UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER: 000-26076
DECEMBER 31, 2000
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 52-1494660
(State of incorporation) (I.R.S. Employer Identification No.)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MD 21030
(Address of principal executive offices)
(410) 568-1500
(Registrant's telephone number, including area code)
--------------------------------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Class A common stock, par value $.01 per share
Series D preferred stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Based on the closing sales price of $7.375 per share as of March 26, 2001,
the aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $294.4 million.
As of March 26, 2001, there were 39,920,877 shares of class A common stock,
$.01 par value; 44,838,828 shares of class B common stock, and 3,450,000 shares
of series D preferred stock, $.01 par value, convertible into 7,561,644 shares
of class A common stock of the registrant issued and outstanding.
In addition, 2,000,000 shares of $200 million aggregate liquidation value
of 11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., are issued and outstanding.
Documents Incorporated by Reference
Portions of the definitive proxy statement to be delivered to shareholders
in connection with the 2001 annual meeting of shareholders are incorporated by
reference into Part III.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
PAGE
----
SINCLAIR BROADCAST GROUP, INC. FINANCIAL STATEMENTS:
Report of Independent Public Accountants.........................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000.....................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1999 and 2000...............................................................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1998, 1999 and 2000...........................................................F-5, F-6, F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1999 and 2000..........................................................................F-8, F-9
Notes to Consolidated Financial Statements......................................................F-10
ACRODYNE COMMUNICATIONS, INC. FINANCIAL STATEMENTS
Report of Independent Public Accountants........................................................F-34
Consolidated Balance Sheets as of December 31, 1999 and 2000....................................F-35
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 2000..............................................................................F-36
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1999 and 2000..............................................................................F-37
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 2000..............................................................................F-38
Notes to Consolidated Financial Statements......................................................F-39
(a) (2) Financial Statements Schedules
The following financial statements schedules required by this item are
submitted on pages S-1 through S-3 of this Report.
PAGE
----
Index to Schedules...............................................................................S-1
Report of Independent Public Accountants.........................................................S-2
Schedule II-Valuation and Qualifying Accounts....................................................S-3
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the accompanying
notes.
(a) (3) Exhibits
The exhibit index in Item 14(c) is incorporated by reference in this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the
fourth quarter of the fiscal year ended December 31, 2000.
(c) Exhibits
The exhibit index is hereby incorporated by reference.
EXHIBIT
NO. EXHIBIT DESCRIPTION
--- -------------------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws (2)
41
EXHIBIT
NO. EXHIBIT DESCRIPTION
--- -------------------
4.1 Indenture, dated as of December 9, 1993, among Sinclair Broadcast
Group, Inc., its wholly-owned subsidiaries and First Union Nation
Bank of North Carolina, as trustee. (2)
4.2 Indenture, dated as of August 28, 1995, among Sinclair Broadcast
Group, Inc., its wholly-owned subsidiaries and the United States
Trust Company of New York as trustee. (2)
4.3 Subordinated Indenture, dated as of December 17, 1997, among
Sinclair Broadcast Group, Inc., and First Union National Bank, as
trustee. (3)
4.4 First Supplemental Indenture, dated as of December 17, 1997, among
Sinclair Broadcast Group, Inc., the Guarantors named therein and
First Union National Bank, as trustree, including Form of Note. (3)
10.1 Stock Option Agreement, dated April 10, 1996 by and between Sinclair
Broadcast Group, Inc. and Barry Baker. (4)
10.2 Termination Agreement by and between Sinclair Broadcast Group, Inc.,
and Barry Baker, dated February 8, 1999. (6)
10.3 Registration Rights Agreement, dated as of May 31, 1996, by and
between Sinclair Broadcast Group Inc. and River City Broadcasting,
L.P. (5)
10.4 Letter Agreement, dated August 20, 1996, between Sinclair Broadcast
Group, Inc., and River City Broadcasting, L.P. and Fox Broadcasting
Company. (7)
10.5 Promissory Note, dated as of May 17, 1990, in the principal amount
of $3,000,000 among David D. Smith, Frederick G. Smith, J. Duncan
Smith and Robert E. Smith (as makers) and Sinclair Broadcast Group,
Inc., Channel 63, Inc., Commerical Radio Institute, Inc., WTTE,
Channel 28, Inc. and Chesapeake Television, Inc. (as holders). (8)
10.6 Term Note, dated as of September 30, 1990, in the principal amount
of $7,515,000 between Sinclair Broadcast Group, Inc. (as borrower)
and Julian S. Smith (as lender). (9)
10.7 Replacement Term Note, dated as of September 30, 1990 in the
principal amount of $6,700,000 between Sinclair Broadcast Group,
Inc. (as borrower) and Carolyn C. Smith (as lender). (2)
10.8 Note, dated as of September 30, 1990 in the principal amount of
$1,500,000 between Frederick G. Smith, David D. Smith, J. Duncan
Smith and Robert E. Smith (as borrowers) and Sinclair Broadcast
Group, Inc. (as lender). (8)
10.9 Amended and Restated Note, dated as of June 30, 1992 in the
principal amount of $1,458,489 between Frederick G. Smith, David D.
Smith, J. Duncan Smith and Robert E. Smith (as borrowers) and
Sinclair Broadcast Group, Inc. (as lender). (8)
10.10 Term Note, dated August 1, 1992 in the principal amount of $900,000
between Frederick G. Smith, David D. Smith, J. Duncan Smith and
Robert E. Smith (as borrowers) and Commercial Radio Institute, Inc.
(as lender) (8)
10.11 Promissory Note, dated as of December 28, 1986 in the principal
amount of $6,421,483.53 between Sinclair Broadcast Group, Inc. (as
maker) and Frederick H. Himes, B. Stanley Resnick and Edward A.
Johnson (as representatives for the holders). (8)
10.12 Term Note, dated as of March 1, 1993 in the principal amount of
$6,559,000 between Julian S. Smith and Carolyn C. Smith (as
makers-borrowers) and Commerical Radio Institute, Inc. (as
holder-lender). (8)
10.13 Restatement of Stock Redemption Agreement by and among Sinclair
Broadcast Group, Inc. and Chesapeake Television, Inc., et al., dated
June 19, 1990. (8)
42
EXHIBIT
NO. EXHIBIT DESCRIPTION
--- -------------------
10.14 Corporate Guaranty Agreement, dated as of September 30, 1990 by
Chesapeake Television, Inc., Commercial Radio, Inc., Channel 63,
Inc. and WTTE, Channel 28, Inc. (as guarantors) to Julian S. Smith
and Carolyn C. Smith (as lenders). (8)
10.15 Security Agreement, dated as of September 30, 1999 among Sinclair
Broadcast Group, Inc., Chesapeake Television, Inc., Commericial
Radio Institute, Inc., WTTE, Channel 28, Inc. and Channel 63, Inc.
(as borrowers and subsidiaries of the borrower) and Julian S. Smith
and Carolyn C. Smith (as lenders). (8)
10.16 Term Note, dated as of September 22, 1993, in the principal amount
of $1,900,000 between Gerstell Development Limited Partnership (as
maker-borrower) and Sinclair Broadcast Group, Inc. (as
holder-lender). (8)
10.17 Credit Agreement, dated as of May 28, 1998, by and among Sinclair
Broadcast Group, Inc., Certain Subsidiary Guarantors, Certain
Lenders, the Chase Manhattan Bank as Administrative Agent, Nations
Bank of Texas, N.A. as Documentation Agent and Chase Securities Inc.
as Arranger. (1)
10.18 Incentive Stock Option Plan for Designated Participants. (2)
10.19 Incentive Stock Option Plan of Sinclair Broadcast Group, Inc. (2)
10.20 First Amendment to Incentive Stock Option Plan of Sinclair
Broadcast Group, Inc., adopted April 10, 1996. (4)
10.21 Second Amendment to Incentive Stock Option Plan of Sinclair
Broadcast Group, Inc., adopted May 31, 1996. (4)
10.22 1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc. (4)
10.23 First Amendment to 1996 Long Term Incentive Plan of Sinclair
Broadcast Group, Inc. (10)
10.24 Primary Television Affiliation Agreement, dated as of March 24,
1997 by and between American Broadcasting Companies, Inc., River
City Broadcasting, L.P. and Chesapeake Television, Inc. (11)
10.25 Primary Television Affiliation Agreement, dated as of March 24,
1997 by and between American Broadcasting Companies, Inc., River
City Broadcasting, L.P. and WPGH, Inc. (11)
10.26 Stock Purchase Agreement by and among the sole stockholders of
Montecito Broadcasting Corporation, Montecito Broadcasting
Corporation and Sinclair Communications, Inc. dated as of February
3, 1998. (12)
10.27 Agreement and Plan of Merger among Sullivan Broadcasting Company
II, Inc., Sinclair Broadcast Group, Inc., and ABRY Partners, Inc.
Effective as of February 23, 1998. (11).
10.28 Agreement and Plan of Merger among Sullivan Broadcasting Holdings,
Inc., Sinclair Broadcast Group, Inc., and ABRY Partners, Inc.
Effective as of February 23, 1998. (11).
10.29 Employment Agreement by and between Sinclair Broadcast Group, Inc.
and Frederick G. Smith, dated June 12, 1998. (12)
10.30 Employment Agreement by and between Sinclair Broadcast Group, Inc.
and J. Duncan Smith, dated June 12, 1998. (12)
10.31 Employment Agreement by and between Sinclair Broadcast Group, Inc.
and David B. Amy, dated September 15, 1998. (12)
10.32 Employment Agreement by and between Sinclair Communications, Inc.
and Barry Drake, dated February 21, 1997. (12)
10.33 First Amendment to Employment Agreement, by and between Sinclair
Broadcast Group, Inc. and Barry Baker, dated May 1998. (6)
43
EXHIBIT
NO. EXHIBIT DESCRIPTION
--- -------------------
10.34 Purchase Agreement by and between Sinclair Communications, Inc. and
STC Broadcasting, Inc. dated as of March 5, 1999. (6)
10.35 Second Modification Agreement dated April 30, 1999 by and between
Guy Gannett Communications and Sinclair Communications, Inc., to
modify the Purchase Agreement dated Spetember 4, 1998 by and between
Guy Gannett Communications and Sinclair Communications Inc., as
thereafter amended and modified. (13)
10.36 Asset Purchase Agreement dated August 18, 1999 by and between
Sinclair Communications, Inc. and certain of its affiliates named
therein and Entercom Communications Corp. (13)
10.37 Asset Purchase Agreement dated August 20, 1999 among Sinclair
Communications, Inc., Sinclair Media III, Inc., Sinclair Radio of
Kansas City Licensee, LLC and Entercom Communications Corp. (13)
10.38 Amendment to Purchase Agreement, dated March 16, 1999, to amend
Purchase Agreement dated as of September 4, 1998 by and between Guy
Gannett Communications and Sinclair Communications, Inc. (13)
10.39 Modification Agreement dated April 12, 1999 by and between Guy
Gannett Communications and Sinclair Communications, Inc., to modify
the Purchase Agreement dated September 4, 1998 by and between Guy
Gannett Communications and Sinclair Communications, Inc., as
thereafter amended. (13)
10.40 Purchase Agreement dated March 16, 1999, by and between Sinclair
Communications, Inc. and STC Broadcasting, Inc. (13)
10.41 Amended and Restated Purchase Agreement dated August 20, 1999 among
Sinclair Communications, Inc. and certain of its affiliates named
therein and Entercom Communications Corp. (13)
10.42 Asset Purchase Agreement among Sinclair Broadcast Group, Inc. and
Sinclair Radio of St. Louis, Inc. and Sinclair Radio of St. Louis
Licensee, LLC as Sellers, and Emmis Communications Corporation as
Buyer dated June 21, 2000. (as previously filed)
11 Statement re computation of per share earnings (included in
financial statements) (as previously filed)
12 Computation of Ratio of Earnings to Fixed Charges
(as previously filed)
21 Subsidiaries of the Registrant (as previously filed)
23.1 Consent of Independent Public Accountants regarding Sinclair
Broadcast Group, Inc.
23.2 Consent of Independent Public Accountants regarding Acrodyne
Communications, Inc.
25 Power of attorney (included in signature page)
(as previously filed)
- -------------
(1) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended June 30, 1998
(2) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-90682
(3) Incorporated by reference from Sinclair's Current Report on Form 8-K,
dated as of December 16, 1997.
(4) Incorporated by reference from Sinclair's Report on Form 10-K for the
year ended December 31, 1996.
(5) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended June 30, 1996.
(6) Incorporated by reference from Sinclair's Report on Form 10-K for the
year ended December 31, 1998.
(7) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended September 30, 1996.
(8) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-69482.
(9) Incorporated by reference from Sinclair's Report on Form 10-K for the
year ended December 31, 1995.
(10) Incorporated by reference from Sinclair's Proxy Statement for the 1998
Annual Meeting filed on Schedule 14A.
(11) Incorporated by reference from Sinclair's Report on Form 10-K for the
year ended December 3 1, 1997
(12) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended September 30, 1998
(13) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended September 20, 1999.
(d) Financial Statements Schedules
The financial statement schedules required by this Item are listed under Item
14 (a) (2).
44
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on
this 17th day of April 2001.
SINCLAIR BROADCAST GROUP, INC.
By: /S/ David D. Smith
---------------------------------
David D. Smith
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
under the heading "Signature" constitutes and appoints David B. Amy as his or
her true and lawful attorney-in-fact each acting alone, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead in any and all capacities to sign any or all amendments to this 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the SEC, granting unto said attorney-in-fact full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully for all intents
and purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact, or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David D. Smith Chairman of the Board and April 17, 2001
- ---------------------------- Chief Executive Officer
David D. Smith (Principal Executive Officer)
/s/ David B. Amy Executive Vice President and April 17, 2001
- ---------------------------- Chief Financial Officer
David B. Amy
/s/ Frederick G. Smith Director April 17, 2001
- ----------------------------
Frederick G. Smith
/s/ J. Duncan Smith Director April 17, 2001
- ----------------------------
J. Duncan Smith
/s/ Robert E. Smith Director April 17, 2001
- ----------------------------
Robert E. Smith
/s/ Basil A. Thomas Director April 17, 2001
- ----------------------------
Basil A. Thomas
/s/ Lawrence E. McCanna Director April 17, 2001
- ----------------------------
Lawrence E. McCanna
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES PAGE
Report of Independent Public Accountants......................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000..................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1999 and 2000...............................................................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1998, 1999 and 2000.........................................................................F-5, F-6, F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1999 and 2000...............................................................................F-8, F-9
Notes to Consolidated Financial Statements....................................................F-10
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited the accompanying consolidated balance sheets of Sinclair
Broadcast Group, Inc. (a Maryland corporation) and Subsidiaries as of December
31, 1999 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sinclair Broadcast Group, Inc.
and Subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
January 30, 2001 (except with respect to the matter discussed
in Note 16, as to which the date is February 7, 2001)
F-2
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF DECEMBER 31,
------------------
1999 2000
---- ----
ASSETS
CURRENT ASSETS:
Cash ...................................................................................... $ 16,408 $ 4,091
Accounts receivable, net of allowance for doubtful accounts of $5,016 and
$5,751, respectively ..................................................................... 192,469 165,913
Current portion of program contract costs ................................................. 74,138 72,841
Prepaid expenses and other current assets ................................................. 25,292 11,461
Deferred barter costs ..................................................................... 1,823 3,472
Broadcast assets related to discontinued operations, net of liabilities ................... 172,983 --
Broadcast assets held for sale, current ................................................... 77,962 --
Deferred tax assets ....................................................................... 5,215 11,939
----------- -----------
Total current assets ................................................................... 566,290 269,717
PROGRAM CONTRACT COSTS, less current portion ................................................. 53,002 53,698
LOANS TO OFFICERS AND AFFILIATES ............................................................. 8,772 8,269
PROPERTY AND EQUIPMENT, net .................................................................. 251,783 280,987
BROADCAST ASSETS HELD FOR SALE, less current portion ......................................... 144,316 --
OTHER ASSETS ................................................................................. 108,383 103,863
ACQUIRED INTANGIBLE BROADCAST ASSETS, net of accumulated amortization of
$331,308 and $382,398, respectively ....................................................... 2,486,964 2,684,106
----------- -----------
Total Assets ........................................................................... $ 3,619,510 $ 3,400,640
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................................... $ 7,600 $ 6,865
Accrued liabilities ....................................................................... 67,078 80,626
Income taxes payable ...................................................................... 116,821 55,912
Notes payable, capital lease, and commercial bank financing ............................... 75,008 100,018
Notes and capital leases payable to affiliates ............................................ 5,890 5,838
Current portion of program contracts payable .............................................. 111,992 110,217
Deferred barter revenues .................................................................. 3,244 4,296
----------- -----------
Total current liabilities ............................................................... 387,633 363,772
LONG-TERM LIABILITIES:
Notes payable, capital lease, and commercial bank financing ............................... 1,677,299 1,481,561
Notes and capital leases payable to affiliates ............................................ 34,142 29,009
Program contracts payable ................................................................. 87,220 99,146
Deferred tax liability .................................................................... 233,927 255,088
Other long-term liabilities ............................................................... 20,444 46,746
----------- -----------
Total liabilities ....................................................................... 2,440,665 2,275,322
----------- -----------
EQUITY PUT OPTION ............................................................................ -- 7,811
----------- -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ............................................... 3,928 4,977
----------- -----------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES .................................... 200,000 200,000
----------- -----------
STOCKHOLDERS' EQUITY:
Series D Preferred Stock, $.01 par value, 3,450,000 shares authorized and
3,450,000 shares issued and outstanding, liquidation preference of
$172,500,000 ............................................................................ 35 35
Class A Common Stock, $.01 par value, 500,000,000 shares authorized and
49,142,513 and 39,032,277 shares issued and outstanding, respectively ................... 491 390
Class B Common Stock, $.01 par value, 140,000,000 shares authorized and
47,608,347 and 45,479,578 shares issued and outstanding, respectively ................... 476 455
Additional paid-in capital ................................................................ 834,393 750,372
Additional paid-in capital - equity put options ........................................... 46,068 --
Additional paid-in capital - deferred compensation ........................................ (4,489) (2,618)
Retained earnings ......................................................................... 97,943 164,958
Other comprehensive loss .................................................................. -- (1,062)
----------- -----------
Total stockholders' equity .............................................................. 974,917 912,530
----------- -----------
Total Liabilities and Stockholders' Equity .............................................. $ 3,619,510 $ 3,400,640
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-3
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1999 2000
---- ---- ----
REVENUES:
Station broadcast revenues, net of agency commissions
of $90,664, $106,925 and $115,579, respectively ...................... $ 564,727 $ 670,252 $ 727,017
Revenues realized from station barter arrangements ..................... 59,697 63,387 57,351
Other revenue .......................................................... -- -- 4,494
--------- --------- ---------
Total revenues ....................................................... 624,424 733,639 788,862
--------- --------- ---------
OPERATING EXPENSES:
Program and production .................................................... 104,463 137,597 156,065
Selling, general and administrative .................................... 116,075 145,737 173,424
Expenses realized from station barter arrangements ..................... 54,067 57,561 51,300
Amortization of program contract costs and net
realizable value adjustments ......................................... 69,453 86,857 100,357
Stock-based compensation ............................................... 2,908 2,494 1,801
Depreciation and amortization of property and equipment ................ 25,216 32,042 38,111
Amortization of acquired intangible broadcast assets,
non-compete and consulting agreements and other assets ............... 82,555 105,654 112,145
Cumulative adjustment for change in assets held for sale ............... -- -- 619
--------- --------- ---------
Total operating costs ................................................ 454,737 567,942 633,822
--------- --------- ---------
Operating income ..................................................... 169,687 165,697 155,040
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense ..................... (138,952) (178,281) (148,906)
Subsidiary trust minority interest expense ............................. (23,250) (23,250) (23,250)
Net gain (loss) on sale of broadcast assets ............................ 1,232 (418) --
Unrealized gain (loss) on derivative instrument ........................ (9,050) 15,747 (296)
Interest income ........................................................ 5,672 3,371 2,645
Loss related to investments ............................................ -- (504) (16,764)
Other income ........................................................... 1,022 619 572
--------- --------- ---------
Income (loss) before income taxes ...................................... 6,361 (17,019) (30,959)
PROVISION FOR INCOME TAXES ................................................ (32,562) (25,107) (4,816)
--------- --------- ---------
Net loss from continuing operations .................................... (26,201) (42,126) (35,775)
DISCONTINUED OPERATIONS:
Net income from discontinued operations, net of related
income tax provision of $8,609, $12,340 and $3,250,
respectively ......................................................... 14,102 17,538 4,876
Gain on sale of broadcast assets, net of related income
tax provision of $4,487, $137,431 and $69,870,
respectively ......................................................... 6,282 192,372 108,264
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of related
income tax benefit of $7,370 ......................................... (11,063) -- --
--------- --------- ---------
NET INCOME (LOSS) ......................................................... $ (16,880) $ 167,784 $ 77,365
========= ========= =========
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS ........................................................... $ (27,230) $ 157,434 $ 67,015
========= ========= =========
BASIC EARNINGS PER SHARE:
Loss per share from continuing operations .............................. $ (0.39) $ (0.54) $ (0.50)
========= ========= =========
Income per share from discontinued operations .......................... $ 0.22 $ 2.17 $ 1.24
========= ========= =========
Loss per share from extraordinary item ................................. $ (0.12) $ -- $ --
========= ========= =========
Income (loss) per common share ......................................... $ (0.29) $ 1.63 $ 0.73
========= ========= =========
Weighted average common shares outstanding ............................. 94,321 96,615 91,405
========= ========= =========
DILUTED EARNINGS PER SHARE:
Loss per share from continuing operations .............................. $ (0.39) $ (0.54) $ (0.50)
========= ========= =========
Income per share from discontinued operations .......................... $ 0.22 $ 2.17 $ 1.24
========= ========= =========
Loss per share from extraordinary item ................................. $ (0.12) $ -- $ --
========= ========= =========
Income (loss) per common share ......................................... $ (0.29) $ 1.63 $ 0.73
========= ========= =========
Weighted average common and common equivalent shares
outstanding .......................................................... 95,692 96,635 91,432
========= ========= =========
The accompanying notes are an integral part of these consolidated statements
F-4
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
ADDITIONAL
PAID-IN
SERIES B SERIES D CLASS A CLASS B ADDITIONAL CAPITAL -
PREFERRED PREFERRED COMMON COMMON PAID-IN EQUITY PUT
STOCK STOCK STOCK STOCK CAPITAL OPTIONS
----- ----- ----- ----- ------- -------
BALANCE, December 31, 1997 ............... $ 11 $ 35 $ 274 $ 509 $ 552,557 $ 23,117
Class B Common Stock converted into
Class A Common Stock ................. -- -- 18 (18) -- --
Series B Preferred Stock converted
into Class A Common Stock ............ (11) -- 75 -- (64) --
Dividends payable on Series D Preferred
Stock ................................ -- -- -- -- -- --
Stock option grants .................... -- -- -- -- 8,383 --
Stock options exercised ................ -- -- 1 -- 1,143 --
Class A Common Stock issued pursuant
to employee benefit plans ............ -- -- 1 -- 1,989 --
Equity put options ..................... -- -- -- -- (20,083) 20,083
Repurchase and retirement of 1,505,000 . -- -- (15) -- (26,650) --
shares of Class A Common Stock
Equity put option premiums ............. -- -- -- -- (12,938) --
Issuance of Class A Common Stock ....... -- -- 120 -- 335,003 --
Amortization of deferred compensation .. -- -- -- -- -- --
Income tax benefit related to deferred
compensation ......................... -- -- -- -- (390) --
Net loss ............................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1998 ............... $-- $ 35 $ 474 $ 491 $ 838,950 $ 43,200
--------- --------- --------- --------- --------- ---------
ADDITIONAL
PAID-IN
CAPITAL - TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
------------ ------- ------
BALANCE, December 31, 1997 ............... $ (954) $ (32,261) $ 543,288
Class B Common Stock converted into
Class A Common Stock ................. -- -- --
Series B Preferred Stock converted
into Class A Common Stock ............ -- -- --
Dividends payable on Series D Preferred
Stock ................................ -- (10,350) (10,350)
Stock option grants .................... (8,383) -- --
Stock options exercised ................ -- -- 1,144
Class A Common Stock issued pursuant
to employee benefit plans ............ -- -- 1,990
Equity put options ..................... -- -- --
Repurchase and retirement of 1,505,000 . -- -- (26,665)
shares of Class A Common Stock
Equity put option premiums ............. -- -- (12,938)
Issuance of Class A Common Stock ....... -- -- 335,123
Amortization of deferred compensation .. 1,721 -- 1,721
Income tax benefit related to deferred
compensation ......................... -- -- (390)
Net loss ............................... -- (16,880) (16,880)
--------- --------- ---------
BALANCE, December 31, 1998 ............... $ (7,616) $ (59,491) $ 816,043
--------- --------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-5
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
ADDITIONAL
PAID-IN
SERIES B SERIES D CLASS A CLASS B ADDITIONAL CAPITAL -
PREFERRED PREFERRED COMMON COMMON PAID-IN EQUITY PUT
STOCK STOCK STOCK STOCK CAPITAL OPTIONS
----- ----- ----- ----- ------- -------
BALANCE, December 31, 1998 .............. $-- $ 35 $ 474 $ 491 $ 838,950 $ 43,200
Class B Common Stock converted into
Class A Common Stock ................ -- -- 15 (15) -- --
Series B Preferred Stock converted
into Class A Common Stock ........... (1) -- 8 -- (7) --
Class A Common Stock converted to
Series B Preferred Stock ............ 1 -- (6) -- 5 --
Series B Preferred Stock redemptions .. -- -- -- -- (1,498) --
Repurchase and retirement of 320,000
shares of Class A Common Stock ...... -- -- (3) -- (3,491) --
Dividends payable on Series D Preferred
Stock ............................... -- -- -- -- -- --
Stock options exercised ............... -- -- 1 -- 1,779 --
Class A Common Stock issued pursuant .. -- -- 2 -- 3,124 --
to employee benefit plans
Equity put options .................... -- -- -- -- (2,868) 2,868
Net payments relating to equity put
options ............................. -- -- -- -- 751 --
Amortization of deferred compensation . -- -- -- -- -- --
Income tax benefit related to deferred
compensation ........................ -- -- -- -- (360) --
Deferred compensation adjustment
related to forfeited stock options .. -- -- (1,992) --
Net income ............................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1999 .............. $-- $ 35 $ 491 $ 476 $ 834,393 $ 46,068
--------- --------- --------- --------- --------- ---------
ADDITIONAL
PAID-IN
CAPITAL - TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
------------ ------- ------
BALANCE, December 31, 1998 .............. $ (7,616) $ (59,491) $ 816,043
Class B Common Stock converted into
Class A Common Stock ................ -- -- --
Series B Preferred Stock converted
into Class A Common Stock ........... -- -- --
Class A Common Stock converted to
Series B Preferred Stock ............ -- -- --
Series B Preferred Stock redemptions .. -- -- (1,498)
Repurchase and retirement of 320,000
shares of Class A Common Stock ...... -- -- (3,494)
Dividends payable on Series D Preferred
Stock ............................... -- (10,350) (10,350)
Stock options exercised ............... -- -- 1,780
Class A Common Stock issued pursuant .. -- -- 3,126
to employee benefit plans
Equity put options .................... -- -- --
Net payments relating to equity put
options ............................. -- 751
Amortization of deferred compensation . 1,135 -- 1,135
Income tax benefit related to deferred
compensation ........................ -- -- (360)
Deferred compensation adjustment
related to forfeited stock options .. 1,992 -- --
Net income ............................ -- 167,784 167,784
--------- --------- ---------
BALANCE, December 31, 1999 .............. $ (4,489) $ 97,943 $ 974,917
--------- --------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-6
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
SERIES D CLASS A CLASS B ADDITIONAL CAPITAL - CAPITAL -
PREFERRED COMMON COMMON PAID-IN EQUITY PUT DEFERRED
STOCK STOCK STOCK CAPITAL OPTIONS COMPENSATION
----- ----- ----- ------- ------- ------------
BALANCE, December 31, 1999 ................... $35 $ 491 $ 476 $ 834,393 $ 46,068 $(4,489)
Class B Common Stock converted into
Class A Common Stock ..................... -- 21 (21) -- -- --
Repurchase and retirement of 12,560,400
shares of Class A Common Stock ........... -- (126) -- (123,174) -- --
Dividends payable on Series D Preferred
Stock .................................... -- -- -- -- -- --
Stock option grants ........................ -- -- -- 558 -- (558)
Stock options exercised .................... -- -- 53 -- --
Class A Common Stock issued pursuant
to employee benefit plans ................ -- 4 -- 2,655 -- --
Equity put options ......................... -- -- -- 38,257 (38,257) --
Reclassification due to adoption of
EITF No. 00-19 ........................... -- -- -- -- (7,811) --
Amortization of deferred compensation ...... -- -- -- -- -- 92
Income tax benefit related to deferred
compensation ............................. -- -- -- (33) -- --
Deferred compensation adjustment
related to forfeited stock options ....... -- -- (2,337) -- 2,337
Net income ................................. -- -- -- -- -- --
Other comprehensive loss on
investments, net of tax benefit
of $695 ................................... -- -- -- -- -- --
Comprehensive income ....................... -- -- -- -- -- --
--- ----- ------- --------- -------- -------
BALANCE, December 31, 2000 ................... $35 $ 390 $ 455 $ 750,372 $-- $(2,618)
=== ===== ======= ========= ======== =======
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS LOSS EQUITY
-------- ---- ------
BALANCE, December 31, 1999 ................ $ 97,943 $-- $ 974,917
Class B Common Stock converted into
Class A Common Stock .................. -- -- --
Repurchase and retirement of 12,560,400
shares of Class A Common Stock ........ -- -- (123,300)
Dividends payable on Series D Preferred
Stock ................................. (10,350) -- (10,350)
Stock option grants ..................... -- -- --
Stock options exercised ................. -- -- 53
Class A Common Stock issued pursuant
to employee benefit plans ............. -- -- 2,659
Equity put options ...................... -- -- --
Reclassification due to adoption of
EITF No. 00-19 ........................ -- -- (7,811)
Amortization of deferred compensation ... -- -- 92
Income tax benefit related to deferred
compensation .......................... -- -- (33)
Deferred compensation adjustment
related to forfeited stock options .... -- --
---------
Net income .............................. 77,365 -- 77,365
Other comprehensive loss on
investments, net of tax benefit
of $695 ................................ -- (1,062) (1,062)
---------
Comprehensive income .................... -- -- 76,303
--------- ------- ---------
BALANCE, December 31, 2000 ................ $ 164,958 $(1,062) $ 912,530
========= ======= =========
The accompanying notes are an integral part of these consolidated statements
F-7
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
1998 1999 2000
---- ---- ----
NET CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) .................................... $ (16,880) $ 167,784 $ 77,365
Adjustments to reconcile net income (loss) to net to
cash flows from operating activities -
Extraordinary loss ................................. 18,433 -- --
(Gain) loss on sale of broadcast assets ............ (1,232) 418 --
Gain on sale of broadcast assets related to
discontinued operations ........................... (10,769) (329,803) (178,134)
Loss (gain) on derivative instrument ............... 9,050 (15,747) 296
Cumulative adjustment for change in assets held for
sale .............................................. -- -- (1,237)
Loss from equity investments ....................... -- 504 16,764
Amortization of debt discount ...................... 98 98 131
Depreciation of property and equipment ............. 29,153 36,419 40,101
Amortization of acquired intangible broadcast
assets, non-compete and consulting agreements and
other assets ...................................... 98,372 123,273 118,208
Amortization of program contract costs and net
realizable value adjustments ...................... 72,403 90,021 100,655
Amortization of deferred compensation .............. 1,721 1,135 92
Deferred tax provision related to operations ....... 30,700 25,197 11,760
Deferred tax provision (benefit) related to sale of
broadcast assets from discontinued operations ..... -- 37,988 (5,342)
Net effect of change in deferred barter revenues and
deferred barter costs ............................. (624) (911) (497)
(Decrease) increase in minority interest ........... (98) 316 (891)
Changes in assets and liabilities, net of effects of
acquisitions and dispositions -
(Increase) decrease in accounts receivable, net .... (68,207) (4,579) 31,529
(Increase) decrease in prepaid expenses and other
current assets ................................... (2,475) (6,154) 2,019
Decrease in refundable income taxes ................ 10,581 -- --
Increase (decrease) in accounts payable and accrued
liabilities ...................................... 40,878 (25,483) (344)
Increase (decrease) in income taxes payable ........ -- 106,033 (60,909)
Increase in other long-term liabilities ............ 483 3,629 11,864
Payments on program contracts payable .............. (61,107) (79,473) (94,303)
--------- --------- ---------
Net cash flows from operating activities ........... $ 150,480 $ 130,665 $ 69,127
--------- --------- ---------
The accompanying notes are an integral part of these consolidated statements
F-8
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
1998 1999 2000
---- ---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES ....................... $ 150,480 $ 130,665 $ 69,127
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ...................... (19,426) (30,861) (33,256)
Payments for acquisitions of television and radio
stations ................................................ (2,068,258) (237,274) (89,936)
Distribution from (contributions in) investments ........... 665 (15,016) (13,465)
Proceeds from sale of broadcast assets ..................... 273,290 733,916 346,439
Loans to officers and affiliates ........................... (2,073) (859) (639)
Repayments of loans to officers and affiliates ............. 3,120 2,593 677
----------- --------- ---------
Net cash flows (used in) from investing activities ...... (1,812,682) 452,499 209,820
----------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and commercial bank
financing ............................................... 1,822,677 357,500 707,500
Repayments of notes payable, commercial bank
financing and capital leases ............................ (578,285) (909,399) (879,500)
Repayments of notes and capital leases to affiliates ....... (1,798) (5,314) (6,079)
Payments of costs related to bank financings ............... (11,138) -- --
Repurchases of Class A Common Stock ........................ (26,665) (3,494) (107,322)
Dividends paid on Series D Preferred Stock ................. (10,350) (10,350) (10,350)
Proceeds from exercise of stock options .................... 1,144 1,780 53
Proceeds from execution/termination of derivative
instruments ............................................. 9,450 -- 4,434
Net (premiums paid) proceeds related to equity put
options ................................................. (14,015) 751 --
Payments for redemption of Series B Preferred Stock ........ -- (1,498) --
Net proceeds from issuances of Class A Common Stock ........ 335,123 -- --
----------- --------- ---------
Net cash flows from (used in) financing activities ...... 1,526,143 (570,024) (291,264)
----------- --------- ---------
NET (DECREASE) INCREASE IN CASH ................................ (136,059) 13,140 (12,317)
CASH, beginning of period ...................................... 139,327 3,268 16,408
----------- --------- ---------
CASH, end of period ............................................ $ 3,268 $ 16,408 $ 4,091
=========== ========= =========
The accompanying notes are an integral part of these consolidated statements
F-9
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sinclair Broadcast Group, Inc., and all other consolidated subsidiaries, which
are collectively referred to hereafter as "the Company, Companies or SBG." The
Company owns or provides programming services pursuant to local marketing
agreements ("LMAs") to television stations throughout the United States.
DISCONTINUED OPERATIONS
In July 1999, the Company entered into an agreement to sell 46 of its radio
stations in nine markets to Entercom Communications Corporation ("Entercom") for
$824.5 million in cash (adjusted for closing costs). In December 1999, the
Company completed the sale of 41 of its radio stations in eight markets to
Entercom for $700.4 million in cash recognizing a gain, net of tax of $192.4
million. The Company completed the sale of four of the remaining five radio
stations to Entercom in July 2000 for $126.6 million in cash and completed the
sale of the remaining radio station in Wilkes-Barre to Entercom in November 2000
for a purchase price of $0.6 million in cash. In addition, in October 2000, the
Company completed its sale to Emmis Communications Corporation ("Emmis") of the
remaining radio stations serving the St. Louis market for a purchase price of
$220.0 million. The Company recognized a gain, net of tax of $108.3 million on
the sales of these remaining radio stations for the year ended December 31,
2000.
Based on the Company's strategy to divest of its radio broadcasting segment,
"Discontinued Operations" accounting has been adopted for the periods presented
in the accompanying financial statements and the notes thereto. As such, the
results from operations of the radio broadcast segment, net of related income
taxes, has been reclassified from income from operations and reflected as income
from discontinued operations in the accompanying consolidated statements of
operations for all periods presented. In addition, assets and liabilities
relating to the radio broadcast segment are reflected in "Broadcast assets
related to discontinued operations, net of liabilities" in the accompanying
consolidated balance sheets for all periods presented. Included in the balance
of "Broadcast assets related to discontinued operations, net of liabilities" as
of December 31, 1999 was property and programming assets of $13.8 million,
intangible assets of $163.9 million, other long-term assets of $1.3 million,
programming liabilities of $5.0 million and other long-term liabilities of $1.0
million. Accounts receivable related to discontinued operations, which the
Company will continue to own the rights to and collect, is included in "Accounts
receivable, net of allowance for doubtful accounts," in the accompanying
consolidated balance sheets for all periods presented. "Accounts receivable, net
of allowance for doubtful accounts" includes accounts receivable related to
discontinued operations balances of $26.9 million, net of allowance of $1.4
million and $1.8 million, net of allowance of $1.4 million as of December 31,
1999 and 2000, respectively.
"Net income from discontinued operations" includes net broadcast revenues of
$112.4 million, $133.8 million and $27.9 million for the years ended December
31, 1998, 1999 and 2000, respectively.
Discontinued operations have not been segregated in the Statement of
Consolidated Cash Flows and therefore, amounts for certain captions will not
agree with the accompanying Consolidated Statements of Operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all its wholly-owned and majority-owned subsidiaries. Minority interest
represents a minority owner's proportionate share of the equity in certain of
the Company's subsidiaries. All significant intercompany transactions and
account balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets,
F-10
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
liabilities, revenues and expenses in the financial statements and in the
disclosures of contingent assets and liabilities. While actual results could
differ from those estimates, management believes that actual results will not be
materially different from amounts provided in the accompanying consolidated
financial statements.
PROGRAMMING
The Company has agreements with distributors for the rights to television
programming over contract periods which generally run from one to seven years.
Contract payments are made in installments over terms that are generally shorter
than the contract period. Each contract is recorded as an asset and a liability
at an amount equal to its gross contractual commitment when the license period
begins and the program is available for its first showing. The portion of
program contracts which become payable within one year is reflected as a current
liability in the accompanying consolidated balance sheets.
The rights to program materials are reflected in the accompanying consolidated
balance sheets at the lower of unamortized cost or estimated net realizable
value. Estimated net realizable values are based upon management's expectation
of future advertising revenues net of sales commissions to be generated by the
program material. Amortization of program contract costs is generally computed
using either a four year accelerated method or based on usage, whichever yields
the greater amortization for each program. Program contract costs, estimated by
management to be amortized in the succeeding year, are classified as current
assets. Payments of program contract liabilities are typically paid on a
scheduled basis and are not affected by adjustments for amortization or
estimated net realizable value.
BARTER ARRANGEMENTS
Certain program contracts provide for the exchange of advertising air time in
lieu of cash payments for the rights to such programming. These contracts are
recorded as the programs are aired at the estimated fair value of the
advertising air time given in exchange for the program rights. Network
programming is excluded from these calculations.
The Company broadcasts certain customers' advertising in exchange for equipment,
merchandise and services. The estimated fair value of the equipment, merchandise
or services received is recorded as deferred barter costs and the corresponding
obligation to broadcast advertising is recorded as deferred barter revenues. The
deferred barter costs are expensed or capitalized as they are used, consumed or
received. Deferred barter revenues are recognized as the related advertising is
aired.
OTHER ASSETS
Other assets as of December 31, 1999 and 2000 consist of the following (in
thousands):
1999 2000
---- ----
Unamortized costs relating to securities issuances ......... $ 27,236 $ 23,307
Investments ................................................ 19,329 14,063
Notes and other accounts receivable ........................ 54,101 52,558
Deposits and other costs relating to future acquisitions ... 7,195 2,272
Fair value of derivative instrument ........................ -- 6,050
Other ...................................................... 522 5,613
-------- --------
$108,383 $103,863
======== ========
F-11
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
The Company uses the equity method of accounting for investments in which it has
a 20% to 50% ownership interest or when the Company has significant influence.
For investments in which it has less than a 20% interest, the Company uses the
lower of cost or fair market value method of accounting.
The Company has a 35% ownership interest in Acrodyne Communications, Inc.
("Acrodyne"), a manufacturer of television transmitters and other broadcast
equipment. The Company accounts for its investment in Acrodyne under the equity
method of accounting. During August 2000, Acrodyne announced that it would be
restating its financial statements for the year ended December 31, 1999 and the
three months ended March 31, 2000 due to an overstatement of revenue, inventory
and gross profits. The impact of the 1999 restatement, which would have
increased the Company's equity share of Acrodyne's losses from $0.5 million to
$2.3 million was not material to the Company's 1999 net income. As a result of
the restatement, Acrodyne was unable to fulfill its quarterly reporting
requirements with the SEC for the quarters ended June 30, 2000 and September 30,
2000 on a timely basis. During September 2000, Acrodyne was delisted from
NASDAQ. As a result, the Company wrote-off its investment in Acrodyne to zero
and recorded a loss of $6.9 million, including its equity in the revised 1999
losses described above and the 2000 losses through the write-off date, which has
been reflected in the accompanying Statements of Operations as "Loss related to
investments".
In addition, during 2000, the Company advanced and guaranteed loans to Acrodyne
under two credit facilities which were fully reserved as of December 31, 2000.
Accordingly, the Company incurred a loss of $3.2 million during 2000 which has
also been reflected in the accompanying Statements of Operations as "Loss
related to investments".
In 1999, the Company made a $2.0 million investment, representing a 30%
ownership interest, in Channel 23 LLC, a start-up entity created to purchase a
FCC license and retransmit a signal in the Tuscaloosa, Alabama market. Channel
23 LLC had no operations and was abandoned by the Company during 2000 resulting
in a loss of $2.2 million which has also been reflected in the accompanying
Statements of Operations as "Loss related to investments".
The Company has no other investments, which were material, individually, or in
the aggregate to the accompanying financial statements.
ACQUIRED INTANGIBLE BROADCAST ASSETS
Acquired intangible broadcast assets are being amortized on a straight-line
basis over periods of 1 to 40 years. These amounts result from the acquisition
of certain television station license and non-license assets. The Company
monitors the individual financial performance of each of the stations and
continually evaluates the realizability of intangible and tangible assets and
the existence of any impairment to its recoverability based on the projected
undiscounted cash flows of the respective stations. As of December 31, 2000,
management believes that the carrying amounts of the Company's tangible and
intangible assets have not been impaired.
Intangible assets as of December 31, 1999 and 2000, consist of the following (in
thousands):
AMORTIZATION
PERIOD 1999 2000
------ ---- ----
Goodwill .......................... 40 years $ 1,539,151 $ 1,733,958
Intangibles related to LMAs ....... 15 years 463,067 460,463
Decaying advertiser base .......... 3 - 15 years 92,000 88,584
FCC licenses ...................... 25 years 433,790 515,044
Network affiliations .............. 25 years 241,356 223,359
Other ............................. 1 - 40 years 48,908 45,096
----------- -----------
2,818,272 3,066,504
Less - Accumulated amortization.... (331,308) (382,398)
----------- -----------
$ 2,486,964 $ 2,684,106
=========== ===========
F-12
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31, 1999 and 2000
(in thousands):
1999 2000
---- ----
Compensation .................................. $20,862 $18,635
Interest ...................................... 27,478 23,864
Unsettled stock repurchases ................... -- 15,979
Other accruals relating to operating expenses.. 18,738 22,148
------- -------
$67,078 $80,626
======= =======
SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS
During 1998, 1999 and 2000, the Company incurred the following transactions
(in thousands):
1998 1999 2000
---- ---- ----
o Purchase accounting adjustments
related to deferred taxes.............. $ 113,950 $ -- $ --
=========== =========== ===========
o Capital leases obligations incurred..... $ 3,807 $ 22,208 $ 5,319
=========== =========== ===========
o Income taxes paid from operations...... $ 3,588 $ 7,433 $ 6,383
=========== =========== ===========
o Income taxes paid related to sale
of discontinued operations............. $ -- $ -- $ 115,054
=========== =========== ===========
o Income tax refund received............. $ 10,486 $ 2,231 $ 3,598
=========== =========== ===========
o Subsidiary trust minority interest
payments .............................. $ 23,250 $ 23,250 $ 23,250
=========== =========== ===========
o Interest paid.......................... $ 117,658 $ 203,976 $ 139,833
=========== =========== ===========
LOCAL MARKETING AGREEMENTS
The Company generally enters into LMAs and similar arrangements with stations
located in markets in which the Company already owns and operates a station, and
in connection with acquisitions, pending regulatory approval of transfer of
License Assets. Under the terms of these agreements, the Company makes specified
periodic payments to the owner-operator in exchange for the grant to the Company
of the right to program and sell advertising on a specified portion of the
station's inventory of broadcast time. Nevertheless, as the holder of the
Federal Communications Commission ("FCC") license, the owner-operator retains
control and responsibility for the operation of the station, including
responsibility over all programming broadcast on the station.
Included in the accompanying consolidated statements of operations for the years
ended December 31, 1998, 1999 and 2000, are net revenues of $202.5 million,
$263.0 million and $253.9 million, respectively, that relate to LMAs.
BROADCAST ASSETS HELD FOR SALE
In March 1999, the Company entered into an agreement to sell to Sunrise
Television Corporation ("STC") the television stations WICS/WICD-TV in the
Springfield/Champaign, Illinois market and KGAN-TV in the Cedar Rapids, Iowa
market. In April 1999, the Justice Department requested additional information
in response to STC's filing under the Hart-Scott-Rodino Antitrust Improvements
Act. Pursuant to the agreement, if the transaction did not close by March 16,
2000, either STC or the Company had the option to terminate the agreement at
that time. On March 15, 2000, the Company entered into an agreement to terminate
the STC transaction. As a result of its termination, the Company recorded a
cumulative accounting adjustment during the first quarter of 2000 as the Company
had previously recorded the assets
F-13
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
and liabilities related to these stations as "Broadcast Assets Held for Sale"
and deferred the losses related to these stations until they were sold.
As of December 31, 1999, broadcast assets held for sale, less current portion,
included the assets of KDNL-TV in the St. Louis, Missouri market. The assets
were reclassified to the appropriate balance sheet classifications during the
second quarter of 2000 as the option to sell these assets was subsequently
terminated (see Note 11).
REVENUE RECOGNITION
Advertising revenues, net of agency and national representatives' commissions,
are recognized in the period during which time spots are aired. Total revenues
includes (i) cash and barter advertising revenues, net of agency and national
representatives' commissions, (ii) network compensation, and (iii) other
revenues.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
2. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
Buildings and improvements .......................... 10 - 35 years
Station equipment ................................... 5 - 10 years
Office furniture and equipment ...................... 5 - 10 years
Leasehold improvements .............................. 10 - 31 years
Automotive equipment ................................ 3 - 5 years
Shorter of 10 years
Property and equipment and autos under capital leases or the lease term
Property and equipment consisted of the following as of December 31, 1999 and
2000 (in thousands):
1999 2000
---- ----
Land and improvements ............... $ 13,015 $ 17,209
Buildings and improvements .......... 67,273 82,667
Station equipment ................... 216,250 254,810
Office furniture and equipment ...... 27,060 33,409
Leasehold improvements .............. 10,441 9,418
Automotive equipment ................ 7,760 9,958
Construction in Progress ............ -- 3,184
--------- ---------
341,799 410,655
Less - Accumulated depreciation ..... (90,016) (129,668)
--------- ---------
$ 251,783 $ 280,987
========= =========
3. DERIVATIVE INSTRUMENTS:
The Company enters into derivative instruments primarily for the purpose of
reducing the impact of changing interest rates on its floating rate debt, and to
reduce the impact of changing fair market values on its fixed rate debt. In
addition, the Company has entered into put and call option derivative
instruments relating to the Company's Class A Common Stock in order to hedge the
possible dilutive effect of employees exercising stock options pursuant to the
Company's stock option plans. The Company does not enter into derivative
instruments for speculative trading purposes.
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. In June 1999, the FASB issued Statement No.
137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
F-14
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. In June 2000, the FASB
issued Statement 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133. Statement 133, as
amended, establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative instrument's gains and losses to offset related
results on the hedged item in the income statement, to the extent effective, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The Company
estimates that SFAS 133 will have the following impact on its financial
statements.
The Company's existing interest rate swap agreements are not expected to qualify
for special hedge accounting treatment under SFAS 133. As a result, both of the
Company's interest rate swap agreements will be reflected as liabilities on
January 1, 2001 at their total fair market value of $7.1 million (described
below), with subsequent changes in their fair market values recorded as other
income or loss. The transition adjustment to record the Company's
fixed-to-floating rate derivative will result in an increase in both the
derivative liability and bond discount of $1.0 million (included in the $7.1
million above) on the balance sheet. The bond discount will be amortized to
interest expense through December 15, 2007, the termination date of the swap
agreement.
SFAS 133 requires deferred gains and losses on terminated floating-to-fixed
rate hedges (described above) to be presented as other comprehensive income or
loss on the balance sheet. As a result, the Company will be required to
reclassify the $4.3 million net balance of deferred losses to other
comprehensive loss as of January 1, 2001, which will be amortized to interest
expense over the term of the related debt.
INTEREST RATE HEDGING DERIVATIVE INSTRUMENTS
As of December 31, 2000, the Company had an interest rate swap agreement with a
notional amount of $575 million which expires on June 3, 2004. The swap
agreement requires the Company to pay a fixed rate which is set in the range of
6% to 6.55% and receive a floating rate based on the three month London
Interbank Offered Rate ("LIBOR"), and the measurement and settlement is
performed quarterly. This swap agreement is reflected as a derivative obligation
of $6.1 million as a component of "Accrued liabilities" on the accompanying
consolidated balance sheet as of December 31, 2000 as a result of a modification
of the agreement during 2000. In addition, the Company has entered into an
interest rate swap agreement with a notional amount of $250 million which
expires on December 15, 2007 in which the Company receives a fixed rate of 8.75%
and pays a floating rate based on LIBOR (and the measurement and settlement is
performed quarterly). Periodic settlements of these agreements are recorded as
adjustments to interest expense in the relevant periods.
The counterparties to these agreements are international financial institutions.
The Company estimates the fair value of these instruments at December 31, 2000
to be $7.1 million, consisting of $6.1 million related to the floating-to-fixed
rate agreement and $1.0 million related to the fixed-to-floating rate agreement.
The fair value of the interest rate swap agreements is estimated by obtaining
quotations from the financial institutions which are a party to the Company's
derivative contracts (the "Banks"). The fair value is an estimate of the net
amount that the Company would pay on December 31, 2000 if the contracts were
transferred to other parties or cancelled by the Company.
The Company experienced losses of $2.6 million during 2000 as a result of
terminating two of its fixed-to-floating interest rate swap agreements. The
losses resulting from these terminations are reflected as a discount on the
Company's fixed rate debt and are being amortized to interest expense through
December 15, 2007, the expiration date of the terminated swap agreements. For
the year ended December 31, 2000, amortization of $0.03 million of the discount
was recorded to interest expense.
The Company experienced gains of $1.9 million as a result of terminating several
of its floating-to-fixed interest rate swap agreements. In addition, the Company
experienced a loss of $6.1 million as a result of modifying the terms of its
remaining floating-to-fixed interest rate swap agreement, as discussed above.
The gains and losses resulting from these terminations and modifications have
been deferred and are recorded as "Other long-term liabilities" and "Other
assets" on the accompanying consolidated balance
F-15
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
sheet as of December 31, 2000. These deferred gains and losses are being
amortized to interest income and expense through the expiration dates of the
terminated or modified swap agreements, which expire from July 9, 2001 to June
3, 2004. For the year ended December 31, 2000, amortization of $0.1 million of
the deferred gain was recorded to interest expense.
No amortization of the deferred loss was recorded because the loss occurred on
the last business day of 2000.
TREASURY OPTION DERIVATIVE INSTRUMENT
In August 1998, the Company entered into a treasury option derivative contract
(the "Option Derivative"). The Option Derivative contract provided for 1) an
option exercise date of September 27, 2000, 2) a notional amount of $300 million
and 3) a five-year treasury strike rate of 6.14%. Upon the execution of the
Option Derivative contract in 1998, the Company received a cash payment
representing an option premium of $9.5 million which was recorded in "Other
long-term liabilities" in the accompanying consolidated balance sheets. The
Company adjusted its liability to the present value of the future payments of
the settlement amounts based on the forward five-year treasury rate at the end
of each accounting period. These adjustments are reflected on the Company's
Consolidated Statement of Operations as "Unrealized gains or losses on
derivative instrument".
On September 27, 2000, the yield in the five-year treasury rate was 5.906%
resulting in a loss of $0.3 million for the year ended December 31, 2000. In
addition, the Company made a cash settlement payment of $3.0 million upon the
expiration of the Option Derivative contract which is equal to the notional
amount of $300 million multiplied by the strike rate (6.14%) less the settlement
rate (5.906%) discounted over a five-year period. The Company realized a $6.4
million cash profit over the life of the transaction.
EQUITY PUT AND CALL OPTIONS
1997 OPTIONS
In April 1997, the Company entered into put and call option contracts related to
its common stock for the purpose of hedging the dilution of the common stock
upon the exercise of stock options granted. The Company entered into 1,100,000
European style (that is, exercisable on the expiration date only) put options
for common stock with a strike price of $12.89 per share which provide for
settlement in cash or in shares, at the election of the Company. The Company
entered into 1,100,000 American style (that is, exercisable any time on or
before the expiration date) call options for common stock with a strike price of
$12.89 per share which provide for settlement in cash or in shares, at the
election of the Company. For the year ended December 31, 2000, upon the
settlement of these options, the Company repurchased 1,100,000 shares of common
stock and made payments of $14.2 million.
1998 OPTIONS
In July 1998, the Company entered into put and call option contracts related to
the Company's common stock (the "July Options"). In September 1998, the Company
entered into additional put and call option contracts related to the Company's
common stock (the "September Options"). These option contracts allow for
settlement in cash or net physically in shares, at the election of the Company.
The Company entered into these option contracts for the purpose of hedging the
dilution of the Company's common stock upon the exercise of stock options
granted. The July Options included 2,700,000 call options for common stock and
2,700,000 put options for common stock, with a strike price of $33.27 and $28.93
per common share, respectively. The September Options included 467,000 call
options for common stock and 700,000 put options for common stock, with a strike
price of $28.00 and $16.0625 per common share, respectively. For the year ended
December 31, 1998, option premium payments of $12.2 million and $0.7 million
were made relating to the July and September Options, respectively. The Company
recorded these premium payments as a reduction of additional paid-in capital. To
the extent that the Company entered into put options related to its common
stock, the additional paid-in capital amounts were reclassified accordingly and
reflected as Equity Put Options in the accompanying consolidated balance sheet
as of December 31, 1998. For the year ended December 31, 1999, the Company
recorded receipts
F-16
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
of $1.25 million relating to the 1998 September Options as an increase in
additional paid-in capital. Additionally, 200,000 of the 1998 September Options
were retired during 1999.
The 1998 July Options and September Options were exercised during March 2000.
The Company repurchased 208,400 shares and made a net payment of $1.6 million
related to this settlement. The 1998 September Options were amended during March
2000 to include 2.1 million equity put options at a put strike price of $10.125.
The Company settled the 1998 September options during December 2000 and
repurchased 1,430,000 shares of common stock and made a payment of $14.5 million
related to this settlement. Additionally, during 2000, the Emerging Issues Task
Force of the Financial Accounting Standards Board (EITF) released EITF Issue No.
00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK. EITF Issue No. 00-19 clarified
how freestanding contracts that are indexed to, and potentially settled in, a
company's own stock should be classified and measured. As a result of
implementing EITF Issue No. 00-19, the Company reclassified the balance relating
to the July Options of $7.8 million from Additional Paid-in Capital-Equity Put
Options to Equity Put Options as reflected in the accompanying balance sheet as
of December 31, 2000.
1999 OPTIONS
In September 1999, the Company entered into put and call option contracts
related to the Company's common stock. The Company entered into 1,700,000
European style put options for common stock with a strike price of $9.45 per
share which provide for settlement in cash or in shares, at the election of the
Company. In September 1999, the Company entered into 1,000,000 American style
call options for common stock with a strike price $10.45 per share which provide
for settlement in cash or in shares, at the election of the Company. For the
year ended December 31, 1999, option premium payments of $0.5 million were made
relating to the September call options. The Company recorded these premium
payments as a reduction of additional paid-in capital. To the extent that the
Company entered into put options related to its common stock, the additional
paid-in capital amounts were reclassified accordingly and reflected as Equity
Put Options in the accompanying consolidated balance sheet as of December 31,
1999. For the year ended December 31, 2000, upon settlement of these options,
the Company repurchased 1,030,000 shares of common stock and made payments of
$9.7 million.
4. NOTES PAYABLE AND COMMERCIAL BANK FINANCING:
1998 BANK CREDIT AGREEMENT
In order to expand its borrowing capacity to fund acquisitions and obtain more
favorable terms with its syndicate of banks, the Company obtained a new $1.75
billion senior secured credit facility (the "1998 Bank Credit Agreement"). The
1998 Bank Credit Agreement was executed in May 1998 and includes (i) a $750.0
million Term Loan Facility repayable in consecutive quarterly installments
commencing on March 31, 1999 and ending on September 15, 2005; and (ii) a $1.0
billion reducing Revolving Credit Facility. Availability under the Revolving
Credit Facility reduces quarterly, commencing March 31, 2001 and terminating on
September 15, 2005. Not more than $350.0 million of the Revolving Credit
Facility will be available for issuances of letters of credit. The 1998 Bank
Credit Agreement also includes a standby uncommitted multiple draw term loan
facility of $400.0 million. The Company is required to prepay the Term Loan
Facility and reduce the Revolving Credit Facility with (i) 100% of the net
proceeds of any casualty loss or condemnation; (ii) 100% of the net proceeds of
any sale or other disposition by the Company of any assets in excess of $100.0
million in the aggregate for any fiscal year, to the extent not used to acquire
new assets; and (iii) 50% of excess cash flow (as defined) if the Company's
ratio of debt to EBITDA (as defined) exceeds a certain threshold. The 1998 Bank
Credit Agreement contains representations and warranties, and affirmative and
negative covenants, including among other restrictions, limitations on
additional indebtedness, customary for credit facilities of this type. The 1998
Bank Credit Agreement is secured only by a pledge of the stock of each
subsidiary of the Company other than KDSM, Inc., KDSM Licensee, Inc., Cresap
Enterprises, Inc., Sinclair Capital and Sinclair Ventures, Inc. The Company is
required to maintain certain debt covenants in connection with the 1998 Bank
Credit Agreement. As of December 31, 2000, the Company was in compliance with
all debt covenants.
F-17
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
The applicable interest rate for the Term Loan Facility and the Revolving Credit
Facility is either LIBOR plus 0.5% to 1.875% or the alternative base rate plus
zero to 0.625%. The applicable interest rate for the Term Loan Facility and the
Revolving Credit Facility is adjusted based on the ratio of total debt to four
quarters' trailing earnings before interest, taxes, depreciation and
amortization. As of December 31, 2000, the Company's applicable interest rate
for borrowings under the 1998 Bank Credit Agreement is either LIBOR plus 1.5% or
the alternative base rate plus 0.25%.
As a result of entering into the Company's 1998 Bank Credit Agreement, the
Company incurred debt acquisition costs of $11.1 million and recognized an
extraordinary loss of $11.1 million net of a tax benefit of $7.4 million. The
extraordinary loss represents the write-off of debt acquisition costs associated
with indebtedness replaced by the new facility. The weighted average interest
rates for outstanding indebtedness relating to the 1998 Bank Credit Agreement
during 2000 and as of December 31, 2000 were 7.73% and 7.54%, respectively.
Interest expense relating to the 1998 Bank Credit Agreement was $108.9 million
and $79.3 million for years ended December 31, 1999 and 2000, respectively.
8 3/4% SENIOR SUBORDINATED NOTES DUE 2007:
In December 1997, the Company completed an issuance of $250 million aggregate
principal amount of 8 3/4% Senior Subordinated Notes due 2007 (the "8 3/4%
Notes") pursuant to a shelf registration statement and generated net proceeds to
the Company of $242.8 million. Of the net proceeds from the issuance, $106.2
million was utilized to tender the Company's 1993 Notes with the remainder
retained for general corporate purposes which may include payments relating to
future acquisitions.
Interest on the 8 3/4% Notes is payable semiannually on June 15 and December 15
of each year, commencing June 15, 1998. Interest expense was $21.9 million for
each of the three years ended December 31, 1998, 1999 and 2000. The 8 3/4% Notes
are issued under an Indenture among SBG, its subsidiaries (the guarantors) and
the trustee. Costs associated with the offering totaled $5.8 million, including
an underwriting discount of $5.0 million. These costs were capitalized and are
being amortized over the life of the debt.
Based upon the quoted market price, the fair value of the 8 3/4% Notes as of
December 31, 1999 and 2000 was $231.3 million and $220.4 million, respectively.
9% SENIOR SUBORDINATED NOTES DUE 2007:
In July 1997, the Company completed an issuance of $200 million aggregate
principal amount of 9% Senior Subordinated Notes due 2007 (the "9% Notes"). The
Company utilized $162.5 million of the approximately $195.6 million net proceeds
of the issuance to repay outstanding revolving credit indebtedness and utilized
the remainder to fund acquisitions.
Interest on the 9% Notes is payable semiannually on January 15 and July 15 of
each year, commencing January 15, 1998. Interest expense was $18.0 million for
each of the three years ended December 31, 1998, 1999 and 2000. The 9% Notes are
issued under an Indenture among SBG, its subsidiaries (the guarantors) and the
trustee. Costs associated with the offering totaled $4.8 million, including an
underwriting discount of $4.0 million. These costs were capitalized and are
being amortized over the life of the debt.
Based upon the quoted market price, the fair value of the 9% Notes as of
December 31, 1999 and 2000 was $186.2 million and $180.4 million, respectively.
10% SENIOR SUBORDINATED NOTES DUE 2005
In August 1995, the Company completed an issuance of $300 million aggregate
principal amount of 10% Senior Subordinated Notes (the "1995 Notes"), due 2005,
generating net proceeds to the Company of $293.2 million. The net proceeds of
this offering were utilized to repay outstanding indebtedness under the then
existing Bank Credit Agreement of $201.8 million with the remainder being
retained and eventually utilized to make payments related to certain
acquisitions consummated during 1996. Interest on the Notes is payable
semiannually on March 30 and September 30 of each year. Interest expense was
$30.0 million for each of the three years ended December 31, 1998, 1999 and
2000. The notes are issued under an indenture among SBG, its subsidiaries (the
guarantors) and the trustee. Costs associated with the
F-18
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
offering totaled $6.8 million, including an underwriting discount of $6.0
million. These costs were capitalized and are being amortized over the life of
the debt.
Based upon the quoted market price, the fair value of the 1995 Notes as of
December 31, 1999 and 2000 was $296.1 million and $291.2 million, respectively.
10% SENIOR SUBORDINATED NOTES DUE 2003 AND 1997 TENDER OFFER
In December 1993, the Company completed an issuance of $200 million aggregate
principal amount of 10% Senior Subordinated Notes (the "1993 Notes"), due 2003.
Subsequently, the Company determined that a redemption of $100.0 million was
required. This redemption and a refund of $1.0 million of fees from the
underwriters took place in the first quarter of 1994.
In December 1997, the Company completed a tender offer of $98.1 million
aggregate principal amount of the 1993 Notes (the "Tender Offer"). Total
consideration per $1,000 principal amount note tendered was $1,082.08 resulting
in total consideration paid to consummate the Tender Offer of $106.2 million. In
conjunction with the Tender Offer, the Company recorded an extraordinary loss of
$6.1 million, net of a tax benefit of $4.0 million. In the second quarter of
1999, the Company redeemed the remaining 1993 notes for a total consideration of
$1.9 million. Interest expense for the years ended December 31, 1998 and 1999,
was $0.2 million and $60,000, respectively. The Notes are issued under an
Indenture among SBG, its subsidiaries (the guarantors) and the trustee.
SUMMARY
Notes payable, capital lease and commercial bank financing consisted of the
following as of December 31, 1999 and 2000 (in thousands):
1999 2000
---- ----
Bank Credit Agreement, Term Loan .............................. $ 700,000 $ 625,000
Bank Credit Agreement, Revolving Credit Facility .............. 303,000 206,000
8 3/4% Senior Subordinated Notes, due 2007 .................... 250,000 250,000
9% Senior Subordinated Notes, due 2007 ........................ 200,000 200,000
10% Senior Subordinated Notes, due 2005 ....................... 300,000 300,000
Capital lease ................................................. -- 3,767
Installment note for certain real estate interest at 8.0% ..... 87 79
----------- -----------
1,753,087 1,584,846
Less: Discount on 8 3/4% Senior Subordinated
Notes, due 2007 ............................................. (780) (682)
Less: Discount from terminations of derivative
instruments on 9% and 10% notes ............................. -- (2,585)
Less: Current portion ........................................ (75,008) (100,018)
----------- -----------
$ 1,677,299 $ 1,481,561
=========== ===========
F-19
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
Indebtedness under the 1998 Bank Credit Agreement, notes payable and capital
lease as of December 31, 2000, mature as follows (in thousands):
2001 ........................................................... $ 100,018
2002 ........................................................... 100,035
2003 ........................................................... 125,047
2004 ........................................................... 150,074
2005 ........................................................... 656,142
2006 and thereafter ............................................ 453,530
-----------
1,584,846
Less: Discount on 8 3/4% Senior Subordinated Notes due 2007 .... (682)
Less: Discount from swap terminations on 9% and 10% notes ...... (2,585)
-----------
$ 1,581,579
Substantially all of the Company's stock in its wholly owned subsidiaries has
been pledged as security for notes payable and commercial bank financing.
5. NOTES AND CAPITAL LEASES PAYABLE TO AFFILIATES:
Notes and capital leases payable to affiliates consisted of the following as of
December 31, 1999 and 2000 (in thousands):
1999 2000
---- ----
Subordinated installment notes payable to former majority owners, interest at
8.75%, principal payments in varying amounts due annually beginning October
1991, with a balloon payment due at
maturity in May 2005 ...................................................... $ 7,632 $ 6,554
Capital lease for building, interest at 17.5% ............................... 676 304
Capital lease for building, interest at 6.62% ............................... 9,136 7,857
Capital leases for broadcasting tower facilities, interest
rates averaging 10% .................................................... 3,310 3,070
Capitalization of time brokerage agreements, interest at
6.20% to 8.25% ......................................................... 18,827 15,648
Capital leases for building and tower, interest at 8.25% .................... 451 1,414
-------- --------
40,032 34,847
Less: Current portion ....................................................... (5,890) (5,838)
-------- --------
$ 34,142 $ 29,009
======== ========
Notes and capital leases payable to affiliates, as of December 31, 2000, mature
as follows (in thousands):
2001 ....................................................... $ 8,238
2002 ....................................................... 7,209
2003 ....................................................... 5,945
2004 ....................................................... 5,246
2005 ....................................................... 6,126
2006 and thereafter ........................................ 11,413
--------
Total minimum payments due ................................. 44,177
Less: Amount representing interest ......................... (9,330)
--------
Present value of future notes and capital lease payments ... $ 34,847
========
F-20
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
6. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
2000 were as follows (in thousands):
2001 ................................................ $ 110,217
2002 ................................................ 54,134
2003 ................................................ 32,143
2004 ................................................ 11,493
2005 ................................................ 1,326
2006 and thereafter ................................. 50
---------
209,363
Less: Current portion ............................... (110,217)
---------
Long-term portion of program contracts payable ...... $ 99,146
=========
Included in the current portion amounts are payments due in arrears of $23.6
million. In addition, the Company has entered into non-cancelable commitments
for future program rights aggregating $183.7 million as of December 31, 2000.
The Company has estimated the fair value of its program contract payables and
non-cancelable commitments at approximately $173.8 million and $145.3 million,
respectively, as of December 31, 1999, and $178.3 million and $149.3 million,
respectively, at December 31, 2000. These estimates were based on future cash
flows discounted at the Company's current borrowing rate.
7. RELATED PARTY TRANSACTIONS:
In connection with the start-up of an affiliate in 1990, certain Class B
Stockholders issued a note allowing them to borrow up to $3.0 million from the
Company. This note was amended and restated June 1, 1994, to a term loan bearing
interest of 6.88% with quarterly principal payments beginning March 31, 1996
through December 31, 1999. The note was paid in full as of December 31, 1999.
During the year ended December 31, 1993, the Company loaned Gerstell Development
Limited Partnership (a partnership owned by Class B Stockholders) $2.1 million.
The note bears interest at 6.18%, with principal payments beginning on November
1, 1994, and a final maturity date of October 1, 2013. As of December 31, 1999
and 2000, the balance outstanding was approximately $1.7 million.
Concurrently with the Company's initial public offering, the Company acquired
options from certain stockholders of Glencairn, LTD ("Glencairn") that will
grant the Company the right to acquire, subject to applicable FCC rules and
regulations, up to 97% of the capital stock of Glencairn. The Glencairn option
exercise price is based on a formula that provides a 10% annual return to
Glencairn. Glencairn is the owner-operator and FCC licensee of WNUV in
Baltimore, WVTV in Milwaukee, WRDC in Raleigh/Durham, WABM in Birmingham, KRRT
in Kerrville, WBSC in Asheville/Greenville /Spartanburg and WTTE in Columbus.
The Company has entered into five-year LMA agreements (with five-year renewal
terms at the Company's option) with Glencairn pursuant to which the Company
provides programming to Glencairn for airing on WNUV, WVTV, WRDC, WABM, KRRT,
WBSC and WTTE. During the years ended December 31, 1998, 1999 and 2000, the
Company made payments of $9.8 million, $10.8 million and $11.3 million,
respectively, to Glencairn under these LMA agreements.
During the years ended December 31, 1998, 1999 and 2000, the Company from time
to time entered into charter arrangements to lease aircraft owned by certain
Class B Stockholders. During the years ended December 31, 1998, 1999 and 2000,
the Company incurred expenses of approximately $0.6 million, $0.4 million and
$0.2 million related to these arrangements, respectively.
F-21
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
Certain assets used by the Company and its operating subsidiaries are leased
from Cunningham Communications Inc., Keyser Investment Group, Gerstel LP, and
Beaver Dam, LLC (entities owned by the Class B Stockholders). Lease payments
made to these entities were $1.5 million, $2.1 million, and $2.8 million for the
years ended December 31, 1998, 1999 and 2000, respectively.
8. INCOME TAXES:
The Company files a consolidated federal income tax return and separate company
state tax returns. The provision (benefit) for income taxes consisted of the
following for the years ended December 31, 1998, 1999 and 2000 (in thousands):
1998 1999 2000
---- ---- ----
Provision for income taxes - continuing operations .... $ 32,562 $ 25,107 $ 4,816
Provision for income taxes - discontinued operations ... 13,096 149,771 73,120
Benefit from income taxes - extraordinary item ......... (7,370) -- --
--------- -------- -------
$ 38,288 $174,878 $77,936
========= ======== =======
Current:
Federal ............................................. $ 3,953 $ 81,370 $58,079
State ............................................... 3,635 30,323 13,439
--------- -------- -------
7,588 111,693 71,518
--------- -------- -------
Deferred:
Federal ............................................. 26,012 56,576 5,829
State ............................................... 4,688 6,609 589
--------- -------- -------
30,700 63,185 6,418
--------- -------- -------
$ 38,288 $174,878 $77,936
========= ======== =======
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision from continuing operations:
1998 1999 2000
---- ---- ----
Statutory federal income taxes ....................... 35.0% (35.0%) (35.0%)
Adjustments-
State income and franchise taxes, net of federal
effect .......................................... 68.9 21.2 7.0
Goodwill amortization ............................. 106.8 99.5 39.0
Non-deductible expense items ...................... 168.1 57.4 6.5
Tax liability related to dividends on Parent
Preferred Stock (a) ............................. 121.7 -- --
Other ............................................. 11.4 4.4 (1.9)
----- ----- ----
Provision for income taxes ........................... 511.9% 147.5% 15.6%
===== ===== ====
- ---------------
(a) In March 1997, the Company issued the HYTOPS securities. In
connection with this transaction, Sinclair Broadcast Group, Inc. (the
"Parent") issued $206.2 million of Series C Preferred Stock (the "Parent
Preferred Stock") to KDSM, Inc., a wholly owned subsidiary. Parent
Preferred Stock dividends paid to KDSM, Inc. are considered taxable
income for Federal tax purposes and not considered income for book
purposes. Also for Federal tax purposes, KDSM, Inc. is allowed a tax
deduction for dividends received on the Parent Preferred Stock in an
amount equal to Parent Preferred Stock dividends received in each taxable
year limited to the extent that the Parent's consolidated group has
"earnings and profits." To the extent that dividends received by KDSM,
Inc. are in excess of the Parent's consolidated group earnings and
profits, KDSM will reduce its tax basis in the Parent Preferred Stock
which gives rise to a deferred tax liability (to be recognized upon
redemption). During the year ended December 31, 1998, the Parent did not
generate "earnings and profits" in an amount greater than or equal to
dividends paid on the Parent Preferred Stock. This resulted in a
reduction in basis of the Parent's Series C Preferred Stock and generated
a related deferred tax liability. During the years ended December 31,
1999 and 2000, the Parent generated "earnings and profits" and avoided a
reduction in basis of its Parent Preferred Stock.
- --------------------------------------------------------------------------------
F-22
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
Temporary differences between the financial reporting carrying amounts and the
tax basis of assets and liabilities give rise to deferred taxes. The Company had
a net deferred tax liability of $228.7 million and $243.1 million as of December
31, 1999 and 2000, respectively.
The Company's remaining Federal NOL's will expire during various years from 2011
to 2019, and are subject to annual limitations under Internal Revenue Code
Section 382 and similar state provisions. The tax effects of these NOL's are
recorded in the deferred tax accounts in the accompanying consolidated balance
sheets.
Total deferred tax assets and deferred tax liabilities as of December 31, 1999
and 2000 were as follows (in thousands):
1999 2000
---- ----
Deferred Tax Assets:
Accruals and reserves ............................................ $ 7,868 $ 7,941
Net operating losses ............................................. 491 2,895
Tax credits ...................................................... -- 534
Investments ...................................................... 158 11,494
Other ............................................................ 1,909 2,921
--------- ---------
$ 10,426 $ 25,785
========= =========
Deferred Tax Liabilities:
FCC license ...................................................... $ (29,010) $ (44,466)
Parent Preferred Stock deferred tax liability (see (a) above) .... (25,833) (25,833)
Fixed assets and intangibles ..................................... (168,995) (181,378)
Program contracts ................................................ (8,715) (12,100)
Treasury option derivative ....................................... (2,679) --
Capital leases ................................................... (2,513) (3,232)
Other ............................................................ (1,393) (1,925)
--------- ---------
$(239,138) $(268,934)
========= =========
During 2000, the Company acquired the stock of Montecito Broadcasting
Corporation ("Montecito") and Grant Television, Inc. ("Grant"). The Company
recorded net deferred tax liabilities resulting from these purchases of
approximately $8.7 million. These net deferred tax liabilities primarily relate
to the differences between financial reporting carrying amounts and tax basis
amounts as measured upon the purchase date.
9. EMPLOYEE BENEFIT PLAN:
The Sinclair Broadcast Group, Inc. 401(k) Profit Sharing Plan and Trust (the
"SBG Plan") covers eligible employees of the Company. Contributions made to
the SBG Plan include an employee elected salary reduction amount, company
matching contributions and a discretionary amount determined each year by the
Board of Directors. The Company's 401(k) expense for the years ended December
31, 1998, 1999 and 2000 was $1.2 million, $1.4 million and $1.7 million,
respectively. There were no discretionary contributions during these periods.
During December 1997, the Company registered 800,000 shares of its Class A
Common Stock with the Securities and Exchange Commission (the "Commission") to
be issued as a matching contribution for the 1997 plan year and subsequent
plan years.
F-23
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages,
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse
effect on the Company's financial position, results of operations or cash
flows. The Company settled its litigation with Emmis and former CEO-designate
Barry Baker regarding the sale of its St. Louis broadcast properties (see Note
11).
COMMITMENT FOR ADVERTISING
During 1999, the Company entered into an option agreement with BeautyBuys.com
("Beauty Buys") to provide radio and television advertising, promotional support
and other services (in-kind services) over a five year period ending December
31, 2004 in exchange for options to acquire an equity interest. Advertising and
promotional support would be provided to BeautyBuys from the Company's
unutilized inventory, valued as if each spot was being sold at the then-current
street rates at the time of the airing. The Company would recognize no revenue
related to its advertising, promotion or other services and would recognize
revenue as the Company's options vest in an amount equal to the fair value of
the options.
In December 2000, the Company entered into a modification agreement with
BeautyBuys and its parent, Synergy Brands, Inc. ("Synergy"), whereby the Company
divested of its option to acquire an equity interest in BeautyBuys in exchange
for a significant reduction in the amount of advertising, promotional support
and other services the Company is to provide to BeautyBuys and an increased
equity position in Synergy. Additionally, the Company, BeautyBuys and Icon
International ("Icon") entered into an agreement whereby BeautyBuys would
transfer and sell to Icon its remaining amount of advertising and promotional
support to be received from SBG for a combination of $2.7 million in cash and
certain trade credits from Icon. Simultaneously, the Company entered into an
agreement with Icon whereby the Company received $3.2 million in cash and
certain trade credits from Icon in exchange for Media Time Credits or commercial
inventory. Icon inventory spots aired will be valued and characterized the same
as other spots sold with similar cash and barter components.
The cash received by BeautyBuys and the Company from Icon was viewed by
management as a measurement of the value of the future advertising the Company
will need to provide to Icon. Therefore, the company recorded an expense of $2.7
million in "Loss related to investments" and a corresponding liability of $6.9
million to "Deferred barter revenue" on the accompanying consolidated Statement
of Operations and Balance sheet for the year ended December 31, 2000. "Deferred
barter revenue" will be amortized to broadcast revenue as the proportionate cash
component of the spots are aired.
OPERATING LEASES
The Company has entered into operating leases for certain property and
equipment under terms ranging from three to ten years. The rent expense under
these leases, as well as certain leases under month-to-month arrangements, for
the years ended December 31, 1998, 1999 and 2000, was approximately $4.0
million, $5.9 million and $6.8 million, respectively.
Future minimum payments under the leases are as follows (in thousands):
2001 ........................................... 5,123
2002 ........................................... 4,254
2003 ........................................... 3,821
2004 ........................................... 3,531
2005 ........................................... 3,280
2006 and thereafter ............................ 35,178
-------
$55,187
=======
F-24
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
11. ACQUISITIONS AND DISPOSITIONS
1998 ACQUISITIONS AND DISPOSITIONS
HERITAGE ACQUISITION. In July 1997, the Company entered into a purchase
agreement to acquire certain assets of the radio and television stations of
Heritage Media Group for approximately $630 million (the "Heritage
Acquisition"). Pursuant to the Heritage Acquisition, and after giving effect to
the STC Disposition, Entercom Disposition and Centennial Disposition and a third
party's exercise of its option to acquire radio station KCAZ in Kansas City,
Missouri, the Company has acquired or provided programming services to three
television stations in two separate markets and 13 radio stations in four
separate markets. In July 1998, the Company acquired three radio stations in the
New Orleans, Louisiana market and simultaneously disposed of two of those
stations (see the Centennial Disposition below). The acquisition was accounted
for under the purchase method of accounting whereby the net purchase price for
stations not sold was allocated to property and programming assets, acquired
intangible broadcasting assets and other intangible assets for $22.6 million,
$222.8 million and $102.6 million, respectively, based on an independent
appraisal.
1998 STC DISPOSITION. In February 1998, the Company entered into agreements to
sell to STC two television stations and the non-license assets and rights to
program a third television station, all of which were acquired in the Heritage
Acquisition. In April 1998, the Company closed on the sale of the non-license
assets of the three television stations in the Burlington, Vermont and
Plattsburgh, New York market for aggregate consideration of approximately $70.0
million. During the third quarter of 1998, the Company sold the license assets
for a sales price of $2.0 million.
MONTECITO ACQUISITION. In February 1998, the Company entered into an agreement
to acquire all of the capital stock of Montecito for approximately $33.0 million
(the "Montecito Acquisition"). Montecito owns all of the issued and outstanding
stock of Channel 33, Inc. which owns and operates KFBT-TV in Las Vegas, Nevada.
In April 1998, the Company began programming KFBT-TV through an LMA upon
expiration of the applicable HSR Act waiting period. On April 18, 2000 the
Company acquired the outstanding capital stock of Montecito upon receiving
approval from the FCC.
WSYX ACQUISITION AND SALE OF WTTE LICENSE ASSETS. In April 1998, the Company
exercised its option to acquire the non-license assets of WSYX-TV in Columbus,
Ohio from River City Broadcasting, LP ("River City") for an option exercise
price and other costs of approximately $228.6 million. In August 1998, the
Company exercised its option to acquire the WSYX License Assets for an option
exercise price of $2.0 million. The acquisition was accounted for under the
purchase method of accounting whereby the purchase price was allocated to
property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $14.6 million, $179.3 million and $61.4 million,
respectively based on an independent appraisal. Simultaneously with the WSYX
Acquisition, the Company sold the WTTE license assets to Glencairn for a sales
price of $2.3 million. In connection with the sale of the WTTE license assets,
the Company recognized a $2.3 million gain.
SFX DISPOSITION. In May 1998, the Company completed the sale of three radio
stations to SFX Broadcasting, Inc. for aggregate consideration of approximately
$35.0 million (the "SFX Disposition"). The radio stations sold are located in
the Nashville, Tennessee market. In connection with the disposition, the Company
recognized a $5.2 million gain on the sale.
LAKELAND ACQUISITION. In May 1998, the Company acquired 100% of the stock of
Lakeland Group Television, Inc. ("Lakeland") for cash payments of approximately
$53.0 million (the "Lakeland Acquisition"). In connection with the Lakeland
Acquisition, the Company now owns television station KLGT-TV in
Minneapolis/St.Paul, Minnesota. The acquisition was accounted for under the
purchase method of accounting whereby the purchase price was allocated to
property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $5.1 million, $35.1 million and $29.4 million,
respectively, based on an independent appraisal.
F-25
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
ENTERCOM DISPOSITION. In June 1998, the Company completed the sale of seven
radio stations acquired in the Heritage Acquisition. The seven stations are
located in the Portland, Oregon and Rochester, New York markets and were sold
for aggregate consideration of approximately $126.9 million.
SULLIVAN ACQUISITION. In July 1998, the Company acquired 100% of the stock of
Sullivan Broadcast Holdings, Inc. and Sullivan Broadcasting Company II, Inc. for
cash payments of approximately $951.0 million (the "Sullivan Acquisition"). The
Company financed the acquisition by utilizing indebtedness under the 1998 Bank
Credit Agreement. In connection with the acquisition, the Company has acquired
the right to program 12 additional television stations in 10 separate markets.
During 2001, the Company intends to acquire the license assets of one station
and the stock of a company that owns the license assets of six additional
stations. In addition, the Company expects to enter into new LMA agreements with
respect to three of the stations and will continue to program two of the
television stations pursuant to existing LMA agreements. The acquisition was
accounted for under the purchase method of accounting whereby the purchase price
was allocated to property and programming assets, acquired intangible
broadcasting assets and other intangible assets for $58.2 million, $336.8
million and $637.6 million, respectively, based on an independent appraisal.
MAX MEDIA ACQUISITION. In July 1998, the Company directly or indirectly acquired
all of the equity interests of Max Media Properties LLC, for $252.2 million (the
"Max Media Acquisition"). The Company financed the acquisition by utilizing
existing cash balances and indebtedness under the 1998 Bank Credit Agreement. In
connection with the transaction, the Company acquired or provided programming
services to nine television stations in six separate markets and eight radio
stations in two separate markets. The acquisition was accounted for under the
purchase method of accounting whereby the purchase price was allocated to
property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $37.1 million, $144.3 million and $89.6 million,
respectively, based on an independent appraisal.
CENTENNIAL DISPOSITION. In July 1998, the Company completed the sale of the
assets of radio stations WRNO-FM, KMEZ-FM and WBYU-AM in New Orleans, Louisiana
to Centennial Broadcasting for $16.1 million in cash and recognized a loss on
the sale of $2.9 million. The Company acquired KMEZ-FM in connection with the
River City Acquisition in May of 1996 and acquired WRNO-FM and WBYU-AM in New
Orleans from Heritage Media Group, Inc. ("Heritage") in July 1998. The Company
was required to divest WRNO-FM, KMEZ-FM and WBYU-AM to meet certain regulatory
ownership guidelines.
GREENVILLE ACQUISITION. In July 1998, the Company acquired three radio stations
in the Greenville/Spartansburg market from Keymarket Radio of South Carolina,
Inc. for a purchase price consideration involving the forgiveness of
approximately $8.0 million of indebtedness to Sinclair. Concurrently with the
acquisition, the Company acquired an additional two radio stations in the same
market from Spartan Broadcasting for a purchase price of approximately $5.2
million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and acquired
intangible broadcasting assets for $5.0 million and $10.1 million, respectively,
based on an independent appraisal.
RADIO UNICA DISPOSITION. In July 1998, the Company completed the sale of KBLA-AM
in Los Angeles, California to Radio Unica, Corp. for approximately $21.0 million
in cash. In connection with the disposition, the Company recognized a $8.4
million gain.
1999 ACQUISITIONS AND DISPOSITIONS
GUY GANNETT ACQUISITION. In September 1998, the Company agreed to acquire from
Guy Gannett Communications its television broadcasting assets for a purchase
price of $317.0 million in cash (the "Guy Gannett Acquisition"). As a result of
this transaction and after the completion of related dispositions, the Company
acquired five television stations in five separate markets. In April 1999, the
Company completed the purchase of WTWC-TV, WGME-TV and WGGB-TV for a purchase
price of $111.0 million. The acquisition was accounted for under the purchase
method of accounting whereby the purchase price was allocated to property and
programming assets, acquired intangible broadcasting assets
F-26
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
and other intangible assets for $20.9 million, $ 45.7 million, and $51.4
million, respectively, based on an independent appraisal. In July 1999, the
Company completed the purchase of WICS/WICD-TV, and KGAN-TV for a purchase price
of $81.0 million. The Company financed these acquisitions by utilizing
indebtedness under the 1998 Bank Credit Agreement.
ACKERLEY DISPOSITION. In September 1998, the Company agreed to sell the Guy
Gannett television station WOKR-TV in Rochester, New York to the Ackerley Group,
Inc. for a sales price of $125 million (the "Ackerley Disposition"). In April
1999, the Company closed on the purchase of WOKR-TV and simultaneously completed
the sale of WOKR-TV to Ackerly.
CCA DISPOSITION. In April 1999, the Company completed the sale of the
non-license assets of KETK-TV and KLSB-TV in Tyler-Longview, Texas to
Communications Corporation of America ("CCA") for a sales price of $36 million
(the "CCA Disposition"). In addition, CCA has an option to acquire the license
assets of KETK-TV for an option purchase price of $2.0 million.
ST. LOUIS RADIO ACQUISITION. In August 1999, the Company completed the purchase
of radio station KXOK-FM in St. Louis, Missouri for a purchase price of $14.1
million in cash. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and acquired
intangible broadcasting assets for $0.6 million and $15.2 million, respectively,
based on an independent appraisal.
BARNSTABLE DISPOSITION. In August 1999, the Company completed the sale of the
radio stations WFOG-FM and WGH-AM/FM serving the Norfolk, Virginia market to
Barnstable Broadcasting, Inc. ("Barnstable"). The stations were sold to
Barnstable for a sales price of $23.7 million.
ENTERCOM DISPOSITION. In July 1999, the Company entered into an agreement to
sell 46 radio stations in nine markets to Entercom for $824.5 million in cash.
The transaction does not include the Company's radio stations in the St. Louis
market which where sold separately during 2000 (see Emmis disposition below). In
December 1999, the Company closed on the sale of 41 radio stations in eight
markets for a purchase price of $700.4 million.
2000 ACQUISITIONS AND DISPOSITIONS
MONTECITO ACQUISITION. In February 1998, the Company entered into a Stock
Purchase Agreement with Montecito and its stockholders to acquire all of the
outstanding stock of Montecito, which owns the FCC License for television
broadcast station KFBT-TV. The FCC granted approval of the transaction and the
Company completed the purchase of the outstanding stock of Montecito on April
18, 2000 for a purchase price of $33.0 million.
EMMIS DISPOSITION In June 2000, the Company settled its litigation with Emmis
and former CEO-designate Barry Baker regarding the sale of its St. Louis
broadcast properties. As a result of the settlement, the purchase option of the
Company's St. Louis broadcast properties has been terminated and a subsequent
agreement was entered into whereby the Company would sell its St. Louis radio
properties to Emmis. In October 2000, the Company completed the sale of its St.
Louis radio properties to Emmis for $220.0 million and retained its St. Louis
television station, KDNL-TV.
ENTERCOM DISPOSITION. On July 20, 2000 the Company completed the sale of four
radio stations in Kansas City to Entercom Communications Corp. for an aggregate
purchase price of $126.6 million in cash. The stations sold were KCFX-FM,
KQRC-FM, KCIY-FM, and KXTR-FM. In November 2000, the Company completed the sale
of WKRF-FM in Wilkes-Barre, Pennsylvania to Entercom for $0.6 million.
WNYO ACQUISITION. In August 2000, the Company entered into an agreement to
purchase the stock of Grant, the owner of WNYO-TV in Buffalo, New York, for a
purchase price of $51.5 million. In October 2000, the Company completed the
stock acquisition of Grant, obtaining the non-license assets of WNYO-TV and
began programming the television station under a time brokerage agreement. The
Company will complete the purchase of the license and related assets of WNYO-TV
upon FCC approval, which is currently pending. The acquisition was accounted for
under the purchase method of accounting whereby the purchase price was allocated
to property and programming assets, acquired intangible broadcasting
F-27
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
assets and other intangible assets for $2.9 million, $3.9 million and $39.8
million, respectively, based on an independent appraisal.
PENDING ACQUISITIONS
GLENCAIRN/WPTT, INC. ACQUISITION. On November 15, 1999, we entered into an
agreement to purchase substantially all of the assets of television station
WCWB-TV, Channel 22, Pittsburgh, Pennsylvania, with the owner of that television
station WPTT, Inc. for a purchase price of $17.8 million. The waiting period
under the Hart-Scott-Rodino Antitrust Act of 1976 has expired and closing on
this transaction is subject to FCC approval.
On November 15, 1999, we entered into five separate plans and agreements of
merger, pursuant to which we would acquire through merger with subsidiaries of
Glencairn, Ltd., television broadcast stations WABM-TV, Birmingham, Alabama,
KRRT-TV, San Antonio, Texas, WVTV-TV, Milwaukee, Wisconsin, WRDC-TV, Raleigh,
North Carolina, and WBSC-TV (formerly WFBC-TV), Anderson, South Carolina. The
consideration for these mergers is the issuance to Glencairn of shares of Class
A Common voting Stock of the Company. The total value of the shares to be issued
in consideration for all the mergers is $8.0 million.
MISSION OPTION. Pursuant to our merger with Sullivan Broadcast Holdings, Inc.,
which was effective July 1, 1998, the Company acquired options to acquire
television broadcast station WUXP-TV in Nashville, Tennessee from Mission
Broadcasting I, Inc. and television broadcast station WUPN-TV in Greensboro,
North Carolina from Mission Broadcasting II, Inc. We currently program these
stations pursuant to LMAs. On November 15, 1999, the Company exercised its
option to acquire both of the foregoing stations. This acquisition is subject to
FCC approval.
12. SECURITIES ISSUANCES AND COMMON STOCK SPLIT:
COMMON STOCK SPLIT
On April 30, 1998, the Company's Board of Directors approved a two-for-one stock
split of its Class A and Class B Common Stock to be distributed in the form of a
stock dividend. As a result of this action, 23,963,013 and 24,984,432 shares of
Class A and Class B Common Stock, respectively, were issued to shareholders of
record as of May 14, 1998. The stock split has been retroactively reflected in
the accompanying consolidated financial statements and related notes thereto.
1997 OFFERING OF COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST
In March 1997, the Company completed a private placement of $200 million
aggregate liquidation value of 11 5/8% High Yield Trust Offered Preferred
Securities (the "HYTOPS") of Sinclair Capital, a subsidiary trust of the
Company. The HYTOPS were issued March 12, 1997, mature March 15, 2009, and
provide for quarterly distributions to be paid in arrears beginning June 15,
1997. The HYTOPS were sold to "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act of 1933, as amended) and a limited number of
institutional "accredited investors" and the offering was exempt from
registration under the Securities Act of 1933, as amended ("the Securities
Act"), pursuant to Section 4(2) of the Securities Act and Rule 144A thereunder.
The Company utilized $135.0 million of the approximately $192.8 million net
proceeds of the private placement to repay outstanding debt and retained the
remainder for general corporate purposes.
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the HYTOPS, the Company offered holders of the HYTOPS the
right to exchange the HYTOPS for new HYTOPS having the same terms as the
existing securities, except that the exchange of the new HYTOPS for the existing
HYTOPS has been registered under the Securities Act. On May 2, 1997, the Company
filed a registration statement on Form S-4 with the Commission for the purpose
of registering the new HYTOPS to be offered in exchange for the aforementioned
existing HYTOPS issued by the Company in March 1997 (the "Exchange Offer"). The
Company's Exchange Offer was closed and became effective August 11, 1997, at
which time all of the existing HYTOPS were exchanged for new HYTOPS. Amounts
payable to the holders of HYTOPS are recorded as "Subsidiary trust minority
interest expense" in the
F-28
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
accompanying financial statements and was $23.3 million for each of the three
years ended December 31, 1998, 1999, and 2000, respectively.
1998 COMMON STOCK OFFERING
On April 14, 1998, the Company and certain stockholders of the Company completed
a public offering of 12,000,000 and 4,060,374 shares, respectively, of Class A
Common Stock (the "1998 Common Stock Offering"). The shares were sold for an
offering price of $29.125 per share and generated proceeds to the Company of
$335.1 million, net of underwriters' discount and other offering costs of
approximately $14.4 million. The Company utilized the proceeds to repay
indebtedness under the 1997 Bank Credit Agreement.
13. STOCK-BASED COMPENSATION PLANS:
STOCK OPTION PLANS
DESIGNATED PARTICIPANTS STOCK OPTION PLAN - In connection with the Company's
initial public offering in June 1995 (the "IPO"), the Board of Directors of the
Company adopted an Incentive Stock Option Plan for Designated Participants (the
Designated Participants Stock Option Plan) pursuant to which options for shares
of Class A common stock were granted to certain key employees of the Company.
The Designated Participants Stock Option Plan provides that the number of shares
of Class A Common Stock reserved for issuance under the Designated Participants
Stock Option Plan is 136,000. Options granted pursuant to the Designated
Participants Stock Option Plan must be exercised within 10 years following the
grant date. As of December 31, 2000, 34,500 shares are available for future
grants.
LONG-TERM INCENTIVE PLAN - In June 1996, the Board of Directors of the Company
adopted, upon approval of the stockholders by proxy, the 1996 Long-Term
Incentive Plan (the "LTIP"). The purpose of the LTIP is to reward key
individuals for making major contributions to the success of the Company and its
subsidiaries and to attract and retain the services of qualified and capable
employees. Options granted pursuant to the LTIP must be exercised within 10
years following the grant date. A total of 14,000,000 shares of Class A Common
Stock are reserved for awards under the plan. As of December 31, 2000,
11,002,505 shares have been granted under the LTIP and 6,752,513 shares
(including forfeited shares) are available for future grants.
INCENTIVE STOCK OPTION PLAN - In June 1996, the Board of Directors adopted, upon
approval of the stockholders by proxy, an amendment to the Company's Incentive
Stock Option Plan. The purpose of the amendment was (i) to increase the number
of shares of Class A Common Stock approved for issuance under the plan from
800,000 to 1,000,000, (ii) to lengthen the period after date of grant before
options become exercisable from two years to three and (iii) to provide
immediate termination and three-year ratable vesting of options in certain
circumstances. Options granted pursuant to the ISOP must be exercised within 10
years following the grant date. As of December 31, 2000, 714,200 shares have
been granted under the ISOP and 648,934 shares (including forfeited shares) are
available for future grants.
F-29
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
A summary of changes in outstanding stock options is as follows:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------- ----- ----------- -----
Outstanding at end of 1997 ............... 4,224,570 $ 17.10 2,428,152 $ 14.91
1998 Activity:
Granted .............................. 5,352,500 25.08 -- --
Exercised ............................ (86,666) 12.96 -- --
Forfeited ............................ (820,284) 23.19 -- --
---------- ---------- --------- ----------
Outstanding at end of 1998 ............... 8,670,120 20.76 3,245,120 15.01
---------- ---------- --------- ----------
1999 Activity:
Granted .............................. 881,300 24.16 -- --
Exercised ............................ (117,500) 19.77 -- --
Forfeited ............................ (1,382,500) 22.53 -- --
---------- ---------- --------- ----------
Outstanding at end of 1999 ............... 8,051,420 20.45 3,640,020 15.41
---------- ---------- --------- ----------
2000 Activity:
Granted .............................. 1,366,835 9.94 -- --
Exercised ............................ (5,667) 9.25 -- --
Forfeited ............................ (1,920,368) 23.23 -- --
---------- ---------- --------- ----------
Outstanding at end of 2000 ............... 7,492,220 $ 17.82 3,859,819 $ 14.89
========== ========== ========= ==========
Additional information regarding stock options outstanding at December 31, 2000
is as follows:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-
REMAINING REMAINING AVERAGE
EXERCISE VESTING PERIOD CONTRACTUAL LIFE EXERCISE
OUTSTANDING PRICE (IN YEARS) (IN YEARS) EXERCISABLE PRICE
- ----------- ----- ---------- ---------- ----------- -----
1,266,950 $7.646-12.646 2.10 8.86 405,849 $ 9.36
3,102,870 15.06 0.06 5.53 3,066,370 15.06
363,400 17.81-18.88 0.17 5.99 340,600 18.79
29,000 20.94 0.05 6.97 5,000 20.94
4,000 22.88-24.18 0.30 7.31 -- --
2,219,500 24.20 5.22 7.33 42,000 24.20
234,500 24.25-27.73 1.74 7.64 -- --
272,000 28.08-28.42 2.35 8.15 -- --
--------- -------------- ---- ---- --------- --------
7,492,220 $ 17.82 2.07 6.82 3,859,819 $ 14.89
========= ============== ==== ==== ========= ========
PRO FORMA INFORMATION RELATED TO STOCK-BASED COMPENSATION
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro
forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by SFAS No. 123 had been applied in measuring
compensation expense.
F-30
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
Had compensation cost for the Company's 1998, 1999 and 2000 grants for
stock-based compensation plans been determined consistent with SFAS No. 123, the
Company's net income, net income available to common shareholders before
extraordinary items, and net income per common share for these years would
approximate the pro forma amounts below (in thousands except per share data):
1998 1999 2000
-------------------------- ------------------------- -------------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- --------- -------- ---------
Net income (loss) before
extraordinary item ............... $ (5,817) $ (13,629) $ 167,784 $ 161,982 $ 77,365 $ 69,454
========== ========== ========== ========== ========== ==========
Net income (loss) ................... $ (16,880) $ (24,692) $ 167,784 $ 161,982 $ 77,365 $ 69,454
========== ========== ========== ========== ========== ==========
Net income (loss) available
to common shareholders ........... $ (27,230) $ (35,042) $ 157,434 $ 151,632 $ 67,015 $ 59,104
========== ========== ========== ========== ========== ==========
Basic net income per share
before extraordinary items ....... $ (0.17) $ (0.25) $ 1.63 $ 1.57 $ 0.73 $ 0.65
========== ========== ========== ========== ========== ==========
Basic net income per share
after extraordinary items ........ $ (0.29) $ (0.37) $ 1.63 $ 1.57 $ 0.73 $ 0.65
========== ========== ========== ========== ========== ==========
Diluted net income per share
before extraordinary items ....... $ (0.17) $ (0.25) $ 1.63 $ 1.57 $ 0.73 $ 0.65
========== ========== ========== ========== ========== ==========
Diluted net income per share
after extraordinary items ........ $ (0.29) $ (0.37) $ 1.63 $ 1.57 $ 0.73 $ 0.65
========== ========== ========== ========== ========== ==========
The Company has computed for pro forma disclosure purposes the value of all
options granted during 1998, 1999 and 2000 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions:
YEAR ENDED DECEMBER 31,
1998 1999 2000
---- ---- ----
Risk-free interest rate ................... 4.54 - 5.68% 4.80 - 5.97% 4.95 - 4.96%
Expected lives ............................ 6 years 6 years 6 years
Expected volatility ....................... 41% 61% 63%
Adjustments are made for options forfeited prior to vesting.
F-31
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
14. EARNINGS PER SHARE:
The Company adopted SFAS No. 128 "Earnings per Share" which requires the
restatement of prior periods and disclosure of basic and diluted earnings per
share and related computations.
THE YEARS ENDED
----------------------------------------------------------
1998 1999 2000
---- ---- ----
Weighted-average number of common shares .............. 94,321 96,615 91,405
Dilutive effect of outstanding stock options .......... 1,083 20 27
Dilutive effect of conversion of preferred shares ..... 288 -- --
-------------- -------------- ---------
Weighted-average number of common equivalent
shares outstanding ................................ 95,692 96,635 91,432
============== ============== =========
Net loss from continuing operations ................... $ (26,201) $ (42,126) $ (35,775)
============== ============== =========
Net income from discontinued operations, including
gain on sale of broadcast assets related to
discontinued operations ........................... $ 20,384 $ 209,910 $ 113,140
============== ============== =========
Net loss from extraordinary item ...................... $ (11,063) $ -- $ --
============== ============== =========
Net income (loss) ..................................... $ (16,880) $ 167,784 $ 77,365
Preferred stock dividends payable ..................... (10,350) (10,350) (10,350)
-------------- -------------- ---------
Net income (loss) available to common shareholders .... $ (27,230) $ 157,434 $ 67,015
============== ============== =========
BASIC EARNINGS PER SHARE:
Net loss per share from continuing operations ......... $ (0.39) $ (0.54) $ (0.50)
============== ============== =========
Net income per share from discontinued operations ..... $ 0.22 $ 2.17 $ 1.24
============== ============== =========
Net loss per share from extraordinary item ............ $ (0.12) $ -- $ --
============== ============== =========
Net income (loss) per share ........................... $ (0.29) $ 1.63 $ 0.73
============== ============== =========
DILUTED EARNINGS PER SHARE:
Net loss per share from continuing operations ......... $ (0.39) $ (0.54) $ (0.50)
============== ============== =========
Net income per share from discontinued operations ..... $ 0.22 $ 2.17 $ 1.24
============== ============== =========
Net loss per share from extraordinary item ............ $ (0.12) $ -- $ --
============== ============== =========
Net income (loss) per share ........................... $ (0.29) $ 1.63 $ 0.73
============== ============== =========
F-32
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000 - (CONTINUED)
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
QUARTERS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
---- ---- ---- ----
Total revenues ....................................... $ 162,358 $ 190,621 $ 176,111 $ 204,549
Operating income ..................................... 26,917 55,015 37,918 45,847
Net loss from continuing operations .................. (3,062) (3,879) (16,898) (18,287)
Net income (loss) available to common
shareholders ....................................... (4,203) (1,283) (13,929) 176,849
Basic loss per share from continuing operations ...... (0.06) (0.07) (0.20) (0.22)
Diluted loss per share from continuing operations .... (0.06) (0.07) (0.20) (0.22)
Basic income (loss) per share ........................ (0.04) (0.01) (0.14) 1.82
Diluted income (loss) per share ...................... (0.04) (0.01) (0.14) 1.82
QUARTERS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
---- ---- ---- ----
Total revenues ....................................... $ 176,427 $ 208,415 $ 187,887 $ 216,133
Operating income ..................................... 22,558 48,659 36,623 47,200
Net loss from continuing operations .................. (2,623) (1,253) (20,613) (11,286)
Net income (loss) available to common
shareholders ....................................... (4,408) (1,378) 16,259 56,542
Basic loss per share from continuing operations ...... (0.05) (0.04) (0.26) (0.16)
Diluted loss per share from continuing operations .... (0.05) (0.04) (0.26) (0.16)
Basic income (loss) per share ........................ (0.05) (0.01) 0.18 0.65
Diluted income (loss) per share ...................... (0.05) (0.01) 0.18 0.65
16. SUBSEQUENT EVENT:
During the first quarter of 2001, the Company offered a voluntary early
retirement program to its eligible employees and implemented a restructuring
program to reduce overhead costs. As a result of these initiatives, the Company
reduced its staff by 186 employees and expects to incur a special charge during
the first quarter of 2001 of approximately $2.5 million.
F-33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ACRODYNE COMMUNICATIONS, INC.:
We have audited the accompanying consolidated balance sheets of Acrodyne
Communications, Inc. (a Delaware corporation) and subsidiary as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. 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 conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 11 to the consolidated financial statements, the
accompanying consolidated balance sheet as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended have been restated.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Acrodyne Communications, Inc.
and subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
As explained in Note 2 to the financial statements, effective January 1, 2000,
the Company changed its method of accounting for revenue.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has net capital and working capital deficiencies that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount of and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Arthur Andersen LLP
Philadelphia, Pennsylvania
April 13, 2001
F-34
ACRODYNE COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------
2000 1999
---- ----
(AS RESTATED -
SEE NOTE 11)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 86,959 $ 664,950
Short-term investments -- 200,000
Accounts receivable, net of allowance for doubtful
accounts of $389,000 and $60,000 at December 31,
2000 and 1999, respectively 944,225 1,201,268
Inventories 2,286,887 3,199,549
Prepaid assets 58,555 348,108
Other current assets 500,524 220,000
----------------- -----------------
Total current assets 3,877,150 5,833,875
PROPERTY, PLANT AND EQUIPMENT, net 4,150,926 570,182
NON-COMPETE AGREEMENT, net of accumulated amortization of $389,178
in 1999 -- 360,822
LICENSE AGREEMENT, net of accumulated amortization of $225,000 in
2000 1,275,000 --
GOODWILL, net of accumulated amortization of $812,062 in 1999 -- 3,899,211
----------------- -----------------
TOTAL ASSETS $ 9,303,076 $ 10,664,090
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit (Note 9) $ 1,158,753 $ 1,613,404
Subordinated debenture with Sinclair Broadcast Group, Inc. 2,000,000 --
Accounts payable 1,737,230 1,801,883
Accrued expenses 1,420,094 272,155
Customer advances 4,723,430 3,233,962
Current portion of capital lease obligations 9,494 69,947
Deferred revenue 2,290,085 818,912
Other current liabilities 651,000 --
----------------- -----------------
Total current liabilities 13,990,086 7,810,263
CAPITAL LEASE OBLIGATIONS (Note 9) 3,776,948 12,021
LICENSE FEE PAYABLE 1,200,000 ---
NON-COMPETE LIABILITY 845,912 845,990
----------------- -----------------
Total liabilities 19,812,946 8,668,274
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (DEFICIT):
Convertible, redeemable, 8% preferred stock, par value $1.00; 1,000,000
shares authorized; 6,500 shares
issued and outstanding at December 31, 2000 and 1999 6,500 6,500
Common stock, par value $.01; 30,000,000 shares
authorized; 6,981,161 and 6,906,161 shares issued and
outstanding at December 31, 2000 and 1999, respectively 69,812 69,062
Additional paid-in capital 21,496,778 21,019,028
Accumulated deficit (32,082,960) (19,098,774)
----------------- -----------------
Total shareholders' equity (deficit) (10,509,870) 1,995,816
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 9,303,076 $ 10,664,090
================= =================
The accompanying notes are an integral part of
these consolidated financial statements.
F-35
ACRODYNE COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999
---- ----
(AS RESTATED -
SEE NOTE 11)
NET SALES $ 6,895,829 $ 10,406,403
COST OF SALES 8,729,960 12,368,883
----------------- ----------------
Gross loss (1,834,131) (1,962,480)
----------------- ----------------
OPERATING EXPENSES:
Engineering, research and development 1,701,258 920,047
Selling 1,162,202 1,387,737
Administration 3,034,253 2,059,173
Amortization of intangible assets 340,749 231,496
Goodwill and non-compete write-off 4,144,284 --
Charge for non-compete liability adjustment -- 145,226
----------------- ----------------
Total operating expenses 10,382,746 4,743,679
----------------- ----------------
Operating loss (12,216,877) (6,706,159)
OTHER (EXPENSES) INCOME:
Interest expense, net (775,020) (202,713)
Other income, net 7,711 2,499
----------------- ----------------
Loss before income taxes (12,984,186) (6,906,373)
INCOME TAXES -- --
----------------- ----------------
NET LOSS (12,984,186) (6,906,373)
DIVIDENDS ON 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK (52,000) (89,361)
----------------- ----------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (13,036,186) $ (6,995,734)
================= ================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (1.84) $ (1.05)
================= ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 7,097,789 6,675,597
================= ================
The accompanying notes are an integral part
of these consolidated financial statements.
F-36
ACRODYNE COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (AS RESTATED - SEE NOTE 11)
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1998 333,030 $ 333,030 5,331,670 $ 53,317 $ 17,720,449
Redemption of Series A preferred
shares (326,530) (326,530) -- -- (672,001)
Issuance of stock and warrants -- -- 1,543,333 15,433 4,059,941
Exercise of warrants -- -- 31,158 312 --
Dividends on preferred stock -- -- -- -- (89,361)
Net loss -- -- -- -- --
-------- ------------- --------- ------------- ------------
BALANCE AT DECEMBER 31, 1999 6,500 6,500 6,906,161 69,062 21,019,028
Lease and loan guarantee payable
in stock (Note 7) -- -- -- -- 305,500
Exercise of warrants -- -- 75,000 750 224,250
Dividends on preferred stock -- -- -- -- (52,000)
Net loss -- -- -- -- --
-------- ------------- --------- ------------- ------------
BALANCE AT DECEMBER 31, 2000 6,500 $ 6,500 6,981,161 $ 69,812 $ 21,496,778
======== ============= ========= ============= ============
TOTAL
SHAREHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------- ---------
BALANCE AT DECEMBER 31, 1998 $ (12,192,401) $ 5,914,395
Redemption of Series A preferred
shares -- (998,531)
Issuance of stock and warrants -- 4,075,374
Exercise of warrants -- 312
Dividends on preferred stock -- (89,361)
Net loss (6,906,373) (6,906,373)
-------------- -------------
BALANCE AT DECEMBER 31, 1999 (19,098,774) 1,995,816
Lease and loan guarantee payable
in stock (Note 7) -- 305,500
Exercise of warrants -- 225,000
Dividends on preferred stock -- (52,000)
Net loss (12,984,186) (12,984,186)
-------------- -------------
BALANCE AT DECEMBER 31, 2000 $ (32,082,960) $ (10,509,870)
============== =============
The accompanying notes are an integral part of
these consolidated financial statements.
F-37
ACRODYNE COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999
---- ----
(AS RESTATED -
SEE NOTE 11)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,984,186) $ (6,906,373)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 654,471 371,763
Provision for lease and loan guarantee 305,500 50,000
Write-off of goodwill and non-compete agreement 4,144,284 --
Adjustment to non-compete liability -- 145,226
Provision for bad debts 341,483 29,881
Changes in assets and liabilities:
Accounts receivable (84,440) (173,690)
Inventories 912,662 719,490
Prepaid and other current assets 9,029 (177,150)
Accounts payable (64,653) (317,721)
Accrued expenses and other liabilities 1,498,861 (125,612)
Deferred revenue 1,471,173 818,912
Customer advances 1,489,468 2,659,797
------------------ ------------------
Net cash used in operating activities (2,306,348) (2,905,477)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (117,799) (205,980)
Sale (purchase) of short-term investment 200,000 (200,000)
------------------ ------------------
Net cash provided by (used in) investing activities 82,201 (405,980)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock and warrants -- 3,805,374
Redemption of Series A preferred stock -- (998,531)
Proceeds from exercise of warrants 225,000 312
(Repayments) borrowings under line of credit (454,651) 338,404
Borrowings under debenture 2,000,000 --
Capital lease repayments (72,193) (63,486)
Preferred stock dividends (52,000) (89,361)
------------------ ------------------
Net cash provided by financing activities 1,646,156 2,992,712
------------------ ------------------
Net decrease in cash and cash equivalents (577,991) (318,745)
Cash and cash equivalents at beginning of year 664,950 983,695
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 86,959 $ 664,950
================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 168,173 $ 221,209
================== ==================
Property and equipment acquired through capital leases $ 3,776,667 $ 20,350
================== ==================
The accompanying notes are an integral part
of these consolidated financial statements.
F-38
ACRODYNE COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
1. BACKGROUND:
ORGANIZATION
Acrodyne Holdings, Inc. (the "Company"), a Delaware corporation, was formed in
May 1991. In 1995, the Company changed its name to Acrodyne Communications, Inc.
The Company operates in one industry segment - the design, manufacture and
marketing of television transmitters and translators which are sold in the
United States and internationally.
On May 16, 1994, the Company entered into agreements to acquire all of the
outstanding stock of Acrodyne Industries, Inc. ("Acrodyne Industries"), a
company engaged in the manufacture and sale of TV transmitters, LPTV
transmitters and TV translators, which are produced to customer specification.
The acquisition was consummated on October 24, 1994 with proceeds obtained from
a public offering of the Company's common stock.
OPERATIONS AND BUSINESS RISK
Due to the nature of the Company's business, it is subject to various risks
including, but not limited to, technological and market acceptance of its
product, capital availability, dependence on management and other risks. The
Company has been in the process of developing products and applications using
digital transmission technology. Related to this process, the Company entered
into a license agreement with Sinclair Broadcast Group, Inc. ("Sinclair") in
March 2000 (see Note 9). The Company shipped the first of its digital
transmitters in March 2001. To date, all orders of the Company's new product
are from Sinclair.
Since the acquisition of Acrodyne Industries in 1994, the Company has incurred
significant losses including net losses of $12,984,186 and $6,906,373 in 2000
and 1999, respectively. In addition, the Company has generated operating cash
flow deficits of $2,306,348 and $2,905,477 in 2000 and 1999, respectively.
Additional losses and cash flow deficits have continued in 2001. These losses
and cash flow deficits have been funded primarily with proceeds from the sale of
equity securities, including $225,000 and $4,075,374 from common stock and
warrants sold to Sinclair in 2000 and 1999, respectively, a $2,000,000
subordinated debenture provided by Sinclair, the Company's Credit Facility with
Sinclair (see Note 6) and customer advances. As of December 31, 2000, Sinclair
owned 34.6% of the Company's common stock and has warrants to purchase 8,644,225
additional shares (see Notes 7 and 9), which represented 60.4% of the Company on
a fully diluted basis.
Sinclair had provided a guarantee of the Company's $2,500,000 credit
facility. In November 2000, Sinclair purchased the credit facility from the
bank (see Note 6). In March 2000, Sinclair agreed to provide additional funds
to the Company of up to $2,000,000 under terms of a subordinated debenture
(see Note 9). From January 1, 2001 through April 13, 2001, Sinclair provided
additional funds to the Company in the amount of $1,341,247. The Company's
ability to continue as a going concern depends upon: (1) market acceptance of
the Company's new product; (2) the Company's ability to generate sufficient
revenues to achieve and sustain positive cash flow; and (3) the Company's
ability to raise the necessary capital to fund operating needs and finance
the planned investment. The factors noted above raise substantial doubt
concerning the ability of the Company to continue as a going concern. The
consolidated financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern. The Company is currently exploring
options available to it to raise capital. Among the options is a potential
recapitalization of the Company by Sinclair. Under terms of the proposed
recapitalization which has yet to be executed, Sinclair would receive
additional common stock in exchange
F-39
for forgiveness of certain amounts owed to Sinclair by the Company in the
amount of approximately $3,500,000 and would cancel certain existing warrants
and receive additional warrants as part of a new secured line of credit in
the amount of $4,000,000. As a result of this transaction, Sinclair would own
approximately 80% of the Company. In addition, Sinclair has verbally
committed to purchase all UHF transmitter requirements from the Company. As
of April 13, 2001, no formal recapitalization plan has been executed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following summarizes the significant accounting policies employed by the
Company in preparation of its consolidated financial statements:
CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiary, Acrodyne Industries. All intercompany transactions and
balances are eliminated in consolidation. Certain prior year amounts have been
reclassified to conform to current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments of $200,000 at December 31, 1999 is comprised of a
certificate of deposit with an original maturity of six months.
INVENTORY
Inventory includes material, direct labor and overhead and is valued at the
lower of cost or market on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The cost of additions and
improvements are capitalized, while maintenance and repairs are charged to
operations when incurred. The cost and related accumulated depreciation of
assets sold, retired or otherwise disposed of are removed from the respective
accounts and any resulting gain or loss is recorded in the statement of
operations. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets, primarily three to seven years. Leasehold
improvements are amortized over the shorter of their useful lives or the
remaining lease terms. Capital leases are depreciated over their useful lives or
lease term, as applicable.
CUSTOMER ADVANCES
Deposits received from customers on orders for purchase of products are recorded
as a liability.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 summarizes the staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. Guidance is provided with
respect to the recognition, presentation and disclosure of revenue in the
financial statements. The Company implemented the provisions of SAB 101 in the
fourth quarter of 2000, retroactive to January 1, 2000. Effective January 1,
2000, the Company changed its method of accounting for transmitter sales such
that the Company recognizes revenue from the sale of transmitters when title and
risks of ownership
F-40
are transferred to the customer, which generally occurs upon shipment, customer
pick-up or completion of the installation process if the Company is obligated to
perform the installation. A customer may be invoiced for and receive title to
transmitters prior to taking physical possession when the customer has made a
fixed, written commitment for the purchase, the transmitters have been
completed, tested and are available for pick-up or delivery, and the customer
has requested that the Company hold the transmitters until the customer
determines the most economical means of taking physical possession. Upon such a
request, the Company recognizes revenue if it has no further obligation except
to segregate the transmitters, invoice the customer under normal billing and
credit terms, and hold the transmitter for a short period of time as is
customary in the industry, until pick-up or delivery. Transmitters are built to
customer specification and no right of return or exchange privileges are
granted. Accordingly, no provision for sales allowances or returns is recorded.
The Company records revenue for services related to installation of transmitters
upon completion of the installation process. Amounts which can not recognized in
accordance with the above policy are recorded as deferred revenue in the
accompanying consolidated balance sheets. The Company expects to recognize
deferred revenues recorded at December 31, 2000 as revenue in 2001.
The adoption of SAB No. 101, in the fourth quarter of 2000, resulted in an
increase in reported revenues for the year 2000 of approximately $540,000;
however, there is no change in earnings as the cost approximated the revenue. In
accordance with the bulletin, prior year consolidated financial statements have
not been restated to apply SAB 101 retroactively.
CONCENTRATION OF CREDIT RISK
The Company's customers are domestic and international television stations,
broadcasters, government entities, not-for-profit organizations and
educational institutions. International sales were $1,035,037 and $2,168,242
for the years ended December 31, 2000 and 1999, respectively. One customer,
Sinclair (see Note 9), represented approximately 37% of sales in 2000 and 13%
in 1999 and 19% of net receivables in 2000 and 4% in 1999. No other customers
represented more than 10% of sales in 2000 or 1999. One other customer
represents 53% of the net receivables balance at December 31, 2000.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities; disclosure of
contingent assets and liabilities at the date of the financial statements; and
the reported amount of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT
Research and development expenditures related to the design and development of
new products are expensed as incurred and as such are included in engineering,
research and development in the accompanying consolidated statements of
operations. Research and development costs charged to expense during the years
ended December 31, 2000 and 1999 were approximately $1,057,000 and $5,000,
respectively.
INCOME TAXES
The Company records deferred income taxes for the estimated future tax effects
of temporary differences between financial statement carrying amounts and the
tax basis of existing assets and liabilities. Under this method, deferred tax
assets and liabilities are recognized for the tax effects of temporary
differences between the financial reporting and tax basis of assets and
liabilities using enacted rates. A valuation allowance is recorded against
deferred tax assets when it is concluded that it is more likely than not that
the related tax benefit will not be realized.
F-41
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, capital leases and debt. The
fair value of cash and cash equivalents, short-term investments and accounts
receivable approximate their recorded book values as of December 31, 2000 and
1999. Because of the uncertainties regarding the Company described in Note 1,
it was not practicable to estimate the fair value of the capital leases and
debt.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically performs analyses on the recoverability of long-lived
assets under the provision of Statement of Financial Accounting Standards
("SFAS") No.121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Statement requires the recognition of
an impairment loss for an asset held for use when the estimated future
undiscounted cash flows associated with the asset is less than the asset's
carrying amount. Measurement of the impairment loss is based on the fair value
of the asset, which is determined using the present value of expected future
cash flows. No impairment losses were recorded during 1999. See Note 5 to the
consolidated financial statements for discussion of impairment charges recorded
in 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, is required to be adopted by the
Company on January 1, 2001. SFAS No. 133 establishes the accounting and
financial reporting requirements for derivative instruments and requires
companies to recognize derivatives as either assets or liabilities on the
balance sheet and measure these instruments at fair value. This statement did
not have a material effect on the Company's consolidated financial position or
results of operations upon adoption in 2001.
The Financial Accounting Standards Board's Emerging Issues Task Force released
Issue 00-10 "Accounting for Shipping and Handling Fees and Costs," which
requires amounts charged to customers for shipping and handling to be classified
as revenue and the related costs to be classified as cost of sales. Issue 00-10
is applicable no later than the fourth quarter of fiscal years beginning after
December 15, 1999, and has been adopted by the Company in 2000. As a result of
the adoption of Issue 00-10, the Company has classified approximately $135,000
of charges to customers for shipping and handling as net sales within the
accompanying consolidated statement of operations for the year ended December
31, 2000. This policy had no effect on the Company's consolidated financial
position or results of operations for the year ended December 31, 2000. The
Company was unable to obtain the information required for 1999 due to the nature
in which the required data was recorded and maintained. Accordingly, no
reclassification was made to the 1999 consolidated financial statements.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net loss applicable to
common shareholders by the weighted average number of shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of shares determined for the basic computations plus the number of shares
of common stock that would be issued assuming all contingently issuable shares
having a dilutive effect on earnings per share were outstanding for the period.
Due to the Company's net loss in 2000 and 1999, the incremental shares issuable
of 175,202 and 545,202, respectively, in connection with convertible preferred
stock, stock options and warrants were anti-dilutive and, accordingly, are not
considered in the calculation (see Note 7).
F-42
3. INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
------------
2000 1999
---- ----
Raw materials $ 641,342 $ 1,220,965
Work-in-process 139,523 764,048
Finished goods 1,506,022 1,214,536
---------------- ----------------
$ 2,286,887 $ 3,199,549
================ ================
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
------------
2000 1999
---- ----
Test equipment $ 692,098 $ 674,417
Machinery and equipment 63,522 63,522
Office furniture and equipment 398,606 320,212
Automobile 19,577 11,043
Building lease /leasehold improvements 3,781,167 76,205
Purchased computer software 116,711 98,666
-------------- --------------
5,071,681 1,244,065
Accumulated depreciation and amortization (920,755) (673,883)
-------------- --------------
$ 4,150,926 $ 570,182
============== ==============
Depreciation and amortization expense amounted to $313,722 and $140,267 for the
years ended December 31, 2000 and 1999, respectively.
The Company moved into a new facility in November 2000. This facility is
subleased from Sinclair and is capitalized at $3,776,667. Amortization expense
was $41,963 in 2000. The net book value of this building which is subject to a
capital lease is $3,734,704. The lease term is fifteen years with two renewable
five-year periods (see note 10).
5. NON-COMPETE AGREEMENT AND GOODWILL:
-----------------------------------
In connection with the acquisition of Acrodyne Industries, the Company entered
into a non-compete agreement with the selling shareholder. In consideration for
this agreement not to compete, the Company is obligated to make annual payments
to the selling shareholder equal to $65,000 and pay for certain benefits for the
remainder of his life. The Company recorded the actuarial present value of the
estimated payments of $750,000 related to this agreement as an asset and
established a corresponding liability at the date of acquisition. During the
years ended December 31, 2000 and 1999, the Company recorded interest expense of
$56,927 and $63,661, respectively, relating to this liability.
Prior to being written off, the intangible asset was being amortized on a
straight-line basis over a ten-year period. Amortization expense of $37,500 and
$75,000 was recorded during the years ended December 31, 2000 and 1999,
respectively.
In 1999, the Company recorded a charge of $145,226 in the accompanying
consolidated statement of operations to adjust the liability to its estimated
actuarial net present value. The significant actuarial assumptions used to
compute this liability at December 31, 1999 include a discount rate of 8% and
mortality based on the 1983 Group Mortality Table.
F-43
In connection with the 1994 acquisition of Acrodyne Industries (see Note 1), the
Company recorded goodwill totaling $4,711,274 representing the excess of
purchase price over the fair value of net assets acquired. Prior to being
written off, goodwill was being amortized on a straight-line basis over 30
years. Amortization charged to expense during the years ended December 31, 2000
and 1999 amounted to $78,249 and $156,496, respectively.
During the third quarter of 2000, the Company determined that as a result of the
combination of regulatory changes, evolving technology, changes dictated by the
market place, changes to key management and continued negative profit margins
for its medium and low power transmitter product line, it would exit such
product line. This product line was acquired by the Company in 1994 (see Note
1). As a result of this decision, the Company reviewed all of the long-term
assets of its medium and low power product line (principally goodwill, covenant
not-to-compete and property and equipment) for impairment. As a result of this
review, management concluded that these assets had been permanently impaired
and, as such, recorded a charge to write-off all goodwill and certain other
long-term assets in the amount of $4,144,284 during the third quarter of 2000,
which includes $323,322 related to the non-compete intangible asset and
$3,820,962 related to goodwill.
6. DEBT:
The line of credit, subordinated debenture and capital lease obligations (test
equipment and property) consist of the following:
DECEMBER 31,
------------
2000 1999
---- ----
Line of credit (Note 9) $ 1,158,753 $ 1,613,404
Subordinated debenture with Sinclair Broadcast Group, Inc. 2,000,000 --
Capital lease obligations (Note 10) 3,786,442 81,968
---------------- ----------------
6,945,195 1,695,372
Current portion (3,168,247) (1,683,351)
---------------- ----------------
$ 3,776,948 $ 12,021
================ ================
The line of credit and the subordinated debenture are due in 2001.
In September 1999, the Company entered into a new credit facility (the
"Credit Facility") with PNC Bank, N.A. that provided for a $2,500,000 line of
credit. The Credit Facility bears interest at LIBOR plus 200 basis points
(8.56% at December 31, 2000 and 7.9% at December 31, 1999) and replaced a
prior $2,000,000 line of credit facility maintained with another bank. The
Credit Facility was collateralized by all personal property of the Company
and was guaranteed by Sinclair. The Credit Facility, which expired on July
31, 2000, was extended to October 31, 2000. In November 2000, Sinclair
purchased the Credit Facility and assumed all rights of the bank (see Note
9). The weighted-average interest rate and total interest expense related to
the lines of credit during 2000 were 8.3% and $111,226, respectively, and
during 1999 were 6.4% and $78,610, respectively. Average borrowings related
to the Credit Facility during 2000 and 1999 were $1,343,000 and $1,221,000,
respectively. The maximum amount borrowed under the Credit Facility was
approximately $1,600,000 in 2000 and $1,700,000 in 1999. The amount available
under the Credit Facility at December 31, 2000 was $1,341,247.
During March 2000, the Company entered into a subordinated debenture
agreement (the "Debenture") with Sinclair. Under the terms of the Debenture,
the Company may borrow up to $2,000,000 at an interest rate of 10.5%. The
first payment of interest shall be made April 1, 2000 and on a monthly basis
thereafter. Principal is payable upon demand of Sinclair. Further, Sinclair
has the right, at any time, to convert all, but not less than all, of the
principal owed to Sinclair into the Company's common stock at $3.45 per
share. Through April 13, 2001, the Company had borrowed $2,000,000 under the
terms of this arrangement. During 2000, the Company charged $115,815 to
interest expense for this Debenture.
F-44
The weighted average interest rate on long-term debt at December 31, 2000 and
1999 was 9.2% and 7.9% respectively.
In connection with the Credit Facility, the Company was obligated to maintain
minimum tangible net worth, as defined, of $4,500,000. As of December 31, 1999,
the Company was not in compliance with terms of the Credit Facility with respect
to minimum tangible net worth. The Company had obtained a waiver for the 1999
event of default. The Company was again out-of-compliance with terms of the
credit facility as of September 30, 2000. Effective October 31, 2000, the
minimum tangible net worth requirement was eliminated.
7. SHAREHOLDERS' EQUITY:
PREFERRED STOCK
Preferred stock consists of 1,000,000 shares, par value $1 per share, which may
be issued in series from time to time with such designation, rights, preferences
and limitations as the Board of Directors of the Company may determine by
resolution. Any and all such rights that may be granted to preferred
stockholders may be in preference to common stockholders.
During 1996, the Company sold 10,500 shares of 8% Convertible Redeemable
Preferred Stock (the "8% Preferred Stock") in a private placement. The 8%
Preferred Stock has a liquidation preference of $100 per share plus all
outstanding and unpaid dividends and is redeemable at the discretion of the
Company for the amount of the liquidation value after one year from issuance
date provided certain stipulations are met. The 8% Preferred Stock is
convertible at the option of the holder into the number of common shares
obtained by dividing the liquidation value by the $3.71 per share conversion
price, subject to adjustment. Holders of the 8% Preferred Stock vote on a fully
converted basis with the holders of common stock and, in the event of certain
dividend arrearages, have the right to elect a director to the Company's Board.
During 1997, 4,000 shares of the 8% Preferred Stock were converted into common
stock at a conversion price of $4.00 per share; 6,500 shares remain outstanding
at the end of 1999.
During 1998, the Company sold 326,530 shares of Series A 8% Convertible
Redeemable Preferred Stock (the "Series A Preferred Stock") in a private
placement for net proceeds of $972,668. In connection with this private
placement, the Company issued warrants to purchase up to 525,000 shares of
common stock at an exercise price of $3.00 per share. The warrants are
exercisable through November 7, 2002. On January 27, 1999, the Series A
Preferred Stock was redeemed by the Company for $998,531.
COMMON STOCK
On November 7, 1997, the Company sold 800,000 shares of common stock and
warrants to purchase up to an additional 500,000 shares of common stock for
aggregate net proceeds of $1,951,800. The warrants issued in connection with
this transaction carry an exercise price of $3.00 per common share and expire on
November 7, 2002.
On January 27, 1999, the Company increased the number of authorized shares of
common stock from 10,000,000 to 30,000,000. Concurrent with this change, the
Company sold 1,431,333 shares of common stock and warrants to purchase up to an
additional 8,719,225 shares of common stock to Sinclair in a private placement
for aggregate proceeds of $4,300,000. As a condition of the transaction,
Sinclair has the right to appoint three of the Company's five directors.
Transaction costs of $494,626 were incurred in connection with this transaction.
The Company utilized $998,531 of the proceeds from this transaction to redeem
the Series A Preferred Stock as discussed above.
On December 20, 1999, the Company committed to issue 112,000 shares of common
stock to Sinclair with a fair market value of $270,000 in accordance with
terms of the Guaranty and Lease Agreements (see Note 9). These shares are
included in outstanding shares.
F-45
In 2000, on the anniversary dates of the above agreements, the Company is
obligated to issue shares to compensate Sinclair for its guarantees. In the
fourth quarter of 2000, 589,506 shares were obligated to be issued with a
fair value of $305,500. This amount is currently recorded in the Company's
Additional Paid-in Capital section of the accompanying consolidated financial
statements and the shares were considered outstanding for purposes of the
basic earnings per share calculation in 2000.
WARRANTS AND OPTIONS
In connection with the initial Sinclair investment discussed above, the Company
executed various agreements dated January 27, 1999, giving Sinclair the right to
purchase up to 8,719,225 shares of the Company's common stock. Of these
warrants, Sinclair may purchase 2,000,000 shares at an exercise price of $3.00
per share based on the following vesting schedule:
DATE CUMULATIVE TOTAL SHARES
---- -----------------------
From and after January 27, 1999 666,666
From and after January 27, 2000 1,333,333
From and after January 27, 2001 2,000,000
In addition, Sinclair received 719,225 anti-dilution warrants to purchase the
Company's stock at $3.00 per share (subject to adjustment based on a formula
defined in the related warrant agreement). Also, Sinclair received 6,000,000
warrants which are exercisable only upon the Company achieving increased product
sales or sales of products with new technology. These warrants may be exercised
at prices ranging from $3.00 to $6.00 per share. The expiration date of all
warrants mentioned above is January 26, 2006. At December 31, 2000, Sinclair had
8,644,225 warrants to purchase the Company's common stock.
The following warrants and options (excluding employee and director stock
options) were outstanding at December 31, 2000 and 1999:
2000 1999 EXERCISE PRICE EXPIRATION DATE
---- ---- -------------- ---------------
200,000 200,000 $ 6.00 May 24, 2001
500,000 500,000 3.00 November 7, 2002
525,000 525,000 3.00 September 4, 2003
111,600 -- 3.00 May 1, 2005
1,925,000 2,000,000 3.00 January 26, 2006
719,225 719,225 3.00 January 26, 2006
6,000,000 6,000,000 3.00-6.00 January 26, 2006
25,000 25,000 3.50 June 5, 2008
----------- -----------
10,005,825 9,969,225
=========== ===========
EMPLOYEE STOCK OPTIONS
In December 1993, the Company adopted the 1993 Stock Option Plan (the "1993
Plan"). A total of 250,000 shares of common stock options were issuable under
the 1993 Plan. The options may be incentive stock options or non-qualified stock
options. The maximum term of each option under the 1993 Plan is 10 years.
In April 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan")
under which 650,000 options have been authorized. In June 1998, the Board
granted 450,000 options under the 1997 Plan to employees. The options had an
exercise price of $4.50 per share. On October 16, 1998, the Board of Directors
repriced the exercise price of these options to $3.00 per share.
In January 1999, the Board granted 175,000 options under the 1997 Plan to an
employee. The options had an exercise price of $3.88 per share. The fair market
value of the Company's stock on the date of grant was $4.06. No compensation
related to the option grant was recorded in 1999.
F-46
In March 1999, the Company adopted the 1999 Long-Term Incentive Plan (the "1999
Plan") under which awards may be granted in the form of stock, restricted stock,
stock options, stock appreciation rights or cash. Under the 1999 Plan, the
Company may make stock-based awards of up to an aggregate of 2,000,000 shares of
common stock. In August 1999, the Board granted 370,000 options to employees and
directors under the 1999 Plan. The majority of these options vested immediately.
The options had an exercise price of $2.34 per share. The fair market value of
the Company's stock on the date of grant was $2.31. No compensation related to
these option grants was recorded in 1999.
On June 9, 2000, the Company issued 439,700 options to employees and directors
under the 1999 Plan. The options had an exercise price of $2.25 to $3.00 per
share and expiration dates ranging from May 1, 2005 to July 1, 2007. The value
of the Company's common stock on the date of grant was $2.25 per share.
The Company applies Accounting Principles Board (APB) Opinion 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
option plans. Had compensation cost for the Company stock-based plans been
determined based on the fair value at the grant date for awards consistent with
the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
DECEMBER 31,
------------
2000 1999
---- ----
Net loss applicable to common shareholders:
As reported $ (13,036,186) $ (6,995,734)
Pro forma (12,756,768) (7,378,117)
Net loss per common share (basic and diluted):
As reported $ (1.84) $ (1.05)
Pro forma (1.80) (1.11)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model using the following parameters: 89%
volatility, 6.7% risk-free rate of return, 0% dividend yield and five to seven
year option life.
A summary of the awards under the Company's stock option plans during the years
ended December 31, 2000 and 1999 is presented below:
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Outstanding at the beginning of year- 1,165,000 $ 3.03 725,000 $ 3.16
Granted 641,300 2.61 545,000 2.83
Exercised -- -- -- --
Rescinded/forfeited (662,500) (3.34) (105,000) (3.00)
------------- ---------- ------------- ----------
Outstanding at year end 1,143,800 $ 2.59 1,165,000 $ 3.03
============= =========== ============= ==========
Options exercisable at year end 517,500 $ 2.54 900,833 $ 3.00
============= =========== ============= ==========
Weighted average fair value of options
granted during the year $ 1.61 $ 2.31
F-47
8. INCOME TAXES:
The provision for income taxes differs from the amount computed using the
federal income tax rate as follows:
DECEMBER 31,
------------
2000 1999
---- ----
Income tax benefit at statutory federal rates $ (4,544,465) $ (2,417,231)
State tax benefit, net of federal tax benefit (499,887) (377,041)
Goodwill amortization and write-off 1,364,723 62,598
Other permanent differences 13,039 11,600
Increase in valuation allowance 3,666,590 2,720,074
----------------- -----------------
$ -- $ --
================= =================
The components of the net deferred income tax asset are as follows:
DECEMBER 31,
------------
2000 1999
---- ----
Deferred tax assets:
Tax loss carryforwards (tax basis) $ 9,118,430 $ 5,893,376
Allowance for doubtful accounts 155,596 24,000
Non-compete agreement 411,753 257,862
Inventory 812,065 672,568
Other deferred tax assets 54,792 70,840
-------------- -------------
Net deferred tax assets 10,552,636 6,918,646
Valuation allowance (10,552,636) (6,918,646)
-------------- -------------
$ -- $ --
============== =============
A full valuation allowance has been established against the Company's net
deferred tax assets as management has concluded that it is more likely than not
the related tax benefits will not be realized.
The Company's tax loss carryforwards, which begin to expire in 2011, totaled
approximately $22,800,000 and $14,700,000 at December 31, 2000 and 1999,
respectively.
9. RELATED PARTY:
As discussed in Note 7, on January 27, 1999, Sinclair invested $4,300,000 in
the Company in return for 1,431,333 shares of the Company's common stock and
warrants to purchase up to an aggregate of 8,719,225 shares over a term of up
to seven years at prices ranging from $3.00 to $6.00 per share. Sinclair also
acquired an additional 800,000 shares of common stock previously held by
outside investors. On December 20, 1999, the Company committed to issue
112,000 shares to Sinclair with respect to the terms of the Guaranty and
Lease Agreements (see discussion below). As of December 31, 2000, the Company
is obligated to issue 588,506 shares to Sinclair with respect to the terms of
the Guaranty and Lease Agreement. As of December 31, 2000, Sinclair held an
aggregate of 2,418,333 shares of the Company's common stock, representing
approximately 34.6% of issued common stock assuming no warrants are exercised.
During November 1999, the Company entered into a Guaranty and Lease Compensation
Agreement (the "Guaranty Agreement") with Sinclair, intended to be effective
September 16, 1999. In connection with the $2,500,000 Credit Facility discussed
in Note 6, the bank required, as a condition of the loan, that Sinclair
F-48
unconditionally and irrevocably guarantee all of the Company's obligation with
respect to the Credit Facility. Under the Guaranty Agreement and as compensation
to Sinclair for the guarantee, the Company committed to provide Sinclair the
following: (1) $200,000 payable in Company common stock (based upon the closing
price as quoted on September 16, 1999), and (2) on October 1, 2000 and payable
each year thereafter until the bank no longer requires the guarantee from
Sinclair, the Company shall pay Sinclair an amount equal to the average of the
line of credit outstanding balances as of the last day of each of the preceding
twelve months (not to be less than $1,700,000) multiplied by 12.5% and payable
in the form of Company common stock. The $200,000 due Sinclair under the terms
of the guarantee was capitalized and was amortized as interest expense over the
guarantee period. Of the $200,000 related to this guarantee, $150,000 and
$50,000 were recorded as interest expense during 2000 and 1999, respectively.
For the year ended December 31, 2000, the Company recorded additional interest
expense related to the Guaranty Agreement of $235,500. In November 2000
Sinclair purchased the credit facility discussed in Note 6 and assumed all
rights of the bank. Sinclair filed the UCC liens against the Company's personal
property, which eliminated the Sinclair guaranty.
During November of 1999, the Company entered into a sublease agreement (the
"Lease Agreement") with Sinclair (see Note 10). Under the terms of the Lease
Agreement and as compensation for the Lease Agreement, the Company agreed to
compensate Sinclair as follows: (1) on the lease execution date, $70,000
payable in the form of Company common stock calculated at the average closing
price for the five business days preceding the lease execution date and (2)
on each lease anniversary date, $70,000 payable in the form of Company common
stock calculated as the average closing price for the five business days
preceding the lease anniversary date.
During March 2000, the Company entered into a 10-year license agreement (the
"License Agreement") with Sinclair for the exclusive right to manufacture and
sell certain Sinclair designed transmitter lines. Under terms of the License
Agreement, the Company will pay Sinclair an annual royalty of $300,000 for five
years. For years six through ten, the Company shall pay Sinclair an annual
royalty equal to 1.0% of revenues realized by the Company attributable to the
License Agreement. At end of the tenth year, the Company has the option to
purchase the Sinclair technology. The purchase price would be twice the
cumulative royalty amount paid to Sinclair for years six through ten.
During March 2000, the Company entered into a subordinated debenture
agreement (the "Debenture") with Sinclair. Under the terms of the Debenture,
the Company may borrow up to $2,000,000 at an interest rate of 10.5%. The
first payment of interest shall be made April 1, 2000 and on a monthly basis
thereafter. Principal is payable upon demand of Sinclair. Further, Sinclair
has the right, at any time, to convert all, but not less than all, of the
principal owed to Sinclair into the Company's common stock at $3.45 per
share. Through April 13, 2001 the Company had borrowed $2,000,000 under the
terms of this arrangement. During 2000, the Company charged $115,815 to
interest expense for this Debenture.
Sales made to Sinclair during 2000 and 1999 totaled $2,591,364 and $1,383,981,
respectively. The Company sells these products to Sinclair at prices which
approximate fair market value. The following amounts are included in the
consolidated balance sheets at year end in connection with trade transactions
with Sinclair:
DECEMBER 31,
------------
2000 1999
---- ----
Receivables $ 183,461 $ 54,434
Customer advances 3,417,245 2,423,044
Deferred revenue 445,650 56,412
See Note 1 regarding the Recapitalization Plan.
F-49
10. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for its manufacturing facility and office
space, which expire July 31, 2000 and October 31, 2001, respectively. Rental
expense was $278,222 and $229,012 for the years ended December 31, 2000 and
1999, respectively.
During September 1999, the Company entered into a sublease agreement with
Sinclair (see Note 9) for the lease of its headquarters and manufacturing
facility, which was occupied during November 2000. Minimum lease payments due
under capital leases are as follows:
2001 $ 424,453
2002 416,374
2003 427,553
2004 448,103
2005 505,341
2006 and thereafter 5,759,784
-------------
7,981,608
Less - amount representing interest 4,195,166
-------------
Present value of obligation 3,786,442
Less - current portion 9,494
-------------
Noncurrent obligations under capital leases $ 3,776,948
=============
Future minimum lease payments under noncancellable operating leases are as
follows:
2001 $ 31,013
2002 31,013
2003 31,013
2004 26,818
2005 8,001
-----------
$ 127,858
===========
LEGAL PROCEEDINGS
In September 2000, the Company was joined as a defendant along with two of its
officers and directors, in a class action in the United States District Court
for the District of Maryland. The lawsuit asserts that the Company issued false
and misleading financial statements. The Company has reached a preliminary
settlement with plaintiffs' counsel. The preliminary settlement requires the
Company to issue plaintiffs warrants to purchase 1,600,000 shares of the
Company's common stock at an exercise price of $1.00 per share. The warrants
will expire after five years. The Company also has agreed to pay plaintiffs
$750,000. The cash portion of the settlement will be funded by its officers' and
directors' indemnity insurance policy. A Memorandum of Understanding reflecting
the material terms of the settlement was filed with the Court on March 1, 2001.
On April 6, 2001, a Stipulation and Agreement of Settlement was submitted to the
Court along with all required documents to effectuate the settlement. On April
9, 2001, the Court approved the proposed settlement but reserved its right to
review the settlement and/or enter a final judgment approving the settlement and
dismissing the lawsuit. If the proposed settlement is finally approved, the
Company will record a charge to operations for the fair value of the warrants
issued. Depending on the terms of the final settlement, including the value of
the warrants issued, the ultimate resolution of this matter may have a material
impact on the Company's consolidated financial position and results of
operations.
11. ACCOUNTING REVIEW CHARGES, ADJUSTMENTS AND RESTATEMENTS:
During the third quarter of 2000, the Company initiated a comprehensive internal
review of its accounting records. As a result of this review, certain charges
and adjustments were recorded, as discussed below, in
F-50
the previously filed audited consolidated financial statements for the year
ended December 31, 1999 which needed to be amended. The following is a summary
of adjustments recorded for 1999:
1999
Cost of sales adjustments, net $ (2,795,322)
Revenue recognition adjustments (2,299,511)
Accrual adjustments (123,750)
-------------
Increase in Net Loss $ (5,218,583)
=============
The Company's results for the year ended December 31, 1999 reflect net
charges to cost of sales of $2,795,322, which related to the pricing of the
year-end physical inventories. The 1999 amount also included a $563,000
increase to the inventory obsolescence reserve. The Company's third quarter
accounting review in 2000 included a detailed review of the pricing of the
physical inventories taken as of the 1999 year-end. The review necessitated a
number of adjustments affecting the prior valuations of the physical
inventory and cost of sales for interim periods offset by the effects of
reversing revenues previously recognized.
The Company has recorded adjustments to net loss related to the timing of
revenue recognition for certain sales of $2,299,511 in 1999. These adjustments
were made based on the Company's internal review in 2000, which indicated that
certain revenues should not have been recognized or were recognized in the
improper period. The adjustments have been determined through a specific review
of the related supporting documents and a determination of the proper reporting
period for the recognition of the revenue transaction.
The Company recorded adjustments of $123,750 pertaining to certain accruals and
expense items, which were not previously recognized in 1999.
In addition to the impact of the above adjustments on shareholders' equity, an
adjustment was recorded to reclassify a liability to Sinclair, of $270,000, to
equity as this liability will be satisfied with the issuance of 112,000 shares
of common stock (see Note 7).
The impact of the above charges increased net loss by $5,218,583 or $.78 per
share in 1999. The schedules that follow show the impact on the consolidated
financial statements from previously reported results, for the year ended
December 31, 1999. The 1998 consolidated financial statements were also restated
for inventory pricing adjustments and adjustments related to the timing of
revenue recognition of certain sales. These adjustments increased the
accumulated deficit by $1,258,891 at January 1, 1999.
F-51
DECEMBER 31, 1999
-----------------------------------------
AS REPORTED
IN 1999
FORM 10-KSB AS RESTATED
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 664,950 $ 664,950
Short-term investments 200,000 200,000
Accounts receivables, net 1,335,158 1,201,268
Inventories, net 6,401,277 3,199,549
Prepaid assets 412,108 348,108
Other current assets 220,000 220,000
----------------- ----------------
Total current assets 9,233,493 5,833,875
PROPERTY, PLANT AND EQUIPMENT, net 570,182 570,182
NON-COMPETE AGREEMENT, net 360,822 360,822
GOODWILL, net 3,899,211 3,899,211
----------------- ----------------
TOTAL ASSETS $ 14,063,708 $ 10,664,090
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,801,883 $ 1,801,883
Accrued expenses 516,405 272,155
Customer advances 984,268 3,733,962
Line of credit 1,613,404 1,613,404
Current portion of capital lease obligations 69,947 69,947
Other current liabilities 16,500 318,912
----------------- ----------------
Total current liabilities 5,002,407 7,810,263
CAPITAL LEASE OBLIGATIONS 12,021 12,021
NON-COMPETE LIABILITY 845,990 845,990
----------------- ----------------
TOTAL LIABILITIES 5,860,418 8,668,274
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY 8,203,290 1,995,816
----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,063,708 $ 10,664,090
================= ================
F-52
FOR THE YEARS ENDED
DECEMBER 31, 1999
-----------------------------------------
AS REPORTED
IN 1999
FORM 10-KSB AS RESTATED
----------- -----------
Net sales $ 12,705,914 $ 10,406,403
Cost of sales 9,573,561 12,368,883
----------------- ----------------
Gross profit (loss) 3,132,353 (1,962,480)
Operating expenses:
Engineering, research and development 920,047 920,047
Selling 1,387,737 1,387,737
Administration 1,983,423 2,059,173
Amortization of intangible assets 231,496 231,496
Charge for non-compete liability adjustment 145,226 145,226
----------------- ----------------
4,667,929 4,743,679
----------------- ----------------
Operating loss (1,535,576) (6,706,159)
Other (expense) income:
Interest expense, net (154,713) (202,713)
Other income 2,499 2,499
----------------- ----------------
Loss before income taxes (1,687,790) (6,906,373)
Income taxes
----------------- ----------------
Net Loss (1,687,790) (6,906,373)
Dividends on 8% convertible, redeemable preferred stock (89,361) (89,361)
----------------- ----------------
Net Loss applicable to Common Shareholders $ (1,777,151) $ (6,995,734)
================= ================
Net Loss per common share -- Basic and Diluted $ (0.27) $ (1.05)
----------------- ----------------
Weighted Average Common Shares Outstanding --
Basic And Diluted 6,659,304 6,675,597
----------------- ----------------
F-53
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
Report of Independent Public Accountants ............................... S-2
Schedule II - Valuation and Qualifying Accounts ........................ S-3
All schedules except those listed above are omitted as not applicable or not
required or the required information is included in the consolidated financial
statements or in the notes thereto.
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of Sinclair Broadcast Group, Inc.
and Subsidiaries included in this Form 10-K and have issued our report
thereon dated January 30, 2001 (except with respect to the matter discussed
in Note 16, as to which the date is February 7, 2001). Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the accompanying index is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN, LLP
Baltimore, Maryland,
January 30, 2001 (except with respect to the matter discussed in
Note 16, as to which the date is February 7, 2001)
S-2
SCHEDULE II
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS PERIOD
----------- ------ -------- ------------ ---------- ------
1998
Allowance for doubtful accounts $ 2,920 $ 3,234 $ 1,279 $ 2,264 $ 5,169
1999
Allowance for doubtful accounts 5,169 2,560 458 3,171 5,016
2000
Allowance for doubtful accounts 5,016 3,336 75 2,676 5,751
- ---------
(1) Amount represents allowance for doubtful account balances related to the
acquisition of certain television stations.
S-3