------------- --------------
Total assets....................................................... $1,554,367,949 $1,543,015,016
-------------- --------------
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................................. $ 25,868,453 $ 20,248,408
Accrued interest (Notes 6 and 7)....................................... 28,562,512 26,525,625
Accrued expenses....................................................... 14,270,758 13,178,102
Current installments of program license liability (Notes 2 and 4)...... 27,163,243 27,419,801
Current installments of long-term debt (Note 6)........................ 31,000,000 1,269,223
Current installments of obligations under capital leases (Note 11)..... 973,316 1,030,877
-------------- --------------
Total current liabilities.......................................... 127,838,282 89,672,036
Program license liability, excluding current installments (Notes 2 and 4). 2,109,357 3,950,954
Long-term debt, excluding current installments (Note 6)................... 674,647,221 144,383,881
Senior notes (Note 6)..................................................... -- 250,000,000
Senior Subordinated Notes (Note 7)........................................ 565,000,000 825,000,000
Deferred taxes and other liabilities (Note 9)............................. 76,073,361 91,575,455
Obligations under capital leases, excluding current installments (Note 11) 4,664,525 3,664,510
-------------- --------------
Total liabilities.................................................. 1,450,332,746 1,408,246,836
-------------- --------------
Minority interest......................................................... 941,645 --
Stockholders' equity (Note 8):
Class A Common Stock, $.001 par value. Authorized 20,000,000 shares;
issued and outstanding 14,254,404 shares at 2000 and 17,369,573
at 2001................................................................. 14,253 17,369
Class B Common Stock, $.001 par value. Authorized 20,000,000 shares;
issued and outstanding 2,291,786 shares at 2000 and 2,264,716
at 2001................................................................. 2,292 2,265
Additional paid-in capital................................................ 269,301,468 374,892,759
Accumulated other comprehensive loss...................................... -- (10,304,903)
Accumulated deficit....................................................... (166,224,455) (229,839,310)
-------------- --------------
Total stockholders' equity......................................... 103,093,558 134,768,180
-------------- --------------
Total liabilities and stockholders' equity......................... $1,554,367,949 $1,543,015,016
============== ==============
See accompanying notes to consolidated financial statements
43
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------
1999 200 2001
------------ ------------ -------------
Net operating revenue........................................ $280,658,940 $372,684,900 $ 368,172,958
------------ ------------ -------------
Operating expenses........................................... 64,843,194 84,787,322 98,135,325
Amortization of program license rights....................... 47,689,774 57,655,218 59,523,235
Selling, general and administrative expenses................. 50,131,239 64,985,471 74,337,465
Depreciation and amortization................................ 47,983,723 55,231,764 61,768,744
Corporate overhead........................................... 8,226,577 12,009,885 9,934,111
Non-cash compensation (Notes 9 and 11)....................... 19,101,560 1,321,031 1,468,532
------------ ------------ -------------
Operating income............................................. 42,682,873 96,694,209 63,005,546
------------ ------------ -------------
Interest expense, net........................................ (62,980,836) (95,842,753) (112,753,609)
Interest expense, non-cash................................... -- -- (3,773,422)
Gain on sale of station...................................... -- 15,650,704 --
Non-cash change in fair value swap........................... -- -- 2,295,495
Other (expenses) income, net................................. (1,244,112) (1,012,776) 47,685
------------ ------------ -------------
(64,224,948) (81,204,825) (114,183,851)
------------ ------------ -------------
Net (loss) income before provision for income taxes.......... (21,542,075) 15,489,384 (51,178,305)
Provision for income taxes................................... -- 1,500,000 --
------------ ------------ -------------
Net (loss) income before extraordinary item.................. $(21,542,075) $ 13,989,384 (51,178,305)
------------ ------------ -------------
Extraordinary loss on extinguishment of debt................. -- -- (12,436,550)
------------ ------------ -------------
Net (loss) income............................................ $(21,542,075) $ 13,989,384 $ (63,614,855)
============ ============ =============
Net (loss) income before extraordinary item per common share:
Basic..................................................... $ (1.59) $ 0.92 $ (2.81)
============ ============ =============
Diluted................................................... $ (1.59) $ 0.85 $ (2.81)
============ ============ =============
Net (loss) income per common share:
Basic..................................................... $ (1.59) $ 0.92 $ (3.50)
============ ============ =============
Diluted................................................... $ (1.59) $ 0.85 $ (3.50)
============ ============ =============
Weighted average shares:
Basic..................................................... 13,588,108 15,157,243 18,185,945
Diluted................................................... 13,588,108 16,440,505 18,185,945
============ ============ =============
See accompanying notes to consolidated financial statements.
44
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
------------------
Additional Accumulated Total
Paid-In Accumulated Comprehensive Stockholders'
Class A Class B Capital Deficit Loss Equity
-------- -------- ------------ ------------- -------------- --------------
Balance at January 1, 1999..................... $ 11,402 $ 2,408 $205,523,080 $(158,671,764) $ 46,865,126
Contribution of shares into Company's
defined contribution plan................. 21 -- 854,205 -- 854,226
Conversion of Class B Common Stock to Class
A Common Stock............................ 57 (57) -- -- --
Exercise of stock options................... 12 -- 223,000 -- 223,012
Repurchase and retirement of Class A Common
Stock..................................... (349) -- (14,031,241) -- (14,031,590)
Non-cash compensation....................... -- -- 18,290,583 -- 18,290,583
Net loss for 1999........................... -- -- -- (21,542,075) (21,542,075)
-------- -------- ------------ ------------- -------------- --------------
Balance at December 31, 1999................... $ 11,143 $ 2,351 $210,859,627 $(180,213,839) $ 30,659,282
Contribution of shares into Company's
defined contribution plan................. 44 -- 1,217,529 -- 1,217,573
Conversion of Class B Common Stock to Class
A Common Stock............................ 59 (59) -- -- --
Exercise of stock options................... 7 -- 211,668 -- 211,675
Repurchase and retirement of Class A Common
Stock..................................... (889) -- (29,995,098) -- (29,995,987)
Issuance of Class A Common Stock............ 3,889 -- 87,007,742 -- 87,011,631
Net income for 2000......................... -- -- -- 13,989,384 13,989,384
-------- -------- ------------ ------------- -------------- --------------
Balance at December 31, 2000................... $ 14,253 $ 2,292 $269,301,468 $(166,224,455) $ 103,093,558
Contribution of shares into Company's
defined contribution plan................. 61 1,521,874 1,521,935
Conversion of Class B Common Stock to Class
A Common Stock............................ 27 (27)
Exercise of stock options................... 28 572,417 572,445
Issuance of Class A Common Stock............ 3,000 103,497,000 103,500,000
Net loss for 2001........................... (63,614,855) (63,614,855)
Comprehensive Loss*............................
Cumulative effect of change in accounting
for cash flow hedge....................... (6,816,890) (6,816,890)
Net change associated with current period
hedging transactions...................... (6,265,478) (6,265,478)
Net amount of reclassification to earnings.. 2,777,465 2,777,465
-------- -------- ------------ ------------- -------------- --------------
Balance at December 31, 2001................... $ 17,369 $ 2,265 $374,892,759 $(229,839,310) $ (10,304,903) $ 134,768,180
======== ======== ============ ============= ============== ==============
- --------
* Total Comprehensive Loss for 2001 $73,919,758
See accompanying notes to consolidated financial statements.
45
YOUNG BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------
1999 2000 2001
------------ ------------- -------------
Operating activities
Net (loss) income........................................................... $(21,542,075) $ 13,989,384 $ (63,614,855)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment................. 23,985,741 22,718,918 25,262,790
Amortization of program license rights.................................. 47,689,774 57,655,218 59,523,235
Amortization of broadcasting licenses, other intangibles and deferred
charges................................................................ 23,997,982 32,512,846 36,505,954
Non-cash compensation paid in Common Stock.............................. 19,101,560 1,321,031 1,468,532
Non-cash interest expense on outstanding indebtedness................... 85,829 -- 3,773,422
Non-cash change in fair value swap...................................... -- -- (6,184,294)
Loss on disposal of fixed assets........................................ 167,480 174,944 713,421
Extraordinary loss on extinguishment of debt............................ -- -- 12,436,550
Gain on sale of WKBT-TV................................................. -- (15,650,704) --
Payments on programming license liabilities............................. (46,678,348) (53,622,716) (54,432,840)
(Increase) decrease in trade accounts receivable........................ (10,891,837) 2,429,748 19,554,386
Increase in prepaid expenses............................................ (3,715,479) (1,219,271) (1,972,093)
Increase (decrease) in trade accounts payable........................... 4,575,414 4,767,416 (7,272,605)
(Decrease) increase in accrued expenses and other liabilities........... (378,071) 15,685,541 (779,225)
------------ ------------- -------------
Net cash provided by operating activities................................... 36,397,970 80,762,355 24,982,378
------------ ------------- -------------
Investing activities
Purchase of KRON-TV......................................................... -- (650,000,000) --
Capital expenditures........................................................ (9,359,911) (17,213,004) (10,726,991)
Proceeds from sale of WKBT-TV............................................... -- 23,983,758 --
Decrease (increase) in deposits and other assets............................ 1,625,139 (1,885,777) (4,041,326)
Increase in broadcast licenses and other intangibles........................ (152,419) -- --
------------ ------------- -------------
Net cash used in investing activities....................................... (7,887,191) (645,115,023) (14,768,317)
------------ ------------- -------------
Financing activities
Borrowings from working capital facility.................................... 6,327,000 3,910,000 92,232,778
Principal payments on long-term debt........................................ (12,327,000) (124,267,000) (652,226,895)
Borrowings from new credit facility......................................... -- 747,004,221 --
Deferred acquisition costs.................................................. (552,705) (13,528,539) --
Debt refinancing costs...................................................... -- (15,486,111) (18,912,138)
Repurchase of Senior Subordinated Notes..................................... (5,000,000) -- (254,445,131)
Repurchase of Class A and Class C common stock.............................. (14,031,590) (29,995,987) --
Proceeds from issuance of Senior Notes...................................... -- -- 250,000,000
Escrow account.............................................................. -- -- (41,777,718)
Proceeds from issuance of common stock...................................... -- -- 103,500,000
Proceeds from issuance of subordinated debt................................. -- -- 508,411,991
Proceeds from exercise of options........................................... 223,012 211,675 572,445
Principal payments under capital lease obligations.......................... (860,650) (871,726) (1,208,608)
------------ ------------- -------------
Net (cash used) provided by financing activities............................ (26,221,933) 566,976,533 (13,853,276)
------------ ------------- -------------
Net increase (decrease) in cash............................................. 2,288,846 2,623,865 (3,639,215)
Cash and cash equivalents at beginning of year.............................. 663,298 2,952,144 5,576,009
------------ ------------- -------------
Cash and cash equivalents at end of year.................................... $ 2,952,144 $ 5,576,009 $ 1,936,794
============ ============= =============
Supplemental disclosure of cash flow information
Interest paid............................................................... $ 62,723,887 $ 79,976,229 $ 116,969,414
============ ============= =============
Income taxes paid........................................................... -- $ 1,125,000 $ --
============ ============= =============
Non-cash investing activities
Common stock issued in connection with purchase of KRON-TV.................. -- $ 87,011,631 $ --
============ ============= =============
See accompanying notes to consolidated financial statements.
46
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations of the Company
The business operations of Young Broadcasting Inc. and subsidiaries (the
"Company") consist of ten network affiliated stations (six with ABC, three with
CBS, and one with NBC), and two independent commercial television broadcasting
station in the states of Michigan, Wisconsin, Louisiana, Illinois, Tennessee,
New York, Virginia, Iowa, South Dakota and California. In addition, the
accompanying consolidated financial statements include the Company's
wholly-owned national television sales representation firm.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of
Young Broadcasting Inc., its wholly-owned subsidiaries and three partnerships.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Concentration of Credit Risk
The Company provides advertising air time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit
is extended based on an evaluation of the customer's financial condition, and
advance payment is not generally required. Credit losses are provided for in
the consolidated financial statements and have consistently been within
management's expectations.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The principal areas of judgment relate to the allowance for
doubtful accounts and the realizability of program license rights. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Program License Rights
Program license rights are stated at cost, less accumulated amortization.
Program license rights acquired as part of a station acquisition are recorded
at their appraised value. Program rights with lives greater than one year, in
which the Company has the right to multiple showings, are amortized using an
accelerated method. Program rights expected to be amortized in the succeeding
year and amounts payable within one year are classified as current assets and
liabilities, respectively. Program rights with lives of one year or less are
amortized on a straight-line basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Equipment under capital leases is stated at the present value of the future
minimum lease payments at the inception of the lease, less accumulated
depreciation. Major renewals and improvements are capitalized to the property
and equipment accounts. Maintenance and repairs which do not improve or extend
the lives of the respective assets are expensed as incurred.
47
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization of property and equipment are calculated on
the straight-line basis over the estimated useful lives of the assets.
Equipment held under capital leases is generally amortized on a straight-line
basis over the shorter of the lease term or estimated useful life of the asset.
The estimated useful lives of depreciable assets are as follows:
Estimated
Classification Useful Lives
-------------- ------------
Land improvements.......................................... 5-19 years
Buildings and building improvements........................ 5-40 years
Broadcast equipment........................................ 3-10 years
Office furniture, fixtures and other equipment............. 5-8 years
Vehicles................................................... 3-5 years
Property and equipment at December 31, 2000 and 2001 consist of the
following:
2000 2001
-------- --------
(in thousands)
Land and land improvements............................ $ 9,138 $ 9,434
Buildings and building improvements................... 47,298 46,813
Broadcast equipment................................... 202,139 207,260
Office furniture, fixtures and other equipment........ 9,132 14,111
Vehicles.............................................. 6,270 7,232
-------- --------
273,977 284,850
Less accumulated depreciation and amortization........ 154,494 178,451
-------- --------
$119,483 $106,399
======== ========
Deposits and Other Assets
Deposits and other assets included approximately $11.6 million of
construction-in-progress at December 31, 2001, a portion of which is related to
digital equipment projects, that will be reclassified to property, plant and
equipment, and will begin depreciation upon the completion of the projects.
Broadcasting Licenses and Other Intangibles
Intangible assets, which include broadcasting licenses, network affiliation
agreements, and other intangibles are carried on the basis of cost, less
accumulated amortization. Cost is based upon appraisals. Intangible assets are
amortized on a straight-line basis over varying periods, not exceeding 40
years. It is the Company's policy to account for broadcasting licenses and
other intangibles at the lower of amortized cost or estimated realizable value.
As part of an ongoing review of the valuation and amortization of broadcasting
licenses and other intangibles of the Company and its subsidiaries, management
assesses the carrying value of the broadcasting licenses and other intangibles
if facts and circumstances suggest that there may be impairment. If this review
indicates that the broadcasting licenses and other intangibles will not be
recoverable as determined by a non-discounted cash flow analysis of the
operating assets over the remaining amortization period, the carrying value of
the broadcasting licenses and other intangibles would be reduced to estimated
fair value (see Impact of Recently Issued Accounting Standards).
48
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Charges
Deferred charges incurred during 2000 consisted of debt issuance costs of
approximately $15.5 million incurred in connection with the Company's new
senior credit facility entered into on June 26, 2000 (see Note 6), and
acquisition costs of approximately $13.5 million associated with the
acquisition of KRON-TV and BayTV on June 26, 2000(see Note 3).
Deferred charges incurred during 2001 consisted primarily of debt issuance
costs incurred in connection with the Company's 10% Senior Subordinated Notes
issued on March 1, 2001 (see note 7), 8 1/2% Senior Notes issued November 7,
2001 (see note 6) and an amendment to its Senior Credit Facility (see note 6).
As a result of the issuance of the 10% Senior Subordinated Notes, approximately
$12.4 million of net deferred charge incurred in 1994 and 1995 relating to the
11 3/4% Senior Subordinated Notes and the 10 1/8% Senior Subordinated Notes
were expensed in 2001 and included as part of the extraordinary item in the
accompanying statements of operations (see note 5).
Revenue
The Company's primary source of revenue is derived from the sale of
television time to advertisers. Revenue is recorded when the advertisements are
broadcast.
Barter Arrangements
The Company, in the ordinary course of business, provides advertising air
time to certain customers in exchange for products or services. Barter
transactions are recorded on the basis of the estimated fair market value of
the products or services received. Revenue is recognized as the related
advertising is broadcast and expenses are recognized when the merchandise or
services are consumed or utilized. Barter revenue transactions related to the
purchase of equipment amounted to approximately $228,000, $851,000 and $945,000
in 1999, 2000 and 2001, respectively, and are depreciated in accordance with
Company policy as stated above. The Company has entered into barter agreements
with program syndicators for television programs with an estimated fair market
value, recorded as assets and liabilities at December 31, 2000 and 2001, of
$1.3 million and $2.1 million, respectively.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return and separate state tax returns. In addition, partnership returns are
filed for its three partnerships. Since the partners are all participants in
the consolidation, all partner-ship income or losses are ultimately included in
the consolidated federal income tax return. The future utilization of a
significant portion of the Company's net operating losses for federal income
tax purposes is subject to an annual limitation (see Note 9).
Accounting Change--Derivative Financial Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain Hedging
Activities," on January 1, 2001. SFAS No. 133 requires that all derivatives be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. SFAS No. 133, as amended, requires the transition adjustment
resulting from adopting this statement to be reported in net income or other
comprehensive income, as appropriate, as the cumulative effect of change in
accounting principle. In accordance with the transition provisions of SFAS No.
133, the Company recorded a cumulative transition adjustment to other
comprehensive loss of approximately $6.8 million, to recognize the value of its
derivative instruments as of the date of adoption.
49
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company utilizes derivative financial instruments, such as interest rate
swap agreements, to manage changes in market conditions related to debt
obligations. As of December 31, 2001, the Company has two interest rate swaps
that serve as economic hedges of its fixed rate debt.
The Company recognizes all derivatives on the balance sheet at fair value at
the end of each quarter. Changes in the fair value of a derivative that is
designated and meets all the criteria for a fair value hedge are recorded in
earnings as there are changes in the fair value of the hedged item attributable
to the risk being hedged. Changes in fair value of derivative instruments not
designated as hedging instruments and ineffective portions of hedges that are
designated as hedging instruments, are recognized in earnings in the current
period. For the year ended December 31, 2001, the Company recorded a
mark-to-market non-cash change in fair value of approximately $95,000 for its
current outstanding economic hedges.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized, but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company applied the new rules on accounting for goodwill and other
intangible assets on January 1, 2002. Application of the non-amortization
provisions of this new standard is expected to result in an increase in net
income of approximately $36.5 million. The Company expects to complete its
review for impairment of goodwill and certain other intangibles under the new
standard by the end of the second quarter of 2002. The effect of such review
for impairment cannot presently be determined, however, no assurance can be
given that an impairment charge upon finalization of the evaluation will not be
necessary. If such a charge is required, it will be recorded as a cumulative
effect of an accounting change, net of any applicable tax benefit.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("FAS 143"), effective for fiscal years beginning after June 15,
2002. This standard provides the accounting for the cost of legal obligations
associated with the retirement of long-lived assets. FAS 143 requires that
companies recognize the fair value of a liability for asset retirement
obligations in the period in which the obligations are incurred and capitalize
that amount as a part of the book value of the long-lived asset. That cost is
then depreciated over the remaining life of the underlying long-lived asset.
The Company is currently evaluating the impact that this new standard will have
on future results of operations and financial position.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets ("FAS 144"), effective for fiscal years beginning
after December 15, 2001. This standard supersedes Financial Accounting
Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of, and provides a single accounting model for long-lived
assets to be disposed of. This standard significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. This distinction is
important because assets to be disposed of are stated at the lower of their
fair values or carrying amounts and depreciation is no longer recognized. The
new rules will also supersede the provisions of APB Opinion 30, Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, with regard to reporting the effects of a disposal of a segment
of a business and will require expected future operating losses from
discontinued operations to be displayed in
50
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discontinued operations in the period in which the losses are incurred, rather
than as of the measurement date as presently required by APB 30. Other than the
accounting impact in connection with the sale of KCAL expected in 2002, the
Company does not expect that the adoption of FAS 144 will have a material
impact on their operations or financial position.
The Company will apply the new rules on accounting for goodwill and other
intangible assets on January 1, 2002. During 2002, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
Reclassifications
Certain balances in prior fiscal years have been reclassified to conform to
the presentation adopted in the current fiscal year.
3. Acquisition and Sale of Stations
On June 26, 2000, the Company acquired KRON-TV ("KRON") and a 51% interest
in the San Francisco cable channel BayTV ("BayTV") from The Chronicle
Publishing Company ("CPC"). Under the terms of the agreement, the Company paid
CPC $650.0 million in cash plus up to approximately 3.9 million shares of the
Company's Class A Common Stock, subject to adjustment. This acquisition was
accounted for under the purchase method of accounting. Net tangible and
intangible assets amounted to approximately $61.8 million and $677.3 million,
respectively. Fixed assets are being depreciated over their estimated useful
lives and intangible assets are being amortized over their estimated lives, not
to exceed 40 years. The operating results of KRON-TV and BayTV are included in
the Company's consolidated results of operations from the date of acquisition.
On February 29, 2000, the Company completed the sale of WKBT-TV in LaCrosse,
Wisconsin to Television Wisconsin, Inc. of Madison, Wisconsin, for
approximately $24.0 million. The Company recorded a gain on the sale of
approximately $15.7 million, and a provision for income taxes of $1.5 million,
in connection with the sale in the first quarter of 2000. The proceeds from the
sale were used to pay down debt under the senior credit facility.
The following unaudited pro forma information gives effect to the
acquisition of KRON and BayTV as if it had been effected on January 1, 2000.
The pro forma information for the year ended December 31, 2000 does not purport
to represent what the Company's results of operation would have been if such
transactions had been effected at such dates and do not purport to project
results of operations of the Company in any future period.
Pro Forma Actual
December 31, 2000 December 31, 2001
----------------- -----------------
(dollars in thousands, except per share data)
Net operating revenue........ $446,734 $368,173
Operating income............. $118,126 $ 63,006
Net income (loss)............ $ 5,775 $(63,615)
Basic income (loss) per
common share............... $ 0.34 $ (3.50)
4. Program License Rights and Liability
The Company entered into agreements for program license rights which became
available in 2000 and 2001 of approximately $59.8 million and $62.1 million,
respectively.
51
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 16, 1998, the Company entered into a long-term agreement with the
Los Angeles Lakers ("Lakers") with broadcast rights through the 2004/2005
season. Under the terms of the seven-year deal, KCAL-TV, Los Angeles,
California, a wholly-owned subsidiary of the Company, will broadcast 41 Lakers
pre-season and regular season away games annually. Additionally, KCAL-TV
obtained the broadcast rights to all post-season away games not subject to
NBA/network commitments. KCAL-TV also obtained the exclusive sales rights and
control over broadcast, production and inventory activities. The Company paid
an initial rights fee of $30.0 million on August 14, 1998, which was recorded
as a deposit in the accompanying consolidated financial statements. The Company
will pay an additional $18.0 million per season. In the event that all 41 games
are not made available to KCAL-TV or are canceled, the Company will receive a
per game credit.
The unpaid program license liability, which is reflected in the December 31,
2001 balance sheet, is payable during each of the years subsequent to 2001 as
follows: $27.4 million in 2002; $3.5 million in 2003; $333,000 in 2004;
$136,000 in 2005; and $21,000 thereafter.
The obligation for programming that has been contracted for, but not
recorded in the accompanying balance sheets because the program rights were not
currently available for airing aggregated approximately $64.7 million at
December 31, 2001.
5. Extraordinary Item
Deferred financing costs, arising from the issuance of its 11 3/4% Senior
Subordinated Notes Offering in 1994 and its 10 1/8% Senior Subordinated Notes
Offering in 1995, with a net carrying value of $12.4 million were charged to
2001 earnings as an extraordinary item in connection with the Company's
redemption of these notes in the first quarter of 2001. (see Note 7).
6. Long -Term Debt
Long-term debt (excluding Senior Subordinated Notes) at December 31, 2000
and 2001 consisted of the following:
2000 2001
-------- --------
(dollars in thousands)
Senior Credit Facility........................... $705,647 $145,653
8 1/2% Senior Notes due 2008..................... -- 250,000
Less:
Scheduled current maturities.................. (31,000) (1,269)
-------- --------
Long-term debt excluding all current installments 674,647 394,384
======== ========
On June 26, 2000, the Company entered into a new senior credit facility
which provides for borrowings up to an aggregate of $600.0 million (the "New
Senior Credit Facility") in the form of an amortizing term loan facility in the
amount of $125.0 million ("Term A") that matures on November 30, 2005, and an
amortizing term loan facility in the amount of $475.0 million ("Term B") that
matures on December 31, 2006. In addition, on June 26, 2000, the Company
amended and restated its existing senior credit facility (as amended, the
"Amended and Restated Credit Facility"), to provide for borrowings of up to an
aggregate of $200.0 million, in the form of a $50.0 million term loan and a
revolving credit facility in the amount of $150.0 million, both of which mature
on November 30, 2005. The New Senior Credit facility and the Amended and
Restated Credit Facility are referred to collectively as the "Senior Credit
Facility." The Company borrowed $708.6 million under the Senior Credit Facility
to finance the cash portion of the KRON-TV acquisition, pay-down $41.1 million
outstanding under the existing senior credit facility, including interest, and
pay closing costs relating to both.
52
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the Senior Credit Facility, the Company is prohibited from
making investments or advances to third parties exceeding $15.0 million unless
the third party becomes a guarantor of the Company's obligation. However, the
Company is permitted to purchase up to $30.0 million of its shares of common
stock, subject to the limitations set forth in the Senior Credit Facility and
in the indentures to its senior subordinated debt. In addition, the Company may
utilize the undrawn amounts under the revolving portion of the Senior Credit
Facility to retire or prepay subordinated debt, subject to the limitations set
forth in the indentures. In 2000, the Company repurchased 888,631 shares of
Class A Common Stock for $30.0 million.
At December 31, 2001, the Company had outstanding borrowings of $145.7
million under the Senior Credit Facility, which approximates its fair value as
its interest rate floats with market conditions. The Company pays an annual
commitment fee of 0.50% of the unused commitment. In addition, at December 31,
2001, the Company had an additional $80.0 million of unused available
borrowings under the revolving credit portion of the Senior Credit Facility.
Long-term debt repayments are due as follows (in millions):
Senior Senior
Credit Facility Notes
--------------- ------
Year ended December 31:
2002.................. $ 1.3 $ --
2003.................. 1.3 --
2004.................. 1.3 --
2005.................. 1.3 --
2006.................. 140.5 --
Thereafter............ -- 250.0
------ ------
$145.7 $250.0
====== ======
The Senior Credit Facility provides, at the option of the Company, that
borrowed funds bear interest based upon the London Interbank Offered Rate
(LIBOR), the customary "CD Rate" or "Base Rate." In addition to the index rate,
the Company pays a floating percentage tied to the Company's ratio of total
debt to operating cash flow. At December 31, 2001, the effective interest rate
for amounts outstanding under the Senior Credit Facility was 7.49%.
Each of the Subsidiaries has guaranteed the Company's obligations under the
Senior Credit Facility. The Senior Credit Facility is secured by the pledge of
all the stock of the Subsidiaries and a first priority lien on all of the
assets of the Company and its Subsidiaries.
The senior credit facilities require the Company to maintain certain
financial ratios. In order to allow more long-term financial flexibility and
liquidity, on November 21, 2001, the Company effected Amendment No. 4 to its
senior credit facilities. This amendment increased the index rates ranging, in
the case of LIBOR rate loans, from 1.75% based upon a ratio under 5.0:1, to
3.50% based upon a 7.0:1 or greater ratio for the Term A advances and revolver
facility; and 3.75% for the Term B advances. Effective with the issuance of the
Senior Notes, the Company is not required to maintain a total debt to operating
cash flow ratio until June 30, 2004, when the commencing ratio will be 7.35x,
the Company is required to maintain a senior debt to operating cash flow ratio
ranging from 3.50x to 4.00x, and the Company is also required to maintain until
December 31, 2006, a senior secured debt to operating cash flow ratio ranging
from 1.75x to 2.00x. Additionally, the Company is required to maintain an
operating cash flow to total cash interest expense ratio ranging from 1.20x to
1.40x and is also required to maintain an operating cash flow minus capital
expenditures to pro forma debt service ratio of no less than 1.10x at any time.
Such ratios must be maintained as of the last day of the quarter for each of
the periods.
53
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Senior Credit Facility requires the Company to apply on April 30 of each
year 50% to 75% (depending upon the level of the Company's debt to operating
cash flow ratio at the end of such year) of its "Excess Cash Flow" for the
preceding completed fiscal year, beginning with Fiscal Year 2001, to reduce
outstanding debt under the Term Loan A advances and Term Loan B advances in
proportion to the outstanding principal amount of such advances.
On June 27, 2001, the Company entered into interest rate swap agreements for
a total notional amount of $100.0 million with two commercial banks who are
also lenders under the Senior Credit Facility. The swap's effective date was
September 4, 2001 and expires on March 1, 2011. The Company pays a floating
interest rate based upon a six month LIBOR rate and the Company receives
interest from the commercial banks, at a fixed rate of 10.0%. The net interest
rate differential paid or received will be recognized as an adjustment to
interest expense. The new interest swaps are accounted for at market value and
are considered economic hedges. The Company received approximately $14.0
million at the inception of the new swap agreements, which was used to pay the
outstanding liability upon the termination of the old cash flow hedges, and
recorded a new swap liability. The Company recorded $3.8 million of non-cash
interest expense relating to the amortization of the old swap liability. The
new swap liability is being adjusted to fair value on a quarterly basis as a
charge to current period interest expense over the term of the swap which began
on September 4, 2001.
On June 6, 2000, the Company entered into an interest rate swap agreement
for a notional amount of $272.0 million with two commercial banks who are also
lenders under the Senior Credit Facility. The swap's effective date is January
2, 2002 and expires on July 2, 2003. The Company will pay a fixed interest rate
of 7.2625% and the Company will receive interest from the commercial banks,
based upon a three month LIBOR rate. The net interest rate differential to be
paid or received will be recognized as an adjustment to interest expense. This
swap was terminated on June 27, 2001 (see above).
On July 3, 2000, the Company entered into an interest rate swap agreement
for a notional amount of $206.0 million with a commercial bank who is also a
lender under the Senior Credit Facility. The swap's effective date was July 3,
2000 and expires on January 3, 2002. The Company paid a fixed interest rate of
7.0882% and the Company received interest from the commercial bank, based upon
a six month LIBOR rate. The net interest rate differential paid was recognized
as an adjustment to interest expense and amounted to $128,000 for the year
ended December 31, 2000. The fair market value of the interest rate swap as of
December 31, 2000 was a liability of $2.7 million. This swap was terminated on
January 27, 2001 (see above).
On December 7, 2001, the Company completed a private offering of $250.0
million principal amount of its 8 1/2% Senior Notes due 2008 (the "Senior
Notes"). The Senior Notes were initially offered to qualified institutional
buyers under Rule 144A and to persons outside the United States under
Regulation S. The Company used all of the net proceeds of approximately $243.1
million to repay a portion of its outstanding indebtedness under its Senior
Credit Facility, including redemption premiums and to pay fees related to the
Senior Notes. On January 31, 2002, the Company filed a registration statement
with the SEC with respect to an offer to exchange the Senior Notes for notes of
the Company with substantially identical terms of the Senior Notes, except the
new notes will not contain terms with respect to transfer restrictions. The
registration statement has not been declared effective by the SEC as of March
22, 2002.
Concurrent with the closing of the Senior Notes, the indenture required the
Company to place into an escrow account, for the benefit of the holders of the
Senior Notes, an amount sufficient to pay the first four semi-annual interest
payments on the Senior Notes (the "Escrow Account"). The Escrow Account of
$41.4 million was funded by the Company from borrowings under its Senior Credit
Facility. The Company entered into an escrow agreement to provide, among other
things, that funds may be disbursed from the Escrow Account only to pay
interest on the Senior Notes (or, if a portion of the Senior Notes has been
retired by the Company, funds
54
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
representing the interest payment on the retired Senior Notes will be released
to the Company as long as no default exists under the indenture), and, upon
certain repurchases or redemptions thereof, to pay principal of an premium, if
any, thereon. All funds placed in the Escrow Account were invested on December
7, 2001 in Treasury Bills, Treasury Principal Strips and Treasury Interest
Strips with maturity dates in correlation with the interest payments for the
first two years.
7. Senior Subordinated Notes
Senior Subordinated Notes at December 31, 2000 and 2001 consisted of the
following:
2000 2001
-------- --------
(dollars in thousands)
11.75% Senior Subordinated Notes. $120,000
10.125% Senior Subordinated Notes 120,000
9% Senior Subordinated Notes..... 125,000 125,000
8.75% Senior Subordinated Notes.. 200,000 200,000
10% Senior Subordinated Notes.... 500,000
-------- --------
Senior Subordinated Notes........ $565,000 $825,000
======== ========
On November 14, 1994, the Company issued 11 3/4% Senior Subordinated Notes
due 2004 with an aggregate principal amount of $120.0 million (the "November
1994 Notes"). Interest on the November 1994 Notes is payable semi-annually on
May 15 and November 15. The November 1994 Notes are redeemable, in whole or in
part, at the option of the Company on or after November 15, 1999, at the
redemption prices set forth in the Senior Subordinated Note Indenture
("Indenture") pursuant to which the November 1994 Notes were issued, plus
accrued interest to the date of redemption. On March 30, 2001, the Company
redeemed the November 1994 Notes in full (see below).
On June 12, 1995, the Company issued 10 1/8% Senior Subordinated Notes due
2005 with an aggregate principal amount of $125.0 million (the "June 1995
Notes"). Interest on the June 1995 Notes is payable semi-annually on February
15 and August 15. The June 1995 Notes are redeemable, in whole or in part, at
the option of the Company on or after February 15, 2000, at the redemption
prices set forth in the Indenture pursuant to which the June 1995 Notes were
issued, plus accrued interest to the date of redemption. On August 17, 1999,
the Company purchased $5 million of outstanding 10 1/8% Senior Subordinated
Notes through JP Morgan Securities at 103 3/8 or $5.2 million. On March 30,
2001, the Company redeemed the June 1995 Notes in full (see below).
On January 16, 1996, the Company issued 9% Senior Subordinated Notes due
2006 with an aggregate principal amount of $125.0 million (the "January 1996
Notes"). Interest on the January 1996 Notes is payable semi-annually on January
15 and July 15. The January 1996 Notes are redeemable, in whole or in part, at
the option of the Company on or after January 15, 2001, at the redemption
prices set forth in the Indenture, pursuant to which the January 1996 Notes
were issued, plus accrued interest to the date of redemption.
On November 27, 2001, the holders of a majority in principal amount of the
January 1996 Notes consented to proposed amendments to the indenture governing
the 9% senior subordinated notes. These amendments, among other things,
provided the Company with flexibility to incur additional debt, including the
Senior Notes. The amendments became effective upon the issuance of the Senior
Notes. The Company paid consenting holders $25.00 in cash for each $1,000
principal amount of the 9% senior subordinated notes held by such consenting
holders.
On June 23, 1997, the Company issued 8 3/4% Senior subordinated Notes due
2007 with an aggregate principal amount of $200.0 million (the "June 1997
Notes"). Interest on the June 1997 Notes is payable semi-annually on June 15
and December 15. The June 1997 Notes are redeemable, in whole or in part, at
the option of
55
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company on or after June 15, 2002, at the redemption prices set forth in
the Indenture, pursuant to which the June 1997 Notes were issued, plus accrued
interest to the date of redemption.
On March 1, 2001, the Company completed a private offering of $500.0 million
principal amount of its 10% Senior Subordinated Notes due 2011 (the "March 2001
Notes"). The March 2001 Notes were sold by the Company at a premium of
approximately $8.4 million. The Company used approximately $254.4 million of
the net proceeds to redeem all of its 11 3/4% Senior Subordinated Notes due
2004 and its 10 1/8% Senior Subordinated Notes due 2005, including accrued
interest and redemption premiums. The Company used the remaining proceeds,
approximately $253.6 million to repay a portion of its outstanding indebtedness
under the Company's Senior Credit Facility. On September 28, 2001, the Company
exchanged the March 2001 Notes for notes with substantially identical terms as
the March 2001 Notes, except that the new notes do not contain terms with
respect to transfer restrictions.
The Company's January 1996 Notes, June 1997 Notes and March 2001 Notes
(collectively the "Notes") are general unsecured obligations of the Company and
subordinated in right of payment to all senior debt, including all indebtedness
of the Company under the Senior Credit Facility. The Notes are guaranteed,
jointly and severally, on a senior subordinated unsecured basis by all of the
Company's subsidiaries.
Upon a change of control, each holder of the Notes will have the right to
require the Company to repurchase such holder's Notes at a price equal to 101%
of their principal amount plus accrued interest to the date of repurchase. In
addition, the Company will be obligated to offer to repurchase Notes at 100% of
their principal amount plus accrued interest to the date of repurchase in the
event of certain asset sales.
At December 31, 2001, the January 1996 Notes, the June 1997 Notes and the
March 2001 Notes were trading in the public market with ask prices of 93.0,
90.0 and 94.75, respectively.
8. Stockholders' Equity
Common Stock
The Company's stockholders' equity consists of three classes of common stock
designated Class A, Class B and Class C which are substantially identical
except for voting rights. The holders of Class A Common Stock are entitled to
one vote per share. Holders of Class B Common Stock are entitled to ten votes
per share. Holders of Class C Common Stock are not entitled to vote. Holders of
all classes of Common Stock entitled to vote will vote together as a single
class. Holders of Class C Common Stock may at any time convert their shares
into the same number of shares of Class A Common Stock. At December 31, 2001,
there were no holders of Class C Common Stock outstanding.
Ownership of Class B Common Stock is restricted to members of management and
by, or in trust for, family members of management ("Management Group"). In the
event that any shares of Class B Common Stock held by a member of the
Management Group are transferred outside of the Management Group, such shares
will automatically be converted into shares of Class A Common Stock.
In any merger, consolidation or business combination, the consideration to
be received per share by holders of Class A and Class C Common Stock must be
identical to that received by holders of Class B Common Stock.
On June 26, 2001, the Company completed an underwritten public offering of 3
million shares of its Class A common stock at a price per share of $36.00. The
proceeds of the offering, net of underwriting discounts and commissions, was
$103.5 million and all such net proceeds were used by the Company to repay
indebtedness outstanding under its senior credit facilities.
56
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The terms of the Senior Credit Facility and the indentures relating to the
Company's outstanding Senior Subordinated Notes (collectively the "Indentures")
restrict the Company's ability to pay cash dividends on its Common Stock. Under
the Indentures, the Company is not permitted to pay any dividends on its Common
Stock unless at the time of, and immediately after giving effect to the
dividend, no default would result under the Indentures and the Company would
continue to have the ability to incur indebtedness. In addition, under the
Indentures, dividends may not exceed an amount equal to the Company's cash flow
less a multiple of the Company's interest expense, plus the net proceeds of the
sale by the Company of additional capital stock.
The Company regularly contributed Class A Common Stock into its defined
contribution plan (see Note 10) for the years ended 1999, 2000 and 2001.
Stock Option Plans
On May 22, 1995, the Company adopted the Young Broadcasting Inc. 1995 Stock
Option Plan ("1995 Stock Option Plan").
The 1995 Stock Option Plan was adopted to provide incentives for independent
directors, officers and employees. It may be administered by either the entire
Board of Directors (the "Board") of the Company or a committee consisting of
two or more members of the Board, each of whom is a non-employee director. The
Board of Directors or committee, as the case may be, is to determine, among
other things, the recipients of grants, whether a grant will consist of
incentive stock options ("ISOs"), non-qualified stock options or stock
appreciation rights ("SARs") (in tandem with an option or free-standing) or a
combination thereof, and the number of shares to be subject to such options.
ISOs may be granted only to officers and key employees of the Company and its
subsidiaries. Non-qualified stock options and SARs may be granted to such
officers and employees as well as to agents and directors of and consultants to
the Company, whether or not otherwise employees of the Company.
The 1995 Stock Option Plan provides for the granting of ISOs to purchase the
Company's Common Stock at not less than the fair market value on the date of
the option grant and the granting of non-qualified options and SARs with any
exercise price. SARs granted in tandem with an option have the same exercise
price as the related option. The total number of shares with respect to which
options and SARs may be granted under the 1995 Stock Option Plan is currently
3,300,000. As of December 31, 2001, non-qualified and incentive stock options
for an aggregate of 3,182,692 shares at various prices from $14.72 to $61.20
have been granted to various individuals, including various executive officers.
The 1995 Stock Option Plan contains certain limitations applicable only to ISOs
granted thereunder. To the extent that the aggregate fair market value, as of
the date of grant, of the shares to which ISOs become exercisable for the first
time by an optionee during the calendar year exceed $100,000, the option will
be treated as a non-qualified option. In addition, if an optionee owns more
than 10% of the total voting power of all classes of the Company's stock at the
time the individual is granted an ISO, the option price per share cannot be
less than 110% of the fair market value per share and the term of the ISO
cannot exceed five years. No option or SAR may be granted under the Stock
Option Plan after February 5, 2005, and no option may be outstanding for more
than ten years after its grant.
On August 3, 1999, the Board of Directors extended the expiration date of
596,188 stock options issued in 1994 and 1995 to directors, officers and
employees. The original option agreements were to expire in 1999 and 2000. The
new option agreements are extended by ten years until 2009. As a result of this
modification to these stock option agreements, the Company recorded a non-cash
compensation charge of $18.3 million in the third quarter of 1999.
57
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Those directors who are not also employees of the Company receive an annual
retainer as determined by the Board of Directors, which may be in the form of
cash or stock options, or a combination of both, and also receive reimbursement
of out-of-pocket expenses incurred for each Board or committee meeting
attended. Non-employee directors also receive, upon becoming a director, a
five-year option to purchase up to 1,000 shares of Class A Common Stock at an
exercise price equal to 120% of the quoted price on the date of grant. Employee
directors are not compensated for services as a director.
Under the 1995 Stock Option Plan for the year ended December 31, 2001,
independent directors, officers and employees were not granted options to
purchase the Company's stock at less than the fair market value on the date of
the option grant. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No.123, ("SFAS No. 123")
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for the
Company's stock option plan been determined based on the fair market value at
the grant date for awards in 1999, 2000 and 2001 consistent with the provisions
of SFAS No. 123, the Company's net (loss) income and (loss) income per share
would have been the pro forma amounts indicated below:
1999 2000 2001
-------- ------- --------
- - (dollars in thousands, except per share data)
Net income (loss)--as reported...................... $(21,542) $13,989 $(63,615)
Net income (loss)--pro forma........................ $(23,892) $11,964 $(66,945)
Net income (loss) per basic common share-as reported $ (1.59) $ 0.92 $ (3.50)
Net income (loss) per basic common share-pro
forma............................................. $ (1.76) $ 0.79 $ (3.68)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years. The
fair value for these options was estimated at the date of grant using the
Black-Scholes model with the following assumptions:
Expected dividend yield........ 0%
Expected stock price volatility 25%
Risk-free interest rate:
1999.......................... 6.66%
2000.......................... 4.93%
2001.......................... 4.65%
Expected life of options....... 5 years
The weighted average fair value of options granted during 1999, 2000 and
2001 was $17.19, $6.95 and $7.60 respectively.
58
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Changes during 1999, 2000 and 2001 in stock options are summarized below:
Stock Options Weighted Average
Outstanding Exercise Price
------------- ----------------
Outstanding at January 1, 1999.. 1,464,370 $28.25
Granted...................... 405,500 25.18
Exercised.................... (10,987) 20.29
Forfeited.................... (530) 41.71
--------- ------
Outstanding at December 31, 1999 1,858,353 $27.59
Granted...................... 580,050 20.99
Exercised.................... (5,950) 30.46
--------- ------
Outstanding at December 31, 2000 2,432,453 $26.01
Granted...................... 1,466,200 24.82
Exercised.................... (27,550) 20.78
Forfeited.................... (22,200) 26.14
--------- ------
Outstanding at December 31, 2001 3,848,903 $25.60
=========
Options for 1,200,633 shares, 1,597,551 shares, and 2,017,655 shares were
exercisable at December 31, 1999, 2000 and 2001, respectively.
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2001 Life Price 2001 Price
--------------- -------------- ----------- --------- -------------- ---------
$14.72-$22.48.. 1,869,314 8.6 18.21 815,629 19.38
$24.50-$26.95.. 405,300 6.7 24.66 288,150 24.68
$28.00-$33.83.. 511,150 5.0 30.74 511,150 30.74
$34.00-$39.875. 941,147 8.3 35.47 300,904 36.24
$43.50-$61.20.. 121,992 6.3 44.25 89,322 44.52
-------------- ----------- --------- -------------- ---------
3,848,903 7.5 $ 25.60 2,005,155 $ 26.69
============== =========== ========= ============== =========
Included in the 2001 granted options, were 538,711 non-qualified options
granted at an exercise price of $15.08 that are conditioned based on
stockholder approval at the 2002 annual meeting of stockholders. In addition,
included in the outstanding options as of December 31, 2001, there were 127,500
non-qualified options with an exercise price of $22.06 that were granted
outside of the 1995 Stock Option Plan.
At December 31, 2001, the Company has reserved 95,692 shares of its Class A
Common Stock and 3,087,000 shares of Class B Common Stock in connection with
stock options.
Stock Repurchases
During February and June 1999, the Company repurchased 348,400 shares of its
Class A Common Stock in open market purchases pursuant to a stock repurchase
program for an aggregate price of approximately $14.0 million.
During July and August 2000, the Company repurchased 888,600 shares of its
Class A Common Stock in open market purchases pursuant to a stock repurchase
program for an aggregate price of approximately $30.0 million.
59
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
For the year ended December 31, 2001, the Company did not record a
provision/benefit for income taxes since the Company generated losses during
such period. For the year ended December 31, 2000, the Company recorded a tax
provision of $1.5 million relating to the sale of WKBT-TV.
At December 31, 2001, the Company had net operating loss ("NOL")
carryforwards for tax purposes of approximately $303.5 million expiring at
various dates through 2021. The availability of NOL carryforwards to offset
future income is subject to annual limitations imposed by Internal Revenue Code
Section 382 as a result of successive ownership changes. To the extent that an
annual NOL limitation is not used, it carries and accumulates forward to future
years.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2000 and 2001 are as follows:
2000 2001
------------ ------------
Deferred Tax Assets:
Stock Option Compensation Accrued.......................... $ 7,207,127 $ 7,032,890
Accounts Receivable........................................ 673,950 751,047
Hedging Gain/Loss.......................................... -- 4,121,961
Other...................................................... 367,327 627,005
Net Operating Loss Carryforwards........................... 86,204,005 121,396,267
Less: Valuation Allowance for Deferred Tax Assets.......... (53,490,449) (83,271,857)
------------ ------------
Total Deferred Tax Assets............................... 40,961,960 50,657,313
------------ ------------
Deferred Tax Liabilities:
Fixed Assets............................................... (2,109,435) (2,252,092)
Intangibles................................................ 74,472,087 83,496,269
Deferred Gain of Interest Rate Swaps....................... -- 813,828
Other...................................................... 49,581 49,581
------------ ------------
Total Deferred Tax Liabilities.......................... 72,412,233 82,107,586
------------ ------------
Net Deferred Tax Asset/(Liability)......................... $(31,450,273) $(31,450,273)
============ ============
10. Employee Benefit Plans
The Company sponsors defined contribution plans ("Plan") which provide
retirement benefits for all eligible employees. The Plan participants may make
pretax contributions from their salaries up to the maximum allowed by the
Internal Revenue Code.
On January 1, 1997, the Company adopted and established a matching stock
plan ("Matching Plan"). According to the Matching Plan, the Company will
contribute one-half of every dollar a participant contributes, up to the first
3% of the participant's pay.
For the years ended December 31, 1999, 2000 and 2001, the Company paid and
accrued matching contributions (21,545; 50,764 and 60,549 shares of Class A
Common Stock, respectively) equal to 3% of eligible employee compensation,
amounting to $811,000, $1,321,000 and $1,469,000 respectively. The Company
effected such contributions by issuing shares on a quarterly basis.
Contributions related to the fourth quarter of 2001 were made on January 22,
2002.
60
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the Matching Plan, the Company assumed a defined benefit
pension plan from the acquisition of KRON in the year 2000. The Company's
defined benefit pension plan covers the IBEW Local 45 employees. Components of
the net periodic benefit plan were as follows:
2001
---------
Estimated return of plan assets... $ 684,372
Service cost...................... (281,004)
Interest cost..................... (527,041)
Net amortization and deferral..... (5,267)
---------
Net periodic benefit (cost)....... $(128,940)
---------
As of December 31, 2001, the status of the Company's defined benefit pension
plan was as follows:
2001
-----------
Projected benefit obligation, beginning of year.................... $6,699,620
Service cost....................................................... 281,004
Interest cost...................................................... 684,372
Actuarial loss (gain).............................................. 472,637
Benefits paid...................................................... (249,410)
-----------
Projected benefit obligation, end of year.......................... $ 7,888,223
-----------
Fair value of plan assets, beginning of year....................... 7,500,445
Actual return of plan assets....................................... (202,443)
Employer contributions............................................. --
Benefits paid...................................................... (249,410)
-----------
Fair value of plan assets, end of year............................. $ 7,048,592
-----------
Fair value of plan assets in excess (unfunded) of projected benefit
obligation....................................................... $ (839,631)
Unrecognized net (gain) loss....................................... 737,419
Unrecognized prior service cost/other.............................. 755,224
Unrecognized transition obligation (asset)......................... (108,756)
-----------
Prepaid pension cost............................................... $ 544,256
-----------
Accumulated benefit obligation..................................... $ 7,050,128
Fair value of plan assets.......................................... (7,048,592)
Prepaid pension cost............................................... 544,256
Intangible asset................................................... (545,792)
-----------
Reduction of stockholder equity.................................... $ --
===========
Weighted average discount rate..................................... 7.25%
Expected return on plan assets..................................... 8.50%
Rate of compensation increase...................................... 3.50%
11. Commitments and Contingencies
The Company is obligated under various capital leases for certain broadcast
equipment, office furniture, fixtures and other equipment that expire at
various dates during the next seven years. At December 31, 2000 and 2001, the
net amount of property and equipment recorded under capital leases was $5.0
million and $4.1 million, respectively. Amortization of assets held under
capital leases is included with depreciation and amortization of property and
equipment.
61
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also has certain non-cancelable operating losses, primarily for
administrative offices, broadcast equipment and vehicles that expire over the
next five years. These leases generally contain renewal options for periods of
up to five years and require the Company to pay all costs such as maintenance
and insurance.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and the present value
of future minimum capital lease payments as of December 31, 2001 are as follows:
Capital Operating
Leases Leases
------- ---------
(dollars in thousands)
Year ending December 31:
2002.................. $1,031 $ 3,678
2003.................. 1,162 3,612
2004.................. 1,868 3,635
2005.................. 623 1,867
2006.................. 11 1,867
Thereafter.............. 0 3,551
------ -------
Total minimum lease
payments.............. $4,695 $18,210
====== =======
Rental expense charged to continuing operations under operating losses for
the years ended December 31, 1999, 2000 and 2001 was approximately $3.7
million, $4.5 million and $3.8 million, respectively.
12. Quarterly Financial Data (Unaudited)
The following summarizes the Company's results of operations for each
quarter of 2001 and 2000 (in thousands, except per share amounts). The income
(loss) per common share computation for each quarter and the year are separate
calculations. Accordingly, the sum of the quarterly income (loss) per common
share amounts may not equal the income (loss) per common share for the year.
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(dollars in thousands, except per share amounts)
2001
Net revenue........... $ 92,652 $100,206 $ 79,117 $ 96,198
Operating income...... 11,807 26,361 8,338 16,500
Net income (loss)..... (32,222) (3,778) (13,435) (14,180)
Net income (loss)
per common share:
Basic............ $ (1.94) $ (0.22) $ (0.69) $ (0.72)
Diluted.......... $ (1.94) $ (0.22) $ (0.69) $ (0.72)
2000
Net revenue........... $ 72,164 $ 74,927 $102,033 $123,561
Operating income
(loss).............. 11,666 17,028 30,750 37,250
Net (loss) income..... 9,885 734 (1,630) 5,000
Net (loss) income
per common share:
Basic............ $ 0.73 $ 0.05 $ (0.10) $ 0.30
Diluted.......... $ 0.71 $ 0.05 $ (0.10) $ 0.28
62
YOUNG BROADCASTING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Subsequent Event
On February 12, 2002, the Company agreed to sell the assets of KCAL-TV in
Los Angeles to CBS Broadcasting Inc. in an all cash transaction valued at $650
million. This transaction is expected to close in mid-year 2002, and is subject
to Federal Communications Commission review.
63
SCHEDULE II
YOUNG BROADCASTING INC.
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- ------------ -------------------- ------------- ----------
Additions
--------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Endof
Description Period Expenses Accounts Deductions(2) Period
----------- ------------ ---------- ---------- ------------- ----------
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts... $2,012,000 377,000 -- 628,000 $1,761,000
Year ended December 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts... $1,761,000 583,000 1,000,000(1) 716,000 $2,628,000
Year ended December 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts... $2,628,000 579,000 -- 822,000 $2,385,000
- --------
(1) Amount relates to the acquisition of KRON-TV
(2) Write-off of uncollectible accounts
64
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information called for by Item 10 is set forth under the heading "Executive
Officers of the Registrant" in Part I hereof and in "Election of Directors" and
"Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in the
Company's Proxy Statement relating to the 2002 Annual Meeting of Stockholders
(the "2002 Proxy Statement"), which is incorporated herein by this reference.
Item 11. Executive Compensation.
Information called for by Item 11 is set forth under the heading "Executive
Compensation" in the 2002 Proxy Statement, which is incorporated herein by this
reference. Notwithstanding the foregoing, the information provided under the
sub-headings "Report of the Compensation Committee" and the "Performance Graph"
in the 2002 Proxy Statement is not incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information called for by Item 12 is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 2002 Proxy
Statement, which is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial statements and the schedule filed as a part of this report are
listed on the "Index to Consolidated Financial Statements" at page 41 herein.
All other schedules are omitted because either (i) they are not required under
the instructions, (ii) they are inapplicable, or (iii) the information is
included in the Consolidated Financial Statements.
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of the year ended December 31, 2001.
Date Report Date of Report Filed with SEC Items Reported
----------------- ----------------------------- --------------------
November 21, 2001 December 3, 2001 Item 5. Other Events
October 26, 2001 October 29, 2001 Item 5. Other Events
65
EXHIBITS
Exhibit
Number Exhibit Description
- ------ -------------------
3.1 Restated Certificate of Incorporation of the Company and all amendments thereto(1)
3.2 Second Amended and Restated By-laws of the Company(2)
9.1(a) Voting Trust Agreement, dated July 1, 1991, between Adam Young, and Vincent Young and Richard
Young as trustees(2)
9.1(b) Amendment No. 1, dated as of July 22, 1994, to Voting Trust Agreement(2)
9.1(c) Amendment No. 2, dated as of April 12, 1995, to Voting Trust Agreement(3)
9.1(d) Amendment No. 3, dated as of July 5, 1995, to Voting Trust Agreement(3)
9.1(e) Amendment No. 4, dated as of September 11, 1996, to Voting Trust Agreement(5)
9.1(f) Amendment No. 5, dated as of January 21, 1997, to Voting Trust Agreement(5)
9.1(g) Amendment No. 6, dated as of May 20, 1997, to Voting Trust Agreement(1)
9.1(j) Amendment No. 9, dated September 16, 1999
9.1(k) Amendment No. 10, dated March 9, 2000
9.1(l) Amendment No. 11, dated June 30, 2001
9.2 Voting Trust Agreement, dated October 1, 1996, between Adam Young, and Vincent Young as
trustee(5)
10.1* Employment Agreement, dated as of August 1, 1998, between the Company and Vincent Young(1)
10.2* Employment Agreement, dated as of August 1, 1998, between the Company and Ronald J.
Kwasnick(1)
10.3* Employment Agreement, dated as of August 1, 1998, between the Company and James A. Morgan(1)
10.4* Employment Agreement, dated as of August 1, 1998, between the Company and Deborah A.
McDermott(1)
10.5 Affiliation Agreements, each dated October 10, 1994, between Young Broadcasting of Albany, Inc.
and ABC (for WTEN and WCDC)(2)
10.6 Affiliation Agreement, dated October 10, 1994, between WKRN, L.P. and ABC (2)
10.7 Affiliation Agreement, dated September 19, 1994, between KLFY, L.P. and CBS(2)
10.8 Affiliation Agreement, dated September 21, 1995, between Winnebago Television Corporation and
ABC(3)
10.9 Affiliation Agreement, dated September 19, 1994, between Young Broadcasting of Lansing, Inc. and
CBS(3)
10.10 Affiliation Agreement, dated October 10, 1994, between Young Broadcasting of Richmond, Inc. and
ABC(2)
10.11 Affiliation Agreement, dated October 10, 1994, between WATE, L.P. and ABC(2)
10.12 Affiliation Agreement, dated October 10, 1994, between Young Broadcasting of Green Bay, Inc. and
ABC(2)
10.13 Affiliation Agreement, dated February 3, 1995, between Broad Street Television, L.P. and NBC(3)
10.14 Affiliation Agreement, dated April 3, 1996, between Young Broadcasting of Sioux Falls, Inc. and
CBS (KELO); Affiliation Agreements (satellite), each dated April 3, 1996, between Young
Broadcasting of Sioux Falls, Inc. and CBS (KPLO and KDLO); and Affiliation Agreement, dated
April 3, 1996, between Young Broadcasting of Rapid City, Inc. and CBS (KCLO)(6)
10.15(a) Lease, dated March 29, 1990, between Lexreal Associates, as Landlord, and the Company(2)
10.15(b) First Amendment to Lease, dated January 14, 1997(5)
10.15(c) Second Amendment to Lease, dated May 25, 1999(1)
10.15(d) Third Amendment to Lease, dated January 14, 2000(1)
10.15(e) Partial Lease Surrender and Termination Agreement and Fourth Amendment of Lease, dated July 26,
2000(1)
66
Exhibit
Number Exhibit Description
- ------ -------------------
10.16(a) Credit Agreement, dated as of June 26, 2000, among the Company, the Banks listed on the signature
pages thereof, Bankers Trust Company (as Administrative Agent) and First Union National Bank and
CIBC World Markets Corp. (as Syndication Agents)(1)
10.17(a) Second Amended and Restated Credit Agreement, dated as of June 26, 2000, among the Company the
Banks listed on the signature pages thereof, Bankers Trust Company (as Administrative Agent and
Issuing Bank) and First Union National Bank and CIBC World Markets Corp. (as Syndication
Agents)(1)
10.17(b) Amendment No. 2, dated as of May 9, 2001, to each of the Amended and Restated Credit Agreement
and the Credit Agreement, each dated June 26, 2000, among the Company, the banks and other
financial institutions listed on the signature pages thereof, Bankers Trust Company, First Union
National Bank and CIBC Markets Corp.(7)
10.17(c) Amendment No. 3, dated as of September 27, 2001, to each of the Amended and Restated Credit
Agreement and the Credit Agreement, each dated June 26, 2000, among the Company, the banks and
other financial institutions listed on the signature pages thereof, Bankers Trust Company, First Union
National Bank and CIBC Markets Corp.(8)
10.17(d) Amendment No. 4, dated as of November 21, 2001, to each of the Amended and Restated Credit
Agreement and the Credit Agreement, each dated June 26, 2000, among the Company, the banks and
other financial institutions listed on the signature pages thereof, Bankers Trust Company, First Union
National Bank and CIBC Markets Corp.(8)
10.18 Amended and Restated Young Broadcasting Inc. 1995 Stock Option Plan(1)
10.19(a) Indenture, dated January 1, 1996, among the Company, the Subsidiary Guarantors and State Street
Bank and Trust Company, as Trustee, relating to the January 1996 Notes(9)
10.19(b) Indenture Supplement No. 7, dated as of November 27, 2001, to the Indenture dated January 1, 1996,
by and among the Company, the Subsidiary Guarantors named therein and State Street Bank and Trust
Company, as trustee(11)
10.20 Indenture, dated June 15, 1997, among the Company, the Subsidiary Guarantors and First Union
National Bank, N.A. relating to the June 1997 Notes(4)
10.21 Indenture, dated March 1, 2001, among the Company, the Subsidiary Guarantors and First Union
National Bank, N.A. relating to the March 2001 Notes(1)
10.22 Indenture, dated as of December 7, 2001, among the Company, the Subsidiary Guarantors and First
Union National Bank, as Trustee, relating to the December 2001 Notes(11)
10.23 ISDA Master Agreement, dated June 6, 2000, between Canadian Imperial Bank of Commerce and the
Company relating to the June 6, 2000 interest rate swap agreement.(1)
10.24 Confirmation dated June 9, 2000, between Deutsche Bank AG and the Company relating to the June
6, 2000 interest rate swap agreement.(1)
10.25 Confirmation dated July 3, 2000, between Deutsche Bank AG and the Company relating to the July 3,
2000 interest rate swap agreement(1)
10.26 Asset Purchase Agreement, dated as of November 15, 1999, between The Chronicle Publishing
Company and Young Broadcasting Inc.(10)
10.27 Asset Purchase Agreement, dated as of February 12, 2002, among CBS Broadcasting Inc., Young
Broadcasting Inc., Young Broadcasting of Los Angeles Inc. and Fidelity Television, Inc.(12)
11.1 Statement re computation of per share earnings
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
67
- --------
(1) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration No. 33-83336, under the Securities Act of 1933 and
incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
Registration No. 33-94192, under the Securities Act of 1933 and
incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
Registration No. 333-31429, under the Securities Act of 1933 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-3,
Registration No. 333-06241, under the Securities Act of 1933 and
incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001 and incorporated herein reference.
(7) Filed as an Exhibit to the Company's Quarterly Report on Form 10-K for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
November 21, 2001 and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
Registration No. 333-2466, under the Securities Act of 1933 and
incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
Registration No. 333-31156, under the Securities Act of 1933 and
incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
Registration No. 333-81878 and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
March 8, 2002 and incorporated herein by reference.
* Management contract or compensatory plan or arrangement.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 25, 2002 YOUNG BROADCASTING INC.
By /S/ VINCENT J. YOUNG
-----------------------------------
Vincent J. Young Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/S/ VINCENT J. YOUNG Chairman and Director March 25, 2002
- ------------------------------- (principal executive
Vincent J. Young officer)
/S/ ADAM YOUNG Treasurer and Director March 25, 2002
- -------------------------------
Adam Young
/S/ JAMES A. MORGAN Executive Vice President, March 25, 2002
- ------------------------------- Chief Financial Officer
James A. Morgan (principal financial
officer and principal
accounting officer) and
Director
/S/ RONALD J. KWASNICK President and Director March 25, 2002
- -------------------------------
Ronald J. Kwasnick
/S/ BERNARD F. CURRY Director March 25, 2002
- -------------------------------
Bernard F. Curry
/S/ ALFRED J. HICKEY, JR. Director March 25, 2002
- -------------------------------
Alfred J. Hickey, Jr.
/S/ LEIF LOMO Director March 25, 2002
- -------------------------------
Leif Lomo
/S/ RICHARD C. LOWE Director March 25, 2002
- -------------------------------
Richard C. Lowe
/S/ DAVID C. LEE Director March 25, 2002
- -------------------------------
David C. Lee
69