1
As filed with the Securities and Exchange Commission on November 6, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to _________
Commission File Number: 0-25206
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LIN TELEVISION CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3581627
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
FOUR RICHMOND SQUARE, SUITE 200, PROVIDENCE, RI 02906
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(401) 454-2880
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 15, 1997
----- -------------------------------
Common Stock, $0.01 par value 29,803,943
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LIN TELEVISION CORPORATION
Form 10-Q
Table of Contents
Part I. Financial Information Page
----
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10
Part II. Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information - Contingent Matters 14
Item 6. Exhibits and Reports on Form 8-K 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN Television Corporation
Consolidated Balance Sheets
(Dollars in thousands)
September 30,
1997 December 31,
(unaudited) 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,642 $ 27,952
Accounts receivable, less allowance for doubtful
accounts (1997 - $2,155; 1996 - $1,960) 54,036 52,666
Program rights 12,441 10,133
Other current assets 4,350 6,675
--------- ---------
Total current assets 96,469 97,426
Property and equipment, less accumulated depreciation 103,693 106,441
Program rights and other noncurrent assets 12,503 10,427
Equity in joint venture 373 505
Intangible assets, less accumulated amortization
(1997 - $68,015; 1996 - $59,348) 372,479 381,145
--------- ---------
Total assets $ 585,517 $ 595,944
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,416 $ 7,593
Program obligations 13,015 10,724
Accrued income taxes 1,957 2,518
Other accruals 24,520 20,023
--------- ---------
Total current liabilities 47,908 40,858
Long-term debt 295,000 350,000
Deferred income taxes 67,083 64,211
Other noncurrent liabilities 2,585 2,427
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 90,000,000
Issued and outstanding shares - 29,798,000 (29,717,000 in 1996) 298 297
Treasury stock (11) -
Additional paid-in capital 279,041 276,997
Accumulated deficit (106,387) (138,846)
--------- ---------
Total stockholders' equity 172,941 138,448
--------- ---------
Total liabilities and stockholders' equity $ 585,517 $ 595,944
========= =========
See accompanying notes.
The December 31, 1996 information was derived from the audited financial
statements at that date.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN TELEVISION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- -------- --------
Net revenues $71,911 $68,780 $216,878 $201,895
Operating costs and expenses:
Direct operating 19,561 19,635 56,094 54,296
Selling, general and administrative 15,142 14,990 49,385 45,838
Corporate 1,751 1,921 5,301 5,229
Amortization of program rights 4,025 3,492 11,684 10,902
Depreciation and amortization of
intangible assets 6,303 6,364 19,003 18,988
Tower write-offs - - 2,697 -
------- ------- -------- --------
Total operating costs and expenses 46,782 46,402 144,164 135,253
------- ------- -------- --------
Operating income 25,129 22,378 72,714 66,642
Other (income) expense:
Interest expense 5,429 6,853 16,652 20,576
Investment income (284) (409) (971) (941)
Equity in loss of joint venture 267 633 1,132 633
Merger expenses 3,873 - 3,873 -
------- ------- -------- --------
Total other expense 9,285 7,077 20,686 20,268
------- ------- -------- --------
Income before provision for income taxes 15,844 15,301 52,028 46,374
Provision for income taxes 5,909 5,556 19,406 16,836
------- ------- -------- --------
Net income $ 9,935 $ 9,745 $ 32,622 $ 29,538
======= ======= ======== ========
Net income per share $ 0.32 $ 0.32 $ 1.07 $ 0.98
======= ======= ======== ========
Weighted average shares outstanding 30,623 30,204 30,470 30,059
======= ======= ======== ========
See accompanying notes
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN Television Corporation
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Nine Months Ended
September 30,
-------------------
1997 1996
-------- --------
OPERATING ACTIVITIES:
Net income $ 32,622 $ 29,538
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (includes amortization
of financing costs) 19,678 19,764
Tax benefit from exercises of stock options - 422
Deferred income taxes 2,872 4,396
Net loss (gain) on disposition of assets 2,248 (205)
Amortization of program rights 11,684 10,902
Program payments (10,044) (12,181)
Equity in loss of joint venture 1,132 633
Changes in operating assets and liabilities:
Accounts receivable (1,370) (2,680)
Other assets (436) 4,312
Liabilities 3,270 (5,762)
-------- --------
Total adjustments 29,034 19,601
-------- --------
Net cash provided by operating activities 61,656 49,139
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (12,970) (22,382)
Asset dispositions 3,133 636
Investment in joint venture (1,000) (750)
-------- --------
Net cash used in investing activities (10,837) (22,496)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and from
sale of Employee Stock Purchase Plan shares 2,687 4,072
Treasury stock purchases (816) -
Principal payments on long-term debt (55,000) (22,000)
Loan fees incurred on long-term debt - (810)
-------- --------
Net cash used in financing activities (53,129) (18,738)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,310) 7,905
-------- --------
Cash and cash equivalents at the beginning of the period 27,952 18,025
-------- --------
Cash and cash equivalents at the end of the period $ 25,642 $ 25,930
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 16,104 $ 23,097
Income taxes $ 20,062 $ 16,629
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN TELEVISION CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Note 1 - Basis of Presentation
These financial statements have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Form 10-K
for the year ended December 31, 1996.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary to a fair presentation of the results for interim periods.
The results of operations for the three and nine month periods ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
Note 2 - Proposed Merger
The Company and newly formed affiliates of Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse") known as Ranger Holdings Corp. and Ranger
Acquisition Company have entered into an agreement and plan of merger dated as
of August 12, 1997, and amended by an Amendment dated as of October 21, 1997,
(the "Merger Agreement"), pursuant to which Ranger Acquisition Company will be
merged with and into the Company (the "Merger").
Under the Merger Agreement, affiliates of Hicks Muse have agreed to acquire
the Company for $55.00 per share in cash, plus an additional amount per share of
8% per annum on $55.00 (approximately $0.36 per share per month) from February
15, 1998 through the completion of the transaction. The total transaction value
is approximately $1.9 billion, which includes the assumption of approximately
$260 million of debt (net of cash).
It is expected that a meeting of the Company's stockholders to vote on the
Merger will take place no later than January, 1998. If the Merger is approved by
stockholders and certain other conditions are satisfied, the transaction is
expected to close in early 1998. If the Merger becomes effective on May 1, 1998,
the purchase price adjusted to include the incremental amount would be $55.90 in
cash per share.
Contemporaneously, AT&T Corp. ("AT&T"), Hicks Muse and the Company have
entered into an agreement pursuant to which AT&T will sell its 100%-owned
television station WOOD-TV (Grand Rapids, Michigan), together with its local
marketing agreement ("LMA") with WOTV, for a net purchase price of approximately
$122.5 million, subject to certain adjustments, to a Hicks Muse affiliate when
the Merger occurs. If the Merger does not occur, the Company will purchase
WOOD-TV and its local marketing agreement with WOTV for that amount. The WOOD-TV
agreement is not subject to Company stockholder approval.
Hicks Muse and National Broadcasting Company, Inc. ("NBC") have entered
into a letter agreement which contemplates the formation of a partnership to
hold KXAS-TV, Channel 5 in Dallas, Texas and KNSD-TV, Channels 7 and 39 in San
Diego, California. NBC will hold a majority interest in
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN TELEVISION CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Note 2 - Proposed Merger (continued)
the partnership and manage both stations. NBC agreed to keep its affiliation
agreements with the Company in effect following completion of the Merger.
Completion of the Merger is subject to various conditions, including
approval by the Federal Communications Commission of the transfer of the
Company's broadcast licenses, approval of the Merger by the holders of a
majority of the outstanding shares of LIN Television common stock, other than
shares (representing approximately 45% of the outstanding shares) owned by AT&T,
present at the stockholders meeting at which the Merger is voted upon, as well
as funding of the transaction under debt and equity commitments. AT&T has agreed
that it will vote its LIN Television shares in favor of the Merger only if the
Merger is approved by the holders of a majority of the outstanding LIN
Television shares, other than those owned by AT&T, present at the stockholders
meeting. Cook Inlet Corp., the holder of approximately 5% of the outstanding LIN
Television shares, has agreed to vote the shares it holds at the time of the
stockholders meeting in favor of the Merger. In addition, Cook Inlet and AT&T
have terminated a pre-existing agreement with respect to the voting of their
shares regarding the election of directors. The Company may terminate the Merger
Agreement prior to receipt of the stockholder approval and accept a proposal
determined by its Board of Directors to be more favorable to the Company's
stockholders than the Merger, subject to the payment of a termination fee to
Hicks Muse.
In connection with the spin-off of the Company from LIN Broadcasting
Corporation in December 1994, the Company and the predecessor of a subsidiary of
AT&T entered into a private market value guarantee, which, among other things,
provides for an appraisal and sale of the Company in 1998. Under the guarantee,
appraisers would have determined a private market value of the Company and AT&T
would have had the option to purchase, at the appraised price, the approximately
55% of the Company it does not own. If AT&T were to decline to exercise its
option, the Company (including AT&T's approximately 45%) would be put up for
sale under the direction of the Company's independent directors. Under the terms
of an amendment to the guarantee, AT&T has relinquished its option to purchase
the approximately 55% of the Company it currently does not own, the requirement
that appraisers be appointed has been eliminated, and the commencement date of
any sale process under the guarantee has been deferred and will only occur if
the Merger does not occur.
Note 3 - Commitments and Contingencies
On September 4, 1997, the Company announced that it had learned of four
lawsuits regarding the Merger. The Company and its directors are defendants in
all of the lawsuits. AT&T is a defendant in three of the lawsuits, and Hicks
Muse is a defendant in one of the lawsuits. Each of the lawsuits was filed by a
shareholder seeking to represent a putative class of all the Company's public
shareholders. Three of the four lawsuits were filed in Delaware Chancery Court,
New Castle County, while the fourth lawsuit was filed in New York Supreme Court,
New York County.
While the allegations of each complaint are not identical, all of the
lawsuits basically assert that the Merger is not in the interests of the
Company's public shareholders. All of the complaints allege breach of fiduciary
duty in approving the Merger. Two of the complaints also allege breach of
fiduciary duty in connection with the proposed sale of the television station
WOOD-TV by AT&T to Hicks Muse and the amendment to a Private Market Value
Guarantee Agreement that was entered into simultaneously
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN TELEVISION CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Note 3 - Commitments and Contingencies (continued)
with the Merger Agreement. The complaints seek the preliminary and permanent
enjoinment of the Merger or alternatively seek damages in an undetermined
amount.
While the Company intends to vigorously defend against the allegations in
each complaint and believes each lawsuit is without merit, these lawsuits are in
the earliest stages and the Company is unable to determine the likelihood and
possible impact on the Company's financial condition or results of operations of
unfavorable outcomes.
Note 4 - Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share (Statement 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase of $0.02 or less in primary earnings per share for the
three and nine month periods ended September 30, 1997 and 1996. The impact of
Statement 128 on the calculation of fully diluted earnings per share for these
quarters is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") effective for years beginning
after December 15, 1997. SFAS 131 requires that a public company report
financial and descriptive information about its reportable operating segments
pursuant to criteria that differ from current accounting practice. Operating
segments, as defined, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The financial information to be reported includes segment profit or
loss, certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general purpose financial statements. SFAS 131
also requires information about revenues from products or services, countries
where the company has operations or assets and major customers. The Company does
not expect the adoption of SFAS 131 to have a material impact on financial
statement disclosures.
Note 5 - Net Income Per Share
Net income per share is calculated by dividing the income attributable to
common shares by the weighted average number of common shares outstanding during
each of the periods, computed under the treasury stock method. Net income per
share for the three and nine month periods ending September 30, 1997 and 1996,
respectively, is computed as follows (amounts in thousands, except per share
data):
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN TELEVISION CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Note 5 - Net Income Per Share (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Primary:
Average shares outstanding 29,791 29,671 29,768 29,609
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 832 533 701 450
------- ------- ------- -------
Totals 30,623 30,204 30,470 30,059
======= ======= ======= =======
Net income $ 9,935 $ 9,745 $32,622 $29,538
======= ======= ======= =======
Per share amount $ 0.32 $ 0.32 $ 1.07 $ 0.98
======= ======= ======= =======
Fully diluted:
Average shares outstanding 29,791 29,671 29,768 29,609
Net effect of dilutive stock options-
based on the treasury stock method
using closing market price, if higher
than average market price 832 676 825 674
------- ------- ------- -------
Totals 30,623 30,347 30,594 30,283
======= ======= ======= =======
Net income $ 9,935 $ 9,745 $32,622 $29,538
======= ======= ======= =======
Per share amount $ 0.32 $ 0.32 $ 1.07 $ 0.98
======= ======= ======= =======
Note 6 - Long-Term Debt
The Company's bank credit facility (the "Bank Credit Facility") permits the
Company to borrow up to $600 million of an eight-year, reducing revolving credit
facility (the "Facility"). The Company presently has indebtedness outstanding of
$295 million and available funds of $305 million under the Facility as of
September 30, 1997.
The commitment of the Facility will begin to reduce in semi-annual
installments commencing June 30, 1999 such that the annual commitment reduction
will be $30 million in 1999, $120 million per year in years 2000 through 2003,
and the remaining $90 million in 2004. As of September 30, 1997, the Company
would be required, in 2002, to begin making payments to the extent that the
balance outstanding under the Facility exceeds the reduced commitment available
and continue making semi-annual installments under the revolving facility
through December 31, 2004, at which time the debt will be fully repaid. The
Company is required to apply cash proceeds from certain sales of assets which
are not reinvested in similar assets to the prepayment of loans. The Bank Credit
Facility also permits the Company to solicit commitments for an incremental $300
million, eight-year, reducing revolving credit facility (the "Incremental
Facility"). Aggregate commitments to the Incremental Facility, if any, will
reduce in eight equal semi-annual amounts beginning 2001 and ending 2004. The
Bank Credit Facility contains covenants restricting or limiting certain
activities, including (i) acquisitions and investments,
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
LIN TELEVISION CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Note 6 - Long-Term Debt (continued)
including treasury stock, (ii) incurrence of debt, (iii) distributions and
dividends to stockholders, (iv) mergers and sales of assets, (v) prepayments and
subordinated indebtedness, and (vi) creations of liens. The Company is required
to apply cash proceeds from certain sales of assets which are not reinvested in
similar assets and excess cash flow to the prepayment of loans. As security
under the Bank Credit Facility, the Company has given a negative pledge on the
assets and capital stock of each of its subsidiaries, which own all of the
Company's television properties. Such subsidiaries are restricted from making
certain distributions or payments to the Company. Under the Bank Credit
Facility, the Company must remain in compliance with a series of financial
covenants. As of September 30, 1997, the Company was in compliance with all
covenants.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties. When used in this Quarterly Report
on Form 10-Q the words "believes," "anticipated" and similar expressions are
intended to identify forward-looking statements. There are a number of factors
that could cause the Company's actual results to differ materially from those
forecasted or projected in such forwarding-looking statements. These factors
include, without limitation, competition from other local free over-the-air
broadcast stations, acquisitions of additional broadcast properties, and future
debt service obligations, as well as those set forth under the caption "Certain
Factors That May Affect Future Results" in the Company's Annual Report on Form
10-K for 1996. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligations to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RECENT DEVELOPMENTS
On August 12, 1997 the Company and newly formed affiliates of Hicks Muse
known as Ranger Holdings Corp. and Ranger Acquisition Company entered into a
Merger Agreement, as amended, pursuant to which Ranger Acquisition Company will
be merged with and into the Company (see "Note 2-Proposed Merger" of the
Company's Notes to Consolidated Financial Statements).
Set forth below are the significant factors that contributed to the
operating results of the Company for the three and nine month periods ending
September 30, 1997 and 1996.
RESULTS OF OPERATIONS
BUSINESS
The Company is engaged in the commercial television broadcasting business
and currently owns and operates eight network affiliated television stations,
two low power television (LPTV) networks and two LPTV stations. The Company also
provides programming and advertising services to four stations through local
marketing agreements (LMAs). LMAs provide the Company with an additional
broadcasting outlet and promote diversity in news, programming and community
service in the markets served by the Company's stations (the "Stations").
REVENUES
Total net revenues consist primarily of national and local time sales, net
of sales adjustments and agency commissions, network compensation, barter
revenues, revenues from the production of local commercials and sports
programming, tower rental revenues, Local Weather Station revenues, and cable
retransmission income. Total net revenues increased approximately 5% and 7% for
the three and nine month periods ended September 30, 1997 compared to the same
periods last year.
Approximately 85% and 86% of the Company's total net revenues for the three
and nine month periods ended September 30, 1997, respectively, were derived from
net national and net local advertising time sales. Advertising revenues for the
third quarter 1997 were flat with last year and, for the nine months ended
September 30, 1997, increased approximately 5% over the same period last year.
The increase was attributable to growth in local advertising revenue at station
WTNH-TV due to continued improvement in that station's local economy, and to net
advertising growth at the LMA stations. The increase was also attributable to
the continued ratings strength of the NBC affiliate stations, as well as
continued advertising growth in those markets, which led to increased
advertising rates for those stations
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
even when compared to incremental net revenue derived from the broadcast of the
Summer Olympics in the third quarter of 1996.
Network revenue for the quarter ended September 30, 1997 increased
approximately 5% due to additional network compensible programming at the NBC
affiliates. For the nine months ended September 30, 1997, network revenue
decreased approximately 2% compared to the same period last year due primarily
to the second quarter 1996 recognition of a new network compensation agreement
at station WTNH-TV, effective, retroactively, to September 1995, offset,
slightly, by the increased network clearance by the NBC affiliate stations.
Revenues from the Local Weather Station remained relatively flat when
compared to the same periods last year. The Company provides the Local Weather
Station to cable operators in all of its markets except New Haven-Hartford and
Buffalo, and presently intends to expand this service to additional markets in
the future.
OPERATING EXPENSES
Direct operating expenses for the quarter remained relatively flat when
compared to last year and increased approximately 3% for the nine months ended
September 30, 1997 over the same period in 1996, due to costs associated with
news expansion at several stations, including operational expenses related to
the acquisition of a helicopter at station WISH-TV in Indianapolis. Maintaining
a strong local news franchise is a key operating strategy for each of the
Stations. The increase was also a result of a change in the syndicated/barter
programming mix primarily in the Austin and Dallas-Fort Worth markets.
Selling, general and administrative expenses for the quarter remained
relatively flat when compared to last year and increased approximately 8% for
the nine months ended September 30, 1997 over the same period in 1996 due to
increased sales compensation resulting from the increase in local revenue,
higher promotional expenditures at stations in the Dallas-Fort Worth market
aimed at strengthening the Company's position in its largest market, and higher
property taxes and insurance costs related to the construction of new towers in
several markets.
Total corporate expenses, which are comprised of costs associated with the
centralized management of the Stations, decreased approximately 9% for the three
month period ended September 30, 1997, related primarily to the engagement of
investment banking firms in the third quarter of 1996 to help the Company's
Board evaluate acquisition opportunities. Corporate expenses for the nine months
ended September 30, 1997 remained relatively flat when compared with the same
period last year.
Amortization of program rights for the quarter and nine months ended
September 30, 1997 increased approximately 15% and 7%, respectively, as a result
of new programming purchases at station WTNH-TV and programming write-offs at
LMA stations KNVA-TV and WBNE-TV.
Depreciation and amortization of intangible assets remained relatively flat
for the three and nine month periods ended September 30, 1997, when compared to
the same periods last year.
The Company began, in 1995, to construct new facilities and purchase new
broadcast equipment to prepare for the upcoming digital transition (see "Other
Information - Contingent Matters"). During the second quarter of 1997, the
Company disposed of towers and other broadcast equipment that could no longer be
used with the new technology. The net book loss on this equipment of
approximately $2.7 million is reflected on the Company's Consolidated Statements
of Income as Tower write-offs.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
OPERATING INCOME
For the reasons discussed above, the Company reported an increase in
operating income of $2.8 million and $6.1 million for the three and nine month
periods ended September 30, 1997, respectively, compared to the same periods
last year.
Interest expense, comprised primarily of interest payable on funds borrowed
under the Company's Bank Credit Facility (the "Bank Credit Facility"), decreased
approximately 21% and 19% for the three and nine month periods ended September
30, 1997, respectively, when compared to the same periods last year, as a result
of the renegotiated terms of the Bank Credit Facility and a reduction in the
principal outstanding.
During the third quarter of 1997 the Company incurred financial advisory
fees and regulatory filing fees in connection with the Merger. These expenses of
approximately $3.9 million are reflected on the Company's Consolidated
Statements of Income as Merger Expenses.
The Company's provision for income taxes increased approximately 6% and 15%
for the three and nine month periods ended September 30,1997, respectively,
compared to the same periods last year, due to higher income before taxes and an
increase in the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
It is the Company's policy to carefully monitor the state of its business,
cash requirements and capital structure. From time to time, the Company may
enter into transactions pursuant to which debt is extinguished, including sales
of assets or equity, joint ventures, reorganizations or recapitalizations. There
can be no assurance that any such transactions will be undertaken or, if
undertaken, will be favorable to stockholders.
The Company's principal source of funds are its operations and its Bank
Credit Facility. Net cash provided by operating activities for the nine months
ended September 30, 1997 was $61.7 million compared to $49.1 million in the same
period last year. The increase is primarily due to higher net income and a
reduction in the amount paid for interest. Net cash used in investing activities
was $10.8 million for the nine months ended September 30, 1997, compared to
$22.5 million in 1996 as a result of reduced capital expenditures of $9.4
million and increased proceeds on asset dispositions of $2.5 million. Net cash
used in financing activities for the period ended September 30, 1997 was $53.1
million compared to $18.7 million in the same period last year. This fluctuation
is due primarily to an increase in principal payments on long-term debt under
the Bank Credit Facility.
The Company presently has indebtedness outstanding of $295 million under
the Bank Credit Facility and has funds available of approximately $305 million.
The Company must also remain in compliance with a series of financial covenants
under the Bank Credit Facility. As of September 30, 1997, the Company was in
compliance with all covenants.
The Company's current and future debt service obligations could have
adverse consequences to holders of the Company's common stock, including the
following: (i) the Company's ability to obtain financing for future working
capital needs or additional acquisitions or other purposes may be limited; (ii)
a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
principal and interest on its indebtedness, thereby reducing funds available for
operations; and (iii) the Company may be more vulnerable to adverse economic
conditions than less leveraged competitors and, thus, may be limited in its
ability to withstand competitive pressures. The Company expects to be able to
satisfy its future debt service obligations and other commitments with cash flow
from operations. However, there can be no assurance that the future cash flow of
the Company will be sufficient to meet such obligations and commitments. If the
Company is unable to generate sufficient cash flow from operations in the future
to service its indebtedness and to meet its other commitments, it may be
required to refinance all or a portion of its existing indebtedness or to obtain
additional financing. There can be no assurance that any such refinancing or
additional financing could be obtained on acceptable terms. If the Company is
unable to service or refinance its indebtedness, it may be required to sell one
or more of its Stations to reduce debt service obligations.
The Company has never paid dividends on its common stock and has no present
intention of paying dividends on its common stock in the foreseeable future. It
has been the Company's policy to retain earnings in order to finance its
business. In addition, the Bank Credit Facility restricts the Company from
paying cash dividends. Any future dividends will be dependent upon the Company's
financial condition, results of operations, current or anticipated cash
requirements, acquisition plans, restrictions imposed by any credit facility
then in place, and other factors which the Company's management and Board of
Directors deem relevant.
INFLATION
The Company believes that its businesses are affected by inflation to an
extent no greater than other businesses are generally affected.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 4, 1997, the Company announced that it had learned of four
lawsuits regarding the Merger. The Company and its directors are defendants in
all of the lawsuits. AT&T is a defendant in three of the lawsuits, and Hicks
Muse is a defendant in one of the lawsuits. Each of the lawsuits was filed by a
shareholder seeking to represent a putative class of all the Company's public
shareholders. Three of the four lawsuits were filed in Delaware Chancery Court,
New Castle County, while the fourth lawsuit was filed in New York Supreme Court,
New York County.
While the allegations of each complaint are not identical, all of the
lawsuits basically assert that the Merger is not in the interests of the
Company's public shareholders. All of the complaints allege breach of fiduciary
duty in approving the Merger. Two of the complaints also allege breach of
fiduciary duty in connection with the proposed sale of the television station
WOOD-TV by AT&T to Hicks Muse and the amendment to a Private Market Value
Guarantee Agreement that was entered into simultaneously with the Merger
Agreement. The complaints seek the preliminary and permanent enjoinment of the
Merger or alternatively seek damages in an undetermined amount.
While the Company intends to vigorously defend against the allegations in
each complaint and believes each lawsuit is without merit, these lawsuits are in
the earliest stages and the Company is unable to determine the likelihood and
possible impact on the Company's financial condition or results of operations of
unfavorable outcomes.
ITEM 5. OTHER INFORMATION
CONTINGENT MATTERS
The Congress and the FCC have under consideration, and in the future may
consider and adopt, other new laws, regulations and policies regarding a wide
variety of matters that could affect, directly or indirectly, the operation,
ownership and profitability of the Stations, result in the loss of audience
share and advertising revenues for the Stations, and affect the ability of the
Company to acquire additional broadcast stations or finance such acquisitions.
The following is a brief discussion of certain provisions of the
Communications Act of 1934, as amended (the "Communications Act"), and of FCC
regulations and policies that affect the business operations of television
broadcasting stations. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC, on which this discussion is
based, for further information concerning the nature and extent of FCC
regulation of television broadcasting stations.
The Telecommunications Act of 1996 (the "Act"), signed into law on February
8, 1996, made various changes in the Communications Act that will affect the
broadcast industry. Among other things and in addition to matters previously
mentioned, the Act (i) directs the FCC to increase the national audience reach
cap for television from 25% to 35% and to eliminate the 12-station numerical
limit; (ii) directs the FCC to review its local broadcast ownership
restrictions; (iii) states that, in general, existing LMAs in compliance with
applicable FCC regulations are "grandfathered", and that future LMAs are not
inconsistent with the Act so long as they comply with applicable FCC
regulations; (iv) directs the FCC to extend its liberal policy of permitting
waivers of its television/radio cross-ownership restriction to proposed
combinations in the top 50 markets; (v) lifts the statutory ban on
cable-broadcast cross-ownership but does not direct the FCC to eliminate its
parallel FCC rule prohibition; (vi) repeals the statutory ban against telephone
companies providing video programming in their own service areas; and (vii)
permits but does not require the FCC to award to broadcasters a second channel
for digital television or Advanced Television ("ATV") and other digital services
and imposes a fee on subscription based services.
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PART II. OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
CONTINGENT MATTERS (CONTINUED)
On April 3, 1997, the FCC adopted rules for implementing ATV in the United
States. These rules are subject to requests for reconsideration and possible
judicial review. In certain important respects, e.g., ATV station construction
deadlines and termination date for current analog operations, the new ATV rules
also will be subject to biennial FCC review and case-by-case waiver requests. In
addition, several important matters regarding ATV are to be the subject of
future FCC rulemakings, including the question of whether broadcasters who
receive ATV licenses shall incur additional public interest obligations. The
White House has announced that it intends to create a government-industry
committee to make specific ATV public service recommendations to the FCC.
ATV will improve the technical quality of over-the-air broadcast television
and enable broadcasters to offer a wide variety of new services, including
high-definition television, multiple standard definition channels, subscription
services and data transmission. It may also result in reduced service areas for
some stations and interference to existing operations during the initial
transitional period. The FCC has granted an ATV license to each commercial
broadcast station to operate on a second channel during a transitional period,
until the year 2006, after which, absent extensions, either the analog or
digital channel must be returned to the government. ATV facilities sufficient to
cover each station's community of license must be constructed by May 1, 1999,
for stations in the top ten markets affiliated with the four major networks, by
November 1, 1999 for all other commercial stations in the top thirty markets,
and by May 1, 2002 for all other commercial stations. Exceptions to the
deadlines will be granted for various factors beyond the licensee's control. The
Company has made a voluntary commitment to the FCC to construct the initial ATV
facility for station KXAS in Dallas by November 1, 1998. The Company is in the
process of analyzing its ATV channel assignments to determine what impact, if
any, these assignments will have on its ATV coverage areas or existing service.
Implementation of ATV will impose additional costs on television stations
providing the new service due to increased equipment costs. The Company
estimates that the adoption of ATV would require average capital and operating
expenditures of approximately $2 million per station to provide facilities
necessary to pass along an ATV signal transmitted by a network with which a
station is affiliated. The conversion of a station's equipment enabling it, for
example, to produce and transmit its own digital or ATV programming, will be
substantially more expensive. The introduction of this new technology will
require that consumers purchase new receivers (television sets) for ATV signals,
or, if available by that time, adapters for their existing receivers. The FCC
has also proposed to assign to full-power ATV stations the channels in the radio
band currently occupied by LPTVs and the FCC has proposed to "repack" television
signals into a "core" spectrum band (either channels 2-46 or channels 7-51) and
auction off the remaining channels to other users. This proposal could adversely
affect the service areas of the Stations and the Company's LPTV channels. The
Company believes that the implementation of ATV is essential to the long-term
viability of the Company and the broadcast industry, but cannot otherwise
predict the precise effect this development might have on the Company's
business.
Budget legislation recently passed by the House and Senate and signed by
the President requires the FCC to raise revenue for the federal government by
auctioning radio frequencies in bands which encompass those currently licensed
for use by broadcasters, including those channels used for "auxiliary" purposes,
such as remote pickups in electronic news gathering and studio-to-transmitter
links. The legislation codifies the FCC's determination that broadcasters return
one of their two channels to the federal government by 2006, subject to
repacking, though it permits the FCC to grant return-date extensions in markets
without certain digital service penetration levels. The legislation requires
that the returned channels be auctioned by 2002 and provides for reallocation to
other users, e.g., public safety institutions, and/or early auctioning of
unutilized spectrum in the band now occupied by television
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PART II. OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
CONTINGENT MATTERS (CONTINUED)
channels 60 - 69. The Company cannot predict what impact, if any, the
implementation of these measures might have on its business.
The FCC has initiated rulemaking proceedings to consider proposals to relax
its television ownership restrictions, including proposals that would permit the
ownership, in some circumstances, of two television stations with overlapping
service areas and relaxing the rules prohibiting cross-ownership of radio and
television stations in the same market. The FCC is also considering in these
proceedings whether to adopt new restrictions on television LMAs. The "duopoly"
rules currently prevent the Company from acquiring the FCC licenses of its LMA
stations, thereby preventing the Company from directly fulfilling its
obligations under put options that such LMA stations have with the Company. If
the Company should be unable to fulfill its obligation under a put option, it
could be required to find an assignee who could perform such obligation. There
is no assurance that the Company could find an assignee to fulfill the Company's
obligations under the put options on favorable terms. Under the Act, the
Company's LMAs were "grandfathered". The precise extent to which the FCC may
nevertheless restrict existing LMAs or make them attributable ownership
interests is uncertain. In the rulemakings, the FCC has proposed, for example,
to make LMAs fully attributable ownership interests and thus prohibited unless
the two stations would qualify for dual ownership under certain specified
criteria (e.g., VHF-UHF or UHF-UHF combinations; second station is a start-up,
failed or failing station) on a case-by-case basis. "Grandfathering" rights for
current LMAs which do not qualify for conversion to ownership would be limited
to fulfilling the current lease term, with renewal rights and transferability
rights eliminated. The Company's LMAs all involve UHF stations which were either
start-up stations or were failing financially and would appear to qualify for
conversion to ownership under the proposed standards. Nevertheless, it is
possible that the FCC could deny the Company the ability to convert its LMAs to
full ownership or require the Company to modify its LMAs in ways which impair
their viability. Further, if the FCC were to find that one of the Company's LMA
stations failed to maintain control over its operations, the licensee of the LMA
station and/or the Company could be fined. The Company is unable to predict the
ultimate outcome of possible changes to these FCC rules and the impact such FCC
rules may have on its broadcasting operations.
In accordance with FCC rules, regulations and policies, all of the
Company's LMAs allow preemptions of the Company's programming by the
owner-operator and FCC licensee of each station with which the Company has an
LMA. Accordingly, the Company cannot be assured that it will be able to air all
of the programming expected to be aired on those stations with which it has an
LMA or that the Company will receive the anticipated advertising revenue from
the sale of advertising spots in such programming. Although the Company believes
that the terms and conditions of each of its LMAs will enable the Company to air
its programming and utilize the programming and other non-broadcast license
assets acquired for use on the LMA stations, there can be no assurance that
early termination of the LMAs or unanticipated termination of all or a
significant portion of the programming by the owner-operator and FCC licensee
will not occur. An early termination of one of the Company's LMAs, or repeated
and material preemptions of programming thereunder, could adversely affect the
Company's operations.
The Company cannot predict what other matters might be considered in the
future, nor can it judge in advance what impact, if any, the implementation of
any of these proposals or changes might have on its business.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
11.1 Statement Re: Computation of Earnings Per Share (See Note 5 to the
consolidated financial statements presented on pages 7-8 of this
report)
27 Financial Data Schedule
REPORTS ON FORM 8-K
The Company filed a Form 8-K and a Form 8-K/A dated August 12, 1997, which
reported under Item 5 that the Company and newly formed affiliates of Hicks Muse
entered into an Agreement and Plan of Merger (the "Merger Agreement"), that AT&T
Corp., Hicks Muse and the Company entered into an agreement pursuant to which
AT&T would sell WOOD-TV, together with its LMA with WOTV, to an affiliate of
Hicks Muse or to the Company, and that the Private Market Value Guarantee
Agreement between the Company and a predecessor of a subsidiary of AT&T had been
amended.
The Company also filed a Form 8-K dated October 21, 1997, which reported
under Item 5 that the Company and Hicks Muse entered into an amendment, dated as
of October 21, 1997 to the previously announced Merger Agreement dated as of
August 12, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIN TELEVISION CORPORATION
(Registrant)
DATED: November 6, 1997 /s/ Peter E. Maloney
------------------ --------------------------------
Peter E. Maloney
Vice President of Finance
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