Item 1. BUSINESS
Business of the Company
LIN Broadcasting Corporation (the "Company" or "LIN"), through its subsidiaries, is engaged primarily in the business of providing cellular voice telephone and data services. McCaw Cellular Communications, Inc. ("McCaw") owns an approximate 52% interest in the Company through a wholly-owned subsidiary, MMM Holdings, Inc. ("MMM"). On September 19, 1994, McCaw became a wholly-owned subsidiary of AT&T Corp. ("AT&T").
The Company owns cellular interests (i.e., direct or indirect interests in licensees) primarily in the New York, Los Angeles, Dallas-Fort Worth and Houston markets. The Company's cellular interests represent approximately 26 million 1994 pops. "Pops" refers to the population of a market multiplied by a percentage ownership interest in an entity licensed or designated to receive a license (a "licensee") by the Federal Communications Commission (the "FCC") to construct or operate a cellular telephone system in such market. Pops do not represent actual subscribers in a cellular system. All of the Company's cellular interests are located in markets where the Company owns a 50% or more equity or voting interest. These markets represent four of the top 10 Metropolitan Statistical Areas ("MSAs") nationwide, including the two largest markets - New York and Los Angeles - in the United States.
As of December 31, 1994, the cellular systems in which the Company owned interests had an aggregate of approximately 1,644,000 subscribers and average penetration was 4.26%. The Company's proportionate share of such subscribers (based on its actual ownership interest) was 1,083,000. During 1994, the cellular operations in which LIN had ownership interests produced aggregate net revenues of $1.4 billion. The Company's proportionate share of such cellular operations' net revenues was $959 million. LIN's media operations, substantially all of which were divested in 1994, recorded net revenues of $184 million during 1994.
On December 28, 1994, the Company divested itself of substantially all of its television broadcasting operations through the distribution (the "Television Spin-off") to the holders of its common stock of all of the outstanding common stock of the Company's wholly-owned subsidiary, LIN Television Corporation ("LIN TV"). The number of network-affiliated stations owned by the Company was reduced from seven to one due to the Television Spin-off, with the remaining station also providing programming and marketing services to another network affiliated station pursuant to a local marketing agreement. On June 24,
1994, the Company disposed of its interest in the Philadelphia cellular licensee and its interest in the GuestInformant speciality publishing business pursuant to the redemption of the preferred stock of LCH Communications, Inc.("LCH"), a wholly-owned subsidiary of the Company.
The Company and McCaw are parties to a Private Market Value Guarantee ("PMVG") pursuant to which McCaw has the right to offer to purchase the shares of the Company's Common Stock that it does not already own. For further information and recent developments, see "-Private Market Value Guarantee."
The Company, a Delaware corporation, was incorporated in October 1961. The Company's principal executive office is located at 5295 Carillon Point, Kirkland, Washington 98033. Its telephone number is (206) 828-1902. References to "the Company" in this Form 10-K include LIN Broadcasting Corporation and/or its subsidiaries and its predecessors, unless the context otherwise requires.
The Cellular Telephone Industry
Cellular telephone technology provides high quality service to and from hand-held and vehicle-mounted portable and stationary wireless telephones. Cellular telephone systems ("cellular systems") divide a region into many "cells," each covered by its own low-power transmitter, receiver and signaling equipment (the "cell site"). Each cell site is connected by landline, microwave or other technology to the system's computers in a mobile telephone switching office (the "switch"). The switches control the operation of the cellular system for the entire service area. Each conversation in a cellular system involves a radio transmission between a cellular telephone and a cell site and the transmission of the call between the cell site and a switch.
Currently, the radio transmission between the cellular telephone and the cell site is primarily an "analog" transmission. With the current analog technology and the amount of licensed radio frequencies available to the Company, there are capacity limitations in certain areas, especially in large markets like New York and Los Angeles. To relieve potential capacity constraints as well as to provide a platform for future service enhancements, the Company has participated in the development of and is in the process of introducing "digital" service in addition to traditional analog service in all of its cellular operations. The Company has launched commercial digital service in Los Angeles and in New York, and as of December 31, 1994, had approximately 50,000 digital subscribers in those markets. The Company has also installed digital transmitting equipment in Dallas-Fort Worth and Houston and is currently conducting subscriber tests of the service. Introduction of
commercial digital service in Dallas and Houston is planned for the first half of 1995. The Company is using a digital format referred to as Time Division Multiple Access ("TDMA"), which has been adopted by several major cellular carriers. Other major cellular carriers have adopted an alternative digital format, Code Division Multiple Access ("CDMA"). Digital technology offers many advantages over analog technology, including an initial three-fold increase in capacity, lower costs and the opportunity to provide enhanced services, such as improved data transmissions, short messaging, Caller ID, longer phone battery life and improved anti-fraud features. Because existing analog cellular telephones will not be capable of receiving digital transmissions from the cell site, the Company expects that the conversion from analog to digital will be phased in over a number of years, during which a system will maintain both analog and digital transmitting equipment and will thus be able to serve customers with either analog, dual-mode (analog and digital) or digital cellular telephones. The Company expects that after a meaningful percentage of call volume is handled by the digital network, the capital costs of adding system capacity to support subscriber growth will drop significantly.
The Company, along with McCaw and other carriers, increasingly is employing a range of techniques to increase capacity, improve coverage in difficult areas and increase in-building penetration. For example, in New York, the Company has introduced cell sites into Grand Central Station and the Lincoln Tunnel. The Company expects this development to provide it with a competitive advantage by permitting coverage in areas that otherwise are hard to reach and by permitting systems to determine within a few yards where a caller is located.
Cellular systems can offer a variety of features, including call forwarding, call waiting, conference calling, voice message storage and retrieval and voice recognition where subscribers can make calls by speaking the number to be dialed. Because cellular systems are fully interconnected with the landline telephone network, subscribers can receive and originate both local and long distance calls from their cellular telephones. The cellular system operator pays an interconnection charge to the local landline telephone company to carry calls placed from a mobile unit to a wired telephone. The amounts paid are subject to negotiation or tariff and FCC regulation and vary from system to system.
The FCC granted only two licenses for cellular service with spectrum bandwidth of 25 megahertz ("MHZ") in each market. During its initial licensing of cellular MSAs and rural service areas ("RSAs"), the FCC reserved one license for applicants (such as the Company) that were not affiliated with any landline telephone carrier (the "A Block license") and the other license for
wireline applicants (the "B Block license"). Now, subject to FCC rules, an A Block or B Block license may be granted to either a wireline or nonwireline entity, but no entity may control more than one cellular system in any service area. All of the interests held by the Company are in A Block licenses.
All cellular phones are designed for compatibility with cellular systems in all market areas within the United States, Canada and Mexico and with all channels allocated for cellular use, so that a mobile unit may be used wherever a subscriber is located. Changes of cellular telephone numbers or other technical adjustments to mobile units by the manufacturer or the cellular service operator may be required, however, to enable the subscriber to change from one cellular system to another. Cellular system operators may provide service to subscribers from another cellular system temporarily located in or traveling through the operator's service area. Such subscribers are called "roamers."
The Company, together with McCaw and Vodaphone Group PLC, is creating a worldwide roaming arrangement. A Company customer traveling in the U.K., 19 other European countries, Hong Kong or Australia can, using a cellular phone obtained locally and an easily inserted adapter card provided by the Company, place and receive calls using the customer's own phone number. The Company plans to participate in the continued worldwide expansion of this service.
The Company believes that its presence in the major markets listed above provides it with a unique position within the industry. In addition to being by far the two largest markets in the United States, New York City and Los Angeles are major national and international commercial centers.
The operations in the New York, Los Angeles, Dallas-Fort Worth, Houston and Galveston markets are conducted by partnerships in which the Company holds an interest. The partnership agreements are generally similar and the Company has or shares effective operating control of each partnership. The Company's wholly or partially owned subsidiaries are general partners in these partnerships, and each of the partnerships is governed by a Partners' or Executive Committee consisting of designated representatives from the partners in the particular partnership. In each case, the applicable partnership agreement generally provides that all rights and obligations (other than voting), such as obligations for capital investment, sharing of profits and losses, and distributions, are based on percentage ownership. The participants in each of these partnership or corporate entities are generally responsible for their pro rata share of all capital contributions called for by the governing bodies of such entities, and failure to make such contributions could result in the ownership interest being either forfeited or diluted. Such ownership interests are also subject to restrictions on the owners' ability to sell, transfer, pledge or otherwise encumber or dispose of such interests under certain circumstances.
Marketing. In marketing its services, the Company stresses that cellular telephones are affordable and easy to use and produce immediate and direct benefits to subscribers, including increased productivity for the business user and convenience for all subscribers. The Company also emphasizes that it is a locally managed, customer-oriented cellular system operator which is responsive and accommodating to the needs of subscribers.
The Company follows a strategy of controlled decentralization which allows each regional manager to adapt the Company's general marketing and incentive plans to the particular needs of the market, to develop innovative uses for cellular telephones and products which are responsive to local needs, and to set goals for its sales force and dealers. The key elements of all such marketing plans are appealing to potential subscribers, creating public awareness and understanding of the cellular telephone services offered by the Company, developing a sales force and dealer network, reducing the initial investment required by subscribers to obtain cellular service and certifying installation centers.
The Company is developing additional or alternative means of attracting new customers. For example, the Company has participated with McCaw in developing and test marketing GoPhone , an attractively priced cellular phone that would be distributed through popular consumer retail outlets, such as Walmart, and service activated through a phone call.
Marketing costs constitute a significant portion of the Company's operating costs. Total marketing expense per gross additional subscriber is expected to increase for at least the next several years.
Subscribers. While subscribers are engaged in a wide range of occupations, they have traditionally been individuals who work in the construction, contracting, real estate, wholesale and retail industries, service industries and professionals. Since these individuals use their cellular telephones during their normal working hours to meet their business communications needs, the Company's systems are used primarily between the hours of 7 a.m. and 6 p.m. Increasingly, the Company's subscribers represent major accounts, such as federal and local governmental agencies, national and regional shipping, delivery and transportation companies and other businesses. Although historically a majority of the Company's subscribers are business users, a growing share of new customers use the phone principally for personal convenience and safety. The Company expects this trend to continue as market penetration increases. Over half of the Company's new subscribers purchase a portable unit that is not restricted to car use. The Company believes that hand-held portable cellular telephones will become an increasingly large portion of its subscriber base as the price for such telephones continues to decline.
Because of the fixed costs involved in the development of a cellular system, as the number of subscribers has increased the Company has benefited from economies of scale, which have allowed the Company to pass lower rates along to its customers. These rate reductions, in turn, make cellular service attractive to an even larger portion of the population. Service rates have fallen most dramatically for roaming, thereby permitting the Company to expand a customer's "home" area.
The Company's proportionate share of subscribers in its markets was approximately 1,083,000 at year end, reflecting an increase of 25% during 1994, including the changes in ownership interests in New York and Philadelphia as discussed earlier. Growth was particularly strong in New York, where the number of subscribers increased over 50%, including those added through the purchase of minority interests in the New York partnership.
The Company is subject to significant levels of turnover, or "churn," among its customers. The Company has instituted programs to reduce churn rates and expects the reduction of customer churn to be a major area of focus in the future.
Another challenge is posed by fraudulent use of cellular service. The Company and McCaw are continuing to develop an extensive antifraud program to combat this problem, including authentication features to verify the validity of each call, real-time comparisons of actual and normal phone usage and radio fingerprinting. The Company expects to continue to devote resources to protect the integrity of its system.
Sales Force, Dealers and Retailers. The Company enlists subscribers primarily through an internal sales force and through a network of independent dealers and retailers. Dealers and retailers are independent contractors who solicit customers on a commission basis for the Company's cellular systems.
The Company's dealers either are in the business of selling or servicing cellular telephones exclusively or are engaged in businesses with customers that are likely to become cellular subscribers. The Company has established and is continuing to pursue multi-state dealer arrangements. The Company has several dealer compensation contracts. Most involve a commission which is paid immediately to the dealer, but with the dealer's retention of all or part of the commission contingent upon the customer keeping the service for a specified period of time (generally between three and six months). Such contracts may also involve the payment of a portion of the commission over time, as service is provided to the subscriber. The Company has also been successful in attracting premier national mass market retailers to distribute its products.
National Marketing. Increasingly, large customers with nationwide needs for cellular services are purchasing these services centrally. Larger corporations generally require a national sales force, special volume purchase discounts, trial programs, central billing, simple rate plans, and national 24-hour customer service. McCaw's National Account Services Group coordinates these activities with local markets, and certain of the Company's markets contract with this group in order to meet the needs of their large customers. To improve these programs, McCaw is now operating a central clearing house for all new national account orders and shipping of the cellular telephones to national accounts. The National Account Services Group also accredits local installers and establishes McCaw's national corporate price plans.
Telephones and Installation. The Company purchases telephones under national sales contracts and, as a means of stimulating demand for cellular service, generally sells phones to its dealers and the major accounts it services directly at prices reflecting its costs. The Company cooperates with several cellular equipment manufacturers in local advertising and promotion of cellular equipment.
There are a number of different types of cellular telephones available, all of which are compatible with cellular systems nationwide. Models vary by type: car-mounted, transportable, and fully portable; by type of transmission: analog and digital; by feature, such as: speed dialing, speakerphone, voice recognition and horn alert; and by price. Prices at which telephones are sold to subscribers may also vary by market, resulting in part from local competitive forces. To ensure quality installation and customer satisfaction, the Company certifies installation centers which meet certain quality control standards.
Products and Services. The Company generally offers its customers several pricing options in each market. Some options consist of a fixed monthly charge plus additional variable charges per minute of telephone use. A high volume caller might find an option with a high monthly access charge and low per-minute charges to be most economical. Low volume users might choose a different package featuring a lower access fee and higher per-minute charge. The Company also offers plans with access fees which include a specified number of minutes, with established per-minute charges for usage in excess of the included minutes.
The Company makes available to subscribers custom calling services such as call-forwarding, call-waiting, three-way calling, no-answer and busy transfer. The Company has also instituted a voice retrieval message system and has or will be installing voice recognition technology in all its cellular systems. The Company also provides news, weather, sports and financial news recordings.
The Company has also implemented automatic roaming in its cellular systems. With automatic roaming, the Company's subscribers are pre-registered in cellular systems outside the Company's regions. Such subscribers receive service automatically while they are roaming, without having to communicate with the local office in any fashion.
The following were among the products and services that were introduced or under development during 1994:
Digital-Based Services. The Company is able to offer or is developing enhanced services to customers who use digital, rather than analog, service, including Caller ID and Message Waiting Indicator. The Company will continue to develop other enhanced services that will be available only to digital customers, which the Company expects will encourage the migration of all customers to digital service over time.
Cellular Office Service. Cellular Office Service combines cellular technology with the internal communications system of an individual business or organization. Users typically would be employees of a business who share a workplace, such as an office or a campus. Outside the workplace boundaries, a user's cellular phone will operate as any cellular phone. Within those boundaries, the cellular phone will function as part of the organization's existing telecommunications system (such as PBX). In either location, all users will be linked by the same system, thereby enabling them to reach one another by dialing only internal extensions, to be available through direct dial, and to use the system's voice mail and other functions. The system has been successfully tested and will be available in certain of the Company's markets in 1995.
Data-Over-Cellular. The Company has participated actively in the development of recently adopted industry specifications for a packet data technology to be used for transmission of data over cellular communications systems (Cellular Digital Packet Data or "CDPD"). This technology will allow data to be transmitted across existing cellular networks without disrupting or degrading voice traffic and without requiring additional system capacity or spectrum. CDPD is in addition to circuit switched systems, which also permit data communication. Circuit switched data transmission requires the maintenance of a dedicated connection throughout the transmission. CDPD, with its connectionless system, operates at greater speed and higher quality but generally at lesser cost for short transmissions such as e-mail messages. The Company has successfully installed its first CDPD system in a commercial site and expects to begin offering CDPD service in selected markets in 1995.
Home Base Station. The Company and other cellular providers are developing and implementing a service for the residential market enabling a cellular phone to operate with both the wireless cellular system and as part of the wired telephone system. In and near the home, the cellular phone will operate as a cordless phone linked through the home base station to the home's wired system. When the customer leaves the home area, the phone will operate as a regular cellular phone connecting to the Company's wireless system.
Customer Service. The Company recognizes that being responsive to the problems and concerns of its subscribers is critical in a service business. The Company trains and certifies various agents to provide repair services for the Company's subscribers. The Company continually monitors and provides ongoing training for service centers. In addition, the Company operates its markets through an on-site staff, including a branch manager or managers, technicians and customer service representatives. Customer service is available toll-free 24 hours a day, 7 days a week by simply dialing 611.
McCaw National Network. McCaw is continuing the process of linking various regional cellular systems, including the Company's, into the North American Cellular Network ("NACN"), a "national seamless network" permitting cellular subscribers, without making special arrangements, to both place and receive calls anywhere they travel in areas served by the NACN, even if the local cellular service is not provided by McCaw or the Company. All of McCaw's and the Company's markets within the continental United States as well as the A Block systems in most other major metropolitan areas and Cantel, which holds Canada's A Block cellular license, are served by the NACN. Most of the major B Block licensees have formed a national network similar to the NACN, which competes with the NACN. As of February 28, 1995, the NACN served over 8 million subscribers and covered a population base of over 200 million. Ultimately, the Company's goal is to extend this network to permit its customers to place and receive calls effortlessly throughout North America.
Cellular Competition. The FCC awarded only two cellular licenses in each market - an A Block and a B Block license. During its initial licensing of MSAs and RSAs, the FCC reserved the A Block license for a nonwireline company (which in each of the Company's markets is the partnership or other entity in which the Company owns an interest) and the B Block license for an affiliate of a local wireline telephone company. Now, subject to FCC rules, an A Block or a B Block license may be held by either a wireline or a nonwireline entity, but no entity may control more than one license per market. Each licensee in a market has the exclusive grant of a defined frequency band within that market. The Company also faces competition for wireless communications services in each market from other wireless technologies which provide many of the characteristics of cellular service. See "-Competition From Other Technologies".
Competition is principally on the basis of service and equipment pricing, services and enhancements offered, the technical quality of the system and quality and responsiveness of customer service. Competition may be intense. Under applicable law, the Company is required to permit the "reselling" of its
services. In certain larger markets and in certain market segments such as national customers, competition from resellers may be significant. There is also competition for dealers.
FCC rules require Regional Bell Operating Companies (the "RBOCs") that become cellular operators to create a separate subsidiary to own and operate cellular systems. This requirement is intended to make it more difficult for these companies to engage in anticompetitive activities, such as subsidizing their cellular operations from monopoly landline revenues in order to force cellular competitors out of the market.
There are currently pending several legislative and regulatory initiatives which may affect the Company, including proposals regarding the obligations of common carriers such as the Company to provide interconnection to resellers and other wireless competitors and to offer equal access to interexchange carriers and the right of the RBOCs (which are the Company's primary B Block competitors) to offer or resell interexchange services. The RBOCs have also filed petitions in federal court seeking to exempt their wireless systems from the proscription against offering interexchange service that is contained in the Modification of Final Judgment pursuant to which certain activities of the RBOCs are governed. In light of the uncertainty surrounding these legislative and regulatory initiatives and judicial proceedings, it is impossible to quantify their impact on the Company and the competitive conditions it may face at this time.
Competition From Other Technologies. The development of the cellular industry has attracted numerous other companies that desire to provide services intended to compete with the service provided, or to be provided, by the Company. Some of these competitive services are currently available and others have been announced. For example, specialized mobile radio ("SMR") systems, generally used by taxicabs and tow truck services, and other communication services which have the technical capability to handle mobile telephone calls may provide competition in certain markets. One-way or two-way messaging or beeper services that feature voice message and data display as well as tones may be adequate for potential subscribers who do not need to transmit back to the caller. Other two-way mobile services may also be competitive with the Company's services.
In addition to B Block cellular competition, the Company and its unconsolidated affiliates expect to face competition from enhanced specialized mobile radio services ("ESMR") operations, such as Nextel, which is providing cellular-like services in the Company's Los Angeles market. Several other ESMR networks have begun operating in other cities; still others are scheduled to begin either operation or construction in 1995 in cities served by the Company's cellular systems.
Recently, the FCC allocated a significant amount of spectrum to new Personal Communications Services ("PCS") that are expected to compete with cellular service. On March 14, 1995, the FCC announced the completion of the first phase of its auction of spectrum for broadband PCS. The first phase involved two licenses for 30 MHZ of spectrum in each of the 51 Major Trading Areas ("MTAs"), except that only one license was available for bidding in each of New York, Los Angeles and Washington, D.C., with the other having been awarded under the FCC's pioneer's preference program. In LIN's markets, the pioneer's preference awards were to OmniPoint Corp. in New York and Cox Cable in Los Angeles. An MTA is considerably larger in geographic size and population than a cellular MSA and may include two or more MSAs or RSAs. The New York MTA, for example, covers Connecticut, Eastern New York state, Long Island and Vermont. The Company chose not to participate in the first phase of the auction. The successful bidders for 30 MHZ licenses in LIN's markets were as follows: New York - a coalition of Sprint and major cable companies ("WirelessCo"); Los Angeles - PacTel; Dallas-Fort Worth - a coalition of Bell Atlantic, NYNEX, US West and AirTouch ("Primeco") and WirelessCo; and Houston - Telephone and Data Systems and Primeco.
In the future, the FCC will auction an additional 30 MHZ license and three 10 MHZ licenses for each of 492 Basic Trading Areas ("BTAs"). BTAs are smaller than MTAs but generally larger than cellular MSAs or RSAs and may include two or more MSAs or RSAs. The additional 30 MHZ license and one of the 10 MHZ licenses in each BTA have been set aside for auction on special terms to small business or minority- or women-owned enterprises ("Designated Entities"). The auction for the 30 MHZ license to Designated Entities was scheduled to begin shortly after the conclusion of the MTA license auction, but the FCC has been ordered to stay auctions to Designated Entities pending resolution of an appeal regarding the special rules concerning bidding on licenses for Designated Entities. The Company will analyze whether to seek additional licenses in these future auctions, but has not yet made any decisions in that regard.
Some of the PCS spectrum is already used by utilities, public safety agencies and other entities for fixed microwave transmissions, and the FCC has determined that the existing microwave users must be phased out or relocated to new frequencies once PCS is deployed. However, the FCC's rules enable displaced microwave users to obtain compensation from PCS licensees for vacating PCS spectrum and provide for a transition period before incumbent microwave users are forced to relocate.
The Company's Media Operations
As discussed earlier, the Company spun-off substantially all its television broadcasting operations effective December 28, 1994 and divested itself of its specialty publishing operations effective June 24, 1994. The Company's results of operations for the year ended December 31, 1994 include the results of these businesses through the dates of their divestiture. Thus, the results for 1994 are not directly comparable to prior years nor will future results be directly comparable to those of 1994. Following the Television Spin-off, the Company continues to own station WOOD-TV, an NBC-affiliated station serving the Grand Rapids-Kalamazoo-Battle Creek, Michigan market. Station WOOD-TV was acquired by the Company in April 1983 and is affiliated with the NBC network. WOOD-TV's current FCC license expires in October 1997. The Grand Rapids-Kalamazoo-Battle Creek market, with a population of approximately 1,666,000, is served by two other commercial VHF television stations which are affiliated with CBS and ABC, by two commercial UHF television stations (one of which is affiliated with ABC and one of which is affiliated with the Fox network) and by three non-commercial UHF television stations. WOOD-TV also provides programming and marketing services pursuant to a local marketing agreement to station WOTV-41, Battle Creek, Michigan, an ABC affiliate operating on UHF Channel 41. WOTV-41's current FCC license expires in October 1997. In addition to network programming, WOOD-TV devotes segments of its broadcasting day to news, local live programming, talk shows, and syndicated and off-network programs. News and community-oriented programs are emphasized and play an important role in the station's services to its viewers.
Mobile Satellite Service
The Company, through subsidiaries, beneficially owned, as of March 15, 1995, approximately 6.7% of the outstanding stock of American Mobile Satellite Corporation, which has been licensed by the FCC to provide national mobile satellite service. This service is expected to be available by the end of 1995 and will provide full-duplex, digital mobile telephony to vehicle mounted and fixed terminals throughout North America. The Company does not expect mobile satellite service to be competitive with cellular service, but should be a complementary service in rural areas not otherwise served by cellular systems.
Private Market Value Guarantee
The Company entered into the Private Market Value Guarantee ("PMVG") with McCaw in 1989 for the benefit of the Company's stockholders (other than McCaw and its affiliates). The PMVG applies for as long as McCaw and its affiliates beneficially own
in the aggregate at least 25% of the outstanding shares of the Company's Common Stock ("Shares") on a fully diluted basis or McCaw's designees constitute a majority of the Board of Directors of the Company, and any Shares are held by other persons.
Status of PMVG Sale Process. Pursuant to the terms of the PMVG, in January 1995 the Independent Directors (as defined below) retained the investment banking firms of Lehman Brothers, Inc. and Bear Stearns & Co., Inc. (together, the "Independent Directors' Appraiser") to act jointly as their appraiser for the purpose of determining the private market value per Share of the Company. AT&T and McCaw retained the investment banking firm of Morgan Stanley & Co., Incorporated (the "Offeror's Appraiser") to act as McCaw's appraiser. On February 15, 1995, the Independent Directors' Appraiser reported that they had determined the private market value per Share to be $155, and the Offeror's Appraiser reported that it had determined the private market value per Share to be $105. In accordance with the PMVG, Wasserstein Perella & Co., Inc. was jointly designated by the Independent Directors' Appraiser and the Offeror's Appraiser as the third appraiser (the "Mutually Designated Appraiser") to determine the private market value. On March 7, 1995, the Mutually Designated Appraiser reported that, based upon its review and subject to the limitations noted in its report dated March 7, 1995, it had determined the private market value per Share to be $127.50. In accordance with the PMVG, the "Private Market Price" per Share therefore was established as $127.50. McCaw must decide by April 21, 1995 whether it desires to proceed with an Acquisition (as defined below).
Litigation involving the PMVG process is pending in several jurisdictions. In re LIN Broadcasting Corporation Shareholders Litigation, filed February 17, 1995 in Delaware Chancery Court, New Castle County, Consolidated C.A. No. 14039, is a consolidated action alleging that AT&T, McCaw and MMM have, by their conduct in the PMVG described above, breached the PMVG and certain fiduciary duties. The relief sought includes an injunction prohibiting AT&T, McCaw and MMM from acquiring LIN stock owned by the class members, an order directing AT&T, McCaw and MMM to fulfill their contractual and fiduciary obligations, rescission if a PMVG sale to AT&T, McCaw or MMM is consummated and monetary damages. In Newman v. McCaw Cellular Communications and AT&T Corp., filed March 7, 1995 in the United States District Court for the Southern District of New York, C.A. No. 95 Civ. 1583, the plaintiff alleges that defendants failed to disclose that private market value would be determined in violation of the method set forth in the PMVG by improperly disregarding certain potential purchasers, including AT&T and other unidentified companies, and this action, together with public statements and other actions taken by the defendants, constituted a violation of federal
securities law. Plaintiff seeks injunctive relief similar to that described above and monetary damages. In Luke v. Wasserstein Perella & Co., AT&T Corp., McCaw Cellular Communications, Inc., LIN Broadcasting Corporation, William G. Herbster, Wilma H. Jordan and Richard W. Kislik, filed March 9, 1995, in New York Supreme Court, New York County, Index No. 95-105973, plaintiffs allege that the Mutually Designated Appraiser was negligent and breached its duty of care, that AT&T, McCaw and MMM were unjustly enriched by such negligence and that the individual defendants may breach their fiduciary duties as Independent Directors. In addition to seeking injunctive relief and monetary damages similar to those described above, the plaintiffs have requested an injunction prohibiting the Independent Directors from approving any sale of LIN for a price less than a properly computed Private Market Price and an order directing the Independent Directors to take all action necessary to determine the Private Market Price and to maximize shareholder value. In all of these cases, none of the defendants have yet filed an answer or otherwise responded to the complaints. All of these cases have been brought as class actions, but no action has yet been taken with respect to the consideration of certifying a class. The Company cannot predict their possible outcome or effect on the Company or the PMVG process at this time. However, the Company does not expect that the ultimate results of any of the foregoing legal proceedings will have a material adverse effect on its financial position, results of operations or cash flows.
The following is a summary of the terms of the PMVG:
Independent Directors. Three members of the Company's board of directors (the "Independent Directors") will be independent directors as determined under the New York Stock Exchange Rules (i.e., independent of management of the Company and its affiliates and free of any relationship that, in the opinion of the Company's board of directors, would interfere with the exercise of independent judgment). The initial Independent Directors are persons who served on the Company's Board prior to the completion by McCaw of its tender offer for the Company. At each annual meeting of the Company's stockholders, Independent Directors will be nominated by the then current Independent Directors and elected by a Majority Vote of the Public Stockholders, as defined below. Independent Directors will be subject to removal only (a) for cause, (b) if a majority of the Independent Directors approve such removal or (c) if such removal is approved by a Majority Vote of the Public Stockholders.
"Majority Vote of the Public Stockholders" means (a) the affirmative vote of the holders of at least a majority of the Public Shares (as defined below) present and entitled to vote at any meeting at which the holders of a majority of the Public Shares are present or (b) the action by written consent (in accordance with applicable provisions of Delaware law and the
Company's certificate of incorporation and by-laws) of the holders of a majority of the Public Shares. "Public Shares" means Shares not owned by McCaw or any of its affiliates.
Sale of the Company after Five Years. On or about January 1, 1995 (the "Initiation Date"), the Independent Directors were required to designate an investment banking firm of recognized national standing and McCaw was required to designate an investment banking firm of recognized national standing, in each case to determine the private market value per Share. As set forth in the PMVG, "private market value per Share is the private market price per Share (including control premium) that an unrelated third party would pay if it were to acquire all outstanding Shares (including the Shares held by [McCaw] and its affiliates) in an arm's-length transaction, assuming that the Company was being sold in a manner designed to attract all possible participants (including the Regional Bell Operating Companies) and to maximize stockholder value, including if necessary through the sale or other disposition (including tax-free spin-offs, if possible) of businesses prohibited by legal restrictions to be owned by any particular buyer or class of buyers (e.g., the Regional Bell Operating Companies)."
If the higher of the respective final views of the Independent Directors' Appraiser and the Offeror's Appraiser as to private market value per Share (the "Higher Appraised Amount") was more than 110% of the lower of such views (the "Lower Appraised Amount"), then the Independent Directors' Appraiser and the Offeror's Appraiser were to agree upon and jointly designate a third investment banking firm of recognized national standing to determine the private market value per Share (the "Mutually Appraised Amount"). The Mutually Designated Appraiser was required, no later than the 65th day after the Initiation Date, to determine the Mutually Appraised Amount, and the private market price per Share (the "Private Market Price") is (x) the Mutually Appraised Amount, if such amount falls (as it did) within the range of values that is greater than one-third and less than two-thirds of the way between the Lower Appraised Amount and the Higher Appraised Amount, and (y) the average of the Mutually Appraised Amount and the other Appraised Amount (Lower or Higher) that is closest to the Mutually Appraised Amount, if the Mutually Appraised Amount does not fall within that range; provided, however, that the Private Market Price may not be less than the Lower Appraised Amount nor more than the Higher Appraised Amount.
Once the Private Market Price was determined pursuant to the procedures provided for in the PMVG, McCaw has 45 days to decide whether it desires to proceed with an acquisition of all of the Public Shares (an "Acquisition") at that price. If McCaw decides to proceed with an Acquisition, it may pay the Private Market Price in cash or any combination of cash, common equity securities and/or nonconvertible senior or subordinated "current
cash pay" debt securities that the Independent Directors, after consultation with their investment banking firm, believe in good faith will have an aggregate market value, on a fully distributed basis, of not less than the Private Market Price. If McCaw determines to proceed with an Acquisition as set forth above, it will enter into an agreement with the Company (containing customary terms and conditions applicable in a situation in which the acquiror has an ownership position comparable to McCaw's ownership interest in the Company) and will cause a meeting of stockholders of the Company to be held as soon as practicable to consider and vote thereon. The Acquisition may only be completed if it is approved by a Majority Vote of the Public Stockholders.
If McCaw determines not to proceed with an Acquisition, or if despite McCaw's good faith efforts an Acquisition has not been completed within 12 months following the Initiation Date (or, if an Acquisition has been approved by a Majority Vote of the Public Stockholders and is being pursued in good faith by McCaw but has not been completed due to regulatory delays or litigation, 20 months following the Initiation Date), McCaw will put the Company in its entirety up for sale under direction of the Independent Directors in a manner intended by the Independent Directors to maximize value for all Shares. The sale procedures will be set by the Independent Directors and may include, if necessary in order to maximize stockholder value, provision for the sale or other disposition (including tax-free spin-offs, if possible) of businesses prohibited by legal restrictions to be owned by any particular buyer or class of buyers (e.g., the Regional Bell Operating Companies). The Independent Directors will select from among the proposed transactions the one or more transactions determined by them as being most likely to maximize value for all Shares and will cause a meeting of the Company's stockholders to be held as soon as practicable to consider and vote thereon. McCaw will not bid unless requested to do so by the Independent Directors. McCaw will fully cooperate in this process and, if one or more of the transactions so selected by the Independent Directors are approved by a Majority Vote of the Public Stockholders, will cause all Shares owned by it or its affiliates to be voted in favor thereof. Any sale of the Company would be subject to receipt of FCC and other necessary regulatory approvals.
If a transaction is presented for approval at a meeting of stockholders as contemplated above and fails to receive the requisite Majority Vote of the Public Stockholders, McCaw will have no further rights or obligations to purchase the remaining interest in the Company, but the remainder of the Private Market Value Guarantee shall continue to apply to the extent described therein.
Continuing Stockholder Protections. Except as described above, neither McCaw nor any of its non-Company affiliates may engage in any material transaction (including, without limitation, agreements, such as roaming agreements, which are standard in the industry) with the Company or any of its subsidiaries (other than proportionate as a stockholder of the Company) unless such transaction has been approved by a majority of the Independent Directors.
Except as described above, neither McCaw nor any of its non-Company affiliates may engage in a merger or consolidation with the Company, or purchase all or substantially all of the Company's assets, unless the transaction is approved not only by a majority of the Independent Directors but also by a Majority Vote of the Public Stockholders. In deciding whether to approve such a transaction, the Independent Directors will be instructed to consider as a fair price per Share the Private Market Price per Share (including control premium) that an unrelated third party would pay if it were to acquire all outstanding Shares (including the Shares held by McCaw and its affiliates) in an arm's length transaction, assuming that the Company was being sold in the manner contemplated above. The Independent Directors will retain independent financial advisors and counsel to advise them with respect to any such transaction.
No transaction will be undertaken, and the Company will not take any action, whether or not approved by a majority of the board of directors of the Company, if the Independent Directors determine in their good faith judgment by unanimous vote that such transaction or action would likely depress the value of the Company on the Initiation Date. In addition, the Company will not acquire or dispose of any business (other than acquisitions of additional cellular interests in markets in which the Company has an interest), whether or not approved by a majority of the board of directors of the Company, if the Independent Directors determine in their good faith judgment by unanimous vote that such acquisition or disposition is not in the best interests of the Company.
Additional Share Purchases. Except as permitted above, neither McCaw nor any of its non-Company affiliates may purchase additional Shares if, after giving effect thereto, they would beneficially own in the aggregate more than 75% of the outstanding Shares on a fully diluted basis.
Corporate Opportunities. McCaw will direct to the Company, and the Company will have a priority right to pursue, all corporate opportunities to acquire interests in U.S. cellular telephone systems other than those in markets in which McCaw has an interest or contiguous to markets in which McCaw has such an interest (in the latter instance, however, only if such market is
not a market in which the Company has such an interest or contiguous to such a market). For purposes of the foregoing, a party will not be deemed to have an interest in a cellular telephone system solely by reason of such party's ownership of less than a majority equity interest in a public company having such an interest. The Independent Directors will be afforded an amount of time reasonably necessary to consider any such transaction, consistent with any time constraints imposed by the other party to such transaction, and if and for as long as a majority of the Independent Directors desire to pursue such transaction, McCaw will not separately pursue that transaction.
Certain Transferees Bound. Except pursuant to a sale of the Company as described above, neither McCaw nor any of its non-Company affiliates may sell more than 25% of the outstanding Shares on a fully diluted basis to a third party or group unless that third party or group agrees in writing to be bound by the provisions set forth in the PMVG to the same extent as McCaw is so bound.
Amendments. The provisions of the PMVG may be amended in any respect not materially adverse to the holders of Public Shares, but only if the amendment is approved by a majority of the Independent Directors. Any such amendment will promptly be disclosed in a filing with the Securities and Exchange Commission. The determination of the Independent Directors as to whether an amendment is materially adverse to the holders of Public Shares shall be final and shall bind all holders of Public Shares. The provisions of the PMVG may also be amended in any other respect if the amendment is approved by a Majority Vote of the Public Stockholders. The PMVG was amended in 1994 in connection with the Television Spin-off.
The foregoing description is only a summary of, and is qualified by reference to, the PMVG, which has been filed with the Securities and Exchange Commission as an exhibit to this Form 10-K.
Governmental Regulation
The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934, as amended (the "Communications Act"). The FCC has promulgated regulations governing the construction and operation of cellular systems, licensing and technical standards for the provision of cellular telephone service.
For licensing purposes the FCC divided the United States into 734 separate geographic markets (306 MSAs and 428 RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the initial application process for MSAs and RSAs, the FCC reserved the A Block frequencies for nonwireline applicants (such as the Company) and the B Block for wireline applicants. Now, subject to FCC rules, an A Block or a B Block license may be held by either a wireline or nonwireline entity, but no entity may control more than one cellular system in any MSA or RSA.
The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval and, in certain cases, compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and state regulatory approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the Company's application for approval of the proposed transfer.
When a cellular system has been constructed, the licensee is required to notify the FCC that construction has been completed. Immediately upon this notification, but not before, FCC rules authorize the licensee to offer commercial service to the public. The licensee is then said to have "operating authority." The Company has obtained operating authority for each of its cellular systems that is currently in operation. Initial operating licenses are granted for 10 year periods. The FCC has recently established the procedures and standards for filing renewal applications, filing petitions to deny applications for renewal and conducting comparative renewal proceedings between cellular licensees and challengers filing competing applications. The FCC will award a "renewal expectancy" to cellular operators meeting specific criteria that establish that the licensee has adequately provided service to the public and has complied with applicable rules and regulations. The ruling establishing the process of obtaining a "renewal expectancy" and other procedures for renewal are subject to court review. Licenses may be revoked and license renewal applications denied for cause. In addition, if a renewal expectancy is not granted, a license could be awarded to a competing applicant if it prevails in a comparative hearing. The licenses for the Company's cellular systems in New York, Dallas-Fort Worth and Houston are due to expire in 1995 and in Los Angeles in 1996. The Company plans to seek license renewals in accordance with the FCC's procedures.
Under FCC rules, the authorized service area for the Company in each of its markets is referred to as the "cellular geographic service area" or CGSA. The CGSA is comprised of the composite service area of the system's cell sites as measured according to a formula established by the FCC in 1992 and contained in its
rules. The CGSA may be coincident with or smaller than the related MSA or RSA. The right to serve areas which fall within the licensee's MSA or RSA but outside of its CGSA is exclusive to such licensee for a period of 5 years from the date the licensee receives authority to construct its system. This ruling and the manner in which the FCC defines the CGSA is currently subject to further FCC and court review. At the conclusion of such 5-year period other entities may apply to serve areas within the MSA or RSA that are unserved by the licensee, and the licensee may apply to retain the exclusive service rights within its cellular block. If more than one mutually exclusive application is filed for an unserved area, the FCC is considering whether to use its auction authority to choose a winner or whether to award the area by lottery. In March 1993 the FCC began accepting such unserved areas applications and the Company expects that there will be applications filed for unserved areas within MSAs where it holds the initial A Block licenses. The Company expects that any unserved areas within its MSAs will be immaterial to the Company. The Los Angeles partnership was selected by the FCC to serve areas within its MSA that it has not yet served. In addition, the Company intends to file several unserved areas applications to attempt to obtain rights to serve additional territory. Because of the possibility of other competing applications, the Company has no assurance that these applications will be granted.
The FCC requires landline telephone carriers in each market to offer reasonable interconnection facilities to both cellular systems in the market and to disclose how the B Block licensee will interconnect with the landline network. The A Block cellular licensee has the right to interconnect with the landline network in a manner no less favorable than that of the B Block licensee; it may, however, negotiate interconnection arrangements that are not identical to those provided to the B Block licensee in that market. In addition, the FCC is now considering the issue of whether commercial mobile radio services such as cellular should be required to provide interconnection to their networks to other carriers.
The FCC's rules also generally require persons or entities holding cellular construction permits or licenses to coordinate their proposed frequency usage and system design with other cellular users and licensees in order to avoid electrical interference between adjacent systems or the capture of another market's subscribers. The height and power of base stations in the cellular system are regulated by FCC rules, as are the type of signals emitted by these stations. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration regulations respecting the marking, lighting, siting and construction of cellular transmitter towers and antennas.
The FCC has initiated a rulemaking proceeding to update its rules which ensure that FCC-regulated transmitters do not expose the public or workers to potentially harmful levels of radio frequency radiation. The Company does not believe that the standards that have been proposed will have any significant impact on the Company or its services.
Applicable law administered by the FCC requires that the total percentage of shares of the Company owned of record or voted by non-United States persons or entities shall not exceed 25%.
The Company is also subject to state and local regulation in some instances. In 1981, the FCC preempted states from exercising jurisdiction in the areas of licensing, technical standards and market structure. However, certain state authorities have regulated several aspects of a cellular operator's business, including the rates it charges its subscribers and cellular resellers, the resale of long-distance service to its subscribers, the technical arrangements and charges for interconnection with the landline network and the transfer of interests in cellular systems. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters may also be subject to state or local zoning, land use and other local regulations.
In 1993, Congress passed legislation preempting state regulation of cellular and other wireless mobile carriers' market entry and rates. The legislation permitted states to seek rate regulatory authority from the FCC in cases where market forces are inadequate to protect consumers and, moreover, allowed states that regulated cellular rates before June 1, 1993 to continue doing so pending FCC review of any rate regulation petitions submitted to the FCC before August 10, 1994. Three of the states in which the Company operates cellular systems - California, New York and Connecticut - timely filed petitions with the FCC to continue regulating cellular rates. (Texas does not regulate cellular services.) The FCC has not yet acted on the petitions but must issue a final opinion on them by August 1995.
The New York Public Service Commission has adopted certain regulations governing cellular operators in that state. In July 1993, the New York State legislature passed a law that exempted cellular telephone companies from a 45 day notice requirement for certain tariff filings. When the California Public Utilities Commission ("CPUC") petitioned the FCC in August 1994 to allow the CPUC to continue regulating cellular rates, it also ordered cellular carriers to interconnect, upon request, to switch-based resellers at market-based "unbundled" wholesale rates that do not exceed current wholesale rates. Several resellers have requested
to interconnect their switches with those of the Company's Los Angeles system. However, due to unresolved technical considerations, no interconnections are yet in operation. Pursuant to the terms of a recent CPUC order, the Company's system and cellular resellers are discussing a test of the interconnection arrangements. The FCC and Congress also are considering proposals to mandate interconnections between wireless carriers (including resellers) in certain circumstances. Any such proposal, if adopted at the federal level, may preempt California's interconnection policies.
Employees
As of December 31, 1994, the Company employed 1,581 full-time and part-time employees in its consolidated cellular operations (New York and Dallas-Fort Worth), broadcasting and corporate offices. Twenty-seven of such employees, all of whom are involved in televisions operations, are represented by unions. The Company's unconsolidated cellular affiliates (Los Angeles, Houston and Galveston) employed an additional 1,951 full-time and part-time employees as of year end 1994. The Company believes that its employee relations are generally good.
Executive Officers
The following individuals are currently serving as executive officers of the Company:
Steven W. Hooper has been Chief Executive Officer of the Company since March 1995 and Chief Executive Officer of McCaw since January 1995. From 1993 to January 1995, he was Executive Vice President and Chief Financial Officer of McCaw. From 1988 until 1993, he was Senior Vice President-Cellular Operations of McCaw. Prior to 1988, Mr. Hooper served with McCaw as Executive Vice President and Chief Operating Officer of its Cable Division and in various financial positions.
Tom A. Alberg has been a director, President and Chief Operating Officer of the Company since 1991 and Executive Vice President of McCaw since 1990. Before joining McCaw, Mr. Alberg was the Chairman of the Executive Committee and a partner of Perkins Coie, the largest law firm headquartered in the Pacific Northwest. Mr. Alberg is a director of Digital Systems International, Inc., Active Voice Corporation and LIN Television Corporation.
Wayne M. Perry has been a director and Vice Chairman of the Board of Directors of the Company since 1990 and Vice Chairman of the Board of McCaw since 1989. From 1985 to 1989, Mr. Perry served as President of McCaw.
Donald Guthrie has been Senior Vice President-Finance of the Company since 1992 and a Senior Vice President and Treasurer of McCaw since 1986. He also served as Vice President-Finance of the Company from 1990 to 1992.
Item 2.
Item 2. PROPERTIES
To provide cellular service, the Company maintains sales and administrative offices, transmitter or antenna sites and switching offices. The Company generally leases all of these facilities, although it does own such premises where it is in the best interests of the Company to do so. The Company's television broadcasting operation maintains an administrative office, television studio and transmitter or antenna site, most of which are owned by the Company. See Note 4 to the Company's consolidated financial statements included elsewhere in this Form 10-K.
With the expansion of cellular networks, increased in-filling of existing networks and the coming needs of PCS and other technologies, the demand for cell sites is growing. Increasingly, however, resistance to the placement of new cell sites is being encountered, largely from groups that object to these sites on the basis of unknown, but alleged, health hazards and aesthetic considerations. The possibility of preemptive federal regulation of the location of cell sites is under review by the FCC, but for the foreseeable future siting is likely to remain subject to local regulation. Although the Company has not yet experienced any significant difficulty in locating cell sites, it is possible that this could become a greater concern.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is from time to time a defendant in and is threatened with various legal proceedings arising from its regular business activities. The Company is also party to routine filings with the FCC and state regulatory authorities and customary regulatory proceedings pending in connection with interconnection, rates, and practices and proceedings concerning the telecommunications industry in general and other proceedings which management does not expect to have a material adverse effect on the financial position or results of operations of the Company.
In August 1993 and in December 1993, two dealers for the Los Angeles cellular partnership (LACTC) filed lawsuits against the partnership and certain other parties in California state court, seeking injunctive relief, damages, treble damages, punitive
damages and restitution. (Goldenwest Cellular Corp. v. Los Angeles SMSA Ltd. Partnership; PacTel Cellular; The Good Guys Inc., Case No. 715479 (Superior Court of California, Orange County), and Autophone, Inc. v. Los Angeles Cellular Telephone Co.; Los Angeles SMSA Ltd. Partnership; PacTel Cellular, et al., Case No. 722299 (Superior Court of California, Orange County)). These cases are now set for trial in June 1995 and have been consolidated. The lawsuits allege various torts and statutory violations, including price-fixing regarding cellular equipment and service, below-cost sales of equipment, fraud, interference with economic relationship, unfair competition, discrimination among agents and conspiracy. A third lawsuit addressing similar facts and raising many of the same claims (Cellular Activators, et al. v. Los Angeles Cellular Telephone Company, et al., Case No. 729278 (Superior Court of California, Orange County)) was filed in May 1994. Plaintiffs in this case seek damages in excess of $1,400,000, punitive damages, treble damages, restitution, and injunctive relief. A fourth suit was filed in February 1994 (Cel-Tech Communications, Inc. et al. v. Los Angeles Cellular Telephone Company et al., Case No. VC015535 (Superior Court of California, Los Angeles County)) containing claims relating to equipment sales and seeking injunctive relief, restitution and monetary damages. This case was tried in February and March 1995; after presentation of the plaintiff's case, the judge granted LACTC's motion to dismiss the case in its entirety.
In August 1994 a class action was filed against LACTC in California state court on behalf of the partnership's cellular telephone service customers and former customers in the greater Los Angeles area (Thomas and Nicola v. Los Angeles Cellular Telephone Company, et al., Case No. 734316, Superior Court of California, Orange County). The complaint alleges that LACTC has engaged in price fixing for cellular service rates with other cellular carriers in violation of California law. The complaint seeks actual damages on behalf of the class in excess of $100,000,000. The complaint further seeks treble damages and injunctive relief. A similar class action complaint was also filed in California state court in November 1994 on behalf of the customers of Los Angeles SMSA (Euros Cady v. Los Angeles Cellular Corp., Case No. 739101, Superior Court of California, Orange County).
Another similar class action complaint was filed against LACTC in federal court in October of 1994, on behalf of former and current cellular customers of both LACTC and its competitor Los Angeles SMSA. This case also specifically named Los Angeles SMSA and its affiliate AirTouch Cellular (PacTel Cellular) as defendants. (Kagan and Sifuentes v. Los Angeles Cellular Telephone Company, et al., Case No. 94-6923, U.S. District Court, Central District of California). The complaint alleged that defendants engaged in price fixing for cellular service rates in
violation of Sections 1 and 2 of the Sherman Act and sought damages, treble damages and injunctive relief. In March 1995, the judge entered an order granting LACTC's motion for a summary judgment in this case.
A class action complaint similar to the Thomas case was filed in November 1993 against PacTel Cellular (AirTouch), Los Angeles SMSA and others in California state court (Garabedian v. California, Case No. 721144, Superior Court of California, Orange County). The complaint, brought on behalf of current and former customers of Los Angeles SMSA and LACTC, alleges that PacTel Cellular and LACTC conspired to fix cellular service prices. Like the Thomas case, the Garabedian complaint seeks damages in excess of $100,000,000, treble damages and injunctive relief. In March 1995, the court granted the motion of AirTouch and Los Angeles SMSA to add LACTC as a defendant in this case, and granted the plaintiffs' motion to certify the class. No trial date has been set in this case.
LACTC intends to continue to defend the above-referenced lawsuits vigorously, and believes that it has meritorious defenses to the allegations contained in the complaints. The Company does not expect that the decisions in these legal proceedings will have a material adverse effect on its financial position or results of operations.
The Company is aware of an antitrust investigation being conducted by the California State Attorney General involving the pricing of cellular telephone service in the Los Angeles area market from about 1986 to the early 1990s. No formal charge or complaint has been filed. The Company and LACTC are cooperating fully with the Attorney General's investigation and believe that the relevant pricing practices were and are in compliance with the antitrust laws.
In August 1993, a class action lawsuit was filed on behalf of Texas cellular subscribers in state court in Texas (Crowley, et al. v. Houston Cellular Telephone Company, et al., Case No. 93-0879, Harrison County, Texas, 71st Judicial District). The defendants in this action are Houston Cellular Telephone Company, LIN Broadcasting Corporation, Metroplex Telephone Co., McCaw Cellular Communications, Inc., and the affiliates of these entities providing cellular service in the State of Texas. The most recent petition, filed in March 1995, generally challenges the liquidated damages and automatic renewal provisions in annual cellular subscriber contracts. Plaintiffs have made the following allegations: (1) the contracts are unconscionable and violate the Texas Deceptive Trade Practices Act; (2) the liquidated damages provisions contained in the contracts constitute an illegal penalty; (3) the defendants have engaged in an antitrust conspiracy with each other and with their competitors to divide
the cellular market in Texas by including the challenged provisions in their subscriber contracts and have therefore violated the Texas Free Enterprise and Antitrust Act; (4) the defendants engaged in a civil conspiracy by which the challenged provisions were included in the subscriber contracts; and (5) the defendants fraudulently concealed their illegal acts such that the running of any applicable statute of limitations has been suspended. Plaintiffs allege two separate sub-classes: the "damages" class, consisting of persons who breached their contracts and were thereby charged liquidated damages; and the "contracts" class, consisting of persons who are currently subject to the challenged provisions in their subscriber contracts. Neither of these sub-classes has been certified by the court at this time. Plaintiffs seek declaratory relief, damages, fees, costs and interest. Written and deposition discovery has commenced. No trial or class certification hearing dates have been set. The defendants intend to defend the lawsuit vigorously, and believe they have meritorious defenses to the allegations contained in the complaint. The Company does not expect that the decision in this legal proceeding will have a material adverse effect on its financial position or results of operations. The Company has been informed that the Office of the Attorney General of the State of Texas notified the Houston Partnership in March 1995 of that office's intention to file claims against that partnership that are largely similar to the claims presented in the Crowley case. Discussions have been held with representatives of the Attorney General's Office and are scheduled to continue.
For a description of litigation related to the PMVG, see "Business - Private Market Value Guarantee - Status of PMVG Sale Process."
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31, 1994.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed for quotation on the Nasdaq National Market under the symbol LINB. The following table sets forth, for the calendar quarters indicated, the high and low sales prices of the Common Stock on the Nasdaq National Market as reported in published financial sources. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The Television Spin-off was completed on December 28, 1994; none of the following prices have been adjusted for that event, but prices for the period including and following that date reflect its effect.
Year High Low
First Quarter . . . .. . . . . . $90 $75-1/2 Second Quarter. . . .. . . . . . $101 $80-1/4 Third Quarter . . . .. . . . . . $121-3/4 $98-1/2 Fourth Quarter. . . .. . . . . . $116-1/2 $108-1/4
First Quarter . .. . . . . . . . $117-1/4 $106-1/2 Second Quarter. .. . . . . . . . $122-1/4 $102-3/4 Third Quarter . .. . . . . . . . $140-3/4 $119-1/4 Fourth Quarter. .. . . . . . . . $146-1/4 $133
First Quarter (through March 15, 1995). . . $141-1/2 $120-1/4
As of February 28, 1995 there were 1,311 holders of record of Common Stock (which number does not include the number of stockholders whose shares are held of record by a broker or clearing agency but does include such a brokerage house or clearing agency as one recordholder).
The Company has never paid cash dividends on its Common Stock. The Board of Directors will determine future dividend policy based on the Company's results of operations, financial condition, capital requirements and other circumstances. The Company's Bank Credit Facilities (described below) restrict the Company's ability to pay dividends to its stockholders. There are also restrictions on the ability of the Company's operating subsidiaries to pay dividends to the Company. It is not anticipated that any cash dividends will be paid on Common Stock in the foreseeable future.
(1) On June 24, 1994, the Company disposed of its equity interest in the Philadelphia cellular operations and its GuestInformant specialty publishing business in connection with the redemption of the LCH preferred stock. On December 28, 1994, the Company completed the Television Spin-off. As a result of these transactions, results of operations and financial position as of and for the year ended December 31, 1994 are not directly comparable to prior periods.
(2) The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", effective January 1, 1991. The effect of the adoption was the $693.8 million charge for the cumulative effect of the change in accounting and an increase in deferred taxes.
(3) Includes a gain of $468.7 million related to the redemption of the LCH Preferred Stock.
(4) Includes nonrecurring charges associated with the completion of the tender offer by McCaw of $292.9 million on a pre-tax basis and $245.6 million on an after-tax basis.
(5) Common equivalent shares are included only in 1994, since they would be antidilutive in all other years.
------------------------ (1) On June 24, 1994, the Company disposed of its equity interest in the Philadelphia cellular operation in connection with the redemption of the LCH preferred stock. On May 31, 1994, the Company acquired an additional 5.2% interest in the New York cellular operations. The proportionate operating data reflect these changes in ownership from the dates of the transactions.
(2) Calculated by multiplying (i) the total subscribers of a licensee in which, as of the date specified, the Company owned an interest by (ii) the percentage ownership interest in that licensee which the Company owned on such date.
(3) Calculated by multiplying (i) the Donnelley Marketing Service estimate of current year population in a market by (ii) the percentage ownership interest that the Company owned in a licensee.
(4) See Note 12 to the Company's consolidated financial statements - "Segment Data."
(5) Includes a $(2,766) cumulative effect of accounting change during 1993 due to the adoption of SFAS No. 109, "Accounting for Income Taxes," at the Company's former Philadelphia cellular affiliate.
(6) Elimination of interest income, interest expense and other non-operating income and expenses included in equity in income of unconsolidated affiliates and minority interests. Such amounts include $3,902 for 1994, $5,715 for 1993 and $1,582 for 1992 due to equity in losses and interest expenses at the former Philadelphia affiliate due to that entity's ownership of an interest in a cable system operator.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The FCC has allocated additional spectrum for mobile communication services and recently concluded auctions for licenses to a significant portion of this spectrum. Federal and state authorities are also considering proposals that may result in the modification of rights held by providers of mobile communications services and the modification of relationships between facilities-based cellular carriers and resellers of cellular services. See "Business - The Company's Cellular Operations-Cellular Competition" and "Governmental Regulation". The Company believes these initiatives will result in additional competition for the Company. The FCC has already authorized one entity to provide a cellular-like mobile service in certain markets of the Company (in addition to the B Block cellular competition). Other entities have submitted winning bids in recent auctions for personal communication services licenses and are expected to launch service within the next few years. The Company also intends to pursue rights to offer additional mobile communications services. In light of the uncertainty as to the eventual outcome of any of these specific initiatives, including the nature and timing of the additional competitive services covered thereby, it is impossible to quantify at this time the impact of these legislative and regulatory initiatives or such competition on the Company at this time.
1994 COMPARED TO 1993
LIN completed two transactions during 1994 which, together, had a significant effect on the Company's results of operations for the year and financial position as of December 31, 1994. On June 24, 1994, LCH Communications, Inc. ("LCH"), a wholly-owned subsidiary of the Company, redeemed all of its outstanding Redeemable Preferred Stock (the "LCH Preferred Stock") held by Comcast Cellular Communications Inc. in exchange for all of the capital stock of a subsidiary of LCH, whose assets consisted primarily of a 49.99% interest in the Philadelphia cellular system and the GuestInformant specialty publishing business, plus $12.3 million cash (which represented 15% of the fair market value of the WOOD-TV business). The Company recognized a non-cash tax-free gain of $468.7 million in connection with this transaction. The Company's results of operations include the results of the consolidated publishing business and the equity investment in the Philadelphia operations through June 24, 1994. On December 28, 1994, the Company distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary LIN TV. The LIN TV operations comprised substantially all of the Company's former television broadcasting operations. The distribution was made in the form of a dividend payable to holders
of record of the Company's common stock at the close of business on December 9, 1994. The Company's shareholders of record on that date received one share of LIN TV common stock for each two shares of the Company's common stock owned. The consolidated financial statements reflect an increase in the Company's additional paid-in capital of $41.25 million, representing the negative net book value of the assets and liabilities distributed. The results of operations of LIN TV are included through December 28, 1994.
LIN reported consolidated net revenues of $876.5 million for 1994, an increase of 27% over 1993 net revenues of $688.6 million, primarily due to continued strong growth in cellular subscribers. The Company recorded consolidated net income for 1994 of $564.2 million, or $10.84 per share, compared to a consolidated net loss of $60.7 million, or $1.18 per share, for 1993. The 1994 results include a non-recurring gain of $468.7 million and a cessation of the preferred stock dividends in the second quarter as a result of the redemption of the LCH Preferred Stock.
Revenues
Net revenues in 1994 for LIN's consolidated cellular operations (principally New York and Dallas-Fort Worth) increased 33% from 1993. This increase was primarily the result of a 38% increase in average subscribers, offset, in part, by a 3% decline in average revenue per subscriber, a trend that the Company expects will continue for at least the next several years. The decrease in average revenue per subscriber is primarily the result of a lower average rate per minute, a decline in long distance revenues per subscriber and a slight decline in average minutes of use per subscriber. The average rate decreased due to a number of factors, including promotional activities and pricing changes, which were offset in part by a change in the mix of customers. Long distance revenues per subscriber have declined primarily due to the October 1993 implementation of equal access at the Company's Los Angeles and Houston cellular operations, where the cellular long distance service operations are wholly-owned by the Company.
The overall demand for wireless services continued to expand during 1994 and the Company expects to benefit from the anticipated continuation of this trend in the future, although there can be no assurance that this trend will continue at the same rate as it has historically. The Company is actively working toward improving the accessibility and value of cellular service in the future by participating in the development and deployment of important new services to complement the basic services now offered. During 1994, the Company continued to market enhanced cellular services in various of its markets including enhanced directory assistance, voice recognition, and data transmission services. The Company also introduced digital cellular service in New York during the first half of 1994 and continued to increase the market penetration of
digital service in Los Angeles. The Company plans to introduce commercial digital service in its Dallas and Houston operations during 1995. During 1995 and beyond, the Company currently plans to implement such additional service improvements as digital messaging service, Caller ID and cellular digital packet data service. The expansion of digital service generally will increase the capacity of the Company's systems, while providing benefits to customers such as the enhanced services available only through the digital network and the longer battery life of digital phones. Continued growth in demand for basic cellular service, as well as demand for new services such as those discussed above should contribute to continued cellular revenue growth for the Company as well as mitigate the trend of declining revenue per subscriber.
Media revenues increased 9% from 1993, due to continued improvement in both the national economy and the local economies where the Company operated, which stimulated growth in advertising spending. Due to the transactions discussed above, results of media operations in 1994 are not directly comparable to results of prior years, and media revenues are not expected to constitute a significant portion of the Company's revenues in the future.
Operating Costs and Expenses
Direct operating expenses increased 13% from 1993 and represented 16% of net revenues versus 18% in 1993. This increase reflects increased cellular network operating expenses due to the subscriber growth and increased network size, an increase in television news and programming expenses and an increase in direct cellular fraud costs. The decline in direct operating expenses as a percentage of net revenues was primarily due to efficiencies in cellular network operations as well as a decline, as a percentage of revenues, in amounts paid to long distance carriers for long distance service that was resold by the Company to its subscribers. Selling, general and administrative expenses increased 45% from 1993 and increased to 43% of net revenues in 1994 versus 38% in 1993. The most significant reason for this increase was an increase in marketing expenses associated with the increase in new cellular subscribers. The Company added 59% more new subscribers in 1994 than in 1993. The cost per new subscriber added increased slightly and is expected to continue to increase for at least the next several years. The Company also had a large increase in costs related to cellular customer service and support. This reflects increases in customer support, billing, administration and other general expenses, including an increase in personnel necessary to administer cellular fraud related issues. The Company expects that operating expenses will continue to grow in the future as the subscriber base expands and additional services are provided.
However, the Company continues to invest in equipment and personnel to improve the efficiency and effectiveness of customer support and administration.
Depreciation increased principally due to the addition of property and equipment to expand and improve the Company's cellular systems. The Company anticipates continued growth in depreciation expense in the future as additional capital expenditures will be required to support growth in the cellular subscriber base and to provide enhanced cellular services, including digital cellular. Amortization expense increased due to the effect of acquisitions as discussed in "Liquidity and Capital Resources" below. Absent any new acquisitions, annual amortization expense should decrease by approximately $15 million during 1995 as certain intangible assets became fully amortized in December 1994. During 1994, the Company completed the replacement of substantially all of the switching and cell site equipment in its Dallas operations (see further discussion in "Liquidity and Capital Resources"). The loss realized upon sale of the old cellular equipment at an amount less than its carrying value was provided for in 1993.
Other Income and Expenses
Equity in income of unconsolidated affiliates rose 12% due to improved results at the affiliates, offset, in part, by the effect of the disposition of the Philadelphia affiliate in June 1994 as discussed earlier. Net revenues of these ventures increased 12 due primarily to an increase in subscribers offset, in part, by a decrease in average revenue per subscriber as well as the disposition of the Philadelphia affiliate. The trend of declining revenue per subscriber was consistent with that of LIN's consolidated cellular operations. Direct operating expenses of these ventures increased 28% and represented 12% of revenues versus 11% in the prior year. The increase was attributable primarily to increased network operations, long distance and roamer fraud expenses, offset in part by the effect of the Philadelphia disposition. Selling, general and administrative expenses of the ventures increased 18% and represented 41% of revenues versus 39% in the prior year. Selling expenses increased 17%, driven by an increase in new customer additions. General and administrative expenses also continued to increase as a result of the growth in subscribers. Depreciation and amortization expense of these ventures increased 1%, reflecting additional capital expenditures for cellular network capacity and coverage expansion, digital equipment conversion, offset in part by the Philadelphia disposition. Net other expense declined due to the Philadelphia disposition and as a result of litigation settlements in 1993.
Interest expense (which includes the amortization of the financing and commitment fees) increased $16.2 million from 1993 due primarily to higher interest rates. The Company's weighted average interest rate on its borrowings was 5.79% during 1994 and 4.94% during 1993. As required under its Bank Credit Facilities (as defined below), the Company has entered into interest rate cap agreements. See Note 6 to the consolidated financial statements contained elsewhere in this Form 10-K.
Minority interests in net income of consolidated subsidiaries increased $23.0 million primarily due to an increase in the net income of the Dallas and New York cellular operations, offset in part by a decrease in the minority interest accrual for the New York operation in 1994 as a result of the Company's acquisition of additional interests in that market in May 1994 (see Liquidity and Capital Resources). The increase in the net income of the Dallas operation was due in part to a $42.2 million loss incurred in 1993 as a result of the write-down and subsequent disposition of a substantial portion of cellular equipment.
As discussed previously, the LCH Preferred Stock was redeemed in the second quarter of 1994. See further discussion in Note 7 to the consolidated financial statements. As a result, the Company is no longer required to accrue preferred stock dividends, which accrued at the rate of 15.8% annually, thereby reducing provisions for preferred stock dividends by approximately $100 million from 1993.
The Company's effective tax rate of 31.5% in 1994 was substantially lower than the 47.2% in 1993 primarily due to the additional tax expense of $15.3 million recorded during 1993 as a result of the increase in the corporate tax rate from 34% to 35%. Pursuant to SFAS No. 109, the Company was required to record this one-time additional tax expense, and corresponding increase in deferred tax liability, as a result of the increase in the statutory tax rate.
1993 COMPARED TO 1992
LIN reported net revenues of $688.6 million for 1993, an increase of 20% over 1992 net revenues of $572.5 million. Consolidated cellular revenues increased 28% as strong cellular subscriber growth continued. Media revenues were up 2% from 1992.
The Company recorded a consolidated net loss for 1993 of $60.7 million, or $1.18 per share, compared to a consolidated net loss of $69.0 million, or $1.34 per share, for 1992.
Revenues
Net revenues for LIN's consolidated cellular operations (principally New York and Dallas) increased 28% from 1992. This increase was primarily the result of a 29% increase in average subscribers, offset, in part, by an 1% decline in average revenue per subscriber. The decrease in average revenue per subscriber is primarily the result of a lower average rate per minute offset by an increase in average minutes of use per subscriber. The average rate has decreased due principally to pricing actions such as actual rate decreases and/or including more minutes for a fixed price.
Net revenues from the media segment increased 2% from 1992. However, excluding cyclical political and Olympics revenues from both years, the increase was 6%.
Operating Costs and Expenses
Direct operating expenses increased 11% from 1992 and represented 18% of net revenues versus 19% in 1992. This increase reflects increased cellular network operating expenses due to the subscriber growth and increased network size, as well as increased television news and programming expenses. Selling, general and administrative expenses increased 27% from 1992 and increased to 38% of net revenues in 1993 versus 36% in 1992. Among the factors contributing to the increase are additional marketing expenses associated with the increase in new cellular subscribers. The Company added 20% more new subscribers in 1993 than in 1992. The Company also had a large increase in costs related to cellular customer service and support. Depreciation increased principally due to the addition of property and equipment to expand and improve the Company's cellular systems. The loss on disposal of cellular equipment in 1993 reflects the loss realized on the replacement of cellular network equipment in Dallas-Fort Worth as discussed earlier.
Other Income and Expenses
Equity in income of unconsolidated affiliates rose 6%. Revenues of these ventures increased 16% due primarily to an increase in subscribers offset, in part, by a decrease in average revenue per subscriber. Direct operating expenses of these ventures increased 24% and represented 11% of revenues versus 10% in the prior year. This increase is due primarily to increased network operations, toll and roamer expenses at those cellular operations. Selling, general and administrative expenses of the ventures increased 17% and represented 39% of revenues in 1993 and in 1992. The majority of this increase was due to increased marketing and sales expenditures associated with a 28% increase in the number of new customers. Depreciation expenses of these ventures increased
33%, reflecting additional capital expenditures for capacity expansion and increased coverage in all the ventures, and digital service equipment in Los Angeles. Other expenses also grew significantly due to settlement of certain lawsuits and equity in losses of a cable affiliate absorbed by Philadelphia.
Interest expense (which includes the amortization of the financing and commitment fees) decreased $29.8 million from the 1992 amount due to lower interest rates and debt levels. The Company's weighted average interest rate on its borrowings was 4.94% during 1993 and 6.43% during 1992. This decrease was due both to reductions in the base borrowing rates as well as the applicable margin the Company pays. The reduction in borrowings was the result of scheduled principal repayments on the Bank Credit Facilities.
Minority interests in net income of consolidated subsidiaries decreased $14.9 million primarily due to the equipment write-down incurred at the Dallas cellular operations as discussed above.
As mentioned above, the Omnibus Budget Reconciliation Act of 1993 increased the corporate tax rate to 35% from 34%, effective as of January 1, 1993. Pursuant to SFAS No. 109, the Company recorded an additional tax expense of $15.3 million, with a corresponding increase in deferred tax liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes capital primarily to expand and improve its cellular systems, to make acquisitions of cellular interests and to make interest and principal payments on its indebtedness. The Company's cellular operations continue to require substantial capital to increase system capacity and coverage areas, to enable provision of new services, and to expand and improve administrative support systems. During 1994, the Company completed the replacement of the existing cellular system in Dallas with a new system provided by L.M. Ericsson, the system vendor in all of the Company's markets. The capitalized costs for this project were approximately $100 million, of which approximately $45 million and $55 million was expended during 1994 and 1993, respectively. Additionally, the Company continued to invest in the conversion to digital cellular equipment and now has introduced commercial digital service in both New York and Los Angeles. The Company expects to begin providing digital service in Dallas and Houston in 1995. Although the conversion to digital services requires significant initial capital and marketing expenditures, there are several advantages such as an immediate three-fold capacity expansion and the establishment of a platform for future service enhancements, including short message transmission caller ID, improved data transmission and longer phone battery life. The Company's share of expenditures in connection with the expansion of digital cellular service totaled approximately $30 million during
1994. Because of the large number of current customers with analog cellular phones that are not able to utilize the digital cellular service, the Company expects that the conversion from analog to digital service will be phased in over a number of years, during which time the Company will maintain both analog and digital transmitting equipment. During 1995, the Company expects that it will continue to invest capital to support the growth of its businesses, including implementation of digital networks and microcells, at levels similar to or in excess of its 1994 capital expenditure levels.
In May 1994, the Company completed the acquisition of an additional 5.2% interest in the New York cellular market for approximately $145 million cash and a 100% interest in the Connecticut RSA-1 adjacent to the New York market for approximately $30 million cash.
The Company's principal sources of funds are provided by operations and two bank credit facilities, a senior secured facility and a senior unsecured facility (together, the "Bank Credit Facilities"). The $200 million senior unsecured financing was established in June 1994. Under the Bank Credit Facilities, the Company had $1.6 billion outstanding and $220 million available as of December 31, 1994. The Company anticipates drawing on the available funds in 1995.
All of the Company's cellular operations are owned by its wholly-owned subsidiary LIN Cellular Network, Inc. and are subject to the restrictions of the Bank Credit Facilities. With limited exceptions, none of the cash flows, proceeds of borrowings or proceeds from sales of assets from these operations are available to meet the cash needs of the Company for operations other than cellular operations. The Company's other assets not described above (principally its remaining television broadcasting interests and an interest in a mobile satellite corporation and some of its cash) are held free of any restriction. Under its Bank Credit Facilities, the Company must remain in compliance with a series of financial covenants which compare the levels of the Company's indebtedness to its cash flows as of the end of each quarter. As of December 31, 1994, the Company was in compliance with all covenants under the Bank Credit Facilities. However, if the Company fails to service its indebtedness, or satisfy or obtain waivers from the covenants contained in the Bank Credit Facilities, the Company will be in default. In such an event, holders of the Company's indebtedness will be able to exercise their rights including the right to declare all the borrowed funds and interest thereon immediately due and payable. If the Company were unable to repay such indebtedness, the holders of such indebtedness could proceed against their collateral, if any. The ability of the Company to comply with these provisions may be affected by events beyond its control. Substantially all of the Company's assets, including its stock in
subsidiaries and its ownership interests in entities holding cellular licenses, are pledged or encumbered as security for indebtedness. Further details with respect to the Company's Bank Credit Facilities are contained in Note 6 to the consolidated financial statements contained elsewhere in this Form 10-K.
The Company's indebtedness is due and payable over several years, with the amortization increasing significantly during the next few years. While the Company expects to have sufficient funds from operations and available under the Bank Credit Facilities to fund its operations and repay its indebtedness when due, there can be no assurance that this will occur as the Company continues to have substantial debt service and other operating and capital requirements. If cash generated from operations is not sufficient to fund those requirements, the Company will have to modify its operations or borrow additional amounts under its Bank Credit Facilities. There are conditions which must be satisfied before the banks will be required to lend those additional amounts. If these conditions are not satisfied, the banks may conclude it is not in their best interest to lend additional amounts to the Company. If the Company were unable to borrow the required amounts from the banks, it may seek to refinance the Bank Credit Facilities, issue additional debt through a private or public offering, sell equity or sell certain cellular interests or other assets. There can be no assurance that the Company will be able to obtain such refinancings, additional financing or asset sales when needed, or if carried out, that the terms will be favorable to the Company or its stockholders.
Cash provided by operating activities totaled $216.8 million in 1994, compared to $221.0 million in 1993. The decrease was primarily due to an increase in income tax payments and interest expense and a reduction of cash received from equity affiliates. The reduction in cash received from equity affiliates was due primarily to significant additional capital expenditures of both the Los Angeles and Houston cellular affiliates as those operations expand their digital cellular networks.
As of December 31, 1994, the Company had a deficit in working capital of $171.9 million, compared to a deficit of $69.3 million as of December 31, 1993. Among the factors contributing to the increased deficit are higher capital expenditures to support cellular subscriber growth and digital implementation and an increase in cellular marketing and operating costs in connection with the accelerated cellular subscriber growth. The Company expects that additional borrowings on its Bank Credit Facilities may be required to meet short-term liquidity needs, particularly if the rapid growth in cellular subscribers continues.
The Company used $327.5 and $168.5 million of cash and cash equivalents for investing activities during 1994 and 1993, respectively, primarily as a result of capital expenditures and cellular acquisitions. As of December 31, 1994, the Company did not have any commitments that, in the aggregate or individually, were material to the Company, other than lease commitments discussed in Note 11 to the consolidated financial statements.
During 1994, the Company made scheduled principal repayments of $135.5 million on its Bank Credit Facilities compared to $71.4 million during 1993. Scheduled principal payments on the Bank Credit Facilities increase to $151.9 million during 1995.
It is the Company's policy to carefully monitor the state of its business, cash requirements and capital structure. From time to time, the Company may enter into transactions pursuant to which debt is extinguished, including sales of assets or equity, joint ventures, reorganizations or recapitalizations. There can be no assurance that any further such transactions will be undertaken or, if undertaken, will be favorable to stockholders.
Inflation
The Company believes that its businesses are affected by inflation to an extent no greater than other businesses are generally affected.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and supplementary data, together with the report of Ernst & Young LLP, independent auditors, are included elsewhere herein. Reference is made to the "Index to Financial Statements" immediately preceding page.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information under the captions "Election of Directors" and "Certain Transactions" in the Company's Proxy Statement relating to its 1995 annual meeting of stockholders (the "Proxy Statement") and under "Business - Employees" contained in this Form 10-K.
Item 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the captions "Election of Directors" and "Executive Compensation" in the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information under the captions "Principal Stockholders," "Election of Directors," "Security Ownership of Management" and "Beneficial Ownership of Common Stock of AT&T" in the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the captions "Election of Directors" and "Certain Transactions" in the Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Filed
Report of Ernst & Young LLP, Independent Auditors
Consolidated Financial Statements of the Company - Consolidated Balance Sheets at December 31, 1994 and - Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992 - Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1993 and 1992 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 - Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors Independent Auditors' Report Report of Independent Public Accountants
Combined Financial Statements of the Company's Unconsolidated Affiliates - Combined Balance Sheets at December 31, 1994 and - Combined Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 - Combined Statements of Ventures' Equity for the Years Ended December 31, 1994, 1993 and 1992 - Combined Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 - Notes to the Combined Financial Statements
(a)(2) Financial Statement Schedules Filed
Financial Statement Schedules of the Company
I - Condensed Financial Information of Registrant II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992
Financial Statement Schedule of the Company's Unconsolidated Affiliates
II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992
All other schedules have been omitted because the information is not required or is not applicable, or because the information required is included in the financial statements or the notes thereto.
(a)(3) Exhibits
3.1 Restated Certificate of Incorporation of LIN Broadcasting Corporation (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 3.2 Amended and Restated By Laws. 10.1* Amended and Restated 1969 Stock Option Plan (incorporated by reference to Appendix A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on June 2, 1994) 10.2(a)* Profit Sharing Plan, as amended and restated effective January 1, 1989 (the "Profit Sharing Plan") (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.2(b)* Amendment, adopted November 22, 1994, to the Profit Sharing Plan 10.3* Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989) 10.4 Partnership Agreement, dated as of March 18, 1983, among LIN Cellular Communications Corporation, Metromedia, Inc., and Cellular Systems, Inc. (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.5 Partnership Agreement, dated as of June 22, 1983, between Los Angeles Cellular Corporation and LIN Cellular Communications Corporation (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.6 Stock Agreement, dated June 5, 1982, by and among Radio Broadcasting Company, LIN Broadcasting Corporation, LIN Cellular Communications Corporation, Metromedia, Inc., and AWACS, Inc. (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992)
10.7 Amended and Restated Partnership Agreement, dated as of November 9, 1984, among LIN Cellular Communications Corporation, D/FW Signal, Inc., MCI Cellular Telephone Company, Cellular Mobile Systems, Inc., and Mid-America Cellular Systems, Inc. (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.8 Amended and Restated Partnership Agreement, dated as of December 12, 1984, among Metro Mobile CTS, Cellular Systems, Inc., and Houston Mobile Cellular Communications Company (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.9 Partnership Agreement, dated as of December 12, 1984, among American Mobile Communications of Houston and the Gulf, Houston Cellular Corporation, LIN Cellular Communications Corporation, MCI Cellular Telephone Company, Charisma Communications Corp. of the Southwest, and Cellular Mobile Systems of Texas, Inc. (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.10 Partnership Agreement, dated as of September 1991, by and between Galveston Mobile Corporation and LIN Cellular Communications Corporation (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.11 Agreement, dated December 11, 1989, between the Company, MMM Holdings, Inc. and McCaw Cellular Communications, Inc. (incorporated by reference to Exhibit (c)(6) to Amendment No. 24 to Schedule 14D-1 and Amendment No. 30 to Schedule 13D relating to the Offer filed by MMM Holdings, Inc. and McCaw with the Securities and Exchange Commission on December 12, 1989) 10.12(a) Private Market Value Guarantee, dated December 11, 1989, between the Company and McCaw Cellular Communications, Inc. (the "Private Market Value Guarantee") (incorporated by reference to Exhibit (c)(7) to Amendment No. 24 to Schedule 14D-1 and Amendment No. 30 to Schedule 13D relating to the Offer filed by MMM Holdings, Inc. and McCaw with the Securities and Exchange Commission on December 12, 1989) 10.12(b) First Amendment, dated June 7, 1994, to the Private Market Value Guarantee (incorporated by reference to Exhibit 99.1 to the Company's Report on Form 8-K dated May 25, 1994)
10.13 Exercise, dated October 27, 1989, of the Company's Rights of First Refusal to Acquire the Interests of Metromedia Company in Metro One Cellular Telephone Company, and Agreement of Purchase and Sale, dated October 3, 1989, by and between McCaw Cellular Communications, Inc. and Metromedia Company (incorporated by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989) 10.14(a) Credit Agreement, dated as of August 1, 1990, among LIN Cellular Network, Inc., Morgan Guaranty Trust Company of New York and the Lenders Named therein (the "1990 Credit Agreement") (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990) 10.14(b) Amendment No. 1, dated as of June 15, 1993, to the 1990 Credit Agreement 10.14(c) Amendment No. 2, dated as of May 31, 1994, to the 1990 Credit Agreement 10.15 Stock Acquisition Agreement, dated as of May 7, 1990, between LCH Cellular, Inc. and Metromedia Company (incorporated by reference to Exhibit (b)(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990) 10.16 Restated Certificate of Incorporation of LCH Communications, Inc. (formerly LCH Cellular, Inc.) (incorporated by reference to Exhibit (b)(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990) 10.17 Stockholders Agreement, dated as of August 10, 1990, among Metromedia Company, LCH Holdings, Inc. and LCH Communications, Inc. (incorporated by reference to Exhibit (b)(iii) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990) 10.18(a)* Employee Stock Purchase Plan (the "ESPP") (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 dated March 13, 1991 (Registration No. 33-39282)) 10.18(b)* Amendment, adopted November 2, 1994, to the ESPP 10.19* Employment Agreement, dated as of October 17, 1990 of Gary Chapman (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991)
10.20* Employment Agreement, dated as of April 16, 1991, of Donald Guthrie (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.21(a)* LIN Broadcasting Corporation Retirement Plan (the "Retirement Plan"), as amended and restated as of January 1, 1989 (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.21(b)* Amendment to the Retirement Plan dated January 1, 1993 (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10.21(c)* Amendment, adopted November 22, 1994, to the Retirement Plan 10.22(a)* LIN Broadcasting Corporation Supplemental Benefit Retirement Plan dated January 1, 1990 (the "Supplemental Plan") (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.22(b)* Amendment, adopted November 22, 1994, to the Supplemental Plan 10.23* LIN Employee Plans, established in connection with the McCaw-AT&T Merger Agreement (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.24* LIN Broadcasting Deferred Compensation Plan, dated December 15, 1993 (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.25 Distribution Agreement, dated as of December 28, 1994, between the Company and LIN Television Corporation ("LIN TV") (incorporated by reference to Exhibit 2.4 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.26 Tax Allocation Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.1 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.27 Management Services Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.2 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation)
10.28 Employee Benefits Allocation Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.3 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.29 Consulting Agreement, dated as of December 28, 1994, between LIN TV, LCH Communications, Inc. and LIN Michigan Broadcasting Corporation (incorporated by reference to Exhibit 99.4 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.30 Right of First Refusal Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.5 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.31(a) Asset Purchase Agreement, dated June 7, 1994 among the Company, LIN TV, Cook Inlet Communications Corp. and Cook Inlet Communications, Inc. (the "Asset Purchase Agreement") (incorporated by reference to Exhibit 99.1 to the Company's Report on Form 8-K dated December 28, 1994) 10.31(b) First Amendment, dated September 26, 1994. to the Asset Purchase Agreement (incorporated by reference to Exhibit 99.2 to the Company's Report on Form 8-K dated December 28, 1994) 10.31(c) Second Amendment, dated December 6, 1994. to the Asset Purchase Agreement (incorporated by reference to Exhibit 99.3 to the Company's Report on Form 8-K dated December 28, 1994) 10.32 Credit Agreement, dated as of June 15, 1994, among LIN Cellular Network, Inc., Toronto Dominion (Texas), Inc. and the Lenders named therein 11 Statement regarding computation of earnings per share 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of Arthur Andersen LLP 24 Powers of Attorney with respect to Certain Signatures 27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
A report on Form 8-K dated December 28, 1994 relating to the completion of the spin-off of LIN Television Corporation, as well as the selection of appraisers under the Private Market Value Guarantee process by the Independent Directors of the Company and AT&T, was filed dated December 28, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIN BROADCASTING CORPORATION
By: TOM A. ALBERG ----------------------- Tom A. Alberg President, Chief Operating Officer March 31, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date ---------- ----------------- -----------
Chairman of the Board Lewis M. Chakrin* and Director March 31, 1995 -------------------- Lewis M. Chakrin
Chief Executive Officer (Principal Executive Steven W. Hooper* Officer) March 31, 1995 -------------------- Steven W. Hooper
President, Chief Operating Officer Tom A. Alberg and Director March 31, 1995 -------------------- Tom A. Alberg
Senior Vice President-Finance (Principal Financial and Donald Guthrie Accounting Officer) March 31, 1995 -------------------- Donald Guthrie
Dennis J. Carey* Director March 31, 1995 -------------------- Dennis J. Carey
Signature Title Date ---------- ----------------- -----------
Harold S. Eastman* Director March 31, 1995 -------------------- Harold S. Eastman
W. Preston Granbery* Director March 31, 1995 -------------------- W. Preston Granbery
William G. Herbster* Director March 31, 1995 -------------------- William G. Herbster
Rolla P. Huff* Director March 31, 1995 -------------------- Rolla P. Huff
Wilma H. Jordan* Director March 31, 1995 -------------------- Wilma H. Jordan
Richard W. Kislik* Director March 31, 1995 -------------------- Richard W. Kislik
Vice Chairman of the Board and Director -------------------- Wayne M. Perry
Director -------------------- Florence L. Walsh
*By: TOM A. ALBERG ------------------------- Attorney-in-fact
Page
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . .F-1
Consolidated Financial Statements of the Company
Consolidated Balance Sheets at December 31, 1994 and 1993 . . . . . . . . . . . . . . . . .F-2 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . .F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . .F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . .F-7 Notes to Consolidated Financial Statements . . . . . . . . . .
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . Independent Auditors' Report. . . . . . . . . . . . . . . . . . . Report of Independent Public Accountants. . . . . . . . . . . . .
Combined Financial Statements of the Company's Unconsolidated Affiliates
Combined Balance Sheets at December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . Combined Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . Combined Statements of Ventures' Equity for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . Combined Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . Notes to Combined Financial Statements . . . . . . . . . . . .
Financial Statement Schedules of the Company I - Condensed Financial Information of Registrant. . . . . . . . II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . .
Financial Statement Schedule of the Company's Unconsolidated Affiliates II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . .
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders of LIN Broadcasting Corporation
We have audited the accompanying consolidated balance sheets of LIN Broadcasting Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LIN Broadcasting Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington January 20, 1995
LIN BROADCASTING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
ASSETS 1994 1993 -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $47,467 $86,366 Marketable securities -- 16,465 Accounts receivable, less allowance for doubtful accounts (1994-$17,395; 1993-$18,138) 136,279 156,784 Inventory 16,848 5,640 Prepaid expenses and other current assets 9,907 16,320 --------------------------------------------------------------------------- Total current assets 210,501 281,575 ----------------------------------------------------------------------------
Property and equipment, at cost, less accumulated depreciation 450,698 405,762 Other noncurrent assets 47,150 61,807 Investments in and advances to unconsolidated affiliates 274,830 264,172 Cellular FCC licenses, less accumulated amortization (1994-$194,997; 1993-$148,672) 1,727,546 1,627,371 Other intangible assets, less accumulated amortization (1994-$141,195; 1993-$145,853) 213,148 268,836 ---------------------------------------------------------------------------- Total Assets $2,923,873 $2,909,523 ============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY ---------------------------------------------------------------------------- Current Liabilities: Current portion of long-term debt $151,875 $146,891 Accrued income taxes 34,875 34,241 Accounts payable 67,880 37,975 Unearned revenues 13,165 25,880 Accrued interest payable 5,399 2,685 Payable to McCaw and AT&T 21,069 16,064 Other accruals 88,186 87,108 --------------------------------------------------------------------------- Total current liabilities 382,449 350,844 ---------------------------------------------------------------------------
(continued)
LIN BROADCASTING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued) 1994 1993 --------------------------------------------------------------------------
Long-term debt 1,443,125 1,551,447 Deferred income taxes 735,313 735,049 Other noncurrent liabilities 6,741 13,091 Minority interests in equity of consolidated subsidiaries 58,507 56,209 Redeemable preferred stock of a subsidiary -- 1,305,248 Stockholders' Equity (Deficit): Common stock, $.01 par value, 150,000,000 shares authorized, 55,329,000 shares issued 553 553 Paid-in capital 1,055,169 224,689 Deficit (586,055) (1,150,205) --------------------------------------------------------------------------- 469,667 (924,963) --------------------------------------------------------------------------- Less common stock in treasury, at cost (1994-3,678,000 shares; 1993-3,826,000 shares) 171,929 177,402 ---------------------------------------------------------------------------- Total stockholders' equity (deficit) 297,738 (1,102,365) ---------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,923,873 $2,909,523 ===========================================================================
See accompanying notes.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Operations
The Company is engaged in the ownership and operation of cellular telephone systems and one television station. On December 28, 1994, the Company spun-off its LIN Television Corporation subsidiary which owned six television stations (see Note 3). McCaw Cellular Communications, Inc. ("McCaw"), a wholly-owned subsidiary of AT&T Corp. ("AT&T"), currently owns approximately 52% of the outstanding shares of the Company.
NOTE 2 - Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and cellular ventures in which the Company has voting control. The Company's investments in cellular ventures in which it has voting interests of at least 20% but not more than 50% (Los Angeles, Houston and Galveston) are accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated.
CELLULAR FCC LICENSES AND OTHER INTANGIBLE ASSETS: Cellular FCC licenses represent costs to acquire cellular licenses authorized by the Federal Communications Commission. Other intangible assets primarily represent costs allocated in acquisitions to customer lists, goodwill and other intangibles. Intangible assets acquired subsequent to October 31, 1970 are being amortized over the lesser of their useful lives or forty years, in accordance with Accounting Principles Board Opinion No. 17. The carrying value of intangible assets will be reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that intangible assets will not be recoverable, the Company's carrying value of the intangible assets will be reduced by the estimated shortfall of cash flows.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES: Certain highly liquid, short-term investments which have a maturity of three months or less when purchased are considered cash equivalents. The Company's excess cash is invested in US Government obligations and money market instruments. Investments which do not meet the definition of a cash equivalent are classified as marketable securities. Marketable securities are carried at aggregate cost which approximates market value. Net realized gains and losses on security transactions are determined on a specific cost basis.
INVENTORY: Inventories are stated at the lower of cost (first-in, first-out) or market.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies (continued)
PROPERTY AND EQUIPMENT: Property and equipment, including renewals and betterments to existing facilities, are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets.
INCOME TAXES: Accelerated depreciation methods are used for tax purposes. The Company provides deferred taxes relating to these and other timing differences.
REVENUE RECOGNITION: Cellular airtime is recorded as revenue when earned. Access fees that are billed in advance to cellular customers are recognized as revenue in the period when the cellular services are provided. Broadcast revenue is billed when contracted and recognized during the period the advertising is aired.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based upon the weighted average common and equivalent shares outstanding during the year. Common stock equivalents are excluded from the calculation when their effect is antidilutive. Average common and equivalent shares outstanding for the years ended December 31, 1994, 1993 and 1992 totaled 52,040,000, 51,445,000 and 51,417,000, respectively.
For 1994, a separate earnings per share calculation for the excess of carrying amount of preferred stock over the fair value of consideration transferred to the holder of the preferred stock added to primary net income is shown below:
Amount Per Share ------- ---------
Net income $564,150 $10.84 Excess carrying value of preferred stock over fair value of consideration transferred 783,823 15.06 -------- -------- Total $1,347,973 $25.90 ========== ========
RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' financial statements in order to conform to the 1994 presentation.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Business Divestiture and Acquisitions
Distribution of LIN Television Corporation: On December 28, 1994, the Company distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary LIN Television Corporation ("LIN TV"). LIN TV operations comprised substantially all of the Company's former broadcast media operations. The distribution was made in the form of a dividend payable to holders of record of the LIN Broadcasting common stock at the close of business on December 9, 1994. The Company's stockholders of record on that date received one share of LIN TV common stock for each two shares of the Company's common stock owned. The consolidated financial statements reflect an increase in the Company's additional paid-in capital of $41.25 million, representing the negative net book value of the assets and liabilities distributed. The results of operations of LIN TV have been included in the Company's consolidated financial statements through December 28, 1994. The table below summarizes the assets and liabilities distributed:
(in thousands) Amount ------------------------------------------------------ Current assets $56,085 Noncurrent assets 154,296 Current liabilities 66,062 Noncurrent liabilities 185,572 Deficit 41,253
The Company entered into a tax allocation agreement with LIN TV that provides for the allocation between the Company and LIN TV of responsibilities, liabilities and benefits relating to or affecting taxes paid or payable by either of them or their respective subsidiaries for all taxable periods before and after the distribution. Generally, the tax allocation agreement provides that the Company will prepare, file and pay taxes associated with all tax returns for periods beginning before the distribution date that are required to be filed on a consolidated, combined or similar group basis unless none of the Company or its subsidiaries (other than LIN TV and its subsidiaries) is included in such return. Other tax returns will be filed by LIN TV if they relate to television businesses (as defined) or by the Company if they relate to LIN businesses. The agreement also provides that each of the Company and LIN TV will pay all taxes that are payable as a result of the distribution and the failure after the distribution of such party to act in conformity with statements (insofar as such statements are applicable to such party) set forth in the Internal Revenue Service ("IRS") letter ruling regarding the distribution and in filings with the IRS made in connection with the IRS letter ruling.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Business Divestitures and Acquisitions (continued)
Certain subsidiaries of the Company also entered into a consulting agreement with LIN TV, pursuant to which LIN TV will provide management and operational consulting for WOOD-TV and WOTV-TV, and a right of first refusal agreement, pursuant to which, in the event the Company receives and wishes to accept an offer to purchase assets associated with WOOD-TV or WOTV-TV, LIN TV has the right to purchase such assets at the offered price.
During 1994, the Company divested its interests in the Philadelphia cellular operation and the GuestInformant specialty publishing business. See further discussion in Note 7.
Acquisitions: On May 31, 1994, the Company acquired an additional 5.2% interest in the New York City cellular licensee for approximately $145 million in cash, bringing the Company's total interest in the New York City licensee to 98.3%. The New York City acquisition was funded through proceeds from the Company's senior unsecured bank credit facility (see Note 6).
On May 25, 1994, the Company acquired a 100% interest in the Litchfield County, Connecticut (Connecticut RSA-1) cellular licensee for aggregate consideration of approximately $30 million cash.
On October 6, 1993, the Company acquired a 100% interest in the Newton, Texas (Texas RSA-17) cellular licensee for approximately $36 million cash.
All of the above acquisitions have been accounted for using the purchase method, and the excess of the costs over fair market values of the tangible assets acquired has been assigned to Cellular FCC licenses, customer lists, goodwill and other intangible assets.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Property and Equipment
The major classifications of property and equipment are as follows:
December 31, (in thousands) 1994 1993 -------------------------------------------------------------------------
Land $867 $5,860 Buildings and improvements 39,524 48,307 Broadcasting and publishing equipment 11,976 70,001 Cellular equipment 416,344 412,824 Construction in progress and other 122,993 154,061 -------- -------- 591,704 691,053 Less accumulated depreciation 141,006 285,291 -------- -------- $450,698 $405,762 ======== ========
NOTE 5 - Investments in and Advances to Unconsolidated Affiliates
As indicated in Note 2, the Company's investments in cellular partnerships or corporations in which it has voting interests of at least 20% but not more than 50% (Los Angeles, Houston and Galveston) are accounted for on the equity method. In June 1994, the Company disposed of its interest in the Philadelphia cellular venture in connection with the redemption of preferred stock (see Note 7).
The Company controlled approximately 1.86 million shares of the common stock of American Mobile Satellite Corporation ("AMSC") as of December 31, 1994 and 1993. This investment is accounted for at cost and amounted to $27.3 million as of December 31, 1994 and 1993. As of December 31, 1994, the market value of AMSC common stock controlled by the Company was $23.7 million based on the closing price on that date.
The Company also had loans and advances totaling $13.6 and $10.2 million outstanding as of December 31, 1994 and 1993, respectively, to certain of its unconsolidated affiliates. The loans carry interest at prime plus 1% and mature in 1995.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt
Long-term debt consists of the following:
December 31, (in thousands) 1994 1993 ------------------------------------------------------------------------- Bank Credit Facilities LIN Cellular Network, Inc.: Term credit facilities $1,315,000 $1,316,250 Revolving credit facilities 280,000 160,000 ---------- ---------- 1,595,000 1,476,250 LIN Television Corporation: Term credit facility -- 159,088 Revolving credit facility -- 63,000 ---------- ---------- -- 222,088 ---------- ---------- 1,595,000 1,698,338 Less current portion of long-term debt 151,875 146,891 ---------- ---------- $1,443,125 $1,551,447 ========== ==========
The Company's wholly-owned subsidiary, LIN Cellular Network, Inc. ("LCNI"), which owns all of the Company's cellular operations, has a senior secured and a senior unsecured bank credit facility (the "Bank Credit Facilities"). As of December 31, 1994, the aggregate additional borrowing capacity available to the Company under these two facilities totaled $220 million. Fees incurred in connection with the Bank Credit Facilities are classified as noncurrent assets and are being amortized over the contractual terms of the facilities.
The aggregate amounts of principal maturities on the utilized portions of the Bank Credit Facilities subsequent to December 31, 1994 are as follows:
(in thousands) Amount ----------------------------------------------------- 1995 $151,875 1996 208,625 1997 253,875 1998 299,125 1999 327,500 Thereafter 354,000 --------- $1,595,000 ==========
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt (continued)
Under the Bank Credit Facilities, interest is payable, at the Company's discretion, at the prevailing prime rate, LIBOR or CD rates, plus an applicable margin. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if the Company selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates. The applicable margin for each loan will be determined each quarter based on LCNI's ratio of adjusted senior debt (as determined under the appropriate Bank Credit Facility) to cash flow, as defined. Due to the frequent repricing of the borrowings under the Bank Credit Facilities, the book values at December 31, 1994 approximate fair values.
The Bank Credit Facilities contain covenants restricting certain activities by LCNI and its subsidiaries, including, without limitation, restrictions on (i) acquisitions and investments, (ii) the incurrence of debt, (iii) distributions and dividends to stockholders, (iv) mergers and sales of assets, (v) prepayments of subordinated indebtedness, (vi) the creation of liens and (vii) the issuance of preferred stock. In addition, LCNI will be required to apply cash proceeds from certain sales of assets that are not reinvested in similar assets and excess cash flow, as defined, to the prepayment of loans. The Company has not guaranteed the repayment of amounts under the Bank Credit Facilities.
LCNI is required to maintain compliance with certain financial covenants set forth in the Bank Credit Facilities, including ratios of senior debt and combined debt to cash flow and cash flow to debt service or fixed charges. LCNI pledged as security the capital stock of certain of its subsidiaries, including those owning the Company's interests in the New York, Dallas-Fort Worth and Houston cellular partnerships. The Company also pledged as security the capital stock of LCNI under the Bank Credit Facilities.
The Bank Credit Facilities contain customary provisions concerning events of default, including (i) failure to make principal or interest payments when due, (ii) failure to comply with covenants, (iii) misrepresentations, (iv) defaults on other indebtedness, (v) material adverse change in the business, condition, operations, performance or properties of the borrower, (vi) unpaid judgments and (vii) standard ERISA and bankruptcy defaults. In addition, it shall be an event of default if AT&T or McCaw fails to have the right to cause the election of its
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt (continued)
nominees to a majority of the directorships of the Board of Directors of the Company or of McCaw or if AT&T fails to have economic ownership of at least 51% of the combined voting power of all voting stock of McCaw.
The weighted average interest rate was 7.04% for the term and revolving credit facilities at December 31, 1994. The Bank Credit Facilities provide for annual fees of .5% of the unused commitments.
In order to comply with covenants under its Bank Credit Facilities and to provide protection against rising interest rates, the Company entered into interest rate cap agreements with notional amounts of $850 million, $840 million and $1.35 billion as of December 31, 1994, 1993 and 1992. The rate cap agreements in effect as of December 31, 1994 have expiration dates ranging from July 1995 to September 1997. All of the interest rate caps are based on three month LIBOR and have strike rates ranging from 8% to 8.5%. During the past three years, the prevailing market rates have been below the rate caps in effect, thus the only effect on the Company's interest expense has been the amortization of the cost of the caps of $860, $1,951, and $2,669 during the years ended December 31, 1994, 1993 and 1992, respectively. In the event that a counterparty to an interest rate cap fails to fulfill its obligation, the Company would be required to pay the interest rate on the underlying debt without the benefit of the hedge.
NOTE 7 - Redeemable Preferred Stock of a Subsidiary
On June 24, 1994, LCH redeemed all of its outstanding Redeemable Preferred Stock held by Comcast Cellular Communications Inc., in exchange for all of the capital stock of a subsidiary of LCH, whose assets consisted primarily of a 49.99% interest in the Philadelphia cellular system and the GuestInformant specialty publishing business, plus $12.3 million cash (which represented 15% of the fair market value of the WOOD-TV business).
The Company has accounted for this transaction as a nonmonetary exchange. Accordingly, the Company recognized a gain of $468.7 million, which represented the excess of the estimated fair market values over the book values of the assets exchanged. The $783.8 million difference between the book value of the Preferred Stock and the fair values of the assets exchanged was credited to additional paid-in capital. The Company has reported the redemption to the IRS as a tax-free transaction.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity
McCaw currently owns approximately 52% of the outstanding Common Stock of the Company. Pursuant to the Private Market Value Guarantee ("PMVG") between the Company and McCaw, a process began on January 1, 1995 to determine the private market price per share of the Company. The private market value is being determined by Lehman Brothers Inc. and Bear, Stearns & Co, designated jointly as the Company's independent directors' appraiser, and by Morgan Stanley & Co. Incorporated, designated as McCaw's appraiser, and if necessary by a third party appraiser. After the price is determined, McCaw will have 45 days to decide whether to proceed with the acquisition of all the public shares of the Company at that price, subject to the approval of the Company's public shareholders, or to put the Company in its entirety up for sale under the direction of the Company's independent directors. Such a sale would also be subject to approval by the Company's public shareholders.
The Company is authorized to issue 2,000,000 shares of preferred stock, without par value, none of which is outstanding. The Company's board of directors is empowered to set the dividend, redemption and liquidation rights pertaining to any series of preferred stock that may be issued from time to time, to designate whether preferred shares of any series shall be convertible and the terms of such convertibility, and to establish the voting rights and any special rights or restrictions that are to apply to preferred shares of any series.
The Company has never paid or declared a cash dividend on its common stock. Its dividend policy is subject to future earnings, financial conditions and other relevant factors (including, without limitation, dividend restrictions in credit and loan agreements between the Company and banks).
Pursuant to the Company's 1969 stock option plan, as amended, incentive and nonqualified options have been granted or are available for grant to officers and key employees at prices not less than the fair market value at date of grant. The exercise price of each outstanding option granted prior to December 28, 1994 to purchase Company stock was adjusted to give effect to the LIN TV spin-off by reducing the exercise price based on the relative fair market values of the corresponding common stocks after the spin-off. As a result, each exercise price was adjusted to approximately 90% of its original amount.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity (continued)
Options are generally not exercisable until one year after grant, have vesting terms ranging from two to five years, and expire ten years from date of grant. Changes in incentive and nonqualified stock options granted and outstanding are as follows:
Shares Prices Per Share --------------------------------------------------------------------------- Options outstanding at December 31, 1991 818,356 $6.28 - $82.70 Granted 521,350 69.57 - 70.48 Exercised (25,101) 6.28 - 45.30 Canceled or expired (51,410) 39.56 - 82.70 ---------- Options outstanding at December 31, 1992 1,263,195 7.30 - 82.70 Granted 473,300 80.48 - 100.49 Exercised (84,911) 8.47 - 70.48 Canceled or expired (52,335) 20.33 - 69.57 ---------- Options outstanding at December 31, 1993 1,599,249 7.30 - 100.49 Granted 301,550 100.26 - 133.50 Exercised (145,120) 7.30 - 101.83 Canceled or expired (71,605) 39.56 - 100.49 ---------- Options outstanding at December 31, 1994 1,684,074 $13.78 - $133.50 ==========
As of December 31, 1994, there were 691,045 exercisable options to purchase shares and there were 724,895 options available for future grants. Pursuant to the Company's stock option plan, in the event of a "change in control" (as defined in the plan) of the Company, vested options at the time of the change in control may be surrendered by officers of the Company, subject to Section 16 of the Securities Exchange Act of 1934, as amended, in exchange for a cash payment per share by the Company equal to the difference between the exercise price for the option and the greater of the highest amount paid to any holder of common stock by the acquiror in connection with the resulting change in control or the highest selling price of the common stock during the 90-day period prior to the date of surrender of the option.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity (continued)
Notwithstanding the foregoing, if a change in control results in the consolidation or merger of the Company with McCaw or a successor to McCaw under the PMVG, and McCaw or any such successor is the surviving company or if McCaw becomes the beneficial owner of 80% or more of the Company's stock (other than pursuant to a private market sale, as defined in the Company's PMVG with McCaw), each outstanding option shall be converted into an option to purchase McCaw's Class A Common Stock or the common stock of any such successor (or in the event that McCaw or any such successor is not publicly traded, the ultimate parent thereof). If a change in control results from a private market sale, upon a vote by a majority of the Company's independent directors, each outstanding option will be converted into an option to purchase the common stock of the acquirer. If the independent directors do not approve the conversion, the Company may (but is not required to) cancel each such option in exchange for a payment per share in cash equal to the excess of the purchase price per share in the private market sale over the exercise price of such option.
The Company's Employee Stock Purchase Plan ("ESPP") allows eligible employees to purchase shares of the Company's common stock, through regular payroll deductions, at 85% of the closing market price of the stock as of the last trading day of each month. The ESPP restricts participant purchases to no more than $25,000 of stock in any calendar year. A total of 300,000 shares have been authorized under the ESPP. There are no charges or credits to income in connection with the ESPP. During 1994, common stock was purchased and distributed to employees at prices ranging from $90.31 to $122.40 per share.
The Company has a Stockholder Rights Plan ("Rights Plan") designed to strengthen its bargaining position on behalf of its stockholders in the event of coercive stock accumulation programs, inadequate offers or other tactics that may be used to gain control of the Company without offering a fair and adequate price to all stockholders. Under the Rights Plan, each stockholder has one right for each share of the Company's outstanding common stock that entitles the holder to purchase one one-thousandth (1/1000th) of a share of a participating preferred stock. At the present time, the rights are attached to the common stock and are not exercisable, and they do not represent any significant value to stockholders. The rights become valuable, as a result of becoming exercisable into capital stock at a substantial discount price, if any person acquires 15% or more of the Company's outstanding common stock or upon the occurrence of certain other events, including a merger or other business combination involving the Company. The Rights Plan, as amended,
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity (continued)
provides that the acquisition of McCaw by AT&T and the consummation of the transactions contemplated or permitted by the PMVG will not constitute a Triggering Event or cause AT&T or McCaw or any of their affiliates to become an Acquiring Person (each as defined) under the Rights Plan.
NOTE 9 - Income Taxes
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and the tax basis of assets and liabilities given the provisions of the enacted tax laws. The components of the net deferred tax liability are as follows:
Deferred Income Taxes (in thousands) Assets Liabilities ------------------------------------------------------------------------ December 31, 1994 Intangible assets $-- $642,926 Property and equipment -- 90,288 Other -- 2,099 -------- -------- Total $-- $735,313 ======== ======== December 31, 1993 Intangible assets $-- $628,822 Property and equipment -- 82,813 Other 2,365 25,779 -------- -------- Total $2,365 $737,414 ======== ========
The components of income tax expense are as follows:
(in thousands) 1994 1993 1992 ------------------------------------------------------------------------- Current: Federal $54,482 $33,984 $29,753 State 7,459 4,938 14,216 -------- -------- -------- 61,941 38,922 43,969 Deferred: Federal (93) 26,800 (5,828) State (2,559) (153) (4,244) -------- -------- -------- (2,652) 26,647 (10,072) -------- -------- -------- $59,289 $65,569 $33,897 ======== ======== =========
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Income Taxes (continued)
The deferred tax benefit results largely from the amortization of intangible assets, offset in part by the excess of tax over financial statement depreciation.
The Omnibus Budget Reconciliation Act of 1993 increased the corporate tax rate to 35% from 34% effective as of January 1, 1993. Pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," the Company recorded an additional tax expense of $15.3 million in the third quarter of 1993, with a corresponding increase in deferred tax liability.
The following table reconciles the amount which would be provided by applying the 35% federal statutory rate to income before income tax expense to the federal income taxes actually provided.
(in thousands) 1994 1993 1992 ------------------------------------------------------------------------ Expense assuming federal statutory rate $239,361 $50,064 $40,154 Nontaxable gain on redemption of preferred stock (164,041) -- -- Equity investments (4,572) (5,672) (4,169) State and local taxes, net of federal benefit 3,185 3,110 6,582 Tax expense not provided on minority partners' share of income (8,147) 1,027 (4,734) Change in statutory tax rate from 34% to 35% -- 15,335 -- Other (6,497) 1,705 (3,936) -------- -------- -------- Total income tax expense $59,289 $65,569 $33,897 ======== ======== ========
NOTE 10 - Retirement Plans
On December 28, 1994, the Company transferred sponsorship of the contributory retirement plan to LIN TV in connection with the spin-off of those operations (see Note 3). LIN TV assumed all rights and responsibilities associated with the Plan. The transfer was made at book value and no significant gain or loss was recognized.
Employees of the Company's consolidated cellular operations are covered by 401(k) plans that provide matching contributions from the Company.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies
The Company leases various property, equipment and cellular sites under noncancellable operating leases. Rent expense relating to such leases amounted to $19.1 million, $15.9 million and $13.2 million in 1994, 1993 and 1992, respectively. Annual commitments for rental payments, principally on real property operating leases, after December 31, 1994 are as follows: 1995-$19.0 million; 1996-$17.5 million; 1997-$16.7 million; 1998-$16.1 million; 1999-$15.4 million and thereafter-$98.0 million.
The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. In particular, certain of the Company's unconsolidated cellular affiliates have been named as defendants in various legal proceedings:
The Los Angeles cellular partnership and several related parties have been named as defendants in various actions brought in California state court by dealers, resellers and equipment sellers for the partnership. The lawsuits variously allege a variety of torts and statutory violations, including price-fixing regarding cellular equipment and service, below-cost sales of equipment, fraud, interference with economic relationship, unfair competition, discrimination among agents, and conspiracy. Several of these cases are scheduled for trial in 1995. The partnership intends to defend each lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the complaints.
The Los Angeles cellular partnership, in some cases along with other cellular carriers, also has been named as a defendant in several class actions filed in California state court by current and former customers alleging violations of federal and state antitrust law as a result of price-fixing of cellular service. Trial dates have not been set for the pending cases. The partnership intends to defend each lawsuit vigorously and believes that is has meritorious defenses to the allegations contained in the complaints.
A class action lawsuit, originally filed in August 1993, has been instituted on behalf of Texas cellular subscribers in Texas state court against the Houston cellular partnership and several related parties, including the Company. As amended, the petition alleges that the liquidated damages and automatic renewal
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies (continued)
provisions in annual cellular subscriber contracts violate or are contrary to state law in several respects. Plaintiffs seek declaratory relief, damages, fees, costs and interest. Neither the class nor any of the subclasses alleged by the plaintiffs have been certified. Discovery is underway, but no trial date has been set. The partnership intends to defend the lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the petition.
The Company does not expect that the ultimate results of any of the foregoing legal proceedings will have a material adverse effect on its financial position, results of operations or cash flows.
NOTE 12 - Segment Data
As explained in Note 3, the Company divested substantially all its media operations through the spin-off of LIN TV and the preferred stock redemption (see Note 7). Accordingly, 1994 media operating data includes LIN TV operations through December 28, 1994 and specialty publishing operations through June 24, 1994.
Cellular revenues primarily represent fees charged for providing cellular telephone service to subscribers. Media revenues are principally from the sale of television time to advertisers and also include revenues from the Company's specialty publishing operation. The cellular business segment data reflects the consolidation of the Company's controlling interests (principally New York and Dallas). Cellular interests in Los Angeles, Galveston and Houston are accounted for by the equity method of accounting, and thus are not included in the cellular business segment data which follows:
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Related Party Transactions
Under an inter-company services arrangement negotiated between the Company and McCaw, McCaw provides management and other services to the Company. LIN also provided certain services to McCaw during the same time periods. The Company incurred $6.3 million, $7.3 million and $5.3 million for the net value of management and other services rendered under the inter-company services agreement during 1994, 1993 and 1992, respectively.
In addition to the transactions described above, the Company or its affiliates routinely enter into transactions with AT&T, McCaw or their affiliates in the ordinary course of business. Among other things, the Company's cellular affiliates purchase long distance services and cellular telephones and accessories from AT&T for resale to cellular subscribers and pay McCaw for providing cellular service to the Company's subscribers under roaming agreements, and McCaw pays the Company for similar services provided by the Company to McCaw's subscribers. The Company's cellular operations also participate in certain programs managed by McCaw, such as national advertising campaigns, national accounts marketing, and the North American Cellular Network. Such transactions are not separately disclosed in the financial statements as they are carried out in the normal course of business.
All of such agreements and arrangements between the Company and McCaw are on terms that the Company believes are as favorable to it as would have been obtained with an unrelated third party. Under the Company's PMVG with McCaw, approval of the majority of LIN's independent directors is required before the Company enters into any material transactions with McCaw or its affiliates.
NOTE 14 - Loss on Disposal of Cellular Equipment
In February 1994, the Company's Dallas cellular operations completed the installation of a new cellular system. As a result, the Company recorded in 1993 a non-cash pre-tax charge of $42.2 million to reflect the loss on the disposal of the previous system. The loss amounted to approximately $14.8 million, or $0.29 per share, after taxes and minority interests.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Other Income and Expenses
In June 1992, the Company settled a lawsuit relating to the McCaw acquisition. Under the terms of the settlement, the Company received from the defendants a payment of $3 million and certain other considerations in July 1992 and payments of $2 million in July 1993 and June 1994. In addition, the Company will receive a final payment of $2 million from McCaw on June 30, 1995. After payment of legal fees and other related costs, this settlement resulted in a net gain to the Company of approximately $7 million.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of LIN Broadcasting Corporation
We have audited the accompanying combined balance sheets of LIN Broadcasting Corporation's Unconsolidated Affiliates listed in Note 1 (the Ventures) as of December 31, 1994 and 1993, and the related combined statements of income, Ventures' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the 1993 and 1992 consolidated financial statements of AWACS, Inc. and subsidiaries, which statements reflect total assets constituting 24% as of December 31, 1993 and net revenues constituting 19% and 17% for each of the two years in the period ended December 31, 1993 of the related combined totals. Those 1993 and 1992 statements were audited by other auditors whose report, which also places reliance on other auditors, has been furnished to us, and our opinion, insofar as it relates to data included for AWACS, Inc. and subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Ventures at December 31, 1994 and 1993, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the reports of other auditors, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP Seattle, Washington January 20, 1995
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders AWACS, Inc. Wayne, Pennsylvania
We have audited the consolidated balance sheet of AWACS, Inc. and subsidiaries as of December 31, 1993, and the related consolidated statements of operations and retained earnings and of cash flows for the years ended December 31, 1993 and 1992 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Garden State Cablevision L.P. ("Garden State"), the Company's investment in which is accounted for by use of the equity method. The Company's equity of $32,302,000 and $22,369,000 in that entity's net losses for the years then ended are included in the accompanying consolidated financial statements. The financial statements of Garden State were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Garden State, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of AWACS, Inc. and subsidiaries as of December 31, 1993 and the results of their operations and their cash flows for the years ended December 31, 1993 and 1992, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for income taxes effective January 1, 1993 to conform with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes".
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania February 18, 1994
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Garden State Cablevision L.P.:
We have audited the accompanying balance sheets of Garden State Cablevision L.P. (a Delaware Limited Partnership) as of December 31, 1993 and 1992, and the related statements of operations, partners' (deficit) capital and cash flows for the years then ended (not presented herein). These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Garden State Cablevision L.P. as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa., February 23, 1994
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
ASSETS 1994 1993 -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $12,905 $28,675 Short-term investments -- 25,682 Accounts receivable, less allowance for doubtful accounts (1994-$27,262, 1993-$9,829) 123,926 111,723 Inventories 36,183 6,079 Prepaid expenses and other 11,685 11,418 ---------------------------------------------------------------------------- Total current assets 184,699 183,577 --------------------------------------------------------------------------- Property and equipment, at cost, less accumulated depreciation 483,269 452,447 Other assets 3,185 2,108 Cellular FCC licenses, less accumulated amortization (1994-$856; 1993-$506) 13,214 13,564 Organization costs, less accumulated amortization (1994-$7,790; 1993-$6,785) 2,260 3,265 Due from affiliate -- 16,387 Notes receivable, less allowance for doubtful accounts of $150 -- 281 ---------------------------------------------------------------------------- Total Assets $686,627 $671,629 ===========================================================================
LIABILITIES AND EQUITY --------------------------------------------------------------------------- Current Liabilities: Accounts payable $62,245 $37,801 Accrued expenses 30,075 39,180 Unearned revenues 32,848 27,610 Commissions payable 11,973 14,439 Notes payable to affiliates 14,917 2,946 Other current liabilities 7,102 6,000 --------------------------------------------------------------------------- Total current liabilities 159,160 127,976 --------------------------------------------------------------------------- Notes payable to affiliates -- 63,126 Investment in affiliate -- 32,302 Deferred income taxes -- 4,236 Other long-term liabilities -- 1,286
(continued)
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
LIABILITIES AND EQUITY (continued) 1994 1993 --------------------------------------------------------------------------
Equity: Contributed capital 47,184 78,690 Excess cost of limited partnership interest -- (70,384) Retained earnings 480,283 434,397 ---------------------------------------------------------------------------- Total equity 527,467 442,703 ----------------------------------------------------------------------------- Total Liabilities and Equity $686,627 $671,629 ===========================================================================
See accompanying notes.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
These combined financial statements have been prepared to comply with the Securities and Exchange Commission's Regulation S-X requirement, in connection with LIN Broadcasting Corporation's ("LIN") consolidated financial statements, which requires separate or combined financial statements of significant subsidiaries in which LIN has a 50% or less controlling interest.
These combined financial statements include 100% of the accounts of the operating ventures listed in the table below in which LIN has voting interests of 50% or less (the "Ventures"). These Ventures are included in LIN's consolidated financial statements on the equity accounting method.
On June 24, 1994, LCH Communications, Inc. ("LCH"), a wholly-owned subsidiary of LIN, redeemed all of its outstanding Redeemable Preferred Stock held by Comcast Cellular Communications Inc., in exchange for all of the capital stock of a subsidiary of LCH, whose assets consisted of a 49.99% interest in the Philadelphia cellular system. Voting/ Name and Location Equity Management ----------------------------------------------------------------------------- AWACS, Inc., d/b/a Comcast Metrophone Corporation 49.99% 49.99% Philadelphia
Los Angeles Cellular Telephone Co., Partnership 39.97% 50.00% Los Angeles
Houston Cellular Telephone Co., Partnership 56.25% 50.00% Houston
Galveston Cellular Telephone Co., Corporation 34.60% 50.00% Galveston
NOTE 2 - Significant Accounting Policies
The following are the Ventures' significant accounting policies:
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: Certain highly liquid, short-term investments which have a maturity of three months or less when purchased are considered cash equivalents. Excess cash is primarily invested in US Government obligations. Short-term investments consist principally of U.S. Government obligations with a maturity of greater than three months when purchased.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies (continued)
INVENTORIES: Inventories consist primarily of cellular phones, related parts and accessories and are stated at the lower of cost (FIFO) or fair market value.
PROPERTY AND EQUIPMENT: Cellular system equipment is recorded at cost and is depreciated on a straight-line basis over an 8 or 10 year period. All other property and equipment, including betterments to existing facilities, are recorded at cost and depreciated on a straight-line basis over their estimated useful lives of three to twenty years.
CELLULAR FCC LICENSES AND ORGANIZATION COSTS: Cellular FCC Licenses represent costs to acquire cellular licenses authorized by the Federal Communications Commission and are amortized using the straight line method over 40 years. Organization costs, consisting principally of legal fees, feasibility studies and other costs related to obtaining required licenses and regulatory approvals, are amortized using the straight-line method over a 10 year period.
INCOME TAXES: Accelerated depreciation methods are used for tax purposes. AWACS, Inc., which is a corporation, provides deferred taxes related to this and other timing differences. Effective January 1, 1993, AWACS, Inc. adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see Note 7). No provision is made for income taxes for either the Los Angeles, Houston or Galveston ventures as the income or loss is included in the tax returns of the respective partners of these partnerships.
REVENUE RECOGNITION: Cellular airtime is recorded as revenue when earned. Unearned revenues consist principally of amounts billed to customers for access fees which are payable one month in advance.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' combined financial statements in order to conform to the 1994 presentation.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 3 - Property and Equipment
The major classifications of property and equipment were as follows: December 31, (in thousands) 1994 1993 ------------------------------------------------------------------------ Land $1,549 $1,379 Buildings and improvements 8,207 6,583 Cellular equipment 658,559 576,655 Other 42,597 70,997 --------- --------- 710,912 655,614 Less accumulated depreciation (227,643) (203,167) --------- --------- $483,269 $452,447 ========= =========
NOTE 4 - Notes Payable to Affiliates
The Houston venture has entered into agreements with the partners under which it has borrowed $11,000 as of December 31, 1994. The note matures in December 1995 and bears interest at the prime rate plus 1%.
The Galveston venture also entered into an agreement with an affiliate under which it has borrowed $3,917 as of December 31, 1994. This note matures beginning in 1995 and bears interest at prime plus 2%.
NOTE 5 - Equity
In accordance with the various partnership agreements, income of the partnerships is allocated to each owner's respective capital account in accordance with its respective equity interest. Additional capital contributions may be called based on annual construction and operating budgets submitted by the partnerships and agreed upon by the operating committees of each partnership.
NOTE 6 - Income Taxes
Effective January 1, 1993, AWACS, Inc. adopted SFAS No. 109, "Accounting for Income Taxes." As a result, AWACS, Inc. recorded a cumulative effect of accounting change of $12,517. The adoption of SFAS No. 109 did not have a significant impact on the amount of income tax expense recorded by AWACS, Inc. during 1993.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 6 - Income Taxes (continued)
The income tax expense relates to the income of AWACS, Inc. and consists of the following:
Year Ended December 31, (in thousands) 1994 1993 1992 --------------------------------------------------------------------
Current: Federal $8,375 $3,543 $3,179 State 3,762 4,653 2,041 ------ ------ ------ 12,137 8,196 5,220 Deferred: Federal 476 4,381 2,509 State 153 (1,330) 735 ------ ------ ------ 629 3,051 3,244 ------ ------ ------ $12,766 $11,247 $8,464 ======= ======= ======
No provision is made for income taxes for either the Los Angeles, Houston or Galveston ventures as the income or loss is included in the tax returns of the respective partners of these partnerships.
Deferred taxes are attributable primarily to excess tax over book depreciation and certain expenses not deductible for tax purposes until paid.
NOTE 7 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, AWACS, Inc. adopted SFAS No. 106. This statement requires AWACS, Inc. to accrue the estimated cost of retiree benefits earned during the years the employee provides services. The cumulative effect as of January 1, 1993 of the adoption of SFAS No. 106 was to reduce the AWACS, Inc. net income by approximately $375 (net of tax).
NOTE 8 - Related-Party Transactions
For each of the years ended December 31, 1994, 1993 and 1992, two partnerships recorded management fees payable to affiliates of their partners of $4,200, for management consultation, legal services and various other professional services.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 8 - Related-Party Transactions (continued)
In addition to the transactions described above, the Ventures routinely enter into transactions with the Company or other affiliates of the Company (including AT&T), or other affiliates of the partners. Such transactions include roaming agreements and participation in the North American Cellular Network, among other things. Such transactions are not separately disclosed in the financial statements as they are carried out in the normal course of business.
NOTE 9 - Commitments
The Ventures lease office space, land and buildings for cell sites and vehicles under operating leases which expire through the year 2010. Total rent expense for the years ended December 31, 1994, 1993 and 1992 was $14,902, $13,945 and $11,909, respectively. Some of the leases include escalation clauses based on increases in the Consumer Price Index. Several of the leases include options to extend the lease term.
Future minimum payments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 1994 are:
(in thousands) Amount ----------------------------------------------------- 1995 $13,769 1996 12,618 1997 11,148 1998 8,782 1999 5,153 2000 and beyond 8,255 ------- $59,725 ======= NOTE 10 - Contingencies
The Ventures are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. The Ventures are also party to routine filings with the FCC and state regulatory authorities and customary regulatory proceedings pending in connection with interconnection, rates, and practices and proceedings concerning the telecommunications industry in general and other proceedings which management does not expect to have a material adverse effect on the financial position or results of operations of the Ventures.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 10 - Contingencies (continued)
The Los Angeles cellular partnership and several related parties have been named as defendants in various actions brought in California state court by dealers, resellers and equipment sellers for the partnership. The lawsuits variously allege a variety of torts and statutory violations, including price-fixing regarding cellular equipment and service, below-cost sales of equipment, fraud, interference with economic relationship, unfair competition, discrimination among agents, and conspiracy. Several of these cases are scheduled for trial in 1995. The partnership intends to defend each lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the complaints.
The Los Angeles cellular partnership, in some cases along with other cellular carriers, also has been named as a defendant in several class actions filed in California state court by current and former customers alleging violations of federal and state antitrust law as a result of price-fixing of cellular service. Trial dates have not been set for the pending cases. The partnership intends to defend each lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the complaints.
A class action lawsuit originally filed in August 1993, has been instituted on behalf of Texas cellular subscribers in Texas state court against the Houston cellular partnership and several related parties, including the Company. As amended, the petition alleges that the liquidated damages and automatic renewal provisions in annual cellular subscriber contracts violate are or contrary to state law in several respects. Plaintiffs seek declaratory relief, damages, fees, costs and interest. Neither the class nor any of the subclasses alleged by the plaintiffs have been certified. Discovery is underway, but no trial date has been set. The partnership intends to defend the lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the petition.
Each of the partnerships, subject to the above-described proceedings, does not expect that the ultimate results of any of such proceedings will have a material adverse effect on its financial position or results of operations.
LIN BROADCASTING CORPORATION (PARENT COMPANY ONLY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands, except share amounts)
ASSETS 1994 1993 ------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $7,811 $3,551 Marketable securities -- 16,465 Other receivables 1,487 2,744 -------------------------------------------------------------------------- Total current assets 9,298 22,760 --------------------------------------------------------------------------- Investment in consolidated subsidiaries 346,216 -- Property and equipment, at cost, less accumulated depreciation 380 471 Other noncurrent assets 520 2,949 -------------------------------------------------------------------------- Total Assets $356,414 $26,180 ==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) --------------------------------------------------------------------------- Current Liabilities: Accounts payable $201 $-- Payable to affiliates, net 49,610 57,435 Deficiency of investment in consolidated subsidiaries -- 1,061,401 Accrued expenses 6,733 1,321 -------------------------------------------------------------------------- Total current liabilities 56,544 1,120,157 -------------------------------------------------------------------------- Other noncurrent liabilities 2,132 8,388
Stockholders' Equity (Deficit): Common stock, $.01 par value, 150,000,000 shares authorized, 55,329,000 shares issued 553 553 Paid-in capital 1,055,169 224,689 Deficit (586,055) (1,150,205) -------------------------------------------------------------------------- 469,667 (924,963) --------------------------------------------------------------------------
(Continued)
LIN BROADCASTING CORPORATION (PARENT COMPANY ONLY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION BALANCE SHEETS (Continued) DECEMBER 31, 1994 AND 1993 (Dollars in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued) 1994 1993 ------------------------------------------------------------------------
Less common stock in treasury, at cost (1994-3,678,000 shares; 1993-3,826,000 shares) 171,929 177,402 ------------------------------------------------------------------------- Total stockholders' equity (deficit) 297,738 (1,102,365) Total Liabilities and Stockholders' Equity $356,414 $26,180 ============================================================================
This Schedule I should be read in conjunction with the LIN Broadcasting Corporation and Subsidiaries Consolidated Financial Statements and Notes thereto.
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE A - Basis of Presentation
In the parent company-only financial statements, the Company's investment in consolidated subsidiaries is stated at cost plus equity in undistributed earnings of consolidated subsidiaries since the date of acquisition.
NOTE B - Dividends
There have been no dividends paid by the Company's subsidiaries to the Company during the years ended December 31, 1994, 1993 and 1992.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The FCC has allocated additional spectrum for mobile communication services and recently concluded auctions for licenses to a significant portion of this spectrum. Federal and state authorities are also considering proposals that may result in the modification of rights held by providers of mobile communications services and the modification of relationships between facilities-based cellular carriers and resellers of cellular services. See "Business - The Company's Cellular Operations-Cellular Competition" and "Governmental Regulation". The Company believes these initiatives will result in additional competition for the Company. The FCC has already authorized one entity to provide a cellular-like mobile service in certain markets of the Company (in addition to the B Block cellular competition). Other entities have submitted winning bids in recent auctions for personal communication services licenses and are expected to launch service within the next few years. The Company also intends to pursue rights to offer additional mobile communications services. In light of the uncertainty as to the eventual outcome of any of these specific initiatives, including the nature and timing of the additional competitive services covered thereby, it is impossible to quantify at this time the impact of these legislative and regulatory initiatives or such competition on the Company at this time.
1994 COMPARED TO 1993
LIN completed two transactions during 1994 which, together, had a significant effect on the Company's results of operations for the year and financial position as of December 31, 1994. On June 24, 1994, LCH Communications, Inc. ("LCH"), a wholly-owned subsidiary of the Company, redeemed all of its outstanding Redeemable Preferred Stock (the "LCH Preferred Stock") held by Comcast Cellular Communications Inc. in exchange for all of the capital stock of a subsidiary of LCH, whose assets consisted primarily of a 49.99% interest in the Philadelphia cellular system and the GuestInformant specialty publishing business, plus $12.3 million cash (which represented 15% of the fair market value of the WOOD-TV business). The Company recognized a non-cash tax-free gain of $468.7 million in connection with this transaction. The Company's results of operations include the results of the consolidated publishing business and the equity investment in the Philadelphia operations through June 24, 1994. On December 28, 1994, the Company distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary LIN TV. The LIN TV operations comprised substantially all of the Company's former television broadcasting operations. The distribution was made in the form of a dividend payable to holders
of record of the Company's common stock at the close of business on December 9, 1994. The Company's shareholders of record on that date received one share of LIN TV common stock for each two shares of the Company's common stock owned. The consolidated financial statements reflect an increase in the Company's additional paid-in capital of $41.25 million, representing the negative net book value of the assets and liabilities distributed. The results of operations of LIN TV are included through December 28, 1994.
LIN reported consolidated net revenues of $876.5 million for 1994, an increase of 27% over 1993 net revenues of $688.6 million, primarily due to continued strong growth in cellular subscribers. The Company recorded consolidated net income for 1994 of $564.2 million, or $10.84 per share, compared to a consolidated net loss of $60.7 million, or $1.18 per share, for 1993. The 1994 results include a non-recurring gain of $468.7 million and a cessation of the preferred stock dividends in the second quarter as a result of the redemption of the LCH Preferred Stock.
Revenues
Net revenues in 1994 for LIN's consolidated cellular operations (principally New York and Dallas-Fort Worth) increased 33% from 1993. This increase was primarily the result of a 38% increase in average subscribers, offset, in part, by a 3% decline in average revenue per subscriber, a trend that the Company expects will continue for at least the next several years. The decrease in average revenue per subscriber is primarily the result of a lower average rate per minute, a decline in long distance revenues per subscriber and a slight decline in average minutes of use per subscriber. The average rate decreased due to a number of factors, including promotional activities and pricing changes, which were offset in part by a change in the mix of customers. Long distance revenues per subscriber have declined primarily due to the October 1993 implementation of equal access at the Company's Los Angeles and Houston cellular operations, where the cellular long distance service operations are wholly-owned by the Company.
The overall demand for wireless services continued to expand during 1994 and the Company expects to benefit from the anticipated continuation of this trend in the future, although there can be no assurance that this trend will continue at the same rate as it has historically. The Company is actively working toward improving the accessibility and value of cellular service in the future by participating in the development and deployment of important new services to complement the basic services now offered. During 1994, the Company continued to market enhanced cellular services in various of its markets including enhanced directory assistance, voice recognition, and data transmission services. The Company also introduced digital cellular service in New York during the first half of 1994 and continued to increase the market penetration of
digital service in Los Angeles. The Company plans to introduce commercial digital service in its Dallas and Houston operations during 1995. During 1995 and beyond, the Company currently plans to implement such additional service improvements as digital messaging service, Caller ID and cellular digital packet data service. The expansion of digital service generally will increase the capacity of the Company's systems, while providing benefits to customers such as the enhanced services available only through the digital network and the longer battery life of digital phones. Continued growth in demand for basic cellular service, as well as demand for new services such as those discussed above should contribute to continued cellular revenue growth for the Company as well as mitigate the trend of declining revenue per subscriber.
Media revenues increased 9% from 1993, due to continued improvement in both the national economy and the local economies where the Company operated, which stimulated growth in advertising spending. Due to the transactions discussed above, results of media operations in 1994 are not directly comparable to results of prior years, and media revenues are not expected to constitute a significant portion of the Company's revenues in the future.
Operating Costs and Expenses
Direct operating expenses increased 13% from 1993 and represented 16% of net revenues versus 18% in 1993. This increase reflects increased cellular network operating expenses due to the subscriber growth and increased network size, an increase in television news and programming expenses and an increase in direct cellular fraud costs. The decline in direct operating expenses as a percentage of net revenues was primarily due to efficiencies in cellular network operations as well as a decline, as a percentage of revenues, in amounts paid to long distance carriers for long distance service that was resold by the Company to its subscribers. Selling, general and administrative expenses increased 45% from 1993 and increased to 43% of net revenues in 1994 versus 38% in 1993. The most significant reason for this increase was an increase in marketing expenses associated with the increase in new cellular subscribers. The Company added 59% more new subscribers in 1994 than in 1993. The cost per new subscriber added increased slightly and is expected to continue to increase for at least the next several years. The Company also had a large increase in costs related to cellular customer service and support. This reflects increases in customer support, billing, administration and other general expenses, including an increase in personnel necessary to administer cellular fraud related issues. The Company expects that operating expenses will continue to grow in the future as the subscriber base expands and additional services are provided.
However, the Company continues to invest in equipment and personnel to improve the efficiency and effectiveness of customer support and administration.
Depreciation increased principally due to the addition of property and equipment to expand and improve the Company's cellular systems. The Company anticipates continued growth in depreciation expense in the future as additional capital expenditures will be required to support growth in the cellular subscriber base and to provide enhanced cellular services, including digital cellular. Amortization expense increased due to the effect of acquisitions as discussed in "Liquidity and Capital Resources" below. Absent any new acquisitions, annual amortization expense should decrease by approximately $15 million during 1995 as certain intangible assets became fully amortized in December 1994. During 1994, the Company completed the replacement of substantially all of the switching and cell site equipment in its Dallas operations (see further discussion in "Liquidity and Capital Resources"). The loss realized upon sale of the old cellular equipment at an amount less than its carrying value was provided for in 1993.
Other Income and Expenses
Equity in income of unconsolidated affiliates rose 12% due to improved results at the affiliates, offset, in part, by the effect of the disposition of the Philadelphia affiliate in June 1994 as discussed earlier. Net revenues of these ventures increased 12 due primarily to an increase in subscribers offset, in part, by a decrease in average revenue per subscriber as well as the disposition of the Philadelphia affiliate. The trend of declining revenue per subscriber was consistent with that of LIN's consolidated cellular operations. Direct operating expenses of these ventures increased 28% and represented 12% of revenues versus 11% in the prior year. The increase was attributable primarily to increased network operations, long distance and roamer fraud expenses, offset in part by the effect of the Philadelphia disposition. Selling, general and administrative expenses of the ventures increased 18% and represented 41% of revenues versus 39% in the prior year. Selling expenses increased 17%, driven by an increase in new customer additions. General and administrative expenses also continued to increase as a result of the growth in subscribers. Depreciation and amortization expense of these ventures increased 1%, reflecting additional capital expenditures for cellular network capacity and coverage expansion, digital equipment conversion, offset in part by the Philadelphia disposition. Net other expense declined due to the Philadelphia disposition and as a result of litigation settlements in 1993.
Interest expense (which includes the amortization of the financing and commitment fees) increased $16.2 million from 1993 due primarily to higher interest rates. The Company's weighted average interest rate on its borrowings was 5.79% during 1994 and 4.94% during 1993. As required under its Bank Credit Facilities (as defined below), the Company has entered into interest rate cap agreements. See Note 6 to the consolidated financial statements contained elsewhere in this Form 10-K.
Minority interests in net income of consolidated subsidiaries increased $23.0 million primarily due to an increase in the net income of the Dallas and New York cellular operations, offset in part by a decrease in the minority interest accrual for the New York operation in 1994 as a result of the Company's acquisition of additional interests in that market in May 1994 (see Liquidity and Capital Resources). The increase in the net income of the Dallas operation was due in part to a $42.2 million loss incurred in 1993 as a result of the write-down and subsequent disposition of a substantial portion of cellular equipment.
As discussed previously, the LCH Preferred Stock was redeemed in the second quarter of 1994. See further discussion in Note 7 to the consolidated financial statements. As a result, the Company is no longer required to accrue preferred stock dividends, which accrued at the rate of 15.8% annually, thereby reducing provisions for preferred stock dividends by approximately $100 million from 1993.
The Company's effective tax rate of 31.5% in 1994 was substantially lower than the 47.2% in 1993 primarily due to the additional tax expense of $15.3 million recorded during 1993 as a result of the increase in the corporate tax rate from 34% to 35%. Pursuant to SFAS No. 109, the Company was required to record this one-time additional tax expense, and corresponding increase in deferred tax liability, as a result of the increase in the statutory tax rate.
1993 COMPARED TO 1992
LIN reported net revenues of $688.6 million for 1993, an increase of 20% over 1992 net revenues of $572.5 million. Consolidated cellular revenues increased 28% as strong cellular subscriber growth continued. Media revenues were up 2% from 1992.
The Company recorded a consolidated net loss for 1993 of $60.7 million, or $1.18 per share, compared to a consolidated net loss of $69.0 million, or $1.34 per share, for 1992.
Revenues
Net revenues for LIN's consolidated cellular operations (principally New York and Dallas) increased 28% from 1992. This increase was primarily the result of a 29% increase in average subscribers, offset, in part, by an 1% decline in average revenue per subscriber. The decrease in average revenue per subscriber is primarily the result of a lower average rate per minute offset by an increase in average minutes of use per subscriber. The average rate has decreased due principally to pricing actions such as actual rate decreases and/or including more minutes for a fixed price.
Net revenues from the media segment increased 2% from 1992. However, excluding cyclical political and Olympics revenues from both years, the increase was 6%.
Operating Costs and Expenses
Direct operating expenses increased 11% from 1992 and represented 18% of net revenues versus 19% in 1992. This increase reflects increased cellular network operating expenses due to the subscriber growth and increased network size, as well as increased television news and programming expenses. Selling, general and administrative expenses increased 27% from 1992 and increased to 38% of net revenues in 1993 versus 36% in 1992. Among the factors contributing to the increase are additional marketing expenses associated with the increase in new cellular subscribers. The Company added 20% more new subscribers in 1993 than in 1992. The Company also had a large increase in costs related to cellular customer service and support. Depreciation increased principally due to the addition of property and equipment to expand and improve the Company's cellular systems. The loss on disposal of cellular equipment in 1993 reflects the loss realized on the replacement of cellular network equipment in Dallas-Fort Worth as discussed earlier.
Other Income and Expenses
Equity in income of unconsolidated affiliates rose 6%. Revenues of these ventures increased 16% due primarily to an increase in subscribers offset, in part, by a decrease in average revenue per subscriber. Direct operating expenses of these ventures increased 24% and represented 11% of revenues versus 10% in the prior year. This increase is due primarily to increased network operations, toll and roamer expenses at those cellular operations. Selling, general and administrative expenses of the ventures increased 17% and represented 39% of revenues in 1993 and in 1992. The majority of this increase was due to increased marketing and sales expenditures associated with a 28% increase in the number of new customers. Depreciation expenses of these ventures increased
33%, reflecting additional capital expenditures for capacity expansion and increased coverage in all the ventures, and digital service equipment in Los Angeles. Other expenses also grew significantly due to settlement of certain lawsuits and equity in losses of a cable affiliate absorbed by Philadelphia.
Interest expense (which includes the amortization of the financing and commitment fees) decreased $29.8 million from the 1992 amount due to lower interest rates and debt levels. The Company's weighted average interest rate on its borrowings was 4.94% during 1993 and 6.43% during 1992. This decrease was due both to reductions in the base borrowing rates as well as the applicable margin the Company pays. The reduction in borrowings was the result of scheduled principal repayments on the Bank Credit Facilities.
Minority interests in net income of consolidated subsidiaries decreased $14.9 million primarily due to the equipment write-down incurred at the Dallas cellular operations as discussed above.
As mentioned above, the Omnibus Budget Reconciliation Act of 1993 increased the corporate tax rate to 35% from 34%, effective as of January 1, 1993. Pursuant to SFAS No. 109, the Company recorded an additional tax expense of $15.3 million, with a corresponding increase in deferred tax liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes capital primarily to expand and improve its cellular systems, to make acquisitions of cellular interests and to make interest and principal payments on its indebtedness. The Company's cellular operations continue to require substantial capital to increase system capacity and coverage areas, to enable provision of new services, and to expand and improve administrative support systems. During 1994, the Company completed the replacement of the existing cellular system in Dallas with a new system provided by L.M. Ericsson, the system vendor in all of the Company's markets. The capitalized costs for this project were approximately $100 million, of which approximately $45 million and $55 million was expended during 1994 and 1993, respectively. Additionally, the Company continued to invest in the conversion to digital cellular equipment and now has introduced commercial digital service in both New York and Los Angeles. The Company expects to begin providing digital service in Dallas and Houston in 1995. Although the conversion to digital services requires significant initial capital and marketing expenditures, there are several advantages such as an immediate three-fold capacity expansion and the establishment of a platform for future service enhancements, including short message transmission caller ID, improved data transmission and longer phone battery life. The Company's share of expenditures in connection with the expansion of digital cellular service totaled approximately $30 million during
1994. Because of the large number of current customers with analog cellular phones that are not able to utilize the digital cellular service, the Company expects that the conversion from analog to digital service will be phased in over a number of years, during which time the Company will maintain both analog and digital transmitting equipment. During 1995, the Company expects that it will continue to invest capital to support the growth of its businesses, including implementation of digital networks and microcells, at levels similar to or in excess of its 1994 capital expenditure levels.
In May 1994, the Company completed the acquisition of an additional 5.2% interest in the New York cellular market for approximately $145 million cash and a 100% interest in the Connecticut RSA-1 adjacent to the New York market for approximately $30 million cash.
The Company's principal sources of funds are provided by operations and two bank credit facilities, a senior secured facility and a senior unsecured facility (together, the "Bank Credit Facilities"). The $200 million senior unsecured financing was established in June 1994. Under the Bank Credit Facilities, the Company had $1.6 billion outstanding and $220 million available as of December 31, 1994. The Company anticipates drawing on the available funds in 1995.
All of the Company's cellular operations are owned by its wholly-owned subsidiary LIN Cellular Network, Inc. and are subject to the restrictions of the Bank Credit Facilities. With limited exceptions, none of the cash flows, proceeds of borrowings or proceeds from sales of assets from these operations are available to meet the cash needs of the Company for operations other than cellular operations. The Company's other assets not described above (principally its remaining television broadcasting interests and an interest in a mobile satellite corporation and some of its cash) are held free of any restriction. Under its Bank Credit Facilities, the Company must remain in compliance with a series of financial covenants which compare the levels of the Company's indebtedness to its cash flows as of the end of each quarter. As of December 31, 1994, the Company was in compliance with all covenants under the Bank Credit Facilities. However, if the Company fails to service its indebtedness, or satisfy or obtain waivers from the covenants contained in the Bank Credit Facilities, the Company will be in default. In such an event, holders of the Company's indebtedness will be able to exercise their rights including the right to declare all the borrowed funds and interest thereon immediately due and payable. If the Company were unable to repay such indebtedness, the holders of such indebtedness could proceed against their collateral, if any. The ability of the Company to comply with these provisions may be affected by events beyond its control. Substantially all of the Company's assets, including its stock in
subsidiaries and its ownership interests in entities holding cellular licenses, are pledged or encumbered as security for indebtedness. Further details with respect to the Company's Bank Credit Facilities are contained in Note 6 to the consolidated financial statements contained elsewhere in this Form 10-K.
The Company's indebtedness is due and payable over several years, with the amortization increasing significantly during the next few years. While the Company expects to have sufficient funds from operations and available under the Bank Credit Facilities to fund its operations and repay its indebtedness when due, there can be no assurance that this will occur as the Company continues to have substantial debt service and other operating and capital requirements. If cash generated from operations is not sufficient to fund those requirements, the Company will have to modify its operations or borrow additional amounts under its Bank Credit Facilities. There are conditions which must be satisfied before the banks will be required to lend those additional amounts. If these conditions are not satisfied, the banks may conclude it is not in their best interest to lend additional amounts to the Company. If the Company were unable to borrow the required amounts from the banks, it may seek to refinance the Bank Credit Facilities, issue additional debt through a private or public offering, sell equity or sell certain cellular interests or other assets. There can be no assurance that the Company will be able to obtain such refinancings, additional financing or asset sales when needed, or if carried out, that the terms will be favorable to the Company or its stockholders.
Cash provided by operating activities totaled $216.8 million in 1994, compared to $221.0 million in 1993. The decrease was primarily due to an increase in income tax payments and interest expense and a reduction of cash received from equity affiliates. The reduction in cash received from equity affiliates was due primarily to significant additional capital expenditures of both the Los Angeles and Houston cellular affiliates as those operations expand their digital cellular networks.
As of December 31, 1994, the Company had a deficit in working capital of $171.9 million, compared to a deficit of $69.3 million as of December 31, 1993. Among the factors contributing to the increased deficit are higher capital expenditures to support cellular subscriber growth and digital implementation and an increase in cellular marketing and operating costs in connection with the accelerated cellular subscriber growth. The Company expects that additional borrowings on its Bank Credit Facilities may be required to meet short-term liquidity needs, particularly if the rapid growth in cellular subscribers continues.
The Company used $327.5 and $168.5 million of cash and cash equivalents for investing activities during 1994 and 1993, respectively, primarily as a result of capital expenditures and cellular acquisitions. As of December 31, 1994, the Company did not have any commitments that, in the aggregate or individually, were material to the Company, other than lease commitments discussed in Note 11 to the consolidated financial statements.
During 1994, the Company made scheduled principal repayments of $135.5 million on its Bank Credit Facilities compared to $71.4 million during 1993. Scheduled principal payments on the Bank Credit Facilities increase to $151.9 million during 1995.
It is the Company's policy to carefully monitor the state of its business, cash requirements and capital structure. From time to time, the Company may enter into transactions pursuant to which debt is extinguished, including sales of assets or equity, joint ventures, reorganizations or recapitalizations. There can be no assurance that any further such transactions will be undertaken or, if undertaken, will be favorable to stockholders.
Inflation
The Company believes that its businesses are affected by inflation to an extent no greater than other businesses are generally affected.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and supplementary data, together with the report of Ernst & Young LLP, independent auditors, are included elsewhere herein. Reference is made to the "Index to Financial Statements" immediately preceding page.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information under the captions "Election of Directors" and "Certain Transactions" in the Company's Proxy Statement relating to its 1995 annual meeting of stockholders (the "Proxy Statement") and under "Business - Employees" contained in this Form 10-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the captions "Election of Directors" and "Executive Compensation" in the Proxy Statement.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information under the captions "Principal Stockholders," "Election of Directors," "Security Ownership of Management" and "Beneficial Ownership of Common Stock of AT&T" in the Proxy Statement.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the captions "Election of Directors" and "Certain Transactions" in the Proxy Statement.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Filed
Report of Ernst & Young LLP, Independent Auditors
Consolidated Financial Statements of the Company - Consolidated Balance Sheets at December 31, 1994 and - Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992 - Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1993 and 1992 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 - Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors Independent Auditors' Report Report of Independent Public Accountants
Combined Financial Statements of the Company's Unconsolidated Affiliates - Combined Balance Sheets at December 31, 1994 and - Combined Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 - Combined Statements of Ventures' Equity for the Years Ended December 31, 1994, 1993 and 1992 - Combined Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 - Notes to the Combined Financial Statements
(a)(2) Financial Statement Schedules Filed
Financial Statement Schedules of the Company
I - Condensed Financial Information of Registrant II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992
Financial Statement Schedule of the Company's Unconsolidated Affiliates
II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992
All other schedules have been omitted because the information is not required or is not applicable, or because the information required is included in the financial statements or the notes thereto.
(a)(3) Exhibits
3.1 Restated Certificate of Incorporation of LIN Broadcasting Corporation (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 3.2 Amended and Restated By Laws. 10.1* Amended and Restated 1969 Stock Option Plan (incorporated by reference to Appendix A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on June 2, 1994) 10.2(a)* Profit Sharing Plan, as amended and restated effective January 1, 1989 (the "Profit Sharing Plan") (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.2(b)* Amendment, adopted November 22, 1994, to the Profit Sharing Plan 10.3* Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989) 10.4 Partnership Agreement, dated as of March 18, 1983, among LIN Cellular Communications Corporation, Metromedia, Inc., and Cellular Systems, Inc. (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.5 Partnership Agreement, dated as of June 22, 1983, between Los Angeles Cellular Corporation and LIN Cellular Communications Corporation (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.6 Stock Agreement, dated June 5, 1982, by and among Radio Broadcasting Company, LIN Broadcasting Corporation, LIN Cellular Communications Corporation, Metromedia, Inc., and AWACS, Inc. (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992)
10.7 Amended and Restated Partnership Agreement, dated as of November 9, 1984, among LIN Cellular Communications Corporation, D/FW Signal, Inc., MCI Cellular Telephone Company, Cellular Mobile Systems, Inc., and Mid-America Cellular Systems, Inc. (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.8 Amended and Restated Partnership Agreement, dated as of December 12, 1984, among Metro Mobile CTS, Cellular Systems, Inc., and Houston Mobile Cellular Communications Company (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.9 Partnership Agreement, dated as of December 12, 1984, among American Mobile Communications of Houston and the Gulf, Houston Cellular Corporation, LIN Cellular Communications Corporation, MCI Cellular Telephone Company, Charisma Communications Corp. of the Southwest, and Cellular Mobile Systems of Texas, Inc. (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.10 Partnership Agreement, dated as of September 1991, by and between Galveston Mobile Corporation and LIN Cellular Communications Corporation (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.11 Agreement, dated December 11, 1989, between the Company, MMM Holdings, Inc. and McCaw Cellular Communications, Inc. (incorporated by reference to Exhibit (c)(6) to Amendment No. 24 to Schedule 14D-1 and Amendment No. 30 to Schedule 13D relating to the Offer filed by MMM Holdings, Inc. and McCaw with the Securities and Exchange Commission on December 12, 1989) 10.12(a) Private Market Value Guarantee, dated December 11, 1989, between the Company and McCaw Cellular Communications, Inc. (the "Private Market Value Guarantee") (incorporated by reference to Exhibit (c)(7) to Amendment No. 24 to Schedule 14D-1 and Amendment No. 30 to Schedule 13D relating to the Offer filed by MMM Holdings, Inc. and McCaw with the Securities and Exchange Commission on December 12, 1989) 10.12(b) First Amendment, dated June 7, 1994, to the Private Market Value Guarantee (incorporated by reference to Exhibit 99.1 to the Company's Report on Form 8-K dated May 25, 1994)
10.13 Exercise, dated October 27, 1989, of the Company's Rights of First Refusal to Acquire the Interests of Metromedia Company in Metro One Cellular Telephone Company, and Agreement of Purchase and Sale, dated October 3, 1989, by and between McCaw Cellular Communications, Inc. and Metromedia Company (incorporated by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989) 10.14(a) Credit Agreement, dated as of August 1, 1990, among LIN Cellular Network, Inc., Morgan Guaranty Trust Company of New York and the Lenders Named therein (the "1990 Credit Agreement") (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990) 10.14(b) Amendment No. 1, dated as of June 15, 1993, to the 1990 Credit Agreement 10.14(c) Amendment No. 2, dated as of May 31, 1994, to the 1990 Credit Agreement 10.15 Stock Acquisition Agreement, dated as of May 7, 1990, between LCH Cellular, Inc. and Metromedia Company (incorporated by reference to Exhibit (b)(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990) 10.16 Restated Certificate of Incorporation of LCH Communications, Inc. (formerly LCH Cellular, Inc.) (incorporated by reference to Exhibit (b)(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990) 10.17 Stockholders Agreement, dated as of August 10, 1990, among Metromedia Company, LCH Holdings, Inc. and LCH Communications, Inc. (incorporated by reference to Exhibit (b)(iii) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990) 10.18(a)* Employee Stock Purchase Plan (the "ESPP") (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 dated March 13, 1991 (Registration No. 33-39282)) 10.18(b)* Amendment, adopted November 2, 1994, to the ESPP 10.19* Employment Agreement, dated as of October 17, 1990 of Gary Chapman (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991)
10.20* Employment Agreement, dated as of April 16, 1991, of Donald Guthrie (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.21(a)* LIN Broadcasting Corporation Retirement Plan (the "Retirement Plan"), as amended and restated as of January 1, 1989 (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.21(b)* Amendment to the Retirement Plan dated January 1, 1993 (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10.21(c)* Amendment, adopted November 22, 1994, to the Retirement Plan 10.22(a)* LIN Broadcasting Corporation Supplemental Benefit Retirement Plan dated January 1, 1990 (the "Supplemental Plan") (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.22(b)* Amendment, adopted November 22, 1994, to the Supplemental Plan 10.23* LIN Employee Plans, established in connection with the McCaw-AT&T Merger Agreement (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.24* LIN Broadcasting Deferred Compensation Plan, dated December 15, 1993 (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.25 Distribution Agreement, dated as of December 28, 1994, between the Company and LIN Television Corporation ("LIN TV") (incorporated by reference to Exhibit 2.4 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.26 Tax Allocation Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.1 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.27 Management Services Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.2 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation)
10.28 Employee Benefits Allocation Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.3 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.29 Consulting Agreement, dated as of December 28, 1994, between LIN TV, LCH Communications, Inc. and LIN Michigan Broadcasting Corporation (incorporated by reference to Exhibit 99.4 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.30 Right of First Refusal Agreement, dated as of December 28, 1994, between the Company and LIN TV (incorporated by reference to Exhibit 99.5 to the Report on Form 8-K dated December 28, 1994 filed by LIN Television Corporation) 10.31(a) Asset Purchase Agreement, dated June 7, 1994 among the Company, LIN TV, Cook Inlet Communications Corp. and Cook Inlet Communications, Inc. (the "Asset Purchase Agreement") (incorporated by reference to Exhibit 99.1 to the Company's Report on Form 8-K dated December 28, 1994) 10.31(b) First Amendment, dated September 26, 1994. to the Asset Purchase Agreement (incorporated by reference to Exhibit 99.2 to the Company's Report on Form 8-K dated December 28, 1994) 10.31(c) Second Amendment, dated December 6, 1994. to the Asset Purchase Agreement (incorporated by reference to Exhibit 99.3 to the Company's Report on Form 8-K dated December 28, 1994) 10.32 Credit Agreement, dated as of June 15, 1994, among LIN Cellular Network, Inc., Toronto Dominion (Texas), Inc. and the Lenders named therein 11 Statement regarding computation of earnings per share 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of Arthur Andersen LLP 24 Powers of Attorney with respect to Certain Signatures 27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
A report on Form 8-K dated December 28, 1994 relating to the completion of the spin-off of LIN Television Corporation, as well as the selection of appraisers under the Private Market Value Guarantee process by the Independent Directors of the Company and AT&T, was filed dated December 28, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIN BROADCASTING CORPORATION
By: TOM A. ALBERG ----------------------- Tom A. Alberg President, Chief Operating Officer March 31, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date ---------- ----------------- -----------
Chairman of the Board Lewis M. Chakrin* and Director March 31, 1995 -------------------- Lewis M. Chakrin
Chief Executive Officer (Principal Executive Steven W. Hooper* Officer) March 31, 1995 -------------------- Steven W. Hooper
President, Chief Operating Officer Tom A. Alberg and Director March 31, 1995 -------------------- Tom A. Alberg
Senior Vice President-Finance (Principal Financial and Donald Guthrie Accounting Officer) March 31, 1995 -------------------- Donald Guthrie
Dennis J. Carey* Director March 31, 1995 -------------------- Dennis J. Carey
Signature Title Date ---------- ----------------- -----------
Harold S. Eastman* Director March 31, 1995 -------------------- Harold S. Eastman
W. Preston Granbery* Director March 31, 1995 -------------------- W. Preston Granbery
William G. Herbster* Director March 31, 1995 -------------------- William G. Herbster
Rolla P. Huff* Director March 31, 1995 -------------------- Rolla P. Huff
Wilma H. Jordan* Director March 31, 1995 -------------------- Wilma H. Jordan
Richard W. Kislik* Director March 31, 1995 -------------------- Richard W. Kislik
Vice Chairman of the Board and Director -------------------- Wayne M. Perry
Director -------------------- Florence L. Walsh
*By: TOM A. ALBERG ------------------------- Attorney-in-fact
Page
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . .F-1
Consolidated Financial Statements of the Company
Consolidated Balance Sheets at December 31, 1994 and 1993 . . . . . . . . . . . . . . . . .F-2 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . .F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . .F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . .F-7 Notes to Consolidated Financial Statements . . . . . . . . . .
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . Independent Auditors' Report. . . . . . . . . . . . . . . . . . . Report of Independent Public Accountants. . . . . . . . . . . . .
Combined Financial Statements of the Company's Unconsolidated Affiliates
Combined Balance Sheets at December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . Combined Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . Combined Statements of Ventures' Equity for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . Combined Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . Notes to Combined Financial Statements . . . . . . . . . . . .
Financial Statement Schedules of the Company I - Condensed Financial Information of Registrant. . . . . . . . II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . .
Financial Statement Schedule of the Company's Unconsolidated Affiliates II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . .
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders of LIN Broadcasting Corporation
We have audited the accompanying consolidated balance sheets of LIN Broadcasting Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LIN Broadcasting Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington January 20, 1995
LIN BROADCASTING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
ASSETS 1994 1993 -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $47,467 $86,366 Marketable securities -- 16,465 Accounts receivable, less allowance for doubtful accounts (1994-$17,395; 1993-$18,138) 136,279 156,784 Inventory 16,848 5,640 Prepaid expenses and other current assets 9,907 16,320 --------------------------------------------------------------------------- Total current assets 210,501 281,575 ----------------------------------------------------------------------------
Property and equipment, at cost, less accumulated depreciation 450,698 405,762 Other noncurrent assets 47,150 61,807 Investments in and advances to unconsolidated affiliates 274,830 264,172 Cellular FCC licenses, less accumulated amortization (1994-$194,997; 1993-$148,672) 1,727,546 1,627,371 Other intangible assets, less accumulated amortization (1994-$141,195; 1993-$145,853) 213,148 268,836 ---------------------------------------------------------------------------- Total Assets $2,923,873 $2,909,523 ============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY ---------------------------------------------------------------------------- Current Liabilities: Current portion of long-term debt $151,875 $146,891 Accrued income taxes 34,875 34,241 Accounts payable 67,880 37,975 Unearned revenues 13,165 25,880 Accrued interest payable 5,399 2,685 Payable to McCaw and AT&T 21,069 16,064 Other accruals 88,186 87,108 --------------------------------------------------------------------------- Total current liabilities 382,449 350,844 ---------------------------------------------------------------------------
(continued)
LIN BROADCASTING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued) 1994 1993 --------------------------------------------------------------------------
Long-term debt 1,443,125 1,551,447 Deferred income taxes 735,313 735,049 Other noncurrent liabilities 6,741 13,091 Minority interests in equity of consolidated subsidiaries 58,507 56,209 Redeemable preferred stock of a subsidiary -- 1,305,248 Stockholders' Equity (Deficit): Common stock, $.01 par value, 150,000,000 shares authorized, 55,329,000 shares issued 553 553 Paid-in capital 1,055,169 224,689 Deficit (586,055) (1,150,205) --------------------------------------------------------------------------- 469,667 (924,963) --------------------------------------------------------------------------- Less common stock in treasury, at cost (1994-3,678,000 shares; 1993-3,826,000 shares) 171,929 177,402 ---------------------------------------------------------------------------- Total stockholders' equity (deficit) 297,738 (1,102,365) ---------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,923,873 $2,909,523 ===========================================================================
See accompanying notes.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Operations
The Company is engaged in the ownership and operation of cellular telephone systems and one television station. On December 28, 1994, the Company spun-off its LIN Television Corporation subsidiary which owned six television stations (see Note 3). McCaw Cellular Communications, Inc. ("McCaw"), a wholly-owned subsidiary of AT&T Corp. ("AT&T"), currently owns approximately 52% of the outstanding shares of the Company.
NOTE 2 - Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and cellular ventures in which the Company has voting control. The Company's investments in cellular ventures in which it has voting interests of at least 20% but not more than 50% (Los Angeles, Houston and Galveston) are accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated.
CELLULAR FCC LICENSES AND OTHER INTANGIBLE ASSETS: Cellular FCC licenses represent costs to acquire cellular licenses authorized by the Federal Communications Commission. Other intangible assets primarily represent costs allocated in acquisitions to customer lists, goodwill and other intangibles. Intangible assets acquired subsequent to October 31, 1970 are being amortized over the lesser of their useful lives or forty years, in accordance with Accounting Principles Board Opinion No. 17. The carrying value of intangible assets will be reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that intangible assets will not be recoverable, the Company's carrying value of the intangible assets will be reduced by the estimated shortfall of cash flows.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES: Certain highly liquid, short-term investments which have a maturity of three months or less when purchased are considered cash equivalents. The Company's excess cash is invested in US Government obligations and money market instruments. Investments which do not meet the definition of a cash equivalent are classified as marketable securities. Marketable securities are carried at aggregate cost which approximates market value. Net realized gains and losses on security transactions are determined on a specific cost basis.
INVENTORY: Inventories are stated at the lower of cost (first-in, first-out) or market.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies (continued)
PROPERTY AND EQUIPMENT: Property and equipment, including renewals and betterments to existing facilities, are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets.
INCOME TAXES: Accelerated depreciation methods are used for tax purposes. The Company provides deferred taxes relating to these and other timing differences.
REVENUE RECOGNITION: Cellular airtime is recorded as revenue when earned. Access fees that are billed in advance to cellular customers are recognized as revenue in the period when the cellular services are provided. Broadcast revenue is billed when contracted and recognized during the period the advertising is aired.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based upon the weighted average common and equivalent shares outstanding during the year. Common stock equivalents are excluded from the calculation when their effect is antidilutive. Average common and equivalent shares outstanding for the years ended December 31, 1994, 1993 and 1992 totaled 52,040,000, 51,445,000 and 51,417,000, respectively.
For 1994, a separate earnings per share calculation for the excess of carrying amount of preferred stock over the fair value of consideration transferred to the holder of the preferred stock added to primary net income is shown below:
Amount Per Share ------- ---------
Net income $564,150 $10.84 Excess carrying value of preferred stock over fair value of consideration transferred 783,823 15.06 -------- -------- Total $1,347,973 $25.90 ========== ========
RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' financial statements in order to conform to the 1994 presentation.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Business Divestiture and Acquisitions
Distribution of LIN Television Corporation: On December 28, 1994, the Company distributed all of the issued and outstanding shares of common stock of its previously wholly-owned subsidiary LIN Television Corporation ("LIN TV"). LIN TV operations comprised substantially all of the Company's former broadcast media operations. The distribution was made in the form of a dividend payable to holders of record of the LIN Broadcasting common stock at the close of business on December 9, 1994. The Company's stockholders of record on that date received one share of LIN TV common stock for each two shares of the Company's common stock owned. The consolidated financial statements reflect an increase in the Company's additional paid-in capital of $41.25 million, representing the negative net book value of the assets and liabilities distributed. The results of operations of LIN TV have been included in the Company's consolidated financial statements through December 28, 1994. The table below summarizes the assets and liabilities distributed:
(in thousands) Amount ------------------------------------------------------ Current assets $56,085 Noncurrent assets 154,296 Current liabilities 66,062 Noncurrent liabilities 185,572 Deficit 41,253
The Company entered into a tax allocation agreement with LIN TV that provides for the allocation between the Company and LIN TV of responsibilities, liabilities and benefits relating to or affecting taxes paid or payable by either of them or their respective subsidiaries for all taxable periods before and after the distribution. Generally, the tax allocation agreement provides that the Company will prepare, file and pay taxes associated with all tax returns for periods beginning before the distribution date that are required to be filed on a consolidated, combined or similar group basis unless none of the Company or its subsidiaries (other than LIN TV and its subsidiaries) is included in such return. Other tax returns will be filed by LIN TV if they relate to television businesses (as defined) or by the Company if they relate to LIN businesses. The agreement also provides that each of the Company and LIN TV will pay all taxes that are payable as a result of the distribution and the failure after the distribution of such party to act in conformity with statements (insofar as such statements are applicable to such party) set forth in the Internal Revenue Service ("IRS") letter ruling regarding the distribution and in filings with the IRS made in connection with the IRS letter ruling.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Business Divestitures and Acquisitions (continued)
Certain subsidiaries of the Company also entered into a consulting agreement with LIN TV, pursuant to which LIN TV will provide management and operational consulting for WOOD-TV and WOTV-TV, and a right of first refusal agreement, pursuant to which, in the event the Company receives and wishes to accept an offer to purchase assets associated with WOOD-TV or WOTV-TV, LIN TV has the right to purchase such assets at the offered price.
During 1994, the Company divested its interests in the Philadelphia cellular operation and the GuestInformant specialty publishing business. See further discussion in Note 7.
Acquisitions: On May 31, 1994, the Company acquired an additional 5.2% interest in the New York City cellular licensee for approximately $145 million in cash, bringing the Company's total interest in the New York City licensee to 98.3%. The New York City acquisition was funded through proceeds from the Company's senior unsecured bank credit facility (see Note 6).
On May 25, 1994, the Company acquired a 100% interest in the Litchfield County, Connecticut (Connecticut RSA-1) cellular licensee for aggregate consideration of approximately $30 million cash.
On October 6, 1993, the Company acquired a 100% interest in the Newton, Texas (Texas RSA-17) cellular licensee for approximately $36 million cash.
All of the above acquisitions have been accounted for using the purchase method, and the excess of the costs over fair market values of the tangible assets acquired has been assigned to Cellular FCC licenses, customer lists, goodwill and other intangible assets.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Property and Equipment
The major classifications of property and equipment are as follows:
December 31, (in thousands) 1994 1993 -------------------------------------------------------------------------
Land $867 $5,860 Buildings and improvements 39,524 48,307 Broadcasting and publishing equipment 11,976 70,001 Cellular equipment 416,344 412,824 Construction in progress and other 122,993 154,061 -------- -------- 591,704 691,053 Less accumulated depreciation 141,006 285,291 -------- -------- $450,698 $405,762 ======== ========
NOTE 5 - Investments in and Advances to Unconsolidated Affiliates
As indicated in Note 2, the Company's investments in cellular partnerships or corporations in which it has voting interests of at least 20% but not more than 50% (Los Angeles, Houston and Galveston) are accounted for on the equity method. In June 1994, the Company disposed of its interest in the Philadelphia cellular venture in connection with the redemption of preferred stock (see Note 7).
The Company controlled approximately 1.86 million shares of the common stock of American Mobile Satellite Corporation ("AMSC") as of December 31, 1994 and 1993. This investment is accounted for at cost and amounted to $27.3 million as of December 31, 1994 and 1993. As of December 31, 1994, the market value of AMSC common stock controlled by the Company was $23.7 million based on the closing price on that date.
The Company also had loans and advances totaling $13.6 and $10.2 million outstanding as of December 31, 1994 and 1993, respectively, to certain of its unconsolidated affiliates. The loans carry interest at prime plus 1% and mature in 1995.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt
Long-term debt consists of the following:
December 31, (in thousands) 1994 1993 ------------------------------------------------------------------------- Bank Credit Facilities LIN Cellular Network, Inc.: Term credit facilities $1,315,000 $1,316,250 Revolving credit facilities 280,000 160,000 ---------- ---------- 1,595,000 1,476,250 LIN Television Corporation: Term credit facility -- 159,088 Revolving credit facility -- 63,000 ---------- ---------- -- 222,088 ---------- ---------- 1,595,000 1,698,338 Less current portion of long-term debt 151,875 146,891 ---------- ---------- $1,443,125 $1,551,447 ========== ==========
The Company's wholly-owned subsidiary, LIN Cellular Network, Inc. ("LCNI"), which owns all of the Company's cellular operations, has a senior secured and a senior unsecured bank credit facility (the "Bank Credit Facilities"). As of December 31, 1994, the aggregate additional borrowing capacity available to the Company under these two facilities totaled $220 million. Fees incurred in connection with the Bank Credit Facilities are classified as noncurrent assets and are being amortized over the contractual terms of the facilities.
The aggregate amounts of principal maturities on the utilized portions of the Bank Credit Facilities subsequent to December 31, 1994 are as follows:
(in thousands) Amount ----------------------------------------------------- 1995 $151,875 1996 208,625 1997 253,875 1998 299,125 1999 327,500 Thereafter 354,000 --------- $1,595,000 ==========
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt (continued)
Under the Bank Credit Facilities, interest is payable, at the Company's discretion, at the prevailing prime rate, LIBOR or CD rates, plus an applicable margin. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if the Company selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates. The applicable margin for each loan will be determined each quarter based on LCNI's ratio of adjusted senior debt (as determined under the appropriate Bank Credit Facility) to cash flow, as defined. Due to the frequent repricing of the borrowings under the Bank Credit Facilities, the book values at December 31, 1994 approximate fair values.
The Bank Credit Facilities contain covenants restricting certain activities by LCNI and its subsidiaries, including, without limitation, restrictions on (i) acquisitions and investments, (ii) the incurrence of debt, (iii) distributions and dividends to stockholders, (iv) mergers and sales of assets, (v) prepayments of subordinated indebtedness, (vi) the creation of liens and (vii) the issuance of preferred stock. In addition, LCNI will be required to apply cash proceeds from certain sales of assets that are not reinvested in similar assets and excess cash flow, as defined, to the prepayment of loans. The Company has not guaranteed the repayment of amounts under the Bank Credit Facilities.
LCNI is required to maintain compliance with certain financial covenants set forth in the Bank Credit Facilities, including ratios of senior debt and combined debt to cash flow and cash flow to debt service or fixed charges. LCNI pledged as security the capital stock of certain of its subsidiaries, including those owning the Company's interests in the New York, Dallas-Fort Worth and Houston cellular partnerships. The Company also pledged as security the capital stock of LCNI under the Bank Credit Facilities.
The Bank Credit Facilities contain customary provisions concerning events of default, including (i) failure to make principal or interest payments when due, (ii) failure to comply with covenants, (iii) misrepresentations, (iv) defaults on other indebtedness, (v) material adverse change in the business, condition, operations, performance or properties of the borrower, (vi) unpaid judgments and (vii) standard ERISA and bankruptcy defaults. In addition, it shall be an event of default if AT&T or McCaw fails to have the right to cause the election of its
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt (continued)
nominees to a majority of the directorships of the Board of Directors of the Company or of McCaw or if AT&T fails to have economic ownership of at least 51% of the combined voting power of all voting stock of McCaw.
The weighted average interest rate was 7.04% for the term and revolving credit facilities at December 31, 1994. The Bank Credit Facilities provide for annual fees of .5% of the unused commitments.
In order to comply with covenants under its Bank Credit Facilities and to provide protection against rising interest rates, the Company entered into interest rate cap agreements with notional amounts of $850 million, $840 million and $1.35 billion as of December 31, 1994, 1993 and 1992. The rate cap agreements in effect as of December 31, 1994 have expiration dates ranging from July 1995 to September 1997. All of the interest rate caps are based on three month LIBOR and have strike rates ranging from 8% to 8.5%. During the past three years, the prevailing market rates have been below the rate caps in effect, thus the only effect on the Company's interest expense has been the amortization of the cost of the caps of $860, $1,951, and $2,669 during the years ended December 31, 1994, 1993 and 1992, respectively. In the event that a counterparty to an interest rate cap fails to fulfill its obligation, the Company would be required to pay the interest rate on the underlying debt without the benefit of the hedge.
NOTE 7 - Redeemable Preferred Stock of a Subsidiary
On June 24, 1994, LCH redeemed all of its outstanding Redeemable Preferred Stock held by Comcast Cellular Communications Inc., in exchange for all of the capital stock of a subsidiary of LCH, whose assets consisted primarily of a 49.99% interest in the Philadelphia cellular system and the GuestInformant specialty publishing business, plus $12.3 million cash (which represented 15% of the fair market value of the WOOD-TV business).
The Company has accounted for this transaction as a nonmonetary exchange. Accordingly, the Company recognized a gain of $468.7 million, which represented the excess of the estimated fair market values over the book values of the assets exchanged. The $783.8 million difference between the book value of the Preferred Stock and the fair values of the assets exchanged was credited to additional paid-in capital. The Company has reported the redemption to the IRS as a tax-free transaction.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity
McCaw currently owns approximately 52% of the outstanding Common Stock of the Company. Pursuant to the Private Market Value Guarantee ("PMVG") between the Company and McCaw, a process began on January 1, 1995 to determine the private market price per share of the Company. The private market value is being determined by Lehman Brothers Inc. and Bear, Stearns & Co, designated jointly as the Company's independent directors' appraiser, and by Morgan Stanley & Co. Incorporated, designated as McCaw's appraiser, and if necessary by a third party appraiser. After the price is determined, McCaw will have 45 days to decide whether to proceed with the acquisition of all the public shares of the Company at that price, subject to the approval of the Company's public shareholders, or to put the Company in its entirety up for sale under the direction of the Company's independent directors. Such a sale would also be subject to approval by the Company's public shareholders.
The Company is authorized to issue 2,000,000 shares of preferred stock, without par value, none of which is outstanding. The Company's board of directors is empowered to set the dividend, redemption and liquidation rights pertaining to any series of preferred stock that may be issued from time to time, to designate whether preferred shares of any series shall be convertible and the terms of such convertibility, and to establish the voting rights and any special rights or restrictions that are to apply to preferred shares of any series.
The Company has never paid or declared a cash dividend on its common stock. Its dividend policy is subject to future earnings, financial conditions and other relevant factors (including, without limitation, dividend restrictions in credit and loan agreements between the Company and banks).
Pursuant to the Company's 1969 stock option plan, as amended, incentive and nonqualified options have been granted or are available for grant to officers and key employees at prices not less than the fair market value at date of grant. The exercise price of each outstanding option granted prior to December 28, 1994 to purchase Company stock was adjusted to give effect to the LIN TV spin-off by reducing the exercise price based on the relative fair market values of the corresponding common stocks after the spin-off. As a result, each exercise price was adjusted to approximately 90% of its original amount.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity (continued)
Options are generally not exercisable until one year after grant, have vesting terms ranging from two to five years, and expire ten years from date of grant. Changes in incentive and nonqualified stock options granted and outstanding are as follows:
Shares Prices Per Share --------------------------------------------------------------------------- Options outstanding at December 31, 1991 818,356 $6.28 - $82.70 Granted 521,350 69.57 - 70.48 Exercised (25,101) 6.28 - 45.30 Canceled or expired (51,410) 39.56 - 82.70 ---------- Options outstanding at December 31, 1992 1,263,195 7.30 - 82.70 Granted 473,300 80.48 - 100.49 Exercised (84,911) 8.47 - 70.48 Canceled or expired (52,335) 20.33 - 69.57 ---------- Options outstanding at December 31, 1993 1,599,249 7.30 - 100.49 Granted 301,550 100.26 - 133.50 Exercised (145,120) 7.30 - 101.83 Canceled or expired (71,605) 39.56 - 100.49 ---------- Options outstanding at December 31, 1994 1,684,074 $13.78 - $133.50 ==========
As of December 31, 1994, there were 691,045 exercisable options to purchase shares and there were 724,895 options available for future grants. Pursuant to the Company's stock option plan, in the event of a "change in control" (as defined in the plan) of the Company, vested options at the time of the change in control may be surrendered by officers of the Company, subject to Section 16 of the Securities Exchange Act of 1934, as amended, in exchange for a cash payment per share by the Company equal to the difference between the exercise price for the option and the greater of the highest amount paid to any holder of common stock by the acquiror in connection with the resulting change in control or the highest selling price of the common stock during the 90-day period prior to the date of surrender of the option.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity (continued)
Notwithstanding the foregoing, if a change in control results in the consolidation or merger of the Company with McCaw or a successor to McCaw under the PMVG, and McCaw or any such successor is the surviving company or if McCaw becomes the beneficial owner of 80% or more of the Company's stock (other than pursuant to a private market sale, as defined in the Company's PMVG with McCaw), each outstanding option shall be converted into an option to purchase McCaw's Class A Common Stock or the common stock of any such successor (or in the event that McCaw or any such successor is not publicly traded, the ultimate parent thereof). If a change in control results from a private market sale, upon a vote by a majority of the Company's independent directors, each outstanding option will be converted into an option to purchase the common stock of the acquirer. If the independent directors do not approve the conversion, the Company may (but is not required to) cancel each such option in exchange for a payment per share in cash equal to the excess of the purchase price per share in the private market sale over the exercise price of such option.
The Company's Employee Stock Purchase Plan ("ESPP") allows eligible employees to purchase shares of the Company's common stock, through regular payroll deductions, at 85% of the closing market price of the stock as of the last trading day of each month. The ESPP restricts participant purchases to no more than $25,000 of stock in any calendar year. A total of 300,000 shares have been authorized under the ESPP. There are no charges or credits to income in connection with the ESPP. During 1994, common stock was purchased and distributed to employees at prices ranging from $90.31 to $122.40 per share.
The Company has a Stockholder Rights Plan ("Rights Plan") designed to strengthen its bargaining position on behalf of its stockholders in the event of coercive stock accumulation programs, inadequate offers or other tactics that may be used to gain control of the Company without offering a fair and adequate price to all stockholders. Under the Rights Plan, each stockholder has one right for each share of the Company's outstanding common stock that entitles the holder to purchase one one-thousandth (1/1000th) of a share of a participating preferred stock. At the present time, the rights are attached to the common stock and are not exercisable, and they do not represent any significant value to stockholders. The rights become valuable, as a result of becoming exercisable into capital stock at a substantial discount price, if any person acquires 15% or more of the Company's outstanding common stock or upon the occurrence of certain other events, including a merger or other business combination involving the Company. The Rights Plan, as amended,
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Stockholders' Equity (continued)
provides that the acquisition of McCaw by AT&T and the consummation of the transactions contemplated or permitted by the PMVG will not constitute a Triggering Event or cause AT&T or McCaw or any of their affiliates to become an Acquiring Person (each as defined) under the Rights Plan.
NOTE 9 - Income Taxes
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and the tax basis of assets and liabilities given the provisions of the enacted tax laws. The components of the net deferred tax liability are as follows:
Deferred Income Taxes (in thousands) Assets Liabilities ------------------------------------------------------------------------ December 31, 1994 Intangible assets $-- $642,926 Property and equipment -- 90,288 Other -- 2,099 -------- -------- Total $-- $735,313 ======== ======== December 31, 1993 Intangible assets $-- $628,822 Property and equipment -- 82,813 Other 2,365 25,779 -------- -------- Total $2,365 $737,414 ======== ========
The components of income tax expense are as follows:
(in thousands) 1994 1993 1992 ------------------------------------------------------------------------- Current: Federal $54,482 $33,984 $29,753 State 7,459 4,938 14,216 -------- -------- -------- 61,941 38,922 43,969 Deferred: Federal (93) 26,800 (5,828) State (2,559) (153) (4,244) -------- -------- -------- (2,652) 26,647 (10,072) -------- -------- -------- $59,289 $65,569 $33,897 ======== ======== =========
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Income Taxes (continued)
The deferred tax benefit results largely from the amortization of intangible assets, offset in part by the excess of tax over financial statement depreciation.
The Omnibus Budget Reconciliation Act of 1993 increased the corporate tax rate to 35% from 34% effective as of January 1, 1993. Pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," the Company recorded an additional tax expense of $15.3 million in the third quarter of 1993, with a corresponding increase in deferred tax liability.
The following table reconciles the amount which would be provided by applying the 35% federal statutory rate to income before income tax expense to the federal income taxes actually provided.
(in thousands) 1994 1993 1992 ------------------------------------------------------------------------ Expense assuming federal statutory rate $239,361 $50,064 $40,154 Nontaxable gain on redemption of preferred stock (164,041) -- -- Equity investments (4,572) (5,672) (4,169) State and local taxes, net of federal benefit 3,185 3,110 6,582 Tax expense not provided on minority partners' share of income (8,147) 1,027 (4,734) Change in statutory tax rate from 34% to 35% -- 15,335 -- Other (6,497) 1,705 (3,936) -------- -------- -------- Total income tax expense $59,289 $65,569 $33,897 ======== ======== ========
NOTE 10 - Retirement Plans
On December 28, 1994, the Company transferred sponsorship of the contributory retirement plan to LIN TV in connection with the spin-off of those operations (see Note 3). LIN TV assumed all rights and responsibilities associated with the Plan. The transfer was made at book value and no significant gain or loss was recognized.
Employees of the Company's consolidated cellular operations are covered by 401(k) plans that provide matching contributions from the Company.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies
The Company leases various property, equipment and cellular sites under noncancellable operating leases. Rent expense relating to such leases amounted to $19.1 million, $15.9 million and $13.2 million in 1994, 1993 and 1992, respectively. Annual commitments for rental payments, principally on real property operating leases, after December 31, 1994 are as follows: 1995-$19.0 million; 1996-$17.5 million; 1997-$16.7 million; 1998-$16.1 million; 1999-$15.4 million and thereafter-$98.0 million.
The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. In particular, certain of the Company's unconsolidated cellular affiliates have been named as defendants in various legal proceedings:
The Los Angeles cellular partnership and several related parties have been named as defendants in various actions brought in California state court by dealers, resellers and equipment sellers for the partnership. The lawsuits variously allege a variety of torts and statutory violations, including price-fixing regarding cellular equipment and service, below-cost sales of equipment, fraud, interference with economic relationship, unfair competition, discrimination among agents, and conspiracy. Several of these cases are scheduled for trial in 1995. The partnership intends to defend each lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the complaints.
The Los Angeles cellular partnership, in some cases along with other cellular carriers, also has been named as a defendant in several class actions filed in California state court by current and former customers alleging violations of federal and state antitrust law as a result of price-fixing of cellular service. Trial dates have not been set for the pending cases. The partnership intends to defend each lawsuit vigorously and believes that is has meritorious defenses to the allegations contained in the complaints.
A class action lawsuit, originally filed in August 1993, has been instituted on behalf of Texas cellular subscribers in Texas state court against the Houston cellular partnership and several related parties, including the Company. As amended, the petition alleges that the liquidated damages and automatic renewal
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies (continued)
provisions in annual cellular subscriber contracts violate or are contrary to state law in several respects. Plaintiffs seek declaratory relief, damages, fees, costs and interest. Neither the class nor any of the subclasses alleged by the plaintiffs have been certified. Discovery is underway, but no trial date has been set. The partnership intends to defend the lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the petition.
The Company does not expect that the ultimate results of any of the foregoing legal proceedings will have a material adverse effect on its financial position, results of operations or cash flows.
NOTE 12 - Segment Data
As explained in Note 3, the Company divested substantially all its media operations through the spin-off of LIN TV and the preferred stock redemption (see Note 7). Accordingly, 1994 media operating data includes LIN TV operations through December 28, 1994 and specialty publishing operations through June 24, 1994.
Cellular revenues primarily represent fees charged for providing cellular telephone service to subscribers. Media revenues are principally from the sale of television time to advertisers and also include revenues from the Company's specialty publishing operation. The cellular business segment data reflects the consolidation of the Company's controlling interests (principally New York and Dallas). Cellular interests in Los Angeles, Galveston and Houston are accounted for by the equity method of accounting, and thus are not included in the cellular business segment data which follows:
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Related Party Transactions
Under an inter-company services arrangement negotiated between the Company and McCaw, McCaw provides management and other services to the Company. LIN also provided certain services to McCaw during the same time periods. The Company incurred $6.3 million, $7.3 million and $5.3 million for the net value of management and other services rendered under the inter-company services agreement during 1994, 1993 and 1992, respectively.
In addition to the transactions described above, the Company or its affiliates routinely enter into transactions with AT&T, McCaw or their affiliates in the ordinary course of business. Among other things, the Company's cellular affiliates purchase long distance services and cellular telephones and accessories from AT&T for resale to cellular subscribers and pay McCaw for providing cellular service to the Company's subscribers under roaming agreements, and McCaw pays the Company for similar services provided by the Company to McCaw's subscribers. The Company's cellular operations also participate in certain programs managed by McCaw, such as national advertising campaigns, national accounts marketing, and the North American Cellular Network. Such transactions are not separately disclosed in the financial statements as they are carried out in the normal course of business.
All of such agreements and arrangements between the Company and McCaw are on terms that the Company believes are as favorable to it as would have been obtained with an unrelated third party. Under the Company's PMVG with McCaw, approval of the majority of LIN's independent directors is required before the Company enters into any material transactions with McCaw or its affiliates.
NOTE 14 - Loss on Disposal of Cellular Equipment
In February 1994, the Company's Dallas cellular operations completed the installation of a new cellular system. As a result, the Company recorded in 1993 a non-cash pre-tax charge of $42.2 million to reflect the loss on the disposal of the previous system. The loss amounted to approximately $14.8 million, or $0.29 per share, after taxes and minority interests.
LIN BROADCASTING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Other Income and Expenses
In June 1992, the Company settled a lawsuit relating to the McCaw acquisition. Under the terms of the settlement, the Company received from the defendants a payment of $3 million and certain other considerations in July 1992 and payments of $2 million in July 1993 and June 1994. In addition, the Company will receive a final payment of $2 million from McCaw on June 30, 1995. After payment of legal fees and other related costs, this settlement resulted in a net gain to the Company of approximately $7 million.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of LIN Broadcasting Corporation
We have audited the accompanying combined balance sheets of LIN Broadcasting Corporation's Unconsolidated Affiliates listed in Note 1 (the Ventures) as of December 31, 1994 and 1993, and the related combined statements of income, Ventures' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the 1993 and 1992 consolidated financial statements of AWACS, Inc. and subsidiaries, which statements reflect total assets constituting 24% as of December 31, 1993 and net revenues constituting 19% and 17% for each of the two years in the period ended December 31, 1993 of the related combined totals. Those 1993 and 1992 statements were audited by other auditors whose report, which also places reliance on other auditors, has been furnished to us, and our opinion, insofar as it relates to data included for AWACS, Inc. and subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Ventures at December 31, 1994 and 1993, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the reports of other auditors, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP Seattle, Washington January 20, 1995
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders AWACS, Inc. Wayne, Pennsylvania
We have audited the consolidated balance sheet of AWACS, Inc. and subsidiaries as of December 31, 1993, and the related consolidated statements of operations and retained earnings and of cash flows for the years ended December 31, 1993 and 1992 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Garden State Cablevision L.P. ("Garden State"), the Company's investment in which is accounted for by use of the equity method. The Company's equity of $32,302,000 and $22,369,000 in that entity's net losses for the years then ended are included in the accompanying consolidated financial statements. The financial statements of Garden State were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Garden State, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of AWACS, Inc. and subsidiaries as of December 31, 1993 and the results of their operations and their cash flows for the years ended December 31, 1993 and 1992, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for income taxes effective January 1, 1993 to conform with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes".
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania February 18, 1994
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Garden State Cablevision L.P.:
We have audited the accompanying balance sheets of Garden State Cablevision L.P. (a Delaware Limited Partnership) as of December 31, 1993 and 1992, and the related statements of operations, partners' (deficit) capital and cash flows for the years then ended (not presented herein). These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Garden State Cablevision L.P. as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa., February 23, 1994
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
ASSETS 1994 1993 -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $12,905 $28,675 Short-term investments -- 25,682 Accounts receivable, less allowance for doubtful accounts (1994-$27,262, 1993-$9,829) 123,926 111,723 Inventories 36,183 6,079 Prepaid expenses and other 11,685 11,418 ---------------------------------------------------------------------------- Total current assets 184,699 183,577 --------------------------------------------------------------------------- Property and equipment, at cost, less accumulated depreciation 483,269 452,447 Other assets 3,185 2,108 Cellular FCC licenses, less accumulated amortization (1994-$856; 1993-$506) 13,214 13,564 Organization costs, less accumulated amortization (1994-$7,790; 1993-$6,785) 2,260 3,265 Due from affiliate -- 16,387 Notes receivable, less allowance for doubtful accounts of $150 -- 281 ---------------------------------------------------------------------------- Total Assets $686,627 $671,629 ===========================================================================
LIABILITIES AND EQUITY --------------------------------------------------------------------------- Current Liabilities: Accounts payable $62,245 $37,801 Accrued expenses 30,075 39,180 Unearned revenues 32,848 27,610 Commissions payable 11,973 14,439 Notes payable to affiliates 14,917 2,946 Other current liabilities 7,102 6,000 --------------------------------------------------------------------------- Total current liabilities 159,160 127,976 --------------------------------------------------------------------------- Notes payable to affiliates -- 63,126 Investment in affiliate -- 32,302 Deferred income taxes -- 4,236 Other long-term liabilities -- 1,286
(continued)
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands)
LIABILITIES AND EQUITY (continued) 1994 1993 --------------------------------------------------------------------------
Equity: Contributed capital 47,184 78,690 Excess cost of limited partnership interest -- (70,384) Retained earnings 480,283 434,397 ---------------------------------------------------------------------------- Total equity 527,467 442,703 ----------------------------------------------------------------------------- Total Liabilities and Equity $686,627 $671,629 ===========================================================================
See accompanying notes.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
These combined financial statements have been prepared to comply with the Securities and Exchange Commission's Regulation S-X requirement, in connection with LIN Broadcasting Corporation's ("LIN") consolidated financial statements, which requires separate or combined financial statements of significant subsidiaries in which LIN has a 50% or less controlling interest.
These combined financial statements include 100% of the accounts of the operating ventures listed in the table below in which LIN has voting interests of 50% or less (the "Ventures"). These Ventures are included in LIN's consolidated financial statements on the equity accounting method.
On June 24, 1994, LCH Communications, Inc. ("LCH"), a wholly-owned subsidiary of LIN, redeemed all of its outstanding Redeemable Preferred Stock held by Comcast Cellular Communications Inc., in exchange for all of the capital stock of a subsidiary of LCH, whose assets consisted of a 49.99% interest in the Philadelphia cellular system. Voting/ Name and Location Equity Management ----------------------------------------------------------------------------- AWACS, Inc., d/b/a Comcast Metrophone Corporation 49.99% 49.99% Philadelphia
Los Angeles Cellular Telephone Co., Partnership 39.97% 50.00% Los Angeles
Houston Cellular Telephone Co., Partnership 56.25% 50.00% Houston
Galveston Cellular Telephone Co., Corporation 34.60% 50.00% Galveston
NOTE 2 - Significant Accounting Policies
The following are the Ventures' significant accounting policies:
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: Certain highly liquid, short-term investments which have a maturity of three months or less when purchased are considered cash equivalents. Excess cash is primarily invested in US Government obligations. Short-term investments consist principally of U.S. Government obligations with a maturity of greater than three months when purchased.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies (continued)
INVENTORIES: Inventories consist primarily of cellular phones, related parts and accessories and are stated at the lower of cost (FIFO) or fair market value.
PROPERTY AND EQUIPMENT: Cellular system equipment is recorded at cost and is depreciated on a straight-line basis over an 8 or 10 year period. All other property and equipment, including betterments to existing facilities, are recorded at cost and depreciated on a straight-line basis over their estimated useful lives of three to twenty years.
CELLULAR FCC LICENSES AND ORGANIZATION COSTS: Cellular FCC Licenses represent costs to acquire cellular licenses authorized by the Federal Communications Commission and are amortized using the straight line method over 40 years. Organization costs, consisting principally of legal fees, feasibility studies and other costs related to obtaining required licenses and regulatory approvals, are amortized using the straight-line method over a 10 year period.
INCOME TAXES: Accelerated depreciation methods are used for tax purposes. AWACS, Inc., which is a corporation, provides deferred taxes related to this and other timing differences. Effective January 1, 1993, AWACS, Inc. adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see Note 7). No provision is made for income taxes for either the Los Angeles, Houston or Galveston ventures as the income or loss is included in the tax returns of the respective partners of these partnerships.
REVENUE RECOGNITION: Cellular airtime is recorded as revenue when earned. Unearned revenues consist principally of amounts billed to customers for access fees which are payable one month in advance.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' combined financial statements in order to conform to the 1994 presentation.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 3 - Property and Equipment
The major classifications of property and equipment were as follows: December 31, (in thousands) 1994 1993 ------------------------------------------------------------------------ Land $1,549 $1,379 Buildings and improvements 8,207 6,583 Cellular equipment 658,559 576,655 Other 42,597 70,997 --------- --------- 710,912 655,614 Less accumulated depreciation (227,643) (203,167) --------- --------- $483,269 $452,447 ========= =========
NOTE 4 - Notes Payable to Affiliates
The Houston venture has entered into agreements with the partners under which it has borrowed $11,000 as of December 31, 1994. The note matures in December 1995 and bears interest at the prime rate plus 1%.
The Galveston venture also entered into an agreement with an affiliate under which it has borrowed $3,917 as of December 31, 1994. This note matures beginning in 1995 and bears interest at prime plus 2%.
NOTE 5 - Equity
In accordance with the various partnership agreements, income of the partnerships is allocated to each owner's respective capital account in accordance with its respective equity interest. Additional capital contributions may be called based on annual construction and operating budgets submitted by the partnerships and agreed upon by the operating committees of each partnership.
NOTE 6 - Income Taxes
Effective January 1, 1993, AWACS, Inc. adopted SFAS No. 109, "Accounting for Income Taxes." As a result, AWACS, Inc. recorded a cumulative effect of accounting change of $12,517. The adoption of SFAS No. 109 did not have a significant impact on the amount of income tax expense recorded by AWACS, Inc. during 1993.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 6 - Income Taxes (continued)
The income tax expense relates to the income of AWACS, Inc. and consists of the following:
Year Ended December 31, (in thousands) 1994 1993 1992 --------------------------------------------------------------------
Current: Federal $8,375 $3,543 $3,179 State 3,762 4,653 2,041 ------ ------ ------ 12,137 8,196 5,220 Deferred: Federal 476 4,381 2,509 State 153 (1,330) 735 ------ ------ ------ 629 3,051 3,244 ------ ------ ------ $12,766 $11,247 $8,464 ======= ======= ======
No provision is made for income taxes for either the Los Angeles, Houston or Galveston ventures as the income or loss is included in the tax returns of the respective partners of these partnerships.
Deferred taxes are attributable primarily to excess tax over book depreciation and certain expenses not deductible for tax purposes until paid.
NOTE 7 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, AWACS, Inc. adopted SFAS No. 106. This statement requires AWACS, Inc. to accrue the estimated cost of retiree benefits earned during the years the employee provides services. The cumulative effect as of January 1, 1993 of the adoption of SFAS No. 106 was to reduce the AWACS, Inc. net income by approximately $375 (net of tax).
NOTE 8 - Related-Party Transactions
For each of the years ended December 31, 1994, 1993 and 1992, two partnerships recorded management fees payable to affiliates of their partners of $4,200, for management consultation, legal services and various other professional services.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 8 - Related-Party Transactions (continued)
In addition to the transactions described above, the Ventures routinely enter into transactions with the Company or other affiliates of the Company (including AT&T), or other affiliates of the partners. Such transactions include roaming agreements and participation in the North American Cellular Network, among other things. Such transactions are not separately disclosed in the financial statements as they are carried out in the normal course of business.
NOTE 9 - Commitments
The Ventures lease office space, land and buildings for cell sites and vehicles under operating leases which expire through the year 2010. Total rent expense for the years ended December 31, 1994, 1993 and 1992 was $14,902, $13,945 and $11,909, respectively. Some of the leases include escalation clauses based on increases in the Consumer Price Index. Several of the leases include options to extend the lease term.
Future minimum payments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 1994 are:
(in thousands) Amount ----------------------------------------------------- 1995 $13,769 1996 12,618 1997 11,148 1998 8,782 1999 5,153 2000 and beyond 8,255 ------- $59,725 ======= NOTE 10 - Contingencies
The Ventures are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. The Ventures are also party to routine filings with the FCC and state regulatory authorities and customary regulatory proceedings pending in connection with interconnection, rates, and practices and proceedings concerning the telecommunications industry in general and other proceedings which management does not expect to have a material adverse effect on the financial position or results of operations of the Ventures.
LIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 10 - Contingencies (continued)
The Los Angeles cellular partnership and several related parties have been named as defendants in various actions brought in California state court by dealers, resellers and equipment sellers for the partnership. The lawsuits variously allege a variety of torts and statutory violations, including price-fixing regarding cellular equipment and service, below-cost sales of equipment, fraud, interference with economic relationship, unfair competition, discrimination among agents, and conspiracy. Several of these cases are scheduled for trial in 1995. The partnership intends to defend each lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the complaints.
The Los Angeles cellular partnership, in some cases along with other cellular carriers, also has been named as a defendant in several class actions filed in California state court by current and former customers alleging violations of federal and state antitrust law as a result of price-fixing of cellular service. Trial dates have not been set for the pending cases. The partnership intends to defend each lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the complaints.
A class action lawsuit originally filed in August 1993, has been instituted on behalf of Texas cellular subscribers in Texas state court against the Houston cellular partnership and several related parties, including the Company. As amended, the petition alleges that the liquidated damages and automatic renewal provisions in annual cellular subscriber contracts violate are or contrary to state law in several respects. Plaintiffs seek declaratory relief, damages, fees, costs and interest. Neither the class nor any of the subclasses alleged by the plaintiffs have been certified. Discovery is underway, but no trial date has been set. The partnership intends to defend the lawsuit vigorously and believes that it has meritorious defenses to the allegations contained in the petition.
Each of the partnerships, subject to the above-described proceedings, does not expect that the ultimate results of any of such proceedings will have a material adverse effect on its financial position or results of operations.
LIN BROADCASTING CORPORATION (PARENT COMPANY ONLY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in thousands, except share amounts)
ASSETS 1994 1993 ------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $7,811 $3,551 Marketable securities -- 16,465 Other receivables 1,487 2,744 -------------------------------------------------------------------------- Total current assets 9,298 22,760 --------------------------------------------------------------------------- Investment in consolidated subsidiaries 346,216 -- Property and equipment, at cost, less accumulated depreciation 380 471 Other noncurrent assets 520 2,949 -------------------------------------------------------------------------- Total Assets $356,414 $26,180 ==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) --------------------------------------------------------------------------- Current Liabilities: Accounts payable $201 $-- Payable to affiliates, net 49,610 57,435 Deficiency of investment in consolidated subsidiaries -- 1,061,401 Accrued expenses 6,733 1,321 -------------------------------------------------------------------------- Total current liabilities 56,544 1,120,157 -------------------------------------------------------------------------- Other noncurrent liabilities 2,132 8,388
Stockholders' Equity (Deficit): Common stock, $.01 par value, 150,000,000 shares authorized, 55,329,000 shares issued 553 553 Paid-in capital 1,055,169 224,689 Deficit (586,055) (1,150,205) -------------------------------------------------------------------------- 469,667 (924,963) --------------------------------------------------------------------------
(Continued)
LIN BROADCASTING CORPORATION (PARENT COMPANY ONLY) SCHEDULE I - CONDENSED FINANCIAL INFORMATION BALANCE SHEETS (Continued) DECEMBER 31, 1994 AND 1993 (Dollars in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued) 1994 1993 ------------------------------------------------------------------------
Less common stock in treasury, at cost (1994-3,678,000 shares; 1993-3,826,000 shares) 171,929 177,402 ------------------------------------------------------------------------- Total stockholders' equity (deficit) 297,738 (1,102,365) Total Liabilities and Stockholders' Equity $356,414 $26,180 ============================================================================
This Schedule I should be read in conjunction with the LIN Broadcasting Corporation and Subsidiaries Consolidated Financial Statements and Notes thereto.
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE A - Basis of Presentation
In the parent company-only financial statements, the Company's investment in consolidated subsidiaries is stated at cost plus equity in undistributed earnings of consolidated subsidiaries since the date of acquisition.
NOTE B - Dividends
There have been no dividends paid by the Company's subsidiaries to the Company during the years ended December 31, 1994, 1993 and 1992.