UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/X/ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number: 000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------------
MARYLAND 52-1494660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MD 21030
(Address of principal executive offices)
(410) 568-1500
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year-
if changed since last report)
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 / /
As of May 11, 2001, there were 39,396,268 shares of Class A Common Stock, $.01
par value; 44,838,828 shares of Class B Common Stock, $.01 par value; 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
11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., are issued and
outstanding.
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
PAGE
----
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000........................................................ 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2001 and 2000............................................ 4
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 2001..................................................... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000............................................ 6
Notes to Unaudited Consolidated Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 11
Item 3. Quantitative and Qualitative disclosure about market risk.......................... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................. 17
Signature.............................................................................. 18
2
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash............................................................................ $ 3,696 $ 4,091
Accounts receivable, net of allowance for doubtful accounts..................... 133,631 165,913
Current portion of program contract costs....................................... 74,315 72,841
Prepaid expenses and other current assets....................................... 16,814 11,461
Deferred barter costs........................................................... 4,080 3,472
Deferred tax assets............................................................. 11,995 11,939
------------ -----------
Total current assets..................................................... 244,531 269,717
PROGRAM CONTRACT COSTS, less current portion........................................ 65,594 53,698
LOANS TO OFFICERS AND AFFILIATES.................................................... 8,247 8,269
PROPERTY AND EQUIPMENT, net......................................................... 278,966 280,987
OTHER ASSETS 100,544 103,863
ACQUIRED INTANGIBLE BROADCAST ASSETS, net........................................... 2,655,560 2,684,106
------------ -----------
Total Assets............................................................. $ 3,353,442 $ 3,400,640
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 5,629 $ 6,865
Accrued liabilities............................................................. 51,485 80,626
Income taxes payable............................................................ 19,212 55,912
Notes payable, capital leases and commercial bank financing..................... 100,023 100,018
Notes and capital leases payable to affiliates.................................. 5,463 5,838
Current portion of program contracts payable.................................... 106,130 110,217
Deferred barter revenues........................................................ 4,736 4,296
------------ -----------
Total current liabilities................................................ 292,678 363,772
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing..................... 1,516,866 1,481,561
Notes and capital leases payable to affiliates.................................. 28,496 29,009
Program contracts payable, less current portion................................. 117,338 99,146
Deferred tax liability.......................................................... 253,323 255,088
Other long-term liabilities..................................................... 59,316 46,746
------------ -----------
Total liabilities........................................................ 2,268,017 2,275,322
------------ -----------
EQUITY PUT OPTION 7,811 7,811
------------ -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES...................................... 4,705 4,977
------------ -----------
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES..................................... 200,000 200,000
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series D Preferred Stock, $0.01 par value, 3,450,000 shares authorized,
issued and outstanding, liquidation preference of $172,500,000.............. 35 35
Class A Common Stock, $0.01 par value, 500,000,000 shares authorized
and 39,920,877 and 39,032,277 shares issued and outstanding, respectively... 399 390
Class B Common Stock, $0.01 par value, 70,000,000 shares authorized
and 44,838,828 and 45,479,578 shares issued and outstanding, respectively... 448 455
Additional paid-in capital...................................................... 752,383 750,372
Additional paid-in capital - deferred compensation.............................. (2,404) (2,618)
Retained earnings............................................................... 125,757 164,958
Other comprehensive loss........................................................ (3,709) (1,062)
------------ -----------
Total stockholders' equity............................................... 872,909 912,530
------------ -----------
Total Liabilities and Stockholders' Equity............................... $ 3,353,442 $ 3,400,640
============ ===========
The accompanying notes are an integral part of these
unaudited consolidated statements.
3
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
---- ----
REVENUES:
Station broadcast revenues, net of agency commissions....................... $ 149,709 $ 160,802
Revenues realized from station barter arrangements.......................... 13,672 15,046
Other revenues.............................................................. 2,183 579
----------- -----------
Total revenues....................................................... 165,564 176,427
----------- -----------
OPERATING EXPENSES:
Program and production...................................................... 38,218 38,065
Selling, general and administrative......................................... 41,586 40,528
Expenses realized from station barter arrangements.......................... 12,126 13,438
Amortization of program contract costs and net 25,117 25,077
realizable value adjustments.............................................
Stock-based compensation.................................................... 618 676
Depreciation of property and equipment...................................... 9,530 8,511
Amortization of acquired intangible broadcast assets,
non-compete and consulting agreements and other assets................... 29,431 26,939
Restructuring charge........................................................ 2,423 --
Cumulative adjustment for change in assets held for sale.................... -- 619
----------- -----------
Total operating costs................................................ 159,049 153,853
------------ -----------
Operating income..................................................... 6,515 22,574
----------- -----------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense.......................... (33,912) (36,872)
Subsidiary trust minority interest expense.................................. (5,813) (5,813)
Interest income............................................................. 675 580
Unrealized gain (loss) on derivative instrument............................. (9,348) 699
Loss related to investments................................................. (68) (535)
Other income (expense)...................................................... 195 (163)
----------- -----------
Loss before income tax benefit....................................... (41,756) (19,530)
INCOME TAX BENEFIT.............................................................. 5,143 16,907
----------- -----------
Net loss from continuing operations......................................... (36,613) (2,623)
Net income from discontinued operations, net of taxes....................... -- 803
----------- -----------
NET LOSS........................................................................ $ (36,613) $ (1,820)
============ ===========
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS....................................... $ (39,201) $ (4,408)
============ ===========
BASIC EARNINGS PER SHARE:
Loss per common share from continuing operations............................ $ (0.46) $ (0.05)
=========== ===========
Income per share from discontinued operations............................... $ -- $ 0.01
=========== ===========
Loss per common share....................................................... $ (0.46) $ (0.05)
=========== ===========
Weighted average common shares outstanding.................................. 84,560 95,237
=========== ===========
DILUTED EARNINGS PER SHARE:
Loss per common share from continuing operations............................ $ (0.46) $ (0.05)
========== ===========
Income per share from discontinued operations............................... $ -- $ 0.01
=========== ===========
Loss per common share....................................................... $ (0.46) $ (0.05)
=========== ===========
Weighted average common and common equivalent shares outstanding............ 84,590 95,237
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated statements.
4
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS) (UNAUDITED)
ADDITIONAL
PAID-IN
SERIES D CLASS A CLASS B ADDITIONAL CAPITAL -
PREFERRED COMMON COMMON PAID-IN DEFERRED
STOCK STOCK STOCK CAPITAL COMPENSATION
----- ----- ----- ------- ------------
BALANCE, December 31, 2000................. $ 35 $ 390 $ 455 $ 750,372 $ (2,618)
Class B common share converted to Class
A common shares.................... --- 7 (7) --- ---
Stock options exercised................ --- --- --- 99 ---
Dividends payable on Series D
Preferred Stock.................... --- --- --- --- ---
Class A Common Stock issued
pursuant to employee benefit plans --- 2 --- 1,912 ---
Amortization of deferred
compensation....................... --- --- --- --- 214
Net loss............................... --- --- --- --- ---
Other Comprehensive Loss:
Reclass of derivative instruments upon
implementation of SFAS 133 net
of tax benefit of $1,707........... --- --- --- --- ---
Amortization of derivative instruments
Unrealized loss on investment, net of
tax benefit of $57................. --- --- --- --- ---
Comprehensive loss..................... --- --- --- --- ---
--------- --------- --------- ---------- -----------
BALANCE, March 31, 2001.................... $ 35 $ 399 $ 448 $ 752,383 $ (2,404)
========= ========= ========= ========== ===========
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS LOSS EQUITY
-------- ---- ------------
BALANCE, December 31, 2000................. $ 164,958 $ (1,062) $ 912,530
Class B common share converted to Class
A common shares.................... --- --- ---
Stock options exercised................ --- --- 99
Dividends payable on Series D
Preferred Stock.................... (2,588) --- (2,588)
Class A Common Stock issued
pursuant to employee benefit plans --- --- 1,914
Amortization of deferred
compensation....................... --- --- 214
-----------
Net loss............................... (36,613) --- (36,613)
Other Comprehensive Loss:
Reclass of derivative instruments upon
implementation of SFAS 133 net
of tax benefit of $1,707........... --- (2,579) (2,579)
Amortization of derivative instruments 18 18
Unrealized loss on investment, net of
tax benefit of $57................. --- (86) (86)
-----------
Comprehensive loss..................... --- --- (39,260)
---------- ----------- -----------
BALANCE, March 31, 2001.................... $ 125,757 $ (3,709) $ 872,909
========= ============ ===========
The accompanying notes are an integral part of these
unaudited consolidated statements.
5
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES: 2001 2000
---- ----
Net loss........................................................................ $ (36,613) $ (1,820)
Adjustments to reconcile net loss to net cash flows from operating activities-
Amortization of debt discount............................................... 159 25
Depreciation of property and equipment...................................... 9,530 9,998
Gain (loss) on derivative instrument........................................ 9,348 (699)
Amortization of acquired intangible broadcast assets,
non-compete and consulting agreements and other assets................... 29,431 30,178
Amortization of program contract costs and net realizable value adjustments. 25,117 25,375
Stock-based compensation.................................................... 214 292
Amortization of derivative instruments...................................... 18 ---
Cumulative adjustment for change in assets held for sale.................... --- (1,237)
Deferred tax provision related to operations................................ (56) (19,034)
Loss from equity investments................................................ 68 535
Net effect of change in deferred barter revenues and deferred barter costs.. (168) 115
Decrease in minority interest............................................... (272) (29)
Changes in assets and liabilities, net of effects of acquisitions and dispositions-
Decrease in accounts receivable, net........................................ 32,282 53,906
(Increase) decrease in prepaid expenses and other current assets............ (5,353) 1,457
Increase in other long-term assets.......................................... (218) (846)
Decrease in accounts payable and accrued liabilities........................ (27,999) 922
Decrease in income taxes payable............................................ (36,700) (95,034)
Increase (decrease) in other long-term liabilities.......................... 1,951 (661)
Payments on program contracts payable....................................... (24,846) (24,675)
-------------- -------------
Net cash flows used in operating activities.............................. (24,107) (21,232)
-------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment........................................... (6,774) (6,378)
Payments relating to the acquisition of broadcast assets........................ (230) (972)
Distributions from joint ventures............................................... 240 333
Contributions in investments.................................................... (525) (3,917)
Proceeds from sale of broadcast assets.......................................... --- 984
Deposit received on future sale of broadcast assets............................. 125 ---
Loans to officers and affiliates................................................ (1,485) (813)
Repayments of loans to officers and affiliates.................................. 166 200
------------- -------------
Net cash flows used in investing activities.............................. (8,483) (10,563)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial bank financing......................................... 176,000 82,000
Repayments of notes payable, commercial bank financing and capital leases....... (140,000) (18,750)
Repurchases of Class A Common Stock............................................. --- (35,060)
Proceeds from exercise of stock options......................................... 99 ---
Dividends paid on Series D Convertible Preferred Stock.......................... (2,588) (2,588)
Repayments of notes and capital leases to affiliates............................ (1,316) (1,650)
-------------- -------------
Net cash flows from financing activities................................. 32,195 23,952
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................................... (395) (7,843)
CASH AND CASH EQUIVALENTS, beginning of period...................................... 4,091 16,408
------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................................ $ 3,696 $ 8,565
============= ==============
The accompanying notes are an integral part of these
unaudited consolidated statements.
6
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sinclair Broadcast Group, Inc. and all of its consolidated subsidiaries, which
are collectively referred to hereafter as "the Company, Companies or SBG." The
Company owns and operates or provides programming services pursuant to local
marketing agreements (LMAs) to television stations throughout the United States.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the three months ended March 31, 2000
and 2001 are unaudited, but in the opinion of management, such financial
statements have been presented on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations, and cash flows for these periods.
As permitted under the applicable rules and regulations of the Securities and
Exchange Commission, these financial statements do not include all disclosures
normally included with audited consolidated financial statements, and,
accordingly, should be read in conjunction with the consolidated financial
statements and notes thereto as of December 31, 2000 and for the year then
ended. The results of operations presented in the accompanying financial
statements are not necessarily representative of operations for an entire year.
RESTRUCTURING CHARGE
During the quarter ended March 31, 2001, the Company offered a voluntary early
retirement program to its eligible employees and implemented a restructuring
program to reduce operating and overhead costs. As a result, the Company reduced
its staff by 186 employees and incurred a restructuring charge of $2.4 million
which is included in the accompanying consolidated statement of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
2. CONTINGENCIES AND OTHER COMMMITMENTS:
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.
3. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
During the three months ended March 31, 2001 and 2000, the Company's
supplemental cash flow information is as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2001 2000
---- ----
Interest payments........................................................ $ 47,345 $ 35,867
=========== ==========
Subsidiary trust minority interest payments.............................. $ 5,813 $ 5,813
=========== ==========
Income taxes paid from continuing operations............................. $ 1,540 $ 1,236
=========== ==========
Income taxes paid related to sale of discontinued operations,
net of refunds received.............................................. $ 35,318 $ 87,035
=========== ==========
Income tax refunds received from continuing operations................... $ 158 $ 901
=========== ==========
7
4. EARNINGS PER SHARE:
The basic and diluted earnings per share and related computations are as follows
(in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
---- ----
Weighted-average number of common shares...................................... 84,560 95,237
Diluted effect of outstanding stock options .................................. 30 ---
Diluted effect of conversion of preferred shares.............................. --- ---
----------- -----------
Weighted-average number of common and common
equivalent shares outstanding............................................. 84,590 95,237
=========== ===========
Net loss from continuing operations........................................... $ (36,613) $ (2,623)
=========== ===========
Net income from discontinued operations....................................... $ --- $ 803
=========== ===========
Net loss...................................................................... $ (36,613) $ (1,820)
Preferred stock dividends payable............................................. (2,588) (2,588)
----------- -----------
Net loss available to common stockholders..................................... $ (39,201) $ (4,408)
=========== ===========
BASIC EARNINGS PER SHARE:
Net loss per common share from continuing operations................... $ (0.46) $ (0.05)
=========== ===========
Net income per share from discontinued operations...................... $ --- $ 0.01
=========== ===========
Net loss per common share.............................................. $ (0.46) $ (0.05)
=========== ===========
DILUTED EARNINGS PER SHARE:
Net loss per common share from continuing operations................... $ (0.46) $ (0.05)
=========== ===========
Net income per share from discontinued operations...................... $ --- $ 0.01
=========== ===========
Net loss per common share.............................................. $ (0.46) $ (0.05)
=========== ===========
5. DERIVATIVE INSTRUMENTS:
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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES -DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 and SFAS
No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133. SFAS No. 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. Statement No. 133 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. SFAS No. 133 had
the following impact on the Company's financial statements.
The Company's existing interest rate swap agreements do not qualify for special
hedge accounting treatment under SFAS No. 133. As a result, both of the
Company's interest rate swap agreements were reflected as liabilities on
January 1, 2001 at their fair market value of $7.1 million in the aggregate,
including $1.0 million of bond discount related to the transition adjustment to
record the Company's fixed-to-floating rate derivative instrument. The bond
discount resulting from the implementation of SFAS No. 133 is being amortized to
interest expense through December 15, 2007, the termination date of the swap
agreement. The floating-to-fixed
8
rate derivative instrument was recorded at its fair value of $6.1 million on
December 29, 2000 as a result of an amendment. Therefore, there was no
transition adjustment on January 1, 2001 related to this instrument as there was
no change in its fair value.
SFAS No. 133 required deferred gains and losses on previously terminated
floating-to-fixed rate hedges to be presented as other comprehensive income or
loss on the balance sheet. As a result, on January 1, 2001, the Company
reclassified the $2.6 million net balance of deferred losses to other
comprehensive loss, net of a deferred tax benefit of $1.7 million and is
amortizing this balance to interest expense over the original terms of the
previously terminated and modified swap agreements, which expire from July 9,
2001 to June 3, 2004. The Company anticipates that approximately $0.3 million
will be amortized from other comprehensive loss to interest expense during the
remaining nine months of 2001.
INTEREST RATE HEDGING DERIVATIVE INSTRUMENTS
As of March 31, 2001, 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") (measurement and settlement is performed
quarterly). This swap agreement is reflected as a derivative obligation of $18.4
million as a component of other long-term liabilities on the accompanying
consolidated balance sheet as of March 31, 2001. 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 (measurement and
settlement is performed quarterly). This swap agreement is reflected as a
derivative asset of $2.0 million as a component of other long-term assets on the
balance sheet as of March 31, 2001. Periodic settlements of these agreements are
recorded as adjustments to interest expense in the relevant periods.
On March 31, 2001, the Company's fixed-to-floating rate derivative was adjusted
to its fair value of $2.0 million which resulted in a reclassification of this
derivative to other long-term assets from its January 1, 2001 balance in other
long-term liabilities of $1.0 million. This reclassification resulted in an
unrealized gain of $3.0 million. The Company's floating-to-fixed rate derivative
was adjusted to its fair value of $18.4 million on March 31, 2001 from its
balance of $6.1 million and is reflected as other long-term liabilities on the
balance sheet. This resulted in an unrealized loss of $12.3 million. The net
unrealized loss of $9.3 million resulting from these mark-to-market adjustments
is reflected as unrealized loss on derivative instruments on the accompanying
consolidated statement of operations.
The counterparties to these agreements are international financial institutions.
The Company estimates the net fair value of these instruments at March 31, 2001
to be a liability of $16.4 million, consisting of an $18.4 million liability
related to the floating-to-fixed rate agreement and a $2.0 million asset 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 March 31, 2001 if the contracts were transferred to other parties or
cancelled by the Company.
EQUITY PUT OPTION DERIVATIVE
As of March 31, 2001 the Company held a put option derivative which provides for
settlement of 2.7 million options of the Company's class A common stock on July
2, 2001. The contract terms require us to make a settlement payment to the
counterparties to this contract (payable in either cash or shares of our class A
common stock) in an amount that is approximately equal to the put strike price
of $28.931 minus the price of our class A common stock as of the termination
date. This payment is limited by a strike price differential of $26.038
resulting in a maximum settlement of $2.893 per option. If the put strike price
is less than the price of our class A common stock as of the termination date,
we would not be obligated to make a settlement payment. This balance is
reflected as Equity Put Options of $7.8 million on the balance sheet as of March
31, 2001.
The equity put option agreement included a provision whereby it would become
immediately exercisable if the Company's closing price was less than $6.45 for
five consecutive days. On April 10, 2001 this option became exercisable and as a
result, the contract was settled for $7.7 million in cash on April 16, 2001.
6. SUBSEQUENT EVENT:
AMENDMENT AND RESTATEMENT TO THE 1998 BANK CREDIT AGREEMENT
9
On May 9, 2001, the banks approved an amendment and restatement of the Company's
1998 Bank Credit Agreement (the "Amended and Restated Bank Credit Agreement")
allowing the Company more operating capacity and liquidity. If implemented as
approved, the Amended and Restated Bank Credit Agreement would reduce the
aggregate borrowing permitted capacity from a $1.6 billion facility to a $1.1
billion facility. The Amended and Restated Bank Credit Agreement would consist
of a $600 million Revolving Credit Facility maturing on September 15, 2005 and a
$500 million Incremental Term Loan Facility repayable in consecutive quarterly
installments amortizing 1% per year commencing March 31, 2003 and continuing
through its maturity on September 30, 2009.
The applicable interest rate on the Revolving Credit Facility is either LIBOR
plus 1.25% to 3.00% or the alternative base rate plus zero to 1.75% adjusted
quarterly based on the ratio of total debt to four quarters' trailing earnings
before interest, taxes, depreciation and amortization. The applicable interest
rate on the Incremental Term Loan Facility is LIBOR plus 3.50% or the
alternative base rate plus 2.25 % through maturity. The Company anticipates this
amendment and restatement to close on May 16, 2001.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in this quarterly
report and the audited financial statements and Management's Discussion and
Analysis contained in our Form 10-K for the fiscal year ended December 31, 2000.
This report includes or incorporates forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, among other things:
o the impact of changes in national and regional economies,
o our ability to service our outstanding debt,
o our ability to successfully compete in our markets and to achieve
synergies and cost reductions at our stations,
o pricing fluctuations in local and national advertising,
o volatility in programming costs, and
o the effects of governmental regulation of broadcasting.
Other matters set forth in this report including the risk factors set forth in
our Form 10-K filed with the Securities and Exchange Commission on March 30,
2001, may also cause actual results in the future to differ materially from
those described in the forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this report might not
occur.
11
The following table sets forth certain operating data for comparison of the
three months ended March 31, 2001 and 2000:
OPERATING DATA (dollars in thousands):
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31,
---------------
2001 2000
---- ----
Net broadcast revenues (a).............................................. $149,709 $160,802
Barter revenues......................................................... 13,672 15,046
Other revenues.......................................................... 2,183 579
--------------- ---------------
Total revenues.......................................................... 165,564 176,427
--------------- ---------------
Operating costs (b)..................................................... 79,804 78,593
Expenses from barter arrangements....................................... 12,126 13,438
Depreciation, amortization and stock-based compensation(c).............. 64,696 61,203
Restructuring charge.................................................... 2,423 0
Cumulative adjustment for change in assets held for sale................ 0 619
--------------- ---------------
Broadcast operating income.............................................. 6,515 22,574
Interest expense........................................................ (33,912) (36,872)
Subsidiary trust minority interest expense (d).......................... (5,813) (5,813)
Interest and other income............................................... 870 417
Loss related to investments............................................. (68) (535)
Unrealized gain (loss) on derivative instrument......................... (9,348) 699
--------------- ---------------
Loss before income tax benefit.......................................... (41,756) (19,530)
Income tax benefit...................................................... 5,143 16,907
--------------- ---------------
Net loss from continuing operations..................................... $ (36,613) $ (2,623)
Net income from discontinued operations, net of taxes................... --- 803
--------------- ---------------
Net loss................................................................ $ (36,613) $ (1,820)
================ ================
Net loss available to common stockholders............................... $ (39,201) $ (4,408)
================ ================
OTHER DATA:
Broadcast Cash Flow (e)............................................. $ 54,023 $ 65,594
Broadcast Cash Flow Margin (f)...................................... 36.1% 40.8%
Adjusted EBITDA (g)................................................. $ 49,168 $ 59,750
Adjusted EBITDA margin (f).......................................... 32.8% 37.2%
After tax cash flow (h)............................................. $ 12,161 $ 15,061
Program contract payments........................................... 24,846 24,675
Corporate expenses.................................................. 4,855 5,844
Selling, general and administrative expenses related to G1440....... 2,563 608
Capital expenditures................................................ 6,774 6,378
Cash flows used in operating activities............................. (24,107) (21,232)
Cash flows used in investing activities............................. (8,483) (10,563)
Cash flows from financing activities................................ 32,195 23,952
- ---------
(a) "Net broadcast revenues" are defined as broadcast revenues net of agency
commissions.
(b) Operating costs include program and production expenses and selling,
general and administrative expenses.
(c) Depreciation, amortization and stock-based compensation includes
amortization of program contract costs and net realizable value
adjustments, depreciation and amortization of property and equipment,
stock-based compensation and amortization of acquired intangible
broadcast assets and other assets including amortization of deferred
financing costs.
(d) Subsidiary trust minority interest expense represents the distributions
on the HYTOPS.
(e) "Broadcast cash flow" (BCF) is defined as operating income plus corporate
expenses, selling, general and administrative expenses related to
internet operations, stock-based compensation, depreciation and
amortization (including film amortization and amortization of deferred
compensation), restructuring charge, cumulative adjustment for change in
assets held for sale, less other revenue and cash payments for program
rights. Cash program payments represent cash payments made for current
programs payable and do not necessarily correspond to program usage. We
have presented BCF data, which we believe is comparable to the data
provided by other companies in the industry, because such data are
commonly used as a measure of performance for broadcast companies;
however, there can be no assurance that it is comparable. However, BCF
does not purport to represent cash provided by operating activities as
reflected in our consolidated statements of cash flows and is not a
measure of financial performance under generally accepted accounting
principles. In addition, BCF should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with
generally accepted accounting principles. Management believes the
presentation of BCF is relevant and
12
useful because 1) it is a measurement utilized by lenders to measure our
ability to service our debt, 2) it is a measurement utilized by industry
analysts to determine a private market value of our television stations
and 3) it is a measurement industry analysts utilize when determining our
operating performance.
(f) "Broadcast cash flow margin" is defined as broadcast cash flow divided by
net broadcast revenues. "Adjusted EBITDA margin" is defined as Adjusted
EBITDA divided by net broadcast revenues.
(g) "Adjusted EBITDA" is defined as broadcast cash flow less corporate
expenses and is a commonly used measure of performance for broadcast
companies. We have presented Adjusted EBITDA data, which we believe is
comparable to the data provided by other companies in the industry,
because such data are commonly used as a measure of performance for
broadcast companies; however, there can be no assurances that it is
comparable. Adjusted EBITDA does not purport to represent cash provided
by operating activities as reflected in our consolidated statements of
cash flows and is not a measure of financial performance under generally
accepted accounting principles. In addition, Adjusted EBITDA should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
Management believes the presentation of Adjusted EBITDA is relevant and
useful because 1) it is a measurement utilized by lenders to measure our
ability to service our debt, 2) it is a measurement utilized by industry
analysts to determine a private market value of our television stations
and 3) it is a measurement industry analysts utilize when determining our
operating performance.
(h) "After tax cash flow" (ATCF) is defined as net income (loss) available to
common shareholders, plus extraordinary items (before the effect of
related tax benefits) plus depreciation and amortization (excluding film
amortization), stock-based compensation, restructuring charge, the
cumulative adjustment for change in assets held for sale, the loss of
equity investments (or minus the gain), unrealized loss on derivative
instrument (or minus the gain), the deferred tax provision related to
operations or minus the deferred tax benefit, and minus the gain on sale
of assets and deferred NOL carry backs. We have presented ATCF data,
which we believe is comparable to the data provided by other companies in
the industry, because such data are commonly used as a measure of
performance for broadcast companies; however, there can be no assurances
that it is comparable. ATCF is presented here not as a measure of
operating results and does not purport to represent cash provided by
operating activities. ATCF should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles. Management believes the
presentation of ATCF is relevant and useful because ATCF is a measurement
utilized by industry analysts to determine a public market value of our
television stations and ATCF is a measurement analysts utilize when
determining our operating performance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000.
Net broadcast revenues decreased to $149.7 million for the three months ended
March 31, 2001 from $160.8 million for the three months ended March 31, 2000, or
6.9%. The decrease in net broadcast revenues for the three months ended March
31, 2001 as compared to the three months ended March 31, 2000 comprised of a
decrease of $15.9 million on a same station basis, or 9.9%, offset by an
increase of $4.8 million related to television broadcast assets acquired during
2000 (the "2000 Acquisitions"). On a same station basis, national revenues
decreased $14.0 million, representing a 20.0% decrease over the prior year's
first quarter national revenue. National revenue decreased due to a soft
advertising market during the three months ended March 31, 2001 combined with
our strategic focus on local revenue growth. Local revenue decreased on a same
station basis by $2.6 million for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 or 3.2% primarily due to the
soft advertising market.
Total operating costs increased to $79.8 million for the three months ended
March 31, 2001 from $78.6 million for the three months ended March 31, 2000 or
1.5%. The increase in expenses for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 comprised of $2.7 million
related to the 2000 Acquisitions, $2.0 million related to selling, general and
administrative expenses incurred by G1440, Inc., our Internet development and
integration company, offset by a decrease of $0.9 million in corporate expenses
and $2.6 million related to a decrease in operating costs on a same station
basis, or 3.7%.
Depreciation and amortization increased $3.5 million to $64.7 million for the
three months ended March 31, 2001 from $61.2 million for the three months ended
March 31, 2000. The increase in depreciation and amortization relates to fixed
asset additions and intangible asset additions associated with businesses
acquired during 2000.
Operating income decreased $16.1 million to $6.5 million for the three months
ended March 31, 2001, from $22.6 million for the three months ended March 31,
2000, or 71.2%. The net decrease in operating income for the three months ended
March 31, 2001 as compared to the three months ended March 31, 2000 was
primarily attributable to a decrease in net broadcast revenues, an increase in
operating expenses, an increase in depreciation and amortization and a
restructuring charge of $2.4 million related to a reduction in our workforce of
186 employees.
13
Interest expense decreased to $33.9 million for the three months ended March 31,
2001 from $36.9 million for the three months ended March 31, 2000, or 8.1%. The
decrease in interest expense resulted from reduction of indebtedness as a result
of the proceeds from the sale of our radio broadcast assets during 2000.
Net loss for the three months ended March 31, 2001 was $36.6 million or $0.46
per share compared to net loss of $1.8 million or $0.05 per share for the three
months ended March 31, 2000. Net loss increased for the three months ended March
31, 2001 as compared to the three months ended March 31, 2000 due to a decrease
in net broadcast revenue, an increase in depreciation and amortization, the
restructuring charge, and the unrealized loss on derivative instrument offset by
a decrease in interest expense.
Income tax benefit decreased to $5.1 million for the three months ended March
31, 2001 from $16.9 million for the three months ended March 31, 2000. This
decrease is a direct result of the decrease in the effective tax rate. The
effective tax rate decreased to 12.3% for the three months ended March 31, 2001
from 86.6% for the three months ended March 31, 2000. The decrease in the
effective tax rate primarily resulted from a decrease in the relative impact of
the permanent differences between taxable income and book income projected for
2001, as compared to the relative impact of the permanent differences for 2000.
The long-term net deferred tax liability decreased to $253.3 million as of March
31, 2001 from $255.1 million at December 31, 2000. Accordingly, the increase in
the short-term net deferred tax asset as of March 31, 2001 as compared to
December 31, 2000 primarily resulted from the anticipation that certain
short-term deferred tax assets related to state tax accounting recorded for the
first quarter of 2001 will be used to offset future deferred tax liabilities
during the current year.
Broadcast cash flow decreased to $54.0 million for the three months ended March
31, 2001 from $65.6 million for the three months ended March 31, 2000, or 17.7%.
The decrease in broadcast cash flow for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 primarily resulted from a
decrease in net broadcast revenue. The Broadcast Cash Flow Margin decreased to
36.1% for the three months ended March 31, 2001 from 40.8% for the three months
ended March 31, 2000.
Adjusted EBITDA decreased to $49.2 million for the three months ended March 31,
2001 from $59.8 million for the three months ended March 31, 2000, or 17.7%. The
decrease in Adjusted EBITDA for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 primarily resulted from the
decrease in net broadcast revenue. The Adjusted EBITDA Margin decreased to 32.8%
for the three months ended March 31, 2001 from 37.2% for the three months ended
March 31, 2000.
After Tax Cash Flow decreased to $12.2 million for the three months ended March
31, 2001 from $15.1 million for the three months ended March 31, 2000, or 19.2%.
The decrease in After Tax Cash Flow for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 primarily resulted from a
decrease in operating income offset by a decrease in interest expense and an
increase in the current tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash provided by operations and
availability under the 1998 Bank Credit Agreement. As of March 31, 2001, we had
$3.7 million in cash balances and working capital of approximately $(48.1)
million. As of March 31, 2001, the remaining balance available under the
Revolving Credit Facility was $267.0 million. Based on pro forma trailing cash
flow levels for the twelve months ended March 31, 2000, we had approximately
$185.0 million available of current borrowing capacity under the Revolving
Credit Facility.
On May 9, 2001, the banks approved an amendment and restatement of our 1998 Bank
Credit Agreement (the "Amended and Restated Bank Credit Agreement") allowing us
more operating capacity and liquidity. If implemented as approved, the Amended
and Restated Bank Credit Agreement would reduce our borrowing permitted capacity
from a $1.6 billion facility to a $1.1 billion facility. The Amended and
Restated Bank Credit Agreement would consist of a $600 million Revolving Credit
Facility maturing on September 15, 2005 and a $500 million Incremental Term Loan
Facility repayable in consecutive quarterly installments amortizing 1% per year
commencing March 31, 2003 and continuing through its maturity on September 30,
2009.
The applicable interest rate on the Revolving Credit Facility is either LIBOR
plus 1.25% to 3.00% or the alternative base rate plus zero to 1.75% adjusted
quarterly based on the ratio of total debt to four quarters' trailing earnings
before interest, taxes, depreciation and amortization. The applicable interest
rate on the Incremental Term Loan Facility is LIBOR plus 3.50% or the
alternative base rate plus 2.25 % through maturity. We anticipate this amendment
and restatement to close on May 16, 2001.
14
Net cash flows used in operating activities increased to $24.1 million for the
three months ended March 31, 2001 from $21.2 million for the three months ended
March 31, 2000. We made income tax payments of $36.7 million for the three
months ended March 31, 2001 as compared to $87.3 million for the three months
ended March 31, 2000 including $35.3 million and $87.0 million, respectively,
for payments related to the sale of our radio broadcast assets. We made interest
payments on outstanding indebtedness and payments for subsidiary minority
interest expense totaling $53.1 million during the three months ended March 31,
2001 as compared to $41.7 million for the three months ended March 31, 2000.
Additional interest payments for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 primarily related to
additional interest costs on indebtedness incurred to finance businesses
acquired during 2000.
Net cash flows used in investing activities decreased to $8.5 million for the
three months ended March 31, 2001 from $10.6 million for the three months ended
March 31, 2000. This decrease is primarily due to equity investments made in the
three months ended March 31, 2000 which were not made during the same periods in
2001. We made payments for property and equipment of $6.8 million for the three
months ended March 31, 2001. We expect that expenditures for property and
equipment will increase for the year ended December 31, 2001 over prior years as
a result of a larger number of stations owned by us and for capital expenditures
incurred during the ordinary course of business, including costs related to our
conversion to digital television, and additional strategic station acquisitions
and equity investments if suitable investments can be identified on acceptable
terms. We expect to fund such capital expenditures with cash generated from
operating activities and funding from our Revolving Credit Facility.
Net cash flows from financing activities increased to $32.2 million for the
three months ended March 31, 2001 from $24.0 million for the three months ended
March 31, 2000. During the three months ended March 31, 2001, we repaid $115.0
million and $25.0 million under the 1998 Bank Credit Agreement Revolving Credit
Facility and Term Loan Facility, respectively. In addition, we utilized
borrowings under the Revolving Credit Facility of $176.0 during the period.
During the three months ended March 31, 2001, we had no repurchases of our
common stock while during the same prior year period, we repurchased $35.1
million of our common stock.
SEASONALITY
Our results are usually subject to seasonal fluctuations, which result in fourth
quarter broadcast operating income being greater usually than first, second and
third quarter broadcast operating income. This seasonality is primarily
attributable to increased expenditures by advertisers in anticipation of holiday
season spending and an increase in viewership during this period. In addition,
revenues from political advertising tend to be higher in even numbered years.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from our derivative instruments. We enter into
derivative instruments primarily for the purpose of reducing the impact of
changing interest rates on our floating rate debt, and to reduce the impact of
changing fair market values on our fixed rate debt. In addition, we have entered
into put and call option derivative instruments relating to our Class A Common
Stock in order to hedge the possible dilutive effect of employees exercising
stock options pursuant to our stock option plans.
INTEREST RATE DERIVATIVE INSTRUMENTS
Our existing interest rate swap agreements do not qualify for special hedge
accounting treatment under SFAS No. 133. As a result, our interest rate swap
agreements are reflected in the balance sheet as either assets or liabilities
measured at their fair value. Changes in the fair value of our interest rate
swap agreements are recognized currently in earnings.
As of March 31, 2001, we had an interest rate swap agreement with a notional
amount of $575 million which expires on June 3, 2004. The swap agreement
requires us 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 $18.4 million as a
component of other long-term liabilities on the accompanying consolidated
balance sheet as of March 31, 2001. In addition, we entered into an interest
rate swap agreement with a notional amount of $250 million which expires on
December 15, 2007 in which we receive a fixed rate of 8.75% and pay a floating
rate based on LIBOR (and the measurement and settlement is performed quarterly).
This swap agreement is reflected as a derivative asset of $2.0 million as a
component of other long-term assets on the balance sheet as of March 31, 2001.
Periodic settlements of these agreements are recorded as adjustments to interest
expense in the relevant periods.
On March 31, 2001, our fixed-to-floating rate derivative was adjusted to its
fair value of $2.0 million which resulted in a reclassification of this
derivative to other long-term assets from its January 1, 2001 balance in other
long-term liabilities of $1.0 million. This re-classification resulted in an
unrealized gain of $3.0 million. Our floating-to-fixed rate derivative was
adjusted to its fair value of $18.4 million on March 31, 2001 from its balance
of $6.1 million and is reflected as other long-term liabilities on the balance
sheet. This resulted in an unrealized loss of $12.3 million. The net unrealized
loss of $9.3 million resulting from these mark-to-market adjustments is
reflected as unrealized loss on derivative instruments on the consolidated
statement of operations.
The counterparties to these agreements are international financial institutions.
We estimate the net fair value of these instruments at March 31, 2001 to be
$16.4 million, consisting of $18.4 million related to the floating-to-fixed rate
agreement and $2.0 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 our derivative
contracts (the "Banks"). The fair value is an estimate of the net amount that we
would pay on March 31, 2001 if the contracts were transferred to other parties
or cancelled by us.
EQUITY PUT OPTION DERIVATIVE
As of March 31, 2001 we held a put option derivative which provides for
settlement of 2.7 million options of our class A common stock on July 2, 2001.
The contract terms require us to make a settlement payment to the counterparties
to this contract (payable in either cash or shares of our class A common stock)
in an amount that is approximately equal to the put strike price of $28.931
minus the price of our class A common stock as of the termination date. This
payment is limited by a strike price differential of $26.038 resulting in a
maximum settlement of $2.893 per option. If the put strike price is less than
the price of our class A common stock as of the termination date, we would not
be obligated to make a settlement payment. This balance is reflected as Equity
Put Options of $7.8 million on the balance sheet as of March 31, 2001.
The equity put option agreement included a provision whereby it would become
immediately exercisable if the Company's closing price was less than $6.45 for
five consecutive days. On April 10, 2001 this option became exercisable and as a
result, the contract was settled for $7.7 million in cash on April 16, 2001.
16
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
NONE
b) REPORTS ON FORM 8-K
NONE
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized in the city of Baltimore, Maryland
on the 15th day of May, 2001.
SINCLAIR BROADCAST GROUP, INC.
by: /s/ DAVID B. AMY
---------------------------------
David B. Amy
Executive Vice President and
Chief Financial Officer
18