-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QEbZ979Ix+x6K8F1vAYhNzA/jB6l+gZxse6tUPo9alxh59TsNm11b86b52N2gR3B TTs2zmRK4AX5h/LK5+cDLg== 0000950135-01-503581.txt : 20020410 0000950135-01-503581.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950135-01-503581 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIN HOLDINGS CORP CENTRAL INDEX KEY: 0001062707 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 752733097 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-54003-06 FILM NUMBER: 1791336 BUSINESS ADDRESS: STREET 1: ONE RICHMOND SQUARE STREET 2: SUITE 230E CITY: PROVIDENCE STATE: RI ZIP: 02906 BUSINESS PHONE: 4014542880 MAIL ADDRESS: STREET 1: ONE RICHMOND SQUARE STREET 2: SUITE 230E CITY: PROVIDENCE STATE: RI ZIP: 02906 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIN TELEVISION CORP CENTRAL INDEX KEY: 0000931058 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 133581627 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25206 FILM NUMBER: 1791347 BUSINESS ADDRESS: STREET 1: ONE RICHMOND SQUARE STREET 2: STE 230 E CITY: PROVIDENCE STATE: RI ZIP: 02906 BUSINESS PHONE: 4014542880 MAIL ADDRESS: STREET 1: ONE RICHMOND SQUARE STREET 2: SUITE 230 E CITY: PROVIDENCE STATE: RI ZIP: 02906 10-Q 1 b41141lte10-q.txt LIN HOLDINGS CORP AND LIN TELEVISION CORPORATION ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. -------------------- 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, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. -------------------- Commission File Number:333-54003-06 Commission File Number: 000-25206 LIN HOLDINGS CORP LIN TELEVISION CORPORATION Incorporated pursuant to the Incorporated pursuant to the Laws of State of Delaware Laws of State of Delaware - ----------------------------------- --------------------------------- Internal Revenue Service Internal Revenue Service Employer Identification No. Employer Identification No. 75-2733097 13-3581627 1 Richmond Square, Suite 230E, Providence, Rhode Island 02906 (401) 454-2880 -------------------- Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. [X] Yes [ ] No NOTE: 10-Q presents results for the two registrants rather than just the parent company on a fully consolidated basis. 1,000 Shares of LIN Holdings Corp.'s Common Stock, par value $.01 per share, and 1,000 shares of LIN Television Corporation's Common Stock, par value $.01 per share, were outstanding as of September 30, 2001. ================================================================================ Table of Contents Page ---- Part I. Financial Information Item 1. Financial Statements LIN HOLDINGS CORP. Condensed Consolidated Balance Sheets ............................ 2 Condensed Consolidated Statements of Operations................... 3 Condensed Consolidated Statements of Cash Flows .................. 4 Notes to Condensed Consolidated Financial Statements ............. 5 LIN TELEVISION CORPORATION Condensed Consolidated Balance Sheets ............................ 11 Condensed Consolidated Statements of Operations .................. 12 Condensed Consolidated Statements of Cash Flows .................. 13 Notes to Condensed Consolidated Financial Statements ............. 14 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .......................................... 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 31 Part II. Other Information Item 1. Legal Proceedings ................................................ 32 Item 6. Exhibits and Reports on Form 8-K ................................. 32 Part I: FINANCIAL INFORMATION Item 1: Financial Statements LIN HOLDINGS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 30, December 31, 2001 2000 (unaudited) ----------- ----------- ASSETS Current assets: Cash and cash equivalents ......................................... $ 22,042 $ 7,832 Accounts receivable, less allowance for doubtful accounts (2001 - $1,586; 2000 - $1,679) ................................. 49,844 58,826 Program rights .................................................... 19,299 13,614 Other current assets .............................................. 2,144 4,302 ----------- ----------- Total current assets ......................................... 93,329 84,574 Property and equipment, net ....................................... 160,733 164,738 Deferred financing costs .......................................... 36,334 36,298 Equity investments ................................................ 83,528 91,798 Investment in Southwest Sports Group, at cost plus accrued interest.................................. 55,250 53,000 Program rights .................................................... 5,869 4,155 Intangible assets, net ............................................ 1,599,249 1,600,882 Other assets ...................................................... 9,918 9,918 ----------- ----------- Total Assets ........................................... $ 2,044,210 $ 2,045,363 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 4,876 $ 7,226 Program obligations ............................................... 17,475 13,491 Accrued income taxes .............................................. 4,560 5,578 Current portion of long-term debt ................................. -- 19,572 Accrued interest expense .......................................... 9,770 10,809 Accrued sales volume discount ..................................... 2,439 4,728 Other accrued expenses ............................................ 14,425 16,604 ----------- ----------- Total current liabilities .................................... 53,545 78,008 Long-term debt, excluding current portion ......................... 1,064,533 968,685 Deferred income taxes ............................................. 495,983 521,494 Program obligations ............................................... 6,514 3,984 Other liabilities ................................................. 10,625 7,002 ----------- ----------- Total liabilities ......................................... 1,631,200 1,579,173 ----------- ----------- Commitments and Contingencies (Note 8) Stockholders' equity: Common stock, $0.01 par value: 1,000 shares authorized, issued and outstanding ......................................... -- -- Additional paid-in capital ........................................ 561,791 561,669 Accumulated deficit ............................................... (148,781) (95,479) ----------- ----------- Total stockholders' equity ................................ 413,010 466,190 ----------- ----------- Total liabilities and stockholders' equity.............. $ 2,044,210 $ 2,045,363 =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 2 LIN HOLDINGS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands)
Three Months Nine Months Ended September 30, Ended September 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Net revenues ...............................................$ 63,534 $ 72,094 $ 194,608 $ 209,166 --------- --------- --------- --------- Operating costs and expenses: Direct operating ..................................... 20,223 20,209 60,817 57,961 Selling, general and administrative .................. 15,398 15,872 47,390 46,989 Corporate ............................................ 2,443 2,630 6,927 7,166 Amortization of program rights ....................... 5,568 5,395 16,367 15,736 Depreciation and amortization of intangible assets.... 17,129 16,784 50,444 48,095 --------- --------- --------- --------- Total operating costs and expenses ......................... 60,761 60,890 181,945 175,947 --------- --------- --------- --------- Operating income ........................................... 2,773 11,204 12,663 33,219 --------- --------- --------- --------- Other (income) expense: Interest expense ..................................... 25,767 24,926 71,964 68,070 Investment income .................................... (1,172) (958) (3,081) (3,010) Share of (income) loss in equity investments ......... 1,933 (401) 3,187 36 Loss on WAND-TV exchange ............................. -- -- -- 2,720 Loss on derivative instruments........................ 3,217 -- 5,198 -- Other, net ........................................... (78) (160) (295) (148) --------- --------- --------- --------- Total other expense, net ................................... 29,667 23,407 76,973 67,668 --------- --------- --------- --------- Loss before provision for (benefit from) income taxes and extraordinary item ................... (26,894) (12,203) (64,310) (34,449) Provision for (benefit from) income taxes .................. (7,366) (4,872) (15,418) 2,054 --------- --------- --------- --------- Loss before extraordinary item ............................. (19,528) (7,331) (48,892) (36,503) Extraordinary loss due to extinguishment of debt, net of tax benefit of $2,400 ......................... -- -- 4,410 -- --------- --------- --------- --------- Net loss ...................................................$ (19,528) $ (7,331) $ (53,302) $ (36,503) ========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 LIN HOLDINGS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months Ended September 30, ------------------------------- 2001 2000 ----------- ----------- Net cash provided by operating activities ......................... $ 15,010 $ 31,296 ----------- ----------- INVESTING ACTIVITIES: Capital expenditures .............................................. (11,389) (20,058) Investment in Banks Broadcasting, Inc. ............................ (1,500) (7,625) Capital distributions from equity investments ..................... 6,582 -- Acquisitions, net of cash acquired ................................ (40,881) (125,878) Local marketing agreement expenditures ............................ -- (3,250) ----------- ----------- Net cash used in investing activities ............................. (47,188) (156,811) ----------- ----------- FINANCING ACTIVITIES: Payments on exercises of phantom stock units....................... (25) (8) Tax benefit on exercise of stock options........................... 147 -- Proceeds from long-term debt related to acquisition of WNAC-TV .... 2,500 -- Proceeds from revolver debt, net .................................. 13,000 -- Proceeds from long-term debt related to acquisition of WWLP-TV .... -- 128,000 Proceeds from long-term debt ...................................... 276,055 20,000 Principal payments on long-term debt .............................. (238,389) (24,196) Financing costs incurred on issuance of long-term debt ............ (6,900) -- ----------- ----------- Net cash provided by financing activities ......................... 46,388 123,796 ----------- ----------- Net increase (decrease) in cash and cash equivalents .............. 14,210 (1,719) Cash and cash equivalents at the beginning of the period .......... 7,832 17,699 ----------- ----------- Cash and cash equivalents at the end of the period ................ $ 22,042 $ 15,980 =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 LIN Holdings Corp. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Basis of Presentation: LIN Holdings Corp. ("LIN Holdings"), together with its subsidiaries, including LIN Television Corporation ("LIN Television") (together, the "Company"), is a television station group operator in the United States and Puerto Rico. LIN Holdings and its subsidiaries are affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"). All of the Company's direct and indirect consolidated subsidiaries fully and unconditionally guarantee the Company's Senior Notes and Senior Subordinated Notes on a joint and several basis. These condensed consolidated 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 statements should be read in conjunction with the Company's annual report on Form 10-K for the fiscal year ended December 31, 2000 and registration statement on Form S-4 filed on October 26, 2001. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to summarize fairly the financial position, results of operations and cash flows of the Company for the periods presented. The interim results of operations are not necessarily indicative of the results to be expected for the full year. The Company's preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used when accounting for the collectability of accounts receivable and valuing intangible assets, deferred tax assets and net assets of businesses acquired. Actual results could differ from these estimates. Certain prior period amounts have been reclassified to conform with the current period presentation. Note 2 - Business Combinations: WJPX-TV, WKPV-TV, and WJWN-TV: On August 2, 2001, the Company acquired the common stock of S&E Network, Inc., a Puerto Rican corporation that owns WJPX-TV, an independent television station in San Juan, Puerto Rico, WKPV-TV, an independent television station in Ponce, Puerto Rico and WJWN-TV, an independent television station in San Sebastian, Puerto Rico. WKPV-TV and WJWN-TV currently rebroadcast the programming carried on WJPX-TV. The total purchase price, including transactional costs, was approximately $11.7 million, and was funded by available cash. The Company has accounted for the business combination under the purchase method of accounting. The acquisition is summarized as follows (in thousands): Working capital ............................................. $ (37) Property and equipment ...................................... 1,327 Deferred taxes............................................... 2,943 FCC licenses................................................. 7,466 ------- Total acquisition ........................................... $11,699 ======= 5 WNLO-TV: On July 25, 2001, the Company acquired the broadcast license and operating assets of WNLO-TV (formerly called WNEQ-TV), an independent broadcast television station located in Buffalo, New York. The Company has been operating WNLO-TV since January 29, 2001 under a Local Market Agreement ("LMA"). The total purchase price, including transactional costs, was approximately $26.0 million, and was funded by available cash. The Company has accounted for the business combination under the purchase method of accounting. The acquisition is summarized as follows (in thousands): Property and equipment ...................................... $ 644 FCC license.................................................. 25,400 ------- Total acquisition ........................................... $26,044 ======= WNAC-TV: On June 5, 2001, the Company acquired the broadcast license and certain related assets of WNAC-TV, the Fox affiliate serving the Providence-New Bedford market. Simultaneously with the acquisition, the Company assumed an existing LMA agreement with STC Broadcasting, Inc., an entity in which Hicks Muse has a substantial economic interest, under which STC Broadcasting, Inc. will operate WNAC-TV. As a result of this LMA, the Company does not generate revenues or incur expenses from the operation of this station but, instead receives an annual fee of $100,000 from STC Broadcasting, Inc. The total purchase price was approximately $2.5 million. The acquisition was funded with a note payable to STC Broadcasting. The Company has accounted for the business combination under the purchase method of accounting. The acquisition is summarized as follows (in thousands): Property and equipment ....................................... $ 16 FCC license and network affiliation .......................... 2,484 ------ Total acquisition ............................................ $2,500 ====== WWLP-TV: On November 10, 2000, the Company acquired the broadcast license and operating assets of WWLP-TV, an NBC affiliate in Springfield, MA. The total purchase price for the acquisition was approximately $128.0 million, including direct costs of the acquisition. The acquisition was funded by borrowings under the Company's incremental term loan facility. Although the Company did not own or control the assets or FCC license of WWLP-TV prior to November 10, 2000, pursuant to Emerging Issues Task Force Topic D-14, "Transactions Involving Special Purpose Entities," WWLP Holdings, Inc., the parent of WWLP-TV, satisfied the definition of a special purpose entity due to a $75 million guarantee of WWLP Holdings debt by the Company and other factors, and the Company was deemed to be the sponsor of WWLP Holdings. Accordingly, the financial results of operations of WWLP Holdings have been consolidated with those of the Company since March 31, 2000, when WWLP Holdings, Inc. acquired WWLP-TV from Benedek Broadcasting Corporation. WAND-TV Exchange: On April 1, 2000, the Company exchanged, with Block Communications Inc., a 66.67% interest in certain assets of its television station WAND-TV, including its FCC license and network affiliation agreement, for substantially all of the assets and certain liabilities of WLFI-TV, Inc. Immediately after the WAND-TV exchange, the Company and Block Communications Inc. contributed their respective interests in the WAND-TV assets to a partnership, with the Company receiving a 33.33% interest in the partnership. UNAUDITED PRO FORMA RESULTS OF ACQUISITIONS. The following summarizes unaudited pro forma consolidated results of operations as if acquisitions and disposals had taken place as of the beginning of the periods presented (in thousands): Three Months Nine Months ended September 30, ended September 30, ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues ........... $ 63,704 $ 72,486 $ 195,926 $ 213,079 Operating income ....... 2,749 11,219 12,913 33,651 Net loss................ (19,558) (6,487) (53,162) (31,574) The pro forma data give effect to actual operating results prior to the acquisitions and disposals and adjustments to interest expense, amortization and income taxes. No effect has been given to cost reductions and operating synergies in this presentation. The pro forma results do not necessarily represent results that would have occurred if the acqusition had taken place as of the beginning of the periods presented, nor are they necessarily indicative of the results of future operations. 6 Note 3 - Investments: Joint Venture with NBC: The Company owns a 20.38% interest in a joint venture with NBC and accounts for its interest using the equity method, as the Company does not have a controlling interest. The following presents the summarized financial information of the joint venture (in thousands): Three Months Nine Months ended September 30, ended September 30, --------------------- ---------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues............... $ 32,551 $ 44,247 $ 109,021 $ 127,184 Operating income........... 8,569 18,446 36,894 50,659 Net income (loss).......... (7,639) 2,414 (11,415) 1,906 September 30, --------------------- 2001 2000 --------- --------- Current assets............ $ 4,315 $ 30,431 Non-current assets........ 243,425 239,199 Current liabilities....... 906 1,087 Non-current liabilities... 815,500 815,500 Investment in Banks Broadcasting, Inc: The Company owns a 50.00% non-voting interest in Banks Broadcasting, Inc., a company formed in August 2000, and accounts for its interest using the equity method, as the Company does not have a controlling interest. The following presents the summarized financial information of Banks Broadcasting, Inc. (in thousands): Three Months Nine Months ended September 30, ended September 30, --------------------- ---------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues............... $ 1,074 $ 768 $ 3,199 $ 768 Operating loss............. (982) (205) (1,854) (205) Net (loss)................. (414) (205) (1,212) (205) September 30, --------------------- 2001 2000 --------- --------- Current assets............ $ 2,285 $ 4,767 Non-current assets........ 26,872 17,883 Current liabilities....... 1,233 2,306 Non-current liabilities... --- 888 Investment in WAND (TV) Partnership: The Company owns a 33.33% interest in WAND (TV) Partnership, a partnership formed in April 2000, and accounts for its interest using the equity method, as the Company does not have a controlling interest. The following presents the summarized financial information of WAND (TV) Partnership (in thousands): Three Months Nine Months ended September 30, ended September 30, --------------------- ---------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues............... $ 1,419 $ 1,953 $ 4,721 $ 4,073 Operating income (loss).... (395) 394 (533) 445 Net income (loss).......... (440) 394 (563) 445 September 30, --------------------- 2001 2000 --------- --------- Current assets............ $ 3,486 $ 3,432 Non-current assets........ 33,943 35,121 Current liabilities....... 881 2,292 7 Note 4 - Intangible Assets: Intangible assets consisted of the following at (in thousands): September 30, December 31, 2001 2000 ----------- ----------- FCC licenses and network affiliations......... $ 1,092,142 $ 1,055,654 Goodwill ..................................... 647,810 652,508 LMA purchase options ......................... 1,125 1,125 ----------- ----------- 1,741,077 1,709,287 Less accumulated amortization................. (141,828) (108,405) ----------- ----------- $ 1,599,249 $ 1,600,882 =========== =========== In accordance with the guidance of SFAS No. 142, "Goodwill and other Intangible Assets", no amortization has been recorded on FCC licenses acquired in business combinations consummated after June 30, 2001, as such licenses have indefinite lives. During 2001 and 2000, acquired net operating loss carryforwards of approximately $12.0 million and $5.3 million, respectively, were utilized to offset taxable income in Puerto Rico. As the deferred tax assets associated with these losses had been fully reserved at the time of the Pegasus Broadcasting acquisition in October 1999, the benefits were recorded as reductions to goodwill of $4.7 million and $2.1 million in 2001 and 2000, respectively. Note 5 - Derivative Instruments: Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and that changes in a derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. The Company uses derivative instruments to manage exposure to interest rate risks. The Company's objective for holding derivatives is to minimize its interest rate risk. The Company uses interest rate collar, cap and swap arrangements, not designated as hedging instruments under SFAS 133, in the notional amount of $150.0 million at September 30, 2001 to mitigate the impact of the variability in interest rates in connection with its variable rate senior credit facility. The aggregate fair value of the arrangements at September 30, 2001 was a liability of $5.2 million. Other expense for the three and nine-month periods ended September 30, 2001 includes a loss of $3.2 million and $5.2 million, respectively, from the marking-to-market of these derivative instruments. Note 6 - Long-Term Debt: Long-term debt consisted of the following at (in thousands): September 30, December 31, 2001 2000 ------------ ----------- Senior Credit Facilities ......................... $ 200,301 $ 425,691 $300,000, 8 3/8% Senior Subordinated Notes due 2008 (net of discount of $451 as of September 30, 2001)......................... 299,549 299,441 $325,000, 10% Senior Discount Notes due 2008 (net of discount of $41,917 as of September 30, 2001)......................... 283,083 263,125 $210,000, 8% Senior Notes due 2008 (net of discount of $7,456 as of September 30, 2001).......................... 202,544 -- $100,000, 10% Senior Discount Notes due 2008 (net of discount of $23,444 as of September 30, 2001) 76,556 -- $2,500, 7% STC Broadcasting Note due 2006......... 2,500 -- ------------ ----------- Total debt ...................................... 1,064,533 988,257 Less current portion ............................. -- (19,572) ------------ ----------- Total long-term debt ............................. $ 1,064,533 $ 968,685 ============ =========== 8 On June 14, 2001, LIN Holdings Corp. issued $100 million aggregate principal amount at maturity of 10% Senior Discount Notes due 2008 in a private placement. The Senior Discount Notes were issued at a discount to yield 12.5% and generated net proceeds of $73.9 million. Financing costs of $2.4 million were incurred in connection with the issuance and will be amortized over the term of the debt. The Senior Discount Notes are unsecured senior obligations of LIN Holdings and are not guaranteed. Cash interest will not accrue or be payable on the Senior Discount Notes prior to March 1, 2003. Cash interest will accrue at a rate of 10% per annum and will be payable semi-annually in arrears commencing on September 1, 2003. The Company is subject to compliance with certain financial covenants and other conditions. The Notes are subject to early redemption provisions in the event of a change of control. On June 14, 2001, LIN Television issued $210 million aggregate principal amount at maturity of 8% Senior Notes due 2008 in a private placement. The Senior Notes were issued at a discount to yield 8 3/4% and generated net proceeds of $202.2 million. The Senior Notes are unsecured senior obligations of LIN Television without collateral rights, subordinated in right of payment to all existing and any future senior indebtedness of LIN Television. Financing costs of $4.5 million were incurred in connection with the issuance and will be amortized over the term of the debt. Cash interest on the Senior Notes accrues at a rate of 8% per annum and will be payable semi-annually in arrears commencing on January 15, 2002. LIN Television is subject to compliance with certain financial covenants and other conditions. The Notes are subject to early redemption provisions in the event of a change of control. A portion of the proceeds from the Senior Discount Notes and the Senior Notes less certain transactional costs were used to repay $233.2 million of the Company's existing Senior Credit Facilities. The Company incurred an extraordinary charge in the nine-month period ended September 30, 2001 of $4.4 million, net of a tax benefit of $2.4 million, related to the write-off of unamortized deferred financing costs attributable to the early settlement of this debt in the second quarter of 2001. Simultaneously with the consummation of the offering of the new Senior Discount Notes and the new Senior Notes, the Company obtained certain amendments to its existing Senior Credit Facilities which (i) provided for the adjustment of certain financial covenants and ratio tests, (ii) provided that $100 million of the $160 million revolving portion of the Senior Credit Facilities may be used to fund the $125 million mandatory redemption payment on the existing Senior Discount Notes due on March 1, 2003 or, subsequent to the funding of the mandatory redemption payment, to make interest payments on the existing Senior Discount Notes and (iii) increased certain fees and interest rate spreads. As a result of the repayment of the term loans under the Senior Credit Facilities, there is expected to be no required scheduled amortization payments until December 2005. The following are the adjustments made to the financial covenant and ratio tests under the Senior Credit Facilities: 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 ---- ---- ---- ---- ---- ---- ---- ---- Maximum Leverage Ratio: Amended ........ 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x Prior .......... 6.75x 6.75x 6.75x 6.75x 6.75x 6.75x 6.40x 6.40x Minimum Interest Coverage Ratio: Amended ........ 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x Prior .......... 1.70x 1.70x 1.70x 1.70x 1.75x 1.75x 1.85x 1.85x On October 26, 2001, the Company filed an effective exchange offer to allow holders of the new Senior Discount Notes and new Senior Notes to exchange their notes for registered notes with essentially identical terms. Note 7 - Related Party Transactions: Monitoring and Oversight Agreement: The Company is party to an agreement with Hicks, Muse & Co. Partners, L.P. ("Hicks Muse Partners"), an affiliate of the Company's ultimate parent, pursuant to which the Company agreed to pay Hicks Muse Partners an annual fee (payable quarterly) for oversight and monitoring services. The aggregate annual fee is adjustable, on a prospective basis, on January 1 of each calendar year to an amount equal to 1% of the budgeted consolidated annual earnings before interest, tax, depreciation and amortization ("EBITDA") of the Company for the then current fiscal year. Upon the acquisition by the Company of another entity or business, the fee is adjusted prospectively in the same manner using the pro forma consolidated annual EBITDA of the Company. In no event shall the annual fee be less than $1.0 million. Hicks Muse Partners is also entitled to reimbursement for any expenses incurred by it in connection with rendering services allocable to the Company. The fee for the three and nine months ended September 30, 2001 was $313,000 and $939,000 respectively. The fee for the three and nine months ended September 30, 2000 was $312,000 and $936,000, respectively. 9 Financial Advisory Agreement: The Company is also party to an agreement with Hicks Muse Partners, pursuant to which Hicks Muse Partners receives a fee equal to 1.5% of the total value of certain transactions in which the Company is involved. Transactions subject to this agreement include a tender offer, acquisition, sale, merger, exchange offer, recapitalization, restructuring or other similar transaction. This fee for the three and nine months ended September 30, 2001 was $2.4 million, relating to the acquisitions of WWLP-TV, WNLO-TV and WJPX-TV, and was included in the total cost of that acquisition. The Company did not incur any fees under this arrangement in the three and nine months ended September 30, 2000. Note 8 - Commitments and Contingencies: The Company currently and from time to time is involved in litigation incidental to the conduct of its business. In the opinion of the Company's management, none of such litigation as of September 30, 2001, is likely to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On March 30, 2001, the Company exercised its option to acquire the FCC licenses of two of the Company's LMA stations, WCTX-TV and WOTV-TV. The Company expects to close on the acquisitions of WCTX-TV and WOTV-TV upon the regulatory approval of the Federal Communication Commission. The combined purchase price is approximately $7.3 million, of which $4.0 million has been pre-paid. The balance of $3.3 million will be funded by a combination of operating funds and additional borrowings from the revolving credit facility. Note 9 - Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting to be applied for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not expect the application of SFAS 141 to have a material impact on its financial position or results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is generally effective for the Company from January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization and the introduction of impairment testing in its place. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet fully determined, the impact that SFAS 142 will have on its financial position and results of operations. Certain provisions of SFAS 142 are applicable to business combinations that close after June 30, 2001. As a result, the FCC licenses acquired in connection with the WJPX-TV, WKPV-TV, WJWN-TV, and WNLO-TV purchases have not been amortized as they have an indefinite life. In October 2001, the FASB issued Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, on January 1, 2002. Management is currently determining what effect, if any, SFAS 144 will have on its financial position and results of operations. 10 LIN TELEVISION CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 30, December 31, 2001 2000 (unaudited) ----------- ----------- Current assets: Cash and cash equivalents ......................................... $ 22,042 $ 7,832 Accounts receivable, less allowance for doubtful accounts (2001 - $1,586; 2000 - $1,679) ................................. 49,844 58,826 Program rights .................................................... 19,299 13,614 Other current assets .............................................. 2,144 4,302 ----------- ----------- Total current assets .......................................... 93,329 84,574 Property and equipment, net ....................................... 160,733 164,738 Deferred financing costs .......................................... 25,777 27,142 Equity investments ................................................ 83,528 91,798 Investment in Southwest Sports Group, at cost plus accrued interest.................................. 55,250 53,000 Program rights .................................................... 5,869 4,155 Intangible assets, net ............................................ 1,599,249 1,600,882 Other assets ...................................................... 9,918 9,918 ----------- ----------- Total Assets ........................................... $ 2,033,653 $ 2,036,207 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 4,876 $ 7,226 Program obligations ............................................... 17,475 13,491 Accrued income taxes .............................................. 4,560 5,578 Current portion of long-term debt ................................. -- 19,572 Accrued interest expense .......................................... 9,770 10,809 Accrued sales volume discount ..................................... 2,439 4,728 Other accrued expenses ............................................ 14,425 16,604 ----------- ----------- Total current liabilities .................................... 53,545 78,008 Long-term debt, excluding current portion ......................... 704,894 705,560 Deferred income taxes ............................................. 519,808 536,619 LIN Holdings tax sharing obligations .............................. 8,365 8,364 Program obligations ............................................... 6,514 3,984 Other liabilities ................................................. 10,625 7,002 ----------- ----------- Total liabilities ......................................... 1,303,751 1,339,537 Commitments and Contingencies (Note 8) Stockholders' equity: Common stock, $0.01 par value: 1,000 shares authorized, issued and outstanding ......................................... -- Additional paid-in capital ........................................ 820,060 748,523 Accumulated deficit ............................................... (90,158) (51,853) ----------- ----------- Total stockholders' equity ................................ 729,902 696,670 ----------- ----------- Total liabilities and stockholders' equity ............. $ 2,033,653 $ 2,036,207 =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 11 LIN TELEVISION CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Three Months Nine Months Ended September 30, Ended September 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Net revenues ...............................................$ 63,534 $ 72,094 $ 194,608 $ 209,166 --------- --------- --------- --------- Operating costs and expenses: Direct operating .................................... 20,223 20,209 60,817 57,961 Selling, general and administrative ................. 15,398 15,872 47,390 46,989 Corporate ........................................... 2,443 2,630 6,927 7,166 Amortization of program rights ...................... 5,568 5,395 16,367 15,736 Depreciation and amortization of intangible assets... 17,129 16,784 50,444 48,095 --------- --------- --------- --------- Total operating costs and expenses ......................... 60,761 60,890 181,945 175,947 --------- --------- --------- --------- Operating income ........................................... 2,773 11,204 12,663 33,219 --------- --------- --------- --------- Other (income) expense: Interest expense .................................... 16,259 18,443 48,265 49,014 Investment income ................................... (1,172) (958) (3,081) (3,010) Share of (income) loss in equity investments ........ 1,933 (401) 3,187 36 Loss on WAND-TV exchange ............................ -- -- -- 2,720 Loss on derivative instruments........................ 3,217 -- 5,198 -- Other, net ........................................... (78) (160) (295) (148) --------- --------- --------- --------- Total other expense, net ................................... 20,159 16,924 53,274 48,612 --------- --------- --------- --------- Loss before provision for (benefit from) income taxes and extraordinary item ............ (17,386) (5,720) 40,611) (15,393) Provision for (benefit from) income taxes .................. (4,930) 43,839 (6,716) 38,425 --------- --------- --------- --------- Loss before extraordinary item ............................. (12,456) (49,559) (33,895) (53,818) Extraordinary loss due to extinguishment of debt, net of tax benefit of $2,400 ........................ -- -- 4,410 -- --------- --------- --------- --------- Net loss ...................................................$ (12,456) $ (49,559) $ (38,305) $ (53,818) ========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 12 LIN TELEVISION CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended September 30, ------------------------------- 2001 2000 ----------- ----------- Net cash provided by operating activities..........................$ 15,044 $ 31,296 ----------- ----------- INVESTING ACTIVITIES: Capital expenditures .............................................. (11,389) (20,058) Investment in Banks Broadcasting, Inc. ............................ (1,500) (7,625) Capital distributions from equity investments ..................... 6,582 -- Acquisitions, net of cash acquired ................................ (40,881) (125,878) Local marketing agreement expenditures ............................ -- (3,250) ----------- ----------- Net cash used in investing activities............................. (47,188) (156,811) ----------- ----------- FINANCING ACTIVITIES: Payments on exercises of phantom stock unites...................... (25) (8) Tax benefit on exercise of stock options........................... 147 -- Capital contribution from LIN Holdings ............................ 71,416 -- Proceeds from long-term debt related to acquisition of WNAC-TV .... 2,500 -- Proceeds from revolver debt, net .................................. 13,000 -- Proceeds from long-term debt related to acquisition of WWLP-TV .... -- 128,000 Proceeds from long-term debt ...................................... 202,205 20,000 Principal payments on long-term debt .............................. (238,389) (24,196) Financing costs incurred on issuance of long-term debt ............ (4,500) -- ----------- ----------- Net cash provided by financing activities.......................... 46,354 123,796 ----------- ----------- Net increase (decrease) in cash and cash equivalents .............. 14,210 (1,719) Cash and cash equivalents at the beginning of the period .......... 7,832 17,699 ----------- ----------- Cash and cash equivalents at the end of the period ................$ 22,042 $ 15,980 =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 13 LIN TELEVISION CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Basis of Presentation: LIN Television Corporation (together with its subsidiaries, the "Company" or "LIN Television") is a television station group operator in the United States and Puerto Rico. LIN Television and its subsidiaries are affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") and are directly owned by LIN Holdings Corporation ("LIN Holdings"). All of the Company's direct and indirect consolidated subsidiaries fully and unconditionally guarantee the Company's Senior Subordinated Notes on a joint and several basis. These condensed consolidated 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 statements should be read in conjunction with the Company's annual report on Form 10-K for the fiscal year ended December 31, 2000 and registration Statement on Form S-4 filed on October 26, 2001. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to summarize fairly the financial position, results of operations and cash flows of the Company for the periods presented. The interim results of operations are not necessarily indicative of the results to be expected for the full year. The Company's preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used when accounting for the collectability of accounts receivable and valuing intangible assets, deferred tax assets and net assets of businesses acquired. Actual results could differ from these estimates. Certain prior period amounts have been reclassified to conform with the current period presentation. Note 2 - Business Combinations: WJPX-TV, WKPV-TV, and WJWN-TV: On August 2, 2001, the Company acquired the common stock of S&E Network, Inc., a Puerto Rican corporation that owns WJPX-TV, an independent television station in San Juan, Puerto Rico, WKPV-TV, an independent television station in Ponce, Puerto Rico and WJWN-TV, an independent television station in San Sebastian, Puerto Rico. WKPV-TV and WJWN-TV currently rebroadcast the programming carried on WJPX-TV. The total purchase price, including transactional costs, was approximately $11.7 million, and was funded by available cash. The Company has accounted for the business combination under the purchase method of accounting. The acquisition is summarized as follows (in thousands): Working capital ............................................. $ (37) Property and equipment ...................................... 1,327 Deferred taxes............................................... 2,943 FCC licenses................................................. 7,466 ------- Total acquisition ........................................... $11,699 ======= 14 WNLO-TV: On July 25, 2001, the Company acquired the broadcast license and operating assets of WNLO-TV (formerly called WNEQ-TV), an independent broadcast television station located in Buffalo, New York. The Company has been operating WNLO-TV since January 29, 2001 under a Local Market Agreement ("LMA"). The total purchase price, including transactional costs, was approximately $26.0 million, and was funded by available cash. The Company has accounted for the business combination under the purchase method of accounting. The acquisition is summarized as follows (in thousands): Property and equipment ...................................... $ 644 FCC license.................................................. 25,400 ------- Total acquisition ........................................... $26,044 ======= WNAC-TV: On June 5, 2001, the Company acquired the broadcast license and certain related assets of WNAC-TV, the Fox affiliate serving the Providence-New Bedford market. Simultaneously with the acquisition, the Company assumed an existing LMA agreement with STC Broadcasting, Inc., an entity in which Hicks Muse has a substantial economic interest, under which STC Broadcasting, Inc. will operate WNAC-TV. As a result of this LMA, the Company does not generate revenues or incur expenses from the operation of this station but, instead receives an annual fee of $100,000 from STC Broadcasting, Inc. The total purchase price was approximately $2.5 million. The acquisition was funded with a note payable to STC Broadcasting. The Company has accounted for the business combination under the purchase method of accounting. The acquisition is summarized as follows (in thousands): Property and equipment ....................................... $ 16 FCC license and network affiliation .......................... 2,484 ------ Total acquisition ............................................ $2,500 ====== WWLP-TV: On November 10, 2000, the Company acquired the broadcast license and operating assets of WWLP-TV, an NBC affiliate in Springfield, MA. The total purchase price for the acquisition was approximately $128.0 million, including direct costs of the acquisition. The acquisition was funded by borrowings under the Company's incremental term loan facility. Although the Company did not own or control the assets or FCC license of WWLP-TV prior to November 10, 2000, pursuant to Emerging Issues Task Force Topic D-14, "Transactions Involving Special Purpose Entities," WWLP Holdings, Inc., the parent of WWLP-TV, satisfied the definition of a special purpose entity due to a $75 million guarantee of WWLP Holdings debt by the Company and other factors, and the Company was deemed to be the sponsor of WWLP Holdings. Accordingly, the financial results of operations of WWLP Holdings have been consolidated with those of the Company since March 31, 2000, when WWLP Holdings, Inc. acquired WWLP-TV from Benedek Broadcasting Corporation. WAND-TV Exchange: On April 1, 2000, the Company exchanged, with Block Communications Inc., a 66.67% interest in certain assets of its television station WAND-TV, including its FCC license and network affiliation agreement, for substantially all of the assets and certain liabilities of WLFI-TV, Inc. Immediately after the WAND-TV exchange, the Company and Block Communications Inc. contributed their respective interests in the WAND-TV assets to a partnership, with the Company receiving a 33.33% interest in the partnership. 15 UNAUDITED PRO FORMA RESULTS OF ACQUISITIONS. The following summarizes unaudited pro forma consolidated results of operations as if acquisitions and disposals had taken place as of the beginning of the periods presented (in thousands): Three Months Nine Months ended September 30, ended September 30, ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues ........... $ 63,704 $ 72,486 $ 195,926 $ 213,079 Operating income ....... 2,749 11,219 12,913 33,651 Net loss................ (12,485) (48,715) (38,164) (48,889) The pro forma data give effect to actual operating results prior to the acquisitions and disposals and adjustments to interest expense, amortization and income taxes. No effect has been given to cost reductions and operating synergies in this presentation. The pro forma results do not necessarily represent results that would have occurred if the acqusition had taken place as of the beginning of the periods presented, nor are they necessarily indicative of the results of future operations. Note 3 - Investments: Joint Venture with NBC: The Company owns a 20.38% interest in a joint venture with NBC and accounts for its interest using the equity method, as the Company does not have a controlling interest. The following presents the summarized financial information of the joint venture (in thousands): Three Months Nine Months ended September 30, ended September 30, --------------------- ---------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues............... $ 32,551 $ 44,247 $ 109,021 $ 127,184 Operating income........... 8,569 18,446 36,894 50,659 Net income (loss).......... (7,639) 2,414 (11,415) 1,906 September 30, --------------------- 2001 2000 --------- --------- Current assets............ $ 4,315 $ 30,431 Non-current assets........ 243,425 239,199 Current liabilities....... 906 1,087 Non-current liabilities... 815,500 815,500 Investment in Banks Broadcasting, Inc: The Company owns a 50.00% non-voting interest in Banks Broadcasting, Inc., a company formed in August 2000, and accounts for its interest using the equity method, as the Company does not have a controlling interest. The following presents the summarized financial information of Banks Broadcasting, Inc. (in thousands): Three Months Nine Months ended September 30, ended September 30, --------------------- ---------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues............... $ 1,074 $ 768 $ 3,199 $ 768 Operating loss............. (982) (205) (1,854) (205) Net income (loss).......... (414) (205) (1,212) (205) September 30, --------------------- 2001 2000 --------- --------- Current assets............ $ 2,285 $ 4,767 Non-current assets........ 26,872 17,883 Current liabilities....... 1,233 2,306 Non-current liabilities... --- 888 16 Investment in WAND (TV) Partnership: The Company owns a 33.33% interest in WAND (TV) Partnership, a partnership formed in April 2000, and accounts for its interest using the equity method, as the Company does not have a controlling interest. The following presents the summarized financial information of WAND (TV) Partnership (in thousands): Three Months Nine Months ended September 30, ended September 30, --------------------- ---------------------- 2001 2000 2001 2000 --------- --------- ---------- --------- Net revenues............... $ 1,419 $ 1,953 $ 4,721 $ 4,073 Operating income (loss) ... (395) 394 (533) 445 Net income (loss).......... (440) 394 (563) 445 September 30, --------------------- 2001 2000 --------- --------- Current assets............ $ 3,486 $ 3,432 Non-current assets........ 33,943 35,121 Current liabilities....... 881 2,292 Note 4 - Intangible Assets: Intangible assets consisted of the following at (in thousands): September 30, December 31, 2001 2000 ----------- ----------- FCC licenses and network affiliations......... $ 1,092,142 $ 1,055,654 Goodwill ..................................... 647,810 652,508 LMA purchase options ......................... 1,125 1,125 ----------- ----------- 1,741,077 1,709,287 Less accumulated amortization................. (141,828) (108,405) ----------- ----------- $ 1,599,249 $ 1,600,882 =========== =========== In accordance with the guidance of SFAS No. 142, "Goodwill and other Intangible Assets", no amortization has been recorded on FCC licenses acquired in business combinations consummated after June 30, 2001, as such licenses have indefinite lives. During 2001 and 2000, acquired net operating loss carryforwards of approximately $12.0 million and $5.3 million, respectively, were utilized to offset taxable income in Puerto Rico. As the deferred tax assets associated with these losses had been fully reserved at the time of the Pegasus Broadcasting acquisition in October 1999, the benefits were recorded as reductions to goodwill of $4.7 million and $2.1 million in 2001 and 2000, respectively. Note 5 - Derivative Instruments: Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and that changes in a derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. The Company uses derivative instruments to manage exposure to interest rate risks. The Company's objective for holding derivatives is to minimize its interest rate risk. The Company uses interest rate collar, cap and swap arrangements, not designated as hedging instruments under SFAS 133, in the notional amount of $150.0 million at Sepetember 30, 2001 to mitigate the impact of the variability in interest rates in connection with its variable rate senior credit facility. The aggregate fair value of the arrangements at September 30, 2001 was a liability of $5.2 million. Interest expense for the three and nine-month periods ended September 30, 2001 includes a loss of $3.2 million and $5.2 million, respectively, from the marking-to-market of these derivative instruments. 17 Note 6 - Long-Term Debt: Long-term debt consisted of the following at (in thousands): September 30, December 31, 2001 2000 ------------ ----------- Senior Credit Facilities .......................... $ 200,301 $ 425,691 $300,000, 8 3/8% Senior Subordinated Notes due 2008 (net of discount of $451 as of September 30, 2001)........................... 299,549 299,441 $210,000, 8% Senior Notes due 2008 (net of discount of $7,456 as of September 30, 2001 202,544 -- $2,500, 7% STC Broadcasting Note due 2006.......... 2,500 -- Total debt ....................................... 704,894 725,132 ------------ ----------- Less current portion .............................. -- (19,572) ------------ ----------- Total long-term debt .............................. $ 704,894 $ 705,560 ============ =========== On June 14, 2001, LIN Television issued $210 million aggregate principal amount at maturity of 8% Senior Notes due 2008 in a private placement. The Senior Notes were issued at a discount to yield 8 3/4% and generated net proceeds of $202.2 million. The Senior Notes are unsecured senior obligations of LIN Television without collateral rights, subordinated in right of payment to all existing and any future senior indebtedness of LIN Television. Financing costs of $4.5 million were incurred in connection with the issuance and will be amortized over the term of the debt. Cash interest on the Senior Notes accrues at a rate of 8% per annum and will be payable semi-annually in arrears commencing on January 15, 2002. LIN Television is subject to compliance with certain financial covenants and other conditions. The Notes are subject to early redemption provisions in the event of a change of control. A portion of the proceeds from the Senior Notes, less certain transactional costs, and a capital contribution from LIN Holdings (see Note 9 - Capital Contribution) were used to repay $233.2 million of the Company's existing Senior Credit Facilities. The Company incurred an extraordinary charge in the period ended June 30, 2001 of $4.4 million, net of a tax benefit of $2.4 million, related to the write-off of unamortized deferred financing costs attributable to the early settlement of this debt in the second quarter of 2001. Simultaneously with the consummation of the offering of the new Senior Notes, the Company obtained certain amendments to its existing Senior Credit Facilities which (i) provided for the adjustment of certain financial covenants and ratio tests and (ii) increased certain fees and interest rate spreads. As a result of the repayment of the term loans under the Senior Credit Facilities, there is expected to be no required scheduled amortization payments until December 2005. The following are the adjustments made to the financial covenant and ratio tests under the Senior Credit Facilities: 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 ---- ---- ---- ---- ---- ---- ---- ---- Maximum Leverage Ratio: Amended ........ 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x Prior .......... 6.75x 6.75x 6.75x 6.75x 6.75x 6.75x 6.40x 6.40x Minimum Interest Coverage Ratio: Amended ........ 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x Prior .......... 1.70x 1.70x 1.70x 1.70x 1.75x 1.75x 1.85x 1.85x On October 26, 2001, the Company filed an effective exchange offer to allow holders of the new Senior Discount Notes and new Senior Notes to exchange their notes for registered notes with essentially identical terms. 18 Note 7 - Related Party Transactions: Monitoring and Oversight Agreement: The Company is party to an agreement with Hicks, Muse & Co. Partners, L.P. ("Hicks Muse Partners"), an affiliate of the Company's ultimate parent, pursuant to which the Company agreed to pay Hicks Muse Partners an annual fee (payable quarterly) for oversight and monitoring services. The aggregate annual fee is adjustable, on a prospective basis, on January 1 of each calendar year to an amount equal to 1% of the budgeted consolidated annual earnings before interest, tax, depreciation and amortization ("EBITDA") of the Company for the then current fiscal year. Upon the acquisition by the Company of another entity or business, the fee is adjusted prospectively in the same manner using the pro forma consolidated annual EBITDA of the Company. In no event shall the annual fee be less than $1.0 million. Hicks Muse Partners is also entitled to reimbursement for any expenses incurred by it in connection with rendering services allocable to the Company. The fee for the three and nine months ended September 30, 2001 was $313,000 and $939,000 respectively. The fee for the three and nine months ended September 30, 2000 was $312,000 and $936,000, respectively. Financial Advisory Agreement: The Company is also party to an agreement with Hicks Muse Partners, pursuant to which Hicks Muse Partners receives a fee equal to 1.5% of the total value of certain transactions in which the Company is involved. Transactions subject to this agreement include a tender offer, acquisition, sale, merger, exchange offer, recapitalization, restructuring or other similar transaction. This fee for the three and nine months ended September 30, 2001 was $2.4 million, relating to the acquisitions of WWLP-TV, WNLO-TV and WJPX-TV, and was included in the total cost of that acquisition. The Company did not incur any fees under this arrangement in the three and nine months ended September 30, 2000. Note 8 - Commitments and Contingencies: The Company currently and from time to time is involved in litigation incidental to the conduct of its business. In the opinion of the Company's management, none of such litigation as of September 30, 2001, is likely to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On March 30, 2001, the Company exercised its option to acquire the FCC licenses of two of the Company's LMA stations, WCTX-TV and WOTV-TV. The Company expects to close on the acquisitions of WCTX-TV and WOTV-TV upon the regulatory approval of the Federal Communication Commission. The combined purchase price is approximately $7.3 million, of which $4.0 million has been pre-paid. The balance of $3.3 million will be funded by a combination of operating funds and additional borrowings from the revolving credit facility. Note 9 - Capital Contribution: On June 14, 2001, and in connection with the issuance of the Senior Discount Notes, LIN Holdings transferred $71.5 million to the Company in the form of a capital contribution. Note 10 - Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting to be applied for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not expect the application of SFAS 141 to have a material impact on its financial position or results of operations. 19 In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is generally effective for the Company from January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization and the introduction of impairment testing in its place. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet fully determined, the impact that SFAS 142 will have on its financial position and results of operations. Certain provisions of SFAS 142 are applicable to business combinations that close after June 30, 2001. As a result, the FCC licenses acquired in connection with the WJPX-TV, WKPV-TV, WJWN-TV, and WNLO-TV purchases have not been amortized as they have an indefinite life. In October 2001, the FASB issued Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, on January 1, 2002. Management is currently determining what effect, if any, SFAS 144 will have on its financial position and results of operations. 20 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Forward-Looking Statements Do not place undue reliance on forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The words "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "foresee," "will," "could," "may" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including those regarding the Company's financial position, business strategy, projected costs and objectives of management for future operations are forward-looking statements. The reader is cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which this Quarterly Report on Form 10-Q is filed. These factors include, without limitation, the promulgation of the new FCC's broadcast ownership regulations and other regulatory changes, changes in advertising, demand, technological changes, acquisitions and dispositions, as well as other risks detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, including those set forth under the heading "Risks Associated with Business Activity" in Item I. The matters discussed in the "Risks Associated with Business Activities" below and other factors noted throughout this Quarterly Report on Form 10-Q are cautionary statements identifying factors with respect to any such forward-looking statements that could cause actual results to differ materially from those in such forward-looking statements. All forward-looking statements contained herein are expressly qualified in their entirety by such cautionary statements. The Company undertakes no obligation to update publicly forward-looking statements, whether as a result of new information, future events or otherwise. Business LIN Holdings Corp. ("LIN Holdings"), together with its subsidiaries, including LIN Television Corporation ("LIN Television" and together with LIN Holdings the "Company"), is a television station group operator in the United States and Puerto Rico. LIN Holdings and its subsidiaries are affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"). Business Combinations and Dispositions We have developed our business through a combination of acquisitions, dispositions and organic growth. We have acquired and disposed of the following businesses in 2001 and 2000: WJPX-TV, WKPV-TV, and WJWN-TV: On August 2, 2001, the Company acquired the common stock of S&E Network Inc., a Puerto Rican corporation that owns WJPX-TV, WKPV-TV, and WJWN-TV. WKPV-TV and WJWN-TV currently rebroadcast the programming carried on WJPX-TV. The total purchase price, including transactional costs, was approximately $11.7 million and was funded by available cash. The Company has accounted for the business combination under the purchase method of accounting. WNLO-TV: On July 25, 2001, the Company acquired the broadcast license and operating assets of WNLO-TV (formerly called WNEQ-TV), an independent broadcast television station located in Buffalo, New York. The Company has been operating WNLO-TV since January 29, 2001 under a LMA agreement. The total purchase price, including transactional costs, was approximately $26.0 million, and was funded by available cash. The Company has accounted for the business combination under the purchase method of accounting. 21 WNAC-TV: On June 5, 2001, the Company acquired the broadcast license and certain related assets of WNAC-TV, the Fox affiliate serving the Providence-New Bedford market. Simultaneously with the acquisition, the Company assumed an existing LMA agreement with STC Broadcasting, Inc., an entity in which Hicks Muse has a substantial economic interest, under which STC Broadcasting, Inc. will operate WNAC-TV. As a result of this LMA, the Company does not generate revenues or incur expenses from the operation of this station but, instead receives an annual fee of $100,000 from STC Broadcasting, Inc. The total purchase price was approximately $2.5 million. The acquisition was funded with a note payable to STC Broadcasting. The Company has accounting for the business combination under the purchase method of accounting. WWLP-TV: On November 10, 2000, the Company acquired the broadcast license and operating assets of WWLP-TV, an NBC affiliate in Springfield, MA. The total purchase price for the acquisition was approximately $128.0 million, including direct costs of the acquisition. The acquisition was funded by borrowings under the Company's incremental term loan facility. Although the Company did not own or control the assets or FCC license of WWLP-TV prior to November 10, 2000, pursuant to Emerging Issues Task Force Topic D-14, "Transactions Involving Special Purpose Entities," WWLP Holdings, Inc., the parent of WWLP-TV, satisfied the definition of a special purpose entity, as a result of a $75 million guarantee of WWLP Holdings debt by the Company and other factors, and the Company was deemed to be the sponsor of WWLP Holdings. Accordingly, the financial results of operations of WWLP Holdings have been consolidated with those of the Company since March 31, 2000, when WWLP Holdings, Inc. acquired WWLP-TV from Benedek Broadcasting Corporation. Banks Broadcasting Inc.: On August 15, 2000, the Company contributed its interest in WLBB Broadcasting, LLC and the Company and 21st Century both contributed their respective interests in Banks-Boise, Inc. to Banks Broadcasting Inc. Banks Broadcasting Inc. owns and operates KWCV-TV, the WB affiliate serving the Wichita-Hutchinson, Kansas DMA and owns and operates KNIN-TV, a UPN affiliate servicing the Boise, Idaho market. WAND-TV Exchange: On April 1, 2000, the Company exchanged, with Block Communications Inc., a 66.67% interest in certain assets of its television station WAND-TV, including its FCC license and network affiliation agreement, for substantially all of the assets and certain liabilities of WLFI-TV, Inc. Immediately after the WAND-TV exchange the Company and Block Communications Inc. contributed their respective interests in the WAND-TV assets to a partnership, with the Company receiving a 33.33% interest in the partnership. In connection with acquisitions accounted for under the purchase method of accounting, the Company does not separately value acquired FCC broadcasting licenses and network affiliation agreements as they do not represent separately identifiable intangible assets, but rather have a value that is inseparably linked. The future value of the Company's FCC licenses could be significantly impaired by the loss of corresponding network affiliation agreements, or vice versa. 22 Results of Operations Set forth below are the significant factors that contributed to the operating results of the Company for the three and nine-month periods ended September 30, 2001 and 2000. The Company's results from operations from period to period are not directly comparable because of the impact of acquisitions and disposals, including the acquisitions of WJPX-TV, WKPV-TV, WJWN-TV, and WNLO-TV in 2001 and WWLP-TV and WLFI-TV in 2000, and the disposition of WAND-TV in 2000.
Three Months Nine Months Ended September 30, Ended September 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Net revenues ...............................................$ 63,534 $ 72,094 $ 194,608 $ 209,166 --------- --------- --------- --------- Operating costs and expenses: Direct operating ..................................... 20,223 20,209 60,817 57,961 Selling, general and administrative .................. 15,398 15,872 47,390 46,989 Corporate ............................................ 2,443 2,630 6,927 7,166 Amortization of program rights ....................... 5,568 5,395 16,367 15,736 Depreciation and amortization of intangible assets.... 17,129 16,784 50,444 48,095 --------- --------- --------- --------- Total operating costs and expenses ......................... 60,761 60,890 181,945 175,947 --------- --------- --------- --------- Operating income ........................................... 2,773 11,204 12,663 33,219
Net revenues consist primarily of national and local airtime sales, net of sales adjustments and agency commissions. Additional but less significant amounts are generated from network compensation, Internet revenues, barter revenues, production revenues and rental income. Total net revenues for the three and nine-month periods ended September 30, 2001 decreased 11.9% to $63.5 million and 7.0% to $194.6 million, respectively, compared to net revenue of $72.1 million and $209.2 million, respectively, for the same periods last year. The decrease in the three and nine-month periods ended September 30, 2001 was primarily due to a decrease of $5.1 million and $7.9 million respectively, in political advertising due to the campaign election cycle and a decrease of $4.5 million and $13.2 million, respectively, in demand for national advertising that began in the third quarter of 2000 and has continued into the fourth quarter of 2001. Direct operating expenses, consisting primarily of news, engineering, programming and music licensing costs, for the three-month period ended September 30, 2001 remained flat at $20.2 million and for the nine-month period ended September 30, 2001 increased 4.9% to $60.8 million, compared to direct operating expenses of $20.2 and $58.0 million, respectively, for the same periods last year. The increase in the nine-month period ended September 30, 2001 is primarily due to the startup costs of the low power television stations in Grand Rapids, Michigan and the LMA in Buffalo, New York of $375,000 and $709,000, respectively, and to the impact of the acquisitions of WLFI-TV, WWLP-TV, WKPV-TV, WJWN-TV, and WJPX-TV partially offset by the disposition of WAND-TV, a net increase of $3.6 million as a result of these acquisitions and disposition. Selling, general and administrative expenses, consisting primarily of employee salaries, sales commissions and other employee benefit costs, advertising and promotional expenses, for the three and nine-month periods ended September 30, 2001 decreased 3.0% to $15.4 million and increased 0.1% to $47.4 million, respectively, compared to selling, general and administrative expenses of $15.9 million and $47.0 million, respectively, for the same periods last year. The decrease is primarily due to favorable terms on an operating agreement of $800,000 and $2.3 million for the three and nine-month periods ended September 30, 2001, respectively, offset by an increase of $339,000 in advertising costs associated with the network affiliation switch from the WB network to the UPN network of WCTX-TV in New Haven, Connecticut for the nine-month period ended September 30, 2001, as well the impact of the acquisitions of WLFI-TV, WWLP-TV, WKPV-TV, WJWN-TV and WJPX-TV partially offset by the disposition of WAND-TV, a net impact of $1.3 million for both the three and nine-month periods ended September 30, 2001 as a result of these acquisitions and disposition. 23 Corporate expenses, representing costs associated with the centralized management of the Company's stations, for the three and nine-month periods ended September 30, 2001 decreased 7.1% to $2.4 million and 3.3% to $6.9 million, respectively, compared to corporate expenses of $2.6 million and $7.2 million, respectively, for the same periods last year. The decrease is due to certain operating agreements being allocated to the stations in the three and nine-month periods ended September 30, 2001. Amortization of program rights, representing costs associated with the acquisition of syndicated programming, features and specials, for the three and nine-month periods ended September 30, 2001 increased 3.2% to $5.6 million and 4.0% to $16.4 million, respectively, compared to amortization of program rights of $5.4 million and $15.7 million, respectively, for the same periods last year. The increase is primarily due to the acquisitions of WLFI-TV and WWLP-TV partially offset by the disposition of WAND-TV. Depreciation and amortization of intangible assets for the three and nine-month periods ended September 30, 2001 increased 2.1% to $17.1 million and 4.9% to $50.4 million, respectively, compared to depreciation and amortization of intangible assets of $16.8 million and $48.1 million, respectively, for the same periods last year. The increase is primarily due to the increase in equipment and intangible assets associated with the acquisitions of WLFI-TV, WWLP-TV, WNLO-TV, WJPX-TV, WKPV-TV, and WJWN-TV partially offset by the disposition of WAND-TV. Other Expenses Interest expense for the three and nine-month periods ended September 30, 2001 increased 3.4% to $25.8 million and 5.7% to $72.0 million, respectively, compared to interest expense of $24.9 million and $68.1 million, respectively, for the same periods last year. The increase in the three and nine-month period ended September 30, 2001 is due to the issuance of the new Senior Notes and Senior Discount Notes (as more fully discussed in "Liquidity and Capital Resources" below) resulting in additional interest expense of $841,000 and $972,000, respectively, and to the increased borrowings associated with the acquisition of WWLP-TV on March 31, 2000 resulting in additional interest expense of $1.6 million. Interest expense for LIN Television Corporation for the three and nine-month periods ended September 30, 2001 decreased 11.8% to $16.3 million and 1.5% to $48.3 million, respectively, compared to interest expense of $18.4 million and $49.0 million, respectively, for the same periods last year. The decrease is primarily due to the early retirement of a portion of the Senior Credit Facility from the proceeds of the issuance of the new Senior Notes and new Senior Discount Notes. Investment income for the three and nine-month periods ended September 30, 2001 increased to $1.2 million and $3.1 million, respectively, compared to an income of $1.0 million and $3.0 million, respectively, for the same periods last year. The increase was the result of improvements to our cash management systems, resulting in higher average investment balances. Share of (income) loss in equity investments for the three-month period ended September 30, 2001 changed to a loss of $1.9 million compared to income of $400,000 for the same period last year. The loss in equity investments for the nine-month period enced September 30, 2001 increased $3.1 million compared to $36,000 for the same period last year. The losses are the result of the operating performances of the NBC Joint Venture, WAND (TV) Partnership and Banks Broadcasting, Inc. Other expenses for the three and nine-month periods ended September 30, 2001 increased to $3.1 million and $4.9 million, respectively, compared to an income of $160,000 and $148,000, respectively, for the same periods last year. The increase is primarily due to losses of $3.2 million and $5.2 million on derivative instruments for the three and nine-month periods ended September 30, 2001, respectively, The Company's benefit from income tax for the three-month period ended September 30, 2001 increased to approximately $7.4 million compared to $4.9 million for the same period last year. The provision for income taxes for the nine-month period ended September 30, 2001 changed to a benefit of $15.4 million compared to a provision of $2.1 million for the same period last year. These changes were primarily due to the disproportionate impact of non-deductible goodwill relative to the projected annual pretax net loss from period to period and the utilization of pre-acquisition net operating losses in Puerto Rico. LIN Television Corporation's benefit from income taxes for the three and nine-month periods ended September 30, 2001 is approximately $4.9 million and $6.7 million, respectively, compared to a provision of approximately $43.8 million and $38.4 million for the same periods last year. These changes were primarily due to the disproportionate impact of non-deductible goodwill relative to the projected annual pretax net loss from period to period and the utilization of pre-acquisition net operating losses in Puerto Rico. 24 Liquidity and Capital Resources At September 30, 2001, the Company had cash and cash equivalents of $22.0 million and total debt of $1.1 billion. Net cash provided by operating activities for the nine months ended September 30, 2001 was $10.4 million compared to $31.3 million for the same period last year. The decrease is primarily the result of a decrease in national and political revenues, a reduction in demand for national adverterising and an increase in operating and interest expenses. Net cash used in investing activities was $42.5 million for the nine months ended September 30, 2001, compared to $156.8 million for the same period last year. The change is primarily due to amounts paid related to the WWLP-TV transaction in the first quarter of 2000 and the acqusitions of WJPX-TV, WKPV-TV, WJWN-TV, and WNLO-TV in the third quarter of 2001. Net cash provided by financing activities for the nine months ended September 30, 2001 was $46.3 million compared to $123.8 million for the same period last year. The change is primarily due to the proceeds from the issuance of the new Senior Discount Notes and the new Senior Notes (net of partial repayment of the Senior Credit Facilities) in 2001 and proceeds from a draw down of a credit facility in connection with the WWLP-TV transaction in 2000. On June 14, 2001, LIN Holdings Corp. issued $100 million aggregate principal amount at maturity of 10% Senior Discount Notes due 2008 in a private placement. These new Senior Discount Notes were issued at a discount to yield 12.5% and generated net proceeds of $73.9 million. Financing costs of $2.4 million were incurred in connection with the issuance and will be amortized over the term of the debt. The new Senior Discount Notes are unsecured senior obligations of LIN Holdings and are not guaranteed. Cash interest will not accrue or be payable on the Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest will accrue at a rate of 10% per annum and will be payable semi-annually in arrears commencing on September 1, 2003. The Company is subject to compliance with certain financial covenants and other conditions set forth in the offering memorandum. The Notes are subject to early redemption provisions in the event of a change of control. On June 14, 2001, LIN Television issued $210 million aggregate principal amount at maturity of 8% Senior Notes due 2008 in a private placement. The new Senior Notes were issued at a discount to yield 8 3/4% and generated net proceeds of $202.2 million. The new Senior Notes are unsecured senior obligations of LIN Television without collateral rights, subordinated in right of payment to all existing and any future senior indebtedness of LIN Television. Financing costs of $4.5 million were incurred in connection with the issuance and will be amortized over the term of the debt. Cash interest on the new Senior Notes accrues at a rate of 8% per annum and will be payable semi-annually in arrears commencing on January 15, 2002. LIN Television is subject to compliance with certain financial covenants and other conditions. The Notes are subject to early redemption provisions in the event of a change of control. Simultaneously with the consummation of the offering of the new Senior Discount Notes and the new Senior Notes, the Company obtained certain amendments to its existing Senior Credit Facilities which (i) provided for the adjustment of certain financial covenants and ratio tests, (ii) provided that $100 million of the $160 million revolving portion of the Senior Credit Facilities may be used to fund the $125 million mandatory redemption payment on the existing Senior Discount Notes due on March 1, 2003 or, subsequent to the funding of the mandatory redemption payment, to make interest payments on the existing Senior Discount Notes and (iii) increased certain fees and interest rate spreads. As a result of the repayment of the term loans under the Senior Credit Facilities, there is expected to be no required scheduled amortization payments until December 2005. 25 The following are the adjustments made to the financial covenant and ratio tests under the Senior Credit Facilities: 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 ---- ---- ---- ---- ---- ---- ---- ---- Maximum Leverage Ratio: Amended ........ 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x 7.40x Prior .......... 6.75x 6.75x 6.75x 6.75x 6.75x 6.75x 6.40x 6.40x Minimum Interest Coverage Ratio: Amended ........ 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x Prior .......... 1.70x 1.70x 1.70x 1.70x 1.75x 1.75x 1.85x 1.85x Based on the current level of operations and anticipated future growth (both internally generated as well as through acquisitions), the Company believes that its cash flows from operations, together with available borrowings under its credit facilities, will be sufficient to meet its anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for at least the next twelve months. Risks Associated with Business Activities Potential Negative Consequences of Substantial Indebtedness. As of September 30, 2001, LIN Holdings had approximately $1.1 billion of consolidated indebtedness and approximately $413.0 million of consolidated stockholders' equity. LIN Television had approximately $704.9 million of consolidated indebtedness and approximately $729.9 million of consolidated stockholders' equity. The level of indebtedness of LIN Holdings and LIN Television could have several negative consequences to holders of the Senior Subordinated Notes, the Senior Discount Notes, the new Senior Notes, and the new Senior Discount Notes, (collectively the "Notes"), including, but not limited to, the following: - - a substantial portion of the Company's cash flow from operations will be dedicated to the payment of principal, premium (if any) and interest on their respective indebtedness, thereby reducing the funds available for operations, distributions to LIN Holdings for payments with respect to LIN Holdings' indebtedness, future business opportunities and other purposes and increasing the vulnerability of LIN Holdings and LIN Television to adverse general economic and industry conditions; - - the ability of the Company to obtain additional financing in the future may be limited; - - all of the indebtedness in connection with the Senior Credit Facilities, a credit facility with Chase Manhattan Bank, as administrative agent, and the lenders named therein, that establishes a $173.3 million term loan facility and a $160 million revolving facility, will be secured and is scheduled to become due prior to the time the principal payments on the Notes are scheduled to become due; - - certain of the Company's borrowings (including, without limitation, amounts borrowed under the Senior Credit Facilities) will be at variable rates of interest, which will expose the Company to increases in interest rates; and - - the mandatory principal redemption amount (expected to be $125 million as defined in the indenture governing the Senior Discount Notes) of the Senior Discount Notes will become due and payable in a lump sum on March 1, 2003. 26 LIN Holdings' and LIN Television's respective abilities to make scheduled payments of the principal of, or to pay interest on, or to refinance their respective indebtedness will depend on the future performance of the Company and its subsidiaries, which to a certain extent will be subject to economic, financial, regulatory, competitive and other factors beyond the Company's control. Based upon the Company's current operations and anticipated growth, management believes that future cash flow from operations, together with the Company's available borrowings under the Senior Credit Facilities, will be adequate to meet LIN Holdings' and LIN Television's respective anticipated requirements for capital expenditures, interest payments and scheduled principal payments. There can be no assurance that the Company's business will continue to generate sufficient cash flow from operations in the future to service the Company's respective indebtedness and make necessary capital expenditures. If unable to do so, the Company may be required to refinance all or a portion of its respective indebtedness or sell assets or to obtain additional financing. There can be no assurance that any such refinancing would be possible, that any assets could be sold (or, if sold, of the timing of such sales and the amount of proceeds realized therefrom) or that additional financing could be obtained. General Electric Capital Corporation ("GECC") provided debt financing for the NBC joint venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the NBC joint venture. The GECC Note is not an obligation of the Company and is recourse only to the NBC joint venture, LIN Television's equity interests therein and Ranger Equity Holdings B Corp. ("Ranger B"), pursuant to a guarantee. Ranger B is a wholly owned subsidiary of Ranger Equity Holdings Corporation and is one of LIN Holdings' two corporate parents and the guarantor of the GECC Note. Ranger B owns 63% of LIN Holdings. If an event of default occurs under the GECC Note, and GECC is unable to collect all obligations owed to it after exhausting all commercially reasonable remedies against the NBC joint venture (including during the pendency of any bankruptcy involving the NBC joint venture), GECC may proceed against Ranger B, to collect any deficiency. If Ranger B does not otherwise satisfy its obligations under the guaranty, GECC could attempt to claim all or a portion of the common stock of LIN Holdings owned by Ranger B through an insolvency proceeding or otherwise. If such an event were to occur, GECC could obtain control of LIN Holdings and, as a result, LIN Television. Restrictions Imposed on the Company by Terms of Indebtedness. The credit agreement governing the Senior Credit Facilities and the indentures governing the Notes contain covenants that restrict LIN Holdings' and LIN Television's respective abilities to: - - incur indebtedness; - - pay dividends; - - create liens; - - sell assets; - - engage in certain mergers and acquisitions; and - - refinance indebtedness. The credit agreement governing the Senior Credit Facilities requires LIN Television to maintain certain financial ratios. If LIN Holdings or LIN Television fails to comply with the various covenants contained in the credit agreement governing the Senior Credit Facilities or the indentures governing the Notes, as applicable, each of them would be in default and the maturity of substantially all of their respective long-term indebtedness could be accelerated. A default of the indentures would also constitute an event of default under the Senior Credit Facilities. If LIN Television were unable to repay amounts outstanding under the credit agreement, the lenders thereunder could proceed against the collateral granted to them to secure the indebtedness. If the amounts outstanding under the credit agreement were accelerated, there can be no assurance that the assets of LIN Television and its subsidiaries would be sufficient to repay the amount in full. The Notes and the Senior Credit Facilities impose certain restrictions on the Company's ability to make capital expenditures and limit the Company's ability to incur additional indebtedness. Such restrictions could limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business or acquisition opportunities. 27 Structural Subordination of LIN Holdings. LIN Holdings is a holding company, which conducts all of its operations through its subsidiaries and whose only material asset is the capital stock of LIN Television. Consequently, LIN Holdings depends on distributions from LIN Television to meet its debt service obligations. Because of the substantial leverage of LIN Television, and the dependence of LIN Holdings upon the operating performance of LIN Television to generate distributions to LIN Holdings, there can be no assurance that LIN Holdings will have adequate funds to fulfill its obligations in respect of the Senior Discount Notes when due. In addition, the credit agreement governing the Senior Credit Facilities, the indentures governing the Senior Subordinated Notes and applicable federal and state law impose restrictions on the payment of dividends and the making of loans by LIN Television to LIN Holdings. As a result of the foregoing restrictions, LIN Holdings may be unable to gain access to the cash flow or assets of LIN Television in amounts sufficient to pay the mandatory principal redemption amount when due on March 1, 2003, and cash interest on the Senior Discount Notes on and after March 1, 2003, the date on which cash interest thereon first becomes payable, and principal of the Senior Discount Notes when due. In such event, LIN Holdings may be required to: - - refinance the Senior Discount Notes; - - seek additional debt or equity financing; - - cause LIN Television to refinance all or a portion of LIN Television's indebtedness with indebtedness containing covenants allowing LIN Holdings to gain access to LIN Television's cash flow or assets; - - cause LIN Television to obtain modifications of the covenants restricting LIN Holdings' access to cash flow or assets of LIN Television contained in LIN Television's financing documents (including, without limitation, the credit agreement and the indentures governing the Senior Subordinated Notes); or - - pursue a combination of the foregoing actions. No assurance can be given that any of the foregoing measures could be accomplished. Growth Through Acquisitions; Future Capital Requirements. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Inherent in any future acquisitions are certain risks such as increasing leverage and debt service requirements and combining company cultures and facilities which could have a material adverse effect on the Company's operating results, particularly during the period immediately following such acquisitions. Additional debt or equity capital may be required to complete future acquisitions, and there can be no assurance the Company will be able to raise the required capital. Moreover, there can be no assurances that with respect to any acquired station, the Company will be able to successfully implement effective cost controls, increase advertising revenues or increase its audience share. Dependence on Advertising and Certain External Factors. The Company's operating results are primarily dependent on advertising revenues which, in turn, depend on national and local economic conditions, coverage of political events and high profile sporting events (e.g., the Olympics, Super Bowl and NCAA Men's Basketball Tournament), the relative popularity of the Company's programming (which in many cases, is dependent on the relative popularity of the relevant network's programming), the demographic characteristics of the Company's markets, the activities of competitors and other factors which are outside the Company's control. The television industry is cyclical in nature, and the Company's revenues could be adversely affected by a future local, regional or national recession. Reliance on Syndicated Programming. One of the Company's most significant operating costs is syndicated programming. There can be no assurance that the Company will not be exposed in the future to increasing syndicated programming costs which may adversely affect the Company's operating results. Acquisitions of program rights are often made two or three years in advance, making it difficult to accurately predict how a program will perform. In some instances, programs must be replaced before their costs have been fully amortized, resulting in write-offs that increase station operating costs. 28 Non-Renewal or Termination of Affiliation Agreements. The non-renewal or termination of a network affiliation agreement could have a material adverse effect on the Company's operations. Four of the Company's owned and operated stations are affiliated with CBS, four with NBC, and one with ABC. Each of these networks generally provides these stations with up to 22 hours of prime time programming per week. In return, the stations broadcast network-inserted commercials during such programming and receive cash network compensation. Although network affiliates generally have achieved higher ratings than unaffiliated independent stations in the same market, there can be no assurance as to the future success of each network's programming or the continuation of such programming. The Company's network affiliation agreements are subject to termination by such networks under certain circumstances. The Company believes that it enjoys a good relationship with each of CBS, NBC and ABC, as well as the other networks with which it has affiliation agreements. Certain of the networks with which the Company's stations are affiliated have required other broadcast groups, upon renewal of affiliation agreements, to reduce or eliminate network affiliation compensation and to accept other material modifications of existing affiliation agreements. However, there can be no assurance that such affiliation agreements will remain in place or that each network will continue to provide programming or compensation to affiliates on the same basis as it currently provides programming or compensation. Competition for Advertising Revenues and Audience Ratings. The television broadcasting industry is a highly competitive business and is undergoing a period of consolidation and significant change. Many of the Company's current and potential competitors have greater financial, marketing, programming and broadcasting resources than the Company. Technological innovation and the resulting proliferation of programming alternatives, such as cable television, wireless cable, satellite-to-home distribution services, internet, pay-per-view and home video and entertainment systems, have fractionalized television viewing audiences and have subjected free over-the-air television broadcast stations to new types of competition. In addition, as a result of the Telecom Act, the legislative ban on telephone cable ownership has been repealed and telephone companies are now permitted to seek FCC approval to provide video services to homes under specified circumstances. Consequently, the Company may not be able to maintain or increase its current audience ratings or advertising revenues. Potential Effects of Television Broadcasting Regulation on License Renewals and Ownership. The broadcasting industry is subject to regulation by various governmental agencies. In particular, under the Communications Act, the FCC licenses television stations and extensively regulates their ownership and operation. The Company depends on its ability to hold television broadcast licenses from the FCC, which are ordinarily issued for maximum terms of eight years and are renewable. Although it is rare for the FCC to deny a license renewal application, there can be no assurance that the Company's television broadcasting licenses or the licenses owned by the owner-operators of the stations currently programmed by the Company under LMAs will be renewed or that if renewed the renewals will not include restrictive conditions or qualifications. Dependence on Key Personnel. The Company believes that its success is dependent upon its ability to attract and retain skilled managers and other personnel, including its present officers and general managers. The loss of the services of Gary R. Chapman, the Chairman, President and Chief Executive Officer of LIN Holdings and LIN Television, could have a material adverse effect on the operations of the Company. Mr. Chapman's current employment agreement with LIN Television will automatically renew for an additional year on December 31, 2001. Recent Accounting Pronouncements. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting to be applied for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not expect the application of SFAS 141 to have a material impact on its financial position or results of operations. 29 In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is generally effective for the Company from January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization and the introduction of impairment testing in its place. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet fully determined, the impact that SFAS 142 will have on its financial position and results of operations. Certain provisions of SFAS 142 are applicable to business combinations that close after June 30, 2001. As a result, the FCC licenses acquired in connection with the WJPX-TV, WKPV-TV, WJWN-TV, and WNLO-TV purchases have not been amortized as they have an indefinite life. In October 2001, the FASB issued Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, on January 1, 2002. Management is currently determining what effect, if any, SFAS 144 will have on its financial position and results of operations. 30 -----END PRIVACY-ENHANCED MESSAGE-----