_______________________________________________________________________________
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 March 29, 1998
or
[ ] 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 33-99622
BUSSE BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 38-2750516
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
141 East Michigan Avenue, Suite 300
Kalamazoo, Michigan 49007
(Address of principal executive offices)
(616) 388-8019
(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.
Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of May 13, 1998, 107,700 shares of the Common Stock of Busse
Broadcasting Corporation were outstanding. None of the outstanding shares
were held by non-affiliates.
_______________________________________________________________________________
BUSSE BROADCASTING CORPORATION
FORM 10-Q TABLE OF CONTENTS
PAGE
REFERENCE
---------
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BUSSE BROADCASTING CORPORATION
Condensed Consolidated Balance Sheets as of March 29, 1998
(Unaudited) and December 28, 1997 (Audited) 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended March 29, 1998 and March 30, 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 29, 1998 and March 30, 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements for
the Three Months Ended March 29, 1998 6
KOLN/KGIN, INC.
(A WHOLLY-OWNED SUBSIDIARY OF BUSSE BROADCASTING CORPORATION)
Condensed Consolidated Balance Sheets as of March 29, 1998
(Unaudited) and December 28, 1997 (Audited) 13
Unaudited Condensed Consolidated Statements of Operations and
Stockholder's Equity for the Three Months Ended
March 29, 1998 and March 30, 1997 14
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 29, 1998 and March 30, 1997 15
Notes to Unaudited Condensed Consolidated Financial Statements for
the Three Months Ended March 29, 1998 16
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 20
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 30
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURES 31
2
Part I Financial Information
Item 1 Financial Statements
Busse Broadcasting Corporation
Condensed Consolidated Balance Sheets
MARCH 29, DECEMBER 28,
1998 1997
UNAUDITED AUDITED
---------------------------
ASSETS (NOTE 1)
Current assets:
Cash and cash equivalents (NOTE 2) $ 11,046,265 $ 8,974,699
Receivables, net 3,328,002 3,804,410
Other current assets 1,095,906 1,343,483
---------------------------
Total current assets 15,470,173 14,122,592
Property, plant and equipment, net 12,924,151 13,226,067
Deferred charges and other assets 1,657,573 1,811,809
Intangible assets and excess reorganization value 47,787,195 48,775,820
---------------------------
Total assets $ 77,839,092 $ 77,936,288
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (NOTE 1)
Current liabilities:
Accounts payable and accrued expenses $ 5,518,955 $ 4,161,712
Long-term debt (NOTE 2) 61,040,472 60,918,857
Stockholders' equity:
Series A cumulative convertible preferred
stock (non-voting) - $.01 par value,
$1,000 per share liquidation preference;
65,524.41 shares authorized, issued and
outstanding as of March 30, 1997;
including dividends in arrears of $10,691,537
and $9,485,924 at March 29, 1998
and December 28, 1997, respectively 28,022,197 26,816,584
Common stock (voting) - $.01 par value;
2,154,000 shares authorized, and 107,700
shares issued and outstanding 1,077 1,077
Additional paid-in capital - common stock 9,185,772 9,185,772
Accumulated deficit (25,929,381) (23,147,714)
---------------------------
Total stockholders' equity 11,279,665 12,855,719
---------------------------
Total liabilities and stockholders' equity $ 77,839,092 $ 77,936,288
---------------------------
---------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
Busse Broadcasting Corporation
Condensed Consolidated Statements of Operations
Unaudited
THREE MONTHS ENDED
-------------------------------
MARCH 29, 1998 March 30, 1997
-------------------------------
Net revenue $ 4,727,128 $ 4,264,942
Operating costs and expenses, excluding
depreciation and amortization 2,270,751 2,164,881
Depreciation 492,412 530,269
Amortization of intangibles and excess reorganization value 988,625 1,012,778
-------------------------------
Total operating costs and expenses of continuing operations 3,751,788 3,707,928
Corporate expenses 552,880 352,953
-------------------------------
Income from operations 422,460 204,061
Other income (expense) from operations:
Interest expense (2,093,157) (2,078,776)
Interest income 100,824 96,514
Gain on disposition of assets 11 20
Other income (expense) (6,192) 69,115
-------------------------------
Other expense from operations (1,998,514) (1,913,127)
-------------------------------
Loss from operations before income taxes (1,576,054) (1,709,066)
Provision for current state income taxes (NOTE 3) -- --
-------------------------------
Net loss (1,576,054) (1,709,066)
Charges to stockholders' equity for Series A
preferred stock dividends in arrears (1,205,613) (1,205,613)
-------------------------------
Net loss attributable to common stockholders $(2,781,667) $(2,914,679)
-------------------------------
-------------------------------
Per common share (Note 1):
Loss from operations $ (14.64) $ (15.87)
Series A preferred stock dividends in arrears (11.19) (11.19)
-------------------------------
Net loss attributable to common stockholders $ (25.83) $ (27.06)
-------------------------------
-------------------------------
Weighted average common shares outstanding 107,700 107,700
-------------------------------
-------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
Busse Broadcasting Corporation
Condensed Consolidated Statements of Cash Flows
Unaudited
THREE MONTHS ENDED
----------------------------
MARCH 29, March 30,
1998 1997
----------------------------
OPERATING ACTIVITIES
Net loss $ (1,576,054) $(1,709,066)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,481,037 1,543,047
Noncash interest expense 121,615 107,234
Amortization of deferred financing costs 154,351 154,351
Program payments over program amortization (2,877) (2,257)
Gain on disposition of property, plant and equipment (11) (20)
Deferred compensation expense 88,507 88,507
Pension expense -- 30,000
Change in current assets and liabilities:
Receivables 476,408 773,009
Other current assets (2,468) (53,161)
Accounts payable and accrued expenses 1,521,658 1,415,566
----------------------------
Net cash provided by operating activities 2,262,166 2,347,210
INVESTING ACTIVITIES:
Capital expenditures (190,496) (260,172)
Proceeds from disposition of assets 11 20
Increase in other assets (115) (962)
----------------------------
Net cash used in investing activities (190,600) (261,114)
----------------------------
Net increase in cash and cash equivalents 2,071,566 2,086,096
Cash and cash equivalents at beginning of period 8,974,699 7,989,805
----------------------------
Cash and cash equivalents at end of period $11,046,265 $10,075,901
----------------------------
----------------------------
Supplemental disclosure of cash flow information:
Interest paid during the period $ -- $ --
----------------------------
----------------------------
Income taxes paid during the period $ -- $ --
----------------------------
----------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited
March 29, 1998
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include Busse Broadcasting
Corporation and its wholly owned subsidiaries (collectively Busse or the
Company) engaged in the following businesses:
TELEVISION:
KOLN/KGIN-TV CBS Affiliate Lincoln/Grand Island, Nebraska
WEAU-TV NBC Affiliate Eau Claire/La Crosse, Wisconsin
All intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements in
conjunction with the related notes to be financial statements reflect, in the
opinion of the Company, all adjustments, consisting of only normal recurring
adjustments necessary to present fairly the Company's financial position and
results of operations for the unaudited interim periods. Results for such
interim periods are not necessarily indicative of the results for the respective
entire years.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto of Busse Broadcasting Corporation
included in the Company's 1997 Annual Report on Form 10-K.
The Company and its wholly-owned subsidiary filed voluntary petitions for a
joint plan of reorganization under Chapter 11 of the United States Bankruptcy
Code (the "Plan") on March 10, 1995. On April 20, 1995 the United States
Bankruptcy Court for the district of Delaware (the "Court") confirmed the Plan,
such Plan became effective May 3, 1995 (the "Effective Date") and the respective
Chapter 11 cases were closed by the Court on September 21, 1995.
6
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
2. DEBT
Debt is summarized as follows:
MARCH 29, DECEMBER 28,
1998 1997
--------------------------
Senior Secured Notes, net of unamortized
original issue discount of $1,486,528
and $1,608,143 at March 29, 1998 and
December 28, 1997, respectively $61,040,472 $60,918,857
--------------------------
--------------------------
On October 26, 1995 the Company issued $62,527,000 principal amount of 11 5/8%
Senior Secured Notes due October 15, 2000 ("Senior Notes") at a price of 95.96%
of the aggregate principal amount thereof and received net proceeds of
$58,125,099 after payment of underwriting discounts and commissions of
$1,875,810. The net proceeds from the issuance of the Senior Notes, and the
interest earnings thereon, were used by the Company to redeem certain of the
Company's outstanding indebtedness in October 1995 and in January 1996.
Interest on the Senior Notes is payable semiannually in arrears on April 15 and
October 15 of each year, commencing April 15, 1996. Interest is computed on the
basis of a 360-day year comprised of twelve 30-day months.
The Senior Notes are senior in right of payment to all existing and future
subordinated indebtedness of the Company and rank pari passu with all existing
and future senior indebtedness of the Company. The Senior Notes are secured by
all of the Company's equity interests in, and certain intercompany indebtedness
of, its subsidiaries, including the subsidiaries which hold the Federal
Communications Commission ("FCC") licenses of the Company's two television
stations, certain agreements and contract rights related to such television
stations (including network affiliation agreements), certain machinery,
equipment and fixtures, certain general intangibles, mortgages on substantially
all of the owned and certain of the leased real property of the Company and its
subsidiaries, and proceeds thereof. In addition, the Company's subsidiaries
(collectively the "Guarantors") have fully and unconditionally guaranteed the
Senior Notes on a joint and several and senior secured basis and each such
guarantee ranks senior in right of payment to all existing and future
subordinated indebtedness of such Guarantor and ranks pari passu with all
existing and future senior indebtedness of such Guarantor.
7
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
2. DEBT (CONTINUED)
The Senior Notes may not, except in certain circumstances, be redeemed by the
Company before October 15, 1998. Thereafter, the Senior Notes will be subject to
redemption at the option of the Company, in whole or in part, at the redemption
prices of 106% and 103% (expressed as percentages of the face amount of the
Senior Notes), plus accrued and unpaid interest to the date of redemption, if
redeemed during the twelve-month period beginning on October 15 of 1998 and
1999, respectively.
The indenture relating to the Senior Notes (the "Indenture") restricts the use
of the net proceeds, as defined in the Indenture, from the 1996 sale of the
Company's printing division, Winnebago Color Press ("Winnebago"). Under the
terms of the Indenture, the Company may only utilize the net proceeds and the
interest earnings thereon, to make investments in or acquire properties and
assets directly related to television and/or radio broadcasting. Such net
proceeds and the interest earnings thereon are held by the Indenture trustee as
collateral proceeds and are classified as cash equivalents on the accompanying
consolidated balance sheets and amounted to $3,401,835 and $3,360,024 as of
March 29, 1998 and December 28, 1997, respectively.
The Indenture contains various convenants and restrictions on the Company and
its subsidiaries including, but not limited to, incurring additional
indebtedness, issuing certain disqualified capital stock, making dividend
payments or certain other restricted payments, consummating certain asset sales,
incurring liens, entering into certain transactions with affiliates, creating or
acquiring additional subsidiaries, merging or consolidating with any other
person, or selling, assigning, transferring, leasing, conveying or otherwise
disposing of all or substantially all of the assets of the Company or its
subsidiaries.
The Indenture does not restrict the ability of a subsidiary to pay dividends or
make loans or advances to the Company.
8
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
3. INCOME TAXES
As of December 28, 1997 the Company had approximately $61.4 million of federal
net operating loss carryforwards ("NOL's") which begin to expire in 2005. As a
result of the Plan (see Note 1) the Company elected treatment under Section 382
(1) (5) of the Internal Revenue Code, as amended. This treatment will allow the
Company to utilize, under certain restrictions, its NOL's to offset taxable
income incurred after the Effective Date. Utilization of a portion of these
NOL's are assumed in the Company's calculation of Post-Effective Date deferred
taxes. If the Like-kind Exchange transaction, as defined and discussed in Note
5 herein, is consummated, the Company anticipates that a significant amount of
its NOL's will be utilized to offset any taxable gain incurred in connection
with the sale of the WEAU Assets, as defined in Note 5.
4. CORPORATE REORGANIZATION/SUBSIDIARY GUARANTORS
The Senior Notes are fully and unconditionally guaranteed, on a joint and
several and senior secured basis, by all of the Company's direct and indirect
subsidiaries, each of which is wholly-owned. To facilitate the collateral
arrangements required by the Senior Notes the Company effected the following
transactions on October 20, 1995:
1. The FCC licenses relating to the operation of WEAU-TV were conveyed to a
wholly-owned subsidiary, WEAU License, Inc., in exchange for a $4,880,000 note
payable to Busse Broadcasting Corporation and 100% of the stock of the
subsidiary;
2. The assets and liabilities relating to the operation of KOLN/KGIN-TV were
conveyed to a wholly-owned subsidiary, KOLN/KGIN, Inc. (formerly known as Busse
Management, Inc. which was formerly known as WWMT, Inc.); and
3. KOLN/KGIN, Inc. conveyed the FCC licenses relating to the operation of
KOLN/KGIN-TV to its wholly-owned subsidiary KOLN/KGIN License, Inc. in exchange
for all of the capital stock of the subsidiary.
9
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
4. CORPORATE REORGANIZATION/SUBSIDIARY GUARANTORS (CONTINUED)
The following tables present summarized combined balance sheet and operating
statement information for (i) KOLN/KGIN, Inc. (ii) KOLN/KGIN License, Inc. and
(iii) WEAU License, Inc. Separate financial statements of KOLN/KGIN, Inc.
immediately follow these notes to condensed consolidated financial statements of
Busse Broadcasting Corporation. Separate financial statements and other
disclosures concerning KOLN/KGIN License, Inc. and WEAU License, Inc. have not
been presented because management has determined that such financial statements
would not be material to investors.
MARCH 29, DECEMBER 28,
1998 1997
---------------------------
ASSETS
Current assets $ 3,499,176 $ 3,377,708
Non-current assets 44,347,801 45,525,932
---------------------------
$ 47,846,977 $ 48,903,640
---------------------------
---------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities $ 1,006,271 $ 1,112,618
Non-current liabilities 6,333,635 6,373,635
Shareholder's equity 40,507,071 41,417,387
---------------------------
Total liabilities and shareholder's equity $ 47,846,977 $ 48,903,640
---------------------------
---------------------------
THREE MONTHS ENDED
----------------------------
MARCH 29, 1998 March 30, 1997
-----------------------------
Net revenue $ 3,228,244 $ 2,819,133
Total operating costs and expenses 2,822,457 2,614,956
Income from operations 405,787 204,177
Net loss $ (910,316) $ (946,891)
10
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
5. SALE OF THE COMPANY'S CAPITAL STOCK AND LIKE-KIND EXCHANGE OF ASSETS
On February 13, 1998, the Company, its stockholders (the "Stockholders") and
Gray Communications Systems, Inc., a Georgia Corporation ("Gray"), entered into
a definitive purchase agreement (the "Stock Purchase Agreement") whereby Gray
agreed to acquire, and the Stockholders agreed to sell, all of the capital stock
of the Company for the aggregate purchase price of (i) $112 million, plus (ii)
the Company's cash and cash equivalents, less (iii) the aggregate amount of the
Company's indebtedness and accrued and unpaid interest thereon, including the
accreted amount of the Company's 11 5/8% Secured Senior Notes due 2000. The
value of the Company's cash, cash equivalents and aggregate indebtedness will be
determined as of the close of business on the business day immediately preceding
the closing date of the Stock Purchase Agreement.
Upon consummation of the Stock Purchase Agreement, the Company is required, upon
notice to the holders of the Senior Notes, to repurchase any Senior Notes
tendered by such holders at a repurchase price in cash in an amount equal to
101% of the Accreted Value thereof (as defined in the Indenture), plus accrued
and unpaid interest to the date of repurchase (a "Change of Control Offer").
Under the terms of the Indenture, the Company must complete the Change of
Control Offer not more than 75 days after consummation of the Stock Purchase
Agreement.
As part of the Stock Purchase Agreement, Busse agreed to cooperate with Gray to
facilitate a like-kind exchange of substantially all of the assets, including
FCC licenses, relating to the operation of WALB-TV Albany, Georgia (the "WALB
Assets"); such assets are owned by Gray's subsidiary, WALB-TV, Inc., except for
the respective FCC licenses which are owned by Gray's subsidiary, WALB Licensee
Corp. (collectively, the "Gray Subsidiaries").
On May 4, 1998, Busse, Gray, WALB Licensee Corp. and Cosmos Broadcasting Corp.
("Cosmos") entered into a letter of intent whereby the parties agreed to effect
a like-kind exchange transaction (the "Like-kind Exchange") as follows: (i)
Busse and/or its subsidiary, as the case may be, will enter into a definitive
asset purchase agreement pursuant to which Busse and/or its subsidiary will
agree to sell all of the assets, including the FCC licenses, of WEAU-TV, Eau
Claire, Wisconsin, (the "WEAU Assets") to Cosmos for a purchase price, in cash,
to be determined by an independent third party appraiser; (ii) the Gray
Subsidiaries and Cosmos will enter into a definitive asset purchase agreement
whereby Cosmos will agree to acquire the WALB Assets from the Gray Subsidiaries
in exchange for the WEAU Assets plus a cash payment in an amount to be
determined by an appraisal and; (iii) Cosmos will direct Busse to deliver the
WEAU Assets directly to the Gray Subsidiaries to complete the Like-kind
Exchange. It is anticipated that the Stock Purchase Agreement will be
consummated immediately following the closing of the Like-kind Exchange.
11
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
5. SALE OF THE COMPANY'S CAPITAL STOCK AND LIKE-KIND EXCHANGE OF ASSETS
(CONTINUED)
Under the terms of the Indenture, the Company is required to utilize the net
proceeds from the sale of the WEAU Assets to fund a mandatory offer to purchase
Senior Notes at an offer price in cash in an amount equal to 100% of the
Accreted Value thereof (as defined in the Indenture), plus accrued and unpaid
interest to the date of purchase, (an "Asset Sale Offer"). The Indenture
requires the Company to complete the Asset Sale Offer not more than 75 days
after consummation of the sale of the WEAU Assets. Upon completion of any Asset
Sale Offer, the Company may utilize any remaining net proceeds from the sale of
the WEAU Assets solely to make investments in or acquire properties and assets
directly related to television and/or radio broadcasting. The net proceeds from
the sale of the WEAU Assets, and the interest earnings thereon, will constitute
collateral proceeds under the Indenture and will be held in trust by the
Indenture's trustee.
The aggregate consideration payable to the Stockholders under the Stock Purchase
Agreement will not be effected by the Like-kind Exchange. Consummation of the
Like-kind Exchange is not a condition precedent for consummation of the Stock
Purchase Agreement.
Consummation of the transactions contemplated by the Stock Purchase Agreement
and/or the Like-kind Exchange, is subject to the receipt of requisite
governmental approvals, including the approval of the Federal Trade Commission,
(the "FTC") and the FCC. The Like-kind Exchange transactions are also subject
to, among other things, negotiation of definitive asset purchase agreements
between Busse and Cosmos for the WEAU Assets and Gray and Cosmos for the WALB
Assets. The Company can make no assurance as to whether any of the transactions
described above will be completed, but currently anticipates that such
transactions will close on or before September 1, 1998.
Effective with the closing of the Stock Purchase Agreement, Messrs. Busse and
Ryan will resign as executive officers of, and terminate their respective
employment with, the Company and Messrs. Busse, Beck and Cornwell will resign as
directors of the Company.
12
KOLN/KGIN, Inc.
(A Wholly-Owned Subsidiary of Busse Broadcasting Corporation)
Condensed Consolidated Balance Sheets
MARCH 29, DECEMBER 28,
1998 1997
UNAUDITED AUDITED
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 774,627 $ 373,716
Receivables, net 2,103,240 2,375,565
Program contract rights 284,795 441,825
Other current assets 8,512 40,600
-------------------------------
Total current assets 3,171,174 3,231,706
Property, plant and equipment, net 7,190,618 7,444,901
Due from Parent 302,750 464,096
Deferred charges and other assets 4,776 4,776
Intangible assets and excess reorganization value 31,743,483 32,404,597
-------------------------------
Total assets $ 42,412,801 $ 43,550,076
-------------------------------
-------------------------------
LIABILITIES AND COMMON STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 545,654 $ 631,201
Program contracts payable 211,591 369,733
-------------------------------
Total current liabilities 757,245 1,000,934
Deferred income tax liabilities 1,743,000 1,783,000
Stockholder's equity:
Common stock (voting) - $.01 par value, 1,000
shares authorized, issued and outstanding 10 10
Additional paid-in capital 46,568,577 46,568,577
Accumulated deficit (6,656,031) (5,802,445)
-------------------------------
Total stockholder's equity 39,912,556 40,766,142
-------------------------------
Total liabilities and stockholder's equity $ 42,412,801 $ 43,550,076
-------------------------------
-------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
13
KOLN/KGIN, Inc.
(A Wholly-Owned Subsidiary of Busse Broadcasting Corporation)
Condensed Consolidated Statements of Operations and Stockholder's Equity
Unaudited
THREE MONTHS ENDED
----------------------------
MARCH 29, March 30,
1998 1997
----------------------------
Net revenue $ 3,046,244 $2,637,133
Operating costs and expenses, excluding
depreciation and amortization 1,425,382 1,334,915
Depreciation 269,750 274,525
Amortization of intangibles and excess
reorganization value 661,114 649,614
Corporate expenses 364,823 218,861
------------------------------
Total operating costs and expenses 2,721,069 2,477,915
------------------------------
Income from operations 325,175 159,218
Other income (expense):
Interest income 3,195 4,962
Other expense (6,956) --
-----------------------------
Other income (expense) (3,761) 4,962
-----------------------------
Income before income taxes 321,414 164,180
(Provision) benefit for income taxes:
Current (1,215,000) (1,060,000)
Deferred 40,000 46,000
-----------------------------
(1,175,000) (1,014,000)
-----------------------------
Net loss (853,586) (849,820)
Stockholder's equity at beginning of period 40,766,142 43,626,546
-----------------------------
Stockholder's equity at end of the period $ 39,912,556 $42,776,726
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
14
KOLN/KGIN, Inc.
(A Wholly-Owned Subsidiary of Busse Broadcasting Corporation)
Condensed Consolidated Statements of Cash Flows
Unaudited
THREE MONTHS ENDED
----------------------------
MARCH 29, March 30,
1998 1997
----------------------------
OPERATING ACTIVITIES
Net loss $ (853,586) $ (849,820)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 930,864 924,139
Program payments over program amortization (1,112) (1,226)
Deferred income taxes (40,000) (46,000)
Change in current assets and liabilities:
Receivables 272,325 411,147
Other current assets 32,088 (27,217)
Accounts payable and accrued expenses (85,547) (124,093)
----------------------------
Net cash provided by operating activities 255,032 286,930
INVESTING ACTIVITIES
Capital expenditures (15,467) (94,073)
----------------------------
Net cash used in investing activities (15,467) (94,073)
FINANCING ACTIVITIES
Decrease (increase) in due from Parent 161,346 (18,709)
----------------------------
Net cash provided by (used in) financing activities 161,346 (18,709)
----------------------------
Net increase in cash and cash equivalents 400,911 174,148
Cash and cash equivalents at beginning of period 373,716 299,008
----------------------------
Cash and cash equivalents at end of period $ 774,627 $ 473,156
----------------------------
----------------------------
Supplemental information
Income taxes paid $ 1,215,000 $ 1,060,000
----------------------------
----------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
15
KOLN/KGIN, Inc.
(A Wholly-Owned Subsidiary of Busse Broadcasting Corporation)
Notes to Condensed Consolidated Financial Statements
Unaudited
March 29, 1998
1. BASIS OF PRESENTATION
The financial statements present the financial position, results of operations
and stockholder's equity, and cash flows of KOLN/KGIN, Inc., a wholly-owned
subsidiary of Busse Broadcasting Corporation (the Company or Parent). KOLN/KGIN,
Inc. owns and operates KOLN/KGIN-TV a CBS affiliate operating channels 10 and 11
in the Lincoln - Hastings - Kearney, Nebraska television market.
The accompanying financial statements include the accounts of KOLN/KGIN License,
Inc., a wholly owned subsidiary of KOLN/KGIN, Inc. All intercompany accounts and
transactions have been eliminated in consolidation.
Net intercompany balances reflected in the due from Parent account are primarily
the result of KOLN/KGIN, Inc.'s participation in the Company's central cash
management program, wherein the month-end cash balances in excess of certain
levels are remitted to the Company. Other transactions include the allocation of
corporate expenses to KOLN/KGIN, Inc. and the current income taxes that would
have been due to the Company. There are no terms of settlement or interest
related to these balances which averaged $383,423 and $246,819 due from the
Parent during the three months ended March 29, 1998 and March 30, 1997,
respectively.
The accompanying unaudited condensed consolidated financial statements in
conjunction with the related notes to the financial statements reflect, in the
opinion of KOLN/KGIN, Inc., all adjustments, consisting of only normal recurring
adjustments necessary to present fairly KOLN/KGIN, Inc.'s financial position and
results of operations for the unaudited interim periods. Results for such
interim periods are not necessarily indicative of the results for the respective
entire years.
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 the rules and regulations of the
Securities and Exchange Commission. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto of KOLN/KGIN, Inc.
16
KOLN/KGIN, Inc.
(A Wholly-Owned Subsidiary of Busse Broadcasting Corporation)
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
1. BASIS OF PRESENTATION (CONTINUED)
The Company and KOLN/KGIN, Inc. (then named WWMT, Inc.) filed voluntary
petitions for a joint plan of reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Plan") on March 10, 1995. On April 20, 1995 the
United States Bankruptcy Court (the "Court") for the district of Delaware
confirmed the Plan, such Plan became effective May 3, 1995 (the "Effective
Date") and the respective Chapter 11 cases were closed by the Court on September
21, 1995.
2. GUARANTEE OF PARENT'S SENIOR NOTES
On October 26, 1995 the Company issued $62,527,000 principal amount of 11 5/8%
Senior Secured Notes due October 15, 2000 ("Senior Notes") at a price of 95.96%
of the aggregate principal amount thereof.
To facilitate the collateral arrangements required by the Senior Notes the
Company effected the following transactions on October 20, 1995:
1. The assets and liabilities relating to the operation of KOLN-TV and KGIN-TV
were conveyed to KOLN/KGIN, Inc.
2. KOLN/KGIN, Inc. transferred the FCC licenses relating to the operation of
KOLN-TV and KGIN-TV to its wholly-owned subsidiary KOLN/KGIN License, Inc. in
exchange for all of the capital stock of the subsidiary.
Interest on the Senior Notes is payable semiannually in arrears on April 15 and
October 15 of each year. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
17
KOLN/KGIN, Inc.
(A Wholly-Owned Subsidiary of Busse Broadcasting Corporation)
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
2. GUARANTEE OF PARENT'S SENIOR NOTES (CONTINUED)
The Senior Notes are senior in right of payment to all existing and future
subordinated indebtedness of the Company and rank pari passu with all existing
and future senior indebtedness of the Company. The Senior Notes are secured by
all of the Company's equity interests in, and certain intercompany indebtedness
of, its subsidiaries, including the respective subsidiaries which own KOLN/KGIN-
TV and hold the FCC licenses of KOLN/KGIN-TV, certain agreements and contract
rights related to such television station (including network affiliation
agreements), certain machinery, equipment and fixtures, certain general
intangibles, mortgages on substantially all of the owned and certain of the
leased real property of the Company and its subsidiaries, and proceeds thereof.
In addition, the Company's subsidiaries (collectively the "Guarantors") have
fully and unconditionally guaranteed, on a joint and several and senior secured
basis, the Senior Notes and each such guarantee ranks senior in right of payment
to all existing and future subordinated indebtedness of such Guarantor and ranks
pari passu with all existing and future senior indebtedness of such Guarantor.
The indenture relating to the Senior Notes (the "Indenture") contains various
convenants and restrictions on the Company and its subsidiaries, including, but
not limited to, incurring additional indebtedness, issuing certain disqualified
capital stock, making dividend payments or certain other restricted payments,
consummating certain asset sales, incurring liens, entering into certain
transactions with affiliates, creating or acquiring additional subsidiaries,
merging or consolidating with any other person, or selling, assigning,
transferring, leasing, conveying or otherwise disposing of all or substantially
all of the assets of the Company or its subsidiaries.
The Indenture does not restrict the ability of a subsidiary to pay dividends or
make loans or advances to the Company.
18
3. SALE OF THE CAPITAL STOCK OF THE PARENT
On February 13, 1998 the Company, its stockholders and Gray Communications
Systems, Inc., a Georgia Corporation ("Gray"), entered into a definitive
purchase agreement (the "Stock Purchase Agreement") whereby Gray agreed to
acquire, and the stockholders agreed to sell, all of the capital stock of the
Company for the aggregate purchase price of (i) $112 million, plus (ii) the
Company's cash and cash equivalents, less (iii) the aggregate amount of the
Company's indebtedness and accrued and unpaid interest thereon, including the
accreted amount of the Company's 11 5/8% Secured Senior Notes due 2000. The
value of the Company's cash, cash equivalents and aggregate indebtedness will be
determined as of the close of business on the business day immediately preceding
the closing date of the Stock Purchase Agreement.
Consummation of the transactions contemplated by the Stock Purchase Agreement is
subject to the receipt of requisite governmental approvals, including the
approval of the FCC. The Company can make no assurance as to whether the
transactions contemplated by the Stock Purchase Agreement will be completed, but
currently anticipates that such transactions will close on or before September
1, 1998.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The following discussion and analysis of financial condition
and results of operations should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements of the Company and notes thereto
included at Item 1, "Financial Statements," which provide additional
information regarding the Company's financial activities and condition. The
accompanying unaudited Condensed Consolidated Financial Statements, together
with the related notes to such financial statements, reflect, in the opinion
of the Company, all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the Company's financial position and
results of operations for the unaudited interim periods. Results of such
interim periods are not necessarily indicative of the results for the
respective entire fiscal years.
The Company's fiscal year is the 52/53 week period ending on the
Sunday nearest to December 31 of each year. The Company's first three fiscal
quarters are each comprised of 13 consecutive weeks. Unless otherwise
indicated, references herein to 1998 and/or 1997 refer to the three month
period ended March 29, 1998 or March 30, 1997, respectively.
RESULTS OF OPERATIONS
The net revenues of KOLN/KGIN-TV and WEAU-TV (collectively, the
"Stations") are derived primarily from advertising revenues 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 employee compensation and related benefits, programming, news gathering
and production and promotions.
In general, television stations receive revenues for advertising
sold for placement within and adjoining its locally originated programming
and adjoining national network programming. Advertising is sold in time
increments and is priced primarily on the basis of a program's popularity
within the demographic group an advertiser desires to reach, as measured
principally by quarterly audience surveys. In addition, advertising rates
are affected by the number of advertisers competing for the available time,
the size of the demographic make-up of the markets served by the television
station and the availability of alternate advertising media in the market
areas. Rates are highest during the most desirable viewing hours with
corresponding reductions during other hours. The ratings of local television
stations affiliated with a national television network can be affected by the
ratings of the network programming.
Most advertising contracts are short-term and generally run for
only a few weeks. A large portion of the revenues of the Stations is
generated from local and regional advertising,
20
which is sold primarily by the Stations' sales staff, and the remainder of
the advertising revenues represents national advertising, which is sold by an
independent national advertising sales representative. The Stations
generally pay commissions to advertising agencies on local, regional, and
national advertising, and on national advertising the Stations also generally
pay commissions to the national sales representative.
The advertising revenues of the 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
revenues are generally higher during election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter. Operating expenses of the Company's television stations are
generally consistent throughout the fiscal year.
COMPARISON OF THE THREE MONTHS ENDED MARCH 29, 1998 AND MARCH 30, 1997
Net revenue increased $462,186, or 10.8%, to $4,727,128 from
$4,264,942 for the three months ended March 29, 1998 compared to the three
months ended March 30, 1997, reflecting increased advertiser demand for
commercial time. KOLN/KGIN-TV recorded a year-to-year increase in net local
and national time sales, excluding net political revenues, of approximately
13.3% and 5.8%, respectively, attributable to a general improvement of
advertising demand, including demand for advertising time relating to the
1998 Winter Olympics telecast. WEAU-TV recorded increases of approximately
3.2% and 7.1% in net local and national time sales, excluding net political
revenues, respectively, during the three month period ended March 29, 1998
compared to the three months ended March 30, 1997 due to increased advertiser
demand, including demand for advertising time relating to the Super Bowl
telecast. Net political revenue for the Stations during the three months
ended March 29, 1998 increased by approximately $126,000, or 382%, to
$159,000 from $33,000 between the fiscal periods reflecting primary election
campaigning in Nebraska as part of the biannual election cycle. Network
compensation for the Stations was consistent between the respective fiscal
periods.
Operating expenses, excluding depreciation and amortization
expenses, increased $105,870, or 4.9%, to $2,270,751 for the three months
ended March 29, 1998 from $2,164,881 for the comparable 1996 period.
Approximately $47,000 of such increase relates to the cost of certain
litigation only during the 1998 period; such litigation has been settled
favorably by the Company.
Depreciation expenses decreased $37,857, or 7.1%, to $492,412 for
the three months ended March 29, 1998 from $530,269 for the comparable 1997
period, reflecting the timing of estimated depreciation charges within the
1997 fiscal year.
Amortization expenses decreased $24,153, or 2.4%, to $988,625 for
the three months ended March 29, 1998 from $1,012,778 for the comparable 1997
period.
21
Corporate expenses increased $199,927, or 56.6%, to $552,880 during
the three months ended March 29, 1998 from $352,953 for the three months
ended March 30, 1997 reflecting, in part, differences in the incurrence of
professional services between the respective fiscal periods including
professional service expenses relating to the pending sale of the Company's
capital stock as discussed below.
Income from operations increased $218,399, or 107.0%, to $422,460
for the three months ended March 29, 1998 from $204,061 for the comparable
period of 1997 primarily reflecting the increased net revenues offset in part
by the increased expenses, both as discussed above.
Interest expense increased $14,381, or 0.7%, to $2,093,157 for the
three months ended March 29, 1998 from $2,078,776 for the comparable 1997
fiscal period reflecting continuing accretion of original issue discount.
Interest income was consistent between the respective fiscal periods.
The Company has analyzed its current and deferred tax assets and
liabilities and has concluded that no provision for current or deferred
federal or state taxes is required for the three months ended March 29, 1998.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's cash and cash equivalents at March 29, 1998
totaled $11,046,265 compared to $8,974,699 at December 28, 1997. The
Company's cash balances at March 29, 1998 and December 28, 1998 includes
$3,401,835 and $3,360,024, respectively, representing the net proceeds, and
the interest earnings thereon, from the sale of Winnebago during 1996. The
Company's use of such net proceeds, and the interest earnings thereon, is
restricted, under the terms of the Indenture, to making investments in or
acquiring property and assets directly related to television and/or radio
broadcasting. Pending any such investment or acquisition such net proceeds
are required by the Indenture to be invested in cash or cash equivalents.
Although the Company has no immediate plans to use such net proceeds to
invest in or acquire assets directly related to television and/or radio
broadcasting, some or all of such proceeds may be used to fund the capital
expenditures described below, other capital expenditures, or for other
permitted uses. See Note 2 to Notes to Condensed Consolidated Financial
Statements (Unaudited) included in "Financial Statements" at Item 1. The
primary changes in the Company's cash position results from changes in
certain working capital accounts.
The Company's primary source of liquidity is cash generated by
operations. There are no contractual restrictions on the ability of the
Company's subsidiaries to pay cash dividends or make loans or advances to the
Company. The Company's net cash provided by operations (including changes in
working capital) was $2,262,166 and $2,347,210 for the three months
22
ended March 29, 1998 and March 30, 1997, respectively. The decrease in net
cash generated between the respective fiscal periods is due primarily to
changes in certain working capital accounts.
The Company continues to have a significant annual cash interest
obligation of approximately $7,268,000 with respect to the Senior Notes.
Such cash interest obligation is payable in semi-annual installments of
approximately $3,634,000 due on the 15th day of April and October.
CAPITAL EXPENDITURES
In addition to its debt service obligations, the Company will
require liquidity for capital expenditures and working capital needs. For
the three months ended March 29, 1998 capital expenditures totaled $190,496.
The Company currently expects fiscal year 1998 capital expenditures to
approximate $1 million with such amount divided approximately evenly between
the Stations.
It is anticipated that significant capital expenditures may be
required in the future to implement advanced television, "ATV" at the
Stations. The FCC has determined the technical standards, the channel
assignments and a time table for implementation of ATV. The FCC has assigned
the following ATV channels to the Company's current channels:
Station Location Current Channel ATV Channel
------- ---------------------- --------------- -----------
KOLN Lincoln, Nebraska 10 25
KGIN Grand Island, Nebraska 11 32
WEAU Eau Claire, Wisconsin 13 39
Generally, under the FCC's implementation schedule, the Company
must apply for ATV construction permits for each of its present television
stations by November 1, 1999 and then commence ATV operations by May 1, 2002.
Under the current FCC implementation schedule the Company would generally be
required to surrender to the government either the current channel or the ATV
channel by December 31, 2006 and continue its digital operations thereafter
on the retained channel. Recent legislation requires the FCC to extend the
December 31, 2006 surrender date with respect to certain stations within a
given television market if (i) at least one network affiliate is not
broadcasting a digital service in the given market and has exercised "due
diligence" in meeting the ATV buildout requirements for that market or (ii)
digital to analog converter technology is not generally available in the
given market or (iii) 15 percent or more of the television households in a
given market do not subscribe to a multichannel video programming distributor
that carries the digital service of each local station and those television
households do not have at least one advanced television set or at least one
digital to analog converter. The foregoing implementation schedule is
subject to review by the FCC every two years and may also be subject to
future legislation or judicial review, the effect of which cannot be
predicted by the Company.
23
The Company is currently studying the ATV channel assignments for
the Stations as well as the technical and capital expenditure requirements to
implement ATV at the Stations. The Company currently intends to implement
ATV at the Stations within the FCC mandated implementation period. The
Company cannot presently predict the cost of such implementation but, based
upon general industry estimates, currently believes that such costs will be
material and will require several million dollars to commence initial ATV
operations.
POSSIBLE LOCAL MARKETING AGREEMENTS
On December 31, 1997, the Company entered into a certain option
agreement (the "Channel 45 Option") with McPike Communications, Inc,
("McPike") to provide McPike with funding in connection with its FCC
application for, and construction of, Channel 45 in Lincoln, Nebraska
("Channel 45') and to provide the Company with an option to purchase the
assets relating to Channel 45. A principal officer of McPike is the
controller for KOLN/KGIN-TV. Except for certain nominal amounts, the Company
intends to invest such funds only after receipt of requisite FCC and other
governmental approvals of the proposed transactions. The funds are expected
to be provided to McPike primarily in the form of a secured loan. In
exchange for such financial assistance, McPike will, subject to the receipt
of requisite FCC and other governmental approvals, including the grant of the
Channel 45 license, enter into an local marketing agreement (an "LMA") with
the Company. An LMA involves the payment of a fee to and/or expenses of a
station licensee in exchange for the rights to provide programming to a
station and to retain revenues derived from the sale of advertising in such
programming. In consideration of the Channel 45 LMA, the Company will agree
to pay all of such station's operating expenses. The Company intends
(subject to requisite FCC and other governmental approvals) to operate
Channel 45 under such an LMA but is presently unable to predict whether the
requisite FCC and other governmental approvals will be received or the timing
of such approvals. Pursuant to the Channel 45 Option, the Company has agreed
to pay to McPike (i) $25,000 within 10 days of a final FCC grant of a
construction permit to McPike for Channel 45, (ii) $25,000 less any amounts
received by McPike as the result of a settlement in the event the
construction permit for Channel 45 is granted to any other party or (iii) a
$25,000 termination fee in the event the Company wishes to terminate the
Channel 45 Option in order to perform its obligations under the Channel 51
Option (described below). The Channel 45 Option will have a term of 10 years
following program test authority for McPike's Channel 45 facility, but can be
extended by the Company for an additional 10 years upon payment by the
Company to McPike of $25,000. The Company's exercise price to purchase the
Channel 45 assets is the greater of $100,000 or an amount equal to the
outstanding principal balance and accrued interest on the secured loan plus a
cash payment of $25,000. The Channel 45 Option also provides for a five-year
lease to install the Channel 45 antenna on the KOLN-TV tower and the Channel
45 transmitter at a suitable location on the KOLN-TV tower site, for a
monthly rental of $2,500. On November 6, 1995, Citadel Communications, Inc.
("Citadel") filed with the FCC a petition to deny McPike's application for
Channel 45. Citadel's petition asserts, among other things, that the
Company's proposed interest in Channel 45 is so substantial that it violates
the FCC's multiple station ownership restrictions. Although McPike has
opposed Citadel's petition, the Company cannot predict the outcome of this
proceeding. Also, on November 6, 1995,
24
Northwest Television, Inc. ("Northwest") and Larry A. Miller ("Miller"), an
individual, filed separate applications with the FCC for Channel 45. The
Miller application indicates that the applicant intends to enter into an LMA
with Pappas Telecasting of the Midlands, a California limited partnership
("Pappas"). Pappas (or affiliates of Pappas) operate, directly or
indirectly, television stations KHGI-TV (with its satellite station KWNB-TV),
an ABC affiliate, and KTVG-TV (with its satellite station KSNB-TV),
affiliated with Fox and UPN, in the Lincoln-Hastings-Kearney market. In
addition, Pappas (or an affiliate of Pappas) owns and operates KPTM-TV, a Fox
affiliate in the adjacent Omaha, Nebraska television market. In addition, on
November 7, 1995, Walnut Creek Telecasting ("Walnut Creek") filed an
application with the FCC for Channel 45.
The McPike, Northwest, Miller and Walnut Creek applications for
Channel 45 are mutually exclusive. On December 14, 1995, Northwest, Miller
and Walnut Creek filed a proposed settlement agreement with the FCC pursuant
to which, if approved by the FCC, Northwest and Walnut Creek would withdraw
their respective applications in return for certain payments from Miller.
However, one of the parties has subsequently attempted to withdraw from the
proposed settlement and the effect of such attempted withdrawal is unclear.
On December 31, 1997, the Company entered into a certain option
agreement (the "Channel 51 Option") with David M. Comisar ("Comisar"), an
individual, to provide Comisar with funding in connection with his FCC
application for, and construction of, Channel 51 in Lincoln Nebraska
("Channel 51") and to provide the Company with an option to purchase the
assets relating to Channel 51. Except for certain nominal amounts, the
Company intends to invest such funds only after receipt of requisite FCC and
governmental approvals of the proposed transactions. The funds are expected
to be provided to Comisar primarily in the form of a secured loan. In
exchange for such financial assistance, Comisar will, subject to the receipt
of requisite FCC and other governmental approvals, including the grant of the
Channel 51 license, enter into an LMA with the Company. In consideration of
the Channel 51 LMA, the Company will agree to pay all such station's
operating expenses. The Company intends (subject to requisite FCC and other
governmental approvals) to operate Channel 51 under such an LMA but is
presently unable to predict whether the requisite FCC and other governmental
approvals will be received or the timing of such approvals. Pursuant to the
Channel 51 Option, the Company has agreed to pay to Comisar (i) $25,000
within 10 days of a final FCC grant of a construction permit to Comisar for
Channel 51, (ii) $25,000 less any amounts received by Comisar as the result
of a settlement in the event the construction permit for Channel 51 is
granted to any other party or (iii) a $25,000 termination fee in the event
the Company wishes to terminate the Channel 51 Option in order to perform its
obligations under the Channel 45 Option (described above). The Channel 51
Option will have a term of 10 years following program test authority for
Comisar's Channel 51 facility, but can be extended by the Company for an
additional 10 years upon payment by the Company to Comisar of $25,000. The
Company's exercise price to purchase the Channel 51 assets is the greater of
$100,000 or an amount equal to the outstanding principal balance and accrued
interest on the secured loan plus a cash payment of $25,000. The Channel 51
Option also provides for a five-year lease to install the Channel 51 antenna
on the KOLN-TV tower and the Channel 51
25
transmitter at a suitable location on the KOLN-TV tower site, for a monthly
rental of $2,500. Mutually exclusive applications for Channel 51 were filed
by Anthony J. Fant on June 2, 1996, by Channel 51, L.L.C. on July 23, 1996
and by World Broadcasting, Inc. and Prime Broadcasting Company on July 24,
1996.
On November 25, 1997, the FCC proposed rules to require that
pending mutually exclusive applications for commercial broadcast facilities
be resolved through auctions, rather than comparative selection procedures.
For applications such as McPike's and Comisar's applications filed prior to
July 1, 1997, only applications already on file are to be eligible to
participate in the auction. Bidding preferences or other advantages might be
given to certain types of "designated entities," including minorities, small
businesses, women, those promoting ownership diversification, and those
proposing service to underserved communities or reception areas. Although
each of McPike and Comisar has advised the Company that it intends to
prosecute fully its application for Channel 45 and Channel 51, respectively,
the Company cannot predict the outcome of the competing applications for
Channel 45 and Channel 51 or the proposed auction procedures.
On December 31, 1997, the Company entered into a certain option
agreement ("Channel 39 Option") with McPike to provide McPike with funding in
connection with its FCC application for, and construction of, Channel 39 in
Marshfield, Wisconsin ("Channel 39") and to provide the Company with an
option to purchase the assets relating to Channel 39. Except for certain
nominal amounts, the Company intends to invest such funds only after receipt
of requisite FCC and other governmental approvals of the proposed
transactions. The funds are expected to be provided to McPike primarily in
the form of a secured loan. In exchange for such financial assistance,
McPike will, subject to the receipt of requisite FCC and other governmental
approvals, including the grant of the Channel 39 license, enter into an LMA
with the Company. In consideration of the Channel 39 LMA, the Company will
agree to pay all of such station's operating expenses. The Company intends
(subject to FCC and other governmental approvals) to operate Channel 39 under
such an LMA but is presently unable to predict whether the requisite FCC and
other governmental approvals will be received or the timing of such
approvals. Pursuant to the Channel 39 Option, the Company has agreed to pay
to McPike (i) $25,000 within 10 days of a final FCC grant of a construction
permit to McPike for Channel 39 or (ii) $25,000 less any amounts received by
McPike as the result of a settlement in the event the construction permit for
Channel 39 is granted to any other party. "The Channel 39 Option will have a
term of 10 years following program test authority for McPike's Channel 39
facility, but can be extended by the Company for an additional 10 years upon
payment by the Company to McPike of $25,000. The Company's exercise price to
purchase the Channel 39 assets is the greater of $100,000 or an amount equal
to the outstanding principal balance and accrued interest on the secured loan
plus a cash payment of $25,000. The Channel 39 Option also provides for a
five-year lease to install the Channel 39 antenna on the WEAU-TV tower and the
Channel 39 transmitter at a suitable location on the WEAU-TV tower site, for a
monthly rental of $2,500. Pursuant to the FCC proposed rules, pending mutually
exclusive applications for commercial broadcast facilities are to be resolved
through auctions, rather than comparative selection procedures. For
applications such as McPike's application for Marshfield, which was filed prior
to July 1, 1997 and against which no mutually exclusive
26
applications have been filed, the FCC has suggested that it might open a
further window for the filing of competing applications or permit parties who
had not filed applications to participate in an auction for such facilities.
Bidding preferences or other advantages might be given to certain types of
"designated entities," including minorities, small businesses, women, those
promoting ownership diversification, and those proposing service to
underserved communities or reception areas. The FCC has proposed the use of
Channel 39 as a second, ATV channel for WEAU-TV, which would preclude its use
by McPike at Marshfield and could jeopardize the viability of that
application.
OTHER LIQUIDITY AND CAPITAL RESOURCE ISSUES
Although there can be no assurance that the Company will generate
earnings in the future sufficient to cover its fixed charges, including the
debt service obligations with respect to the Senior Notes, management
believes that the cash flow generated from the Company's operations and
available cash on hand should be sufficient to fund its interest
requirements, working capital needs, anticipated capital expenditures and
other operating expenses through the end of fiscal year 1999. The Company's
high degree of leverage will have important consequences, including the
following: (i) the ability of the Company to obtain additional financing for
working capital, capital expenditures, debt service requirements or other
purposes may be impaired; (ii) a substantial portion of the Company's
operating cash flow will be required to be dedicated to the payment of the
Company's interest expense; (iii) the Company may be more highly leveraged
than companies with which it competes, which may place it at a competitive
disadvantage; and (iv) the Company may be more vulnerable in the event of a
downturn in its businesses. The Company's future operating performance and
ability to service or refinance the Senior Notes will be subject to future
economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.
The Company does not currently have additional credit availability
under any agreements and the Indenture governing the Senior Notes limits the
Company's ability to incur additional Indebtedness (as defined therein). The
limitation in the Indenture on the Company's ability to incur additional
Indebtedness, together with the highly leveraged nature of the Company, could
limit corporate and operating activities, including the Company's ability to
respond to market conditions, to provide for unanticipated capital
investments or to take advantage of business opportunities.
INCOME TAXES
The Company's federal NOL carryover as of December 28, 1997 was
approximately $61.4 million and such NOL's will begin to expire in 2005. The
Company elected treatment under Section 382(l)(5) (the "L5 Election") of the
Internal Revenue Code, as amended (the "Code"). The L5 Election allows the
Company to utilize, subject to certain restrictions, its Pre-Effective Date
NOL of approximately $59.8 million to offset any taxable income incurred
after the Effective Date. The Company's use of its Post-Effective Date NOL
is not restricted, absent a future "ownership change" under Section 382 of
the Code. If the Like-kind
27
Exchange transaction is consummated, the Company anticipates that a
significant amount of its NOL's will be utilized to offset any taxable gain
incurred in connection with the sale of the WEAU Assets. See Note 3 of Notes
to Condensed Consolidated Financial Statements (Unaudited) included in
"Financial Statements" at Item 1.
STOCK PURCHASE AGREEMENT AND LIKE-KIND EXCHANGE OF ASSETS
On February 13, 1998, the Company, the Stockholders and Gray
entered into the Stock Purchase Agreement whereby Gray agreed to acquire, and
the Stockholders agreed to sell, all of the capital stock of the Company for
the aggregate purchase price of (i) $112 million, plus (ii) the Company's
cash and cash equivalents, less (iii) the aggregate amount of the Company's
indebtedness and accrued and unpaid interest thereon, including the accreted
amount of the Company's Senior Notes. The value of the Company's cash, cash
equivalents and aggregate indebtedness will be determined as of the close of
business on the business day immediately preceding the closing date of the
Stock Purchase Agreement.
Upon consummation of the Stock Purchase Agreement, the Company is
required, upon notice to the holders of the Senior Notes, to repurchase any
Senior Notes tendered by such holders at a repurchase price in cash in an
amount equal to 101% of the Accreted Value thereof (as defined in the
Indenture), plus accrued and unpaid interest to the date of repurchase (a
"Change of Control Offer"). Under the terms of the Indenture, the Company
must complete the Change of Control Offer not more than 75 days after
consummation of the Stock Purchase Agreement.
As part of the Stock Purchase Agreement, Busse agreed to cooperate
with Gray to facilitate a like-kind exchange of substantially all of the
assets, including "FCC" licenses, relating to the operation of WALB-TV
Albany, Georgia (the "WALB Assets"); such assets are owned by Gray's
subsidiary, WALB-TV, Inc., except for the respective FCC licenses which are
owned by Gray's subsidiary, WALB Licensee Corp. (collectively, the "Gray
Subsidiaries").
On May 4, 1998, Busse, Gray, WALB Licensee Corp. and Cosmos
Broadcasting Corp. ("Cosmos") entered into a letter of intent whereby the
parties agreed to effect a like-kind exchange transaction (the "Like-kind
Exchange") as follows: (i) Busse and/or its subsidiary, as the case may be,
will enter into a definitive asset purchase agreement pursuant to which Busse
and/or its subsidiary will agree to sell all of the assets, including the FCC
licenses, of WEAU-TV, Eau Claire, Wisconsin (the "WEAU Assets") to Cosmos for
a purchase price, in cash, to be determined by an independent third party
appraiser; (ii) the Gray Subsidiaries and Cosmos will enter into a definitive
asset purchase agreement whereby Cosmos will agree to acquire the WALB Assets
from the Gray Subsidiaries in exchange for the WEAU Assets plus a cash
payment in an amount to be determined by an appraisal; and (iii) Cosmos will
direct Busse to deliver the WEAU Assets directly to the Gray Subsidiaries to
complete the Like-kind Exchange. It is anticipated that the Stock Purchase
Agreement will be consummated immediately following the closing of the
Like-kind Exchange.
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Under the terms of the Indenture, the Company is required to
utilize the net proceeds from the sale of the WEAU Assets to fund a mandatory
offer to purchase Senior Notes at an offer price in cash in an amount equal
to 100% of the Accreted Value thereof (as defined in the Indenture), plus
accrued and unpaid interest to the date of purchase, (an "Asset Sale Offer").
The Indenture requires the Company to complete the Asset Sale Offer not more
than 75 days after consummation of the sale of the WEAU Assets. Upon
completion of any Asset Sale Offer, the Company may utilize any remaining net
proceeds from the sale of the WEAU Assets solely to make investments in or
acquire properties and assets directly related to television and/or radio
broadcasting. The net proceeds from the sale of the WEAU Assets, and the
interest earnings thereon, will constitute collateral proceeds under the
Indenture and will be held in trust by the Indenture's trustee.
The aggregate consideration payable to the Stockholders under the
Stock Purchase Agreement will not be effected by the Like-kind Exchange.
Consummation of the Like-kind Exchange is not a condition precedent for
consummation of the Stock Purchase Agreement.
Consummation of the transactions contemplated by the Stock Purchase
Agreement and/or the Like-kind Exchange, is subject to the receipt of
requisite governmental approvals, including the approval of the FTC and FCC.
The Like-kind Exchange transactions are also subject to, among other things,
negotiation of definitive asset purchase agreements between Busse and Cosmos
for the WEAU Assets and Gray and Cosmos for the WALB Assets. The Company can
make no assurance as to whether any of the transactions described above will
be completed, but currently anticipates that such transactions will close on
or before September 1, 1998.
Effective with the closing of the Stock Purchase Agreement, Messrs.
Busse and Ryan will resign as executive officers of, and terminate their
respective employment with, the Company and Messrs. Busse, Beck and Cornwell
will resign as directors of the Company.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. When used in this report, the words "believes," "expects,"
"anticipates," "estimates" and similar words and expressions are generally
intended to identify forward-looking statements. Statements that describe
the Company's future strategic plans, goals or objectives are also
forward-looking statements. Readers of this report are cautioned that any
forward-looking statements, including those regarding the intent, belief, or
current expectations of the Company or management, are not guarantees of
future performance, results or events and involve risks and uncertainties,
and that actual results and events may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to (i) general economic conditions in the markets in which the
Company operates, (ii) competitive pressures within
29
the industry and/or the markets in which the Company operates, (iii) the
effect of future legislation or regulatory changes on the Company's
operations and (iv) other factors described from time to time in the
Company's filings with the Securities and Exchange Commission. The
forward-looking statements included in this report are made only as of the
date hereof. The Company undertakes no obligation to update such
forward-looking statements to reflect subsequent events or circumstances.
.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company from time to time is involved in litigation incidental
to the conduct of its business. The Company is not currently a party to any
lawsuit or proceeding which, in the opinion of the Company, could have a
material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBITS
27 Financial Data Schedule for the Quarter ended
March 29, 1998
(b) REPORTS ON FORM 8-K
Form 8-K dated January 15, 1998 filed with the Securities and
Exchange Commission disclosing the Stockholders had entered
into a letter of intent to sell all of the capital stock of
the Company to Gray.
Form 8-K dated February 18, 1998 filed with the Securities and
Exchange Commission incorporating the press release issued by
the Company and Gray announcing that the Company, the
Stockholders and Gray had entered into a definitive agreement
pursuant to which Gray had agreed to purchase all of the
capital stock of the Company.
Form 8-K dated March 6, 1998 filed with the Securities and
Exchange Commission incorporating the press release issued by
the Company announcing the Company's unaudited results of
operations for the year ended December 28, 1997.
30
SIGNATURES
Pursuant to the requirements 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.
BUSSE BROADCASTING CORPORATION
(Registrant)
DATED: May 13, 1998 BY: /s/ JAMES C. RYAN
-----------------------------
James C. Ryan
Chief Financial Officer
(Authorized Officer and
Principal Accounting Officer)
31