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 June 30, 1997
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)
2000 WEST 41ST STREET
BALTIMORE, MARYLAND 21211
(Address of principal executive offices)
(410) 467-5005
(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 August 11, 1997, there are 7,168,941 shares of Class A Common Stock, $.01
par value, 27,576,581 shares of Class B Common Stock, $.01 par value and
1,091,825 shares of Series B Preferred Stock, $.01 par value, convertible into
3,970,277 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.
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended June 30, 1997
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and
June 30, 1997................................................ 3
Consolidated Statements of Operations for the Three Months and Six
Months Ended June 30, 1996 and 1997.......................... 4
Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 1997.......................................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1997................................. 6
Notes to Unaudited Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 5. Other Information.............................................. 19
Item 6. Exhibits and Reports on Form 8-K .............................. 22
Signature................................................................... 23
2
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, JUNE 30,
ASSETS 1996 1997
--------------- --------------
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 2,341 $ 2,740
Accounts receivable, net of allowance for doubtful accounts..................... 112,313 102,093
Current portion of program contract costs....................................... 44,526 34,768
Prepaid expenses and other current assets....................................... 3,704 4,054
Deferred barter costs........................................................... 3,641 4,267
Deferred tax asset ............................................................. 1,245 8,188
------------- ------------
Total current assets..................................................... 167,770 156,110
PROGRAM CONTRACT COSTS, less current portion........................................ 43,037 30,778
LOANS TO OFFICERS AND AFFILIATES.................................................... 11,426 11,241
PROPERTY AND EQUIPMENT, net......................................................... 154,333 156,681
NON-COMPETE AND CONSULTING AGREEMENTS, net.......................................... 10,193 2,250
OTHER ASSETS ....................................................................... 64,235 71,970
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net........................................ $ 1,256,303 $ 1,333,475
------------- ------------
Total Assets.................................................................... $ 1,707,297 $ 1,762,505
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 11,886 $ 5,310
Income taxes payable............................................................ 730 -
Accrued liabilities............................................................. 35,030 39,023
Current portion of long-term liabilities-
Notes payable and commercial bank financing................................. 62,144 65,500
Capital leases payable...................................................... 44 11
Notes and capital leases payable to affiliates.............................. 1,774 1,370
Program contracts payable................................................... 58,461 49,766
Deferred barter revenues........................................................ 3,576 4,458
------------- ------------
Total current liabilities................................................ 173,645 165,438
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing..................................... 1,212,000 1,097,000
Capital leases payable.......................................................... - 30
Notes and capital leases payable to affiliates.................................. 12,185 11,872
Program contracts payable....................................................... 56,194 46,670
Deferred tax liability.......................................................... 463 -
Other long-term liabilities.....................................................
2,739 4,960
------------- ------------
Total liabilities 1,457,226 1,325,970
------------- ------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES...................................... 3,880 3,897
EQUITY PUT OPTIONS ................................................................. 8,938 -
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUB-
SIDIARY TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES (Note 6).................... - 200,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized and 1,138,138
and 1,106,608 shares issued and outstanding, respectively................... 11 11
Class A Common stock, $.01 par value, 100,000,000 shares authorized
and 6,911,880 and 7,100,188 shares issued and outstanding, respectively..... 70 71
Class B Common stock, $.01 par value, 35,000,000 shares authorized
and 27,850,581 and 27,591,581 shares issued and outstanding................. 279 277
Additional paid-in capital...................................................... 256,954 234,812
Additional paid-in capital - deferred compensation.............................. (1,129) (896)
Additional paid-in capital - equity put options................................. - 23,117
Accumulated deficit............................................................. (18,932) (24,754)
Total stockholders' equity............................................... 237,253 232,638
Total Liabilities and Stockholders' Equity............................... $ 1,707,297 $ 1,762,505
============== =============
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)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
----------- ----------- ----------- -----------
REVENUES:
Station broadcast revenues, net of agency commissions..........$ 73,163 $ 120,792 $ 117,339 $ 219,701
Revenues realized from station barter arrangements............. 5,978 10,555 9,571 19,870
---------- ---------- ---------- ----------
Total revenues.......................................... 79,141 131,347 126,910 239,571
OPERATING EXPENSES:
Program and production......................................... 13,051 24,253 20,699 46,760
Selling, general and administrative............................ 14,976 26,393 24,268 51,634
Expenses realized from station barter arrangements............. 4,928 8,859 7,859 16,303
Amortization of program contract costs and net
realizable value adjustments............................... 9,840 13,400 17,557 30,918
Amortization of deferred compensation.......................... 506 116 506 233
Depreciation and amortization of property and equipment........ 2,079 4,179 3,544 8,340
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets..... 13,715 18,371 24,392 37,392
---------- ---------- ---------- ----------
Total operating expenses................................ 59,095 95,571 98,825 191,580
---------- ---------- ---------- -- -------
Broadcast operating income.............................. 20,046 35,776 28,085 47,991
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense............ (16,750) (24,928) (27,646) (51,993)
Subsidiary trust minority interest expense.................... - (5,797) - (7,007)
Interest income............................................... 798 638 2,521 1,040
Other income (expense)........................................ 398 (97) 651 47
---------- ---------- ---------- ----------
Income (loss) before income tax provision.............. 4,492 5,592 3,611 (9,922)
INCOME TAX (PROVISION) BENEFIT.................................... (2,523) (3,800) (2,100) 4,100
---------- ---------- ---------- ----------
NET INCOME (LOSS)................................................. $ 1,969 $ 1,792 $ 1,511 $ (5,822)
========== ========== ========== ==========
Net income (loss) per common share................................ $ 0.05 $ 0.05 $ 0.04 $ (0.17)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ....................... 34,750 34,639 34,750 34,746
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING.. 36,325 38,790 35,546 38,913
========== ========== ========== ==========
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 SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
SERIES B CLASS A CLASS B ADDITIONAL CAPITAL - CAPITAL -
PREFERRED COMMON COMMON PAID-IN EQUITY PUT DEFERRED
STOCK STOCK STOCK CAPITAL OPTIONS COMPENSATION
-------------- ------------ ------------ -------------- --------------- -----------------
BALANCE, December 31, 1996.............. $ 11 $ 70 $ 279 $ 256,954 $ - $ (1,129)
Repurchase of 186,000 shares of
Class A Common Stock............ - (2) - (4,597) - -
Class B Common Stock converted
into Class A Common Stock....... - 2 (2) - - -
Series B Preferred Stock converted
into Class A Common Stock....... - 1 - (1) - -
Equity put options.................. - - - (14,179) 23,117 -
Equity put options premium.......... - - - (3,365) - -
Amortization of deferred
compensation.................... - - - - - 233
Net loss............................ - - - - - -
============== ============ ============ ============== =============== =================
BALANCE, June 30, 1997.................. $ 11 $ 71 $ 277 $ 234,812 $ 23,117 $ (896)
============== ============ ============ ============== =============== =================
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------------- ----------------
BALANCE, December 31, 1996.............. $ (18,932) $ 237,253
Repurchase of 186,000 shares of
Class A Common Stock............ - (4,599)
Class B Common Stock converted
into Class A Common Stock....... - -
Series B Preferred Stock converted
into Class A Common Stock....... - -
Equity put options.................. - 8,938
Equity put options premium.......... - (3,365)
Amortization of deferred
compensation.................... - 233
Net loss............................ (5,822) (5,822)
================= ================
BALANCE, June 30, 1997.................. $ (24,754) $ 232,638
================= ================
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)
SIX MONTHS ENDED
JUNE 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1997
--------------- ---------------
Net income (loss)............................................................. $ 1,511 $ (5,822)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities-
Depreciation and amortization of property and equipment................... 3,544 8,340
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets................. 24,392 37,392
Amortization of program contract costs and net realizable value 17,557 30,918
adjustments
Amortization of deferred compensation..................................... 506 233
Deferred tax provision (benefit).......................................... 488 (7,406)
Changes in assets and liabilities, net of effects of acquisitions and
dispositions-
(Increase) decrease in accounts receivable, net........................... (12,006) 9,947
Increase in prepaid expenses and other current assets..................... (68) (358)
Increase in other assets and acquired intangible broadcasting assets...... (43) -
Increase (decrease) in accounts payable and accrued liabilities........... 6,344 (3,916)
Decrease in income taxes payable.......................................... (3,944) (730)
Net effect of change in deferred barter revenues
and deferred barter costs.............................................. 328 236
Decrease in other long-term liabilities................................... (58) (109)
Increase (decrease) in minority interest................................. (33) 17
Payments on program contracts payable......................................... (12,071) (26,259)
Net cash flows from operating activities.................................. 26,447 42,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment........................................... (2,114) (8,286)
Payments for acquisition of television and radio stations....................... (34,726) (89,382)
Payments related to the acquisition of the non-license assets of
River City Broadcasting..................................................... (811,260) -
Payment for acquisition of certain other non-license assets..................... (29,532) -
Payments to exercise options to acquire certain FCC licenses.................... - (8,524)
Payment for the purchase of outstanding stock of Superior Communications, Inc... (63,275) -
Payments for consulting and non-compete agreements.............................. (50) -
Purchase option extension payments relating to WSYX............................. - (6,499)
Loans to officers and affiliates................................................ - (650)
Repayments of loans to officers and affiliates.................................. 258 748
Distribution (investment) in joint venture...................................... (364) 381
Payments relating to future acquisitions........................................ (1,063) (217)
Net cash flows used in investing activities.............................. (942,126) (112,429)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases....... 897,000 92,546
Repayments of notes payable, commercial bank financing and capital leases...... (67,915) (204,193)
Payments of costs relating to financing......................................... (20,009) (4,669)
Payments for interest rate derivative agreements................................ (851) -
Repurchases of the Company's Class A Company Stock.............................. - (4,599)
Proceeds from Subsidiary Trust Securities offering, net of $5,000 underwriters' - 195,000
discount
Payments of costs related to Subsidiary Trust Securities offering............... - (1,650)
Prepayments of excess syndicated program contract liabilities................... - (1,373)
Repayments of notes and capital leases to affiliates............................ (800) (717)
------------ -----------
Net cash flows from financing activities................................. 807,425 70,345
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (108,254) 399
CASH AND CASH EQUIVALENTS, beginning of period...................................... 112,450 2,341
------------ -----------
CASH AND CASH EQUIVALENTS, end of period............................................$ 4,196 $ 2,740
============ ===========
SUPPLEMENTAL DISCLOSURES:
Interest payments...............................................................$ 29,472 $ 55,723
============ ===========
Subsidiary trust minority interest payments.....................................$ - $ 6,006
============ ===========
Income tax payments.............................................................$ 5,586 $ 5,298
============ ===========
Issuance of 1,150,000 shares of Series A Preferred Stock........................$ 125,079 $ -
============ ===========
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., Sinclair Communications, Inc. and all other
consolidated subsidiaries, which are collectively referred to hereafter as "the
Company, Companies or SBG." The Company owns and operates television and radio
stations throughout the United States. Additionally, included in the
accompanying consolidated financial statements are the results of operations of
certain television stations pursuant to local marketing agreements (LMAs) and
radio stations pursuant to joint sales agreements (JSAs).
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the six months ended June 30, 1996 and
1997 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, 1995, and 1996 and for the years
then ended. The results of operations presented in the accompanying financial
statements are not necessarily representative of operations for an entire year.
PROGRAMMING
The Companies have 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
when the license period begins and the program is available for its first
showing. The portion of the program contracts 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
under 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.
7
2. CONTINGENCIES AND OTHER COMMITMENTS:
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 or results of operations.
3. FINANCIAL INFORMATION BY SEGMENT (IN THOUSANDS):
Prior to the acquisition of River City Broadcasting, L.P. in May 1996, the
Company did not own or operate radio stations. As of June 30, 1997, the Company
consisted of two principal business segments - television broadcasting and radio
broadcasting. The Company owns or provides programming services pursuant to LMAs
to 29 television stations located in 21 geographically diverse markets in the
continental United States. The Company owns or provides programming services
pursuant to JSAs to 25 radio stations in seven geographically diverse markets.
Substantially all revenues represent income from unaffiliated companies.
TELEVISION TELEVISION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
---- ---- ---- ----
Total revenues.................................................... $ 74,275 $ 114,377 $ 122,044 $ 210,151
Station operating expenses........................................ 29,725 48,008 49,596 92,645
Depreciation, program amortization and deferred compensation...... 12,296 17,134 21,478 38,368
Amortization of intangibles and other assets...................... 13,197 15,086 23,874 30,901
----------- ----------- ---------- -----------
Station broadcast operating income................................ $ 19,057 $ 34,149 $ 27,096 $ 48,237
=========== =========== ========== ===========
Total assets...................................................... $ 1,390,854 $ 1,456,776 $1,390,854 $ 1,456,776
=========== =========== ========== ===========
Capital expenditures.............................................. $ 1,272 $ 4,167 $ 2,092 $ 6,194
=========== =========== ========== ===========
RADIO RADIO
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
---- ---- ---- ----
Total revenues.................................................... $ 4,866 $ 16,970 $ 4,866 $ 29,420
Station operating expenses........................................ 3,230 11,497 3,230 22,052
Depreciation, program amortization and deferred compensation...... 129 561 129 1,123
Amortization of intangibles and other assets...................... 518 3,285 518 6,491
------------ ---------- ---------- -----------
Station broadcast operating income (loss)......................... $ 989 $ 1,627 $ 989 $ (246)
============ ========== ========== ============
Total assets...................................................... $ 236,124 $ 305,729 $ 236,124 $ 305,729
============ ========== ========== ===========
Capital expenditures.............................................. $ 22 $ 1,874 $ 22 $ 2,092
============ ========== ========== ===========
8
4. EARNINGS PER SHARE:
In March 1997, the Financial Accounting Standard Board released SFAS 128
"Earnings per Share." The new statement is effective December 15, 1997 and early
adoption is not permitted. When adopted, SFAS 128 will require the restatement
of prior periods and disclosure of basic and diluted earnings per share and
related computations. At the present time, management believes that the adoption
of SFAS 128 will not materially affect the Company's consolidated financial
statements.
5. EQUITY PUT AND CALL OPTIONS:
During December 1996, the Company entered into physically settled in cash put
and call option contracts related to the Company's common stock. These option
contracts were entered into for the purpose of hedging the dilution of the
Company's common stock upon the exercise of stock options granted. The Company
entered into 250,000 call options for common stock and 320,600 put options for
common stock, with a strike price of $37.75 and $27.88 per common share,
respectively. To the extent that the Company entered into put option contracts,
the additional paid-in capital amounts were adjusted accordingly and reflected
as Equity Put Options in the accompanying balance sheet as of December 31, 1996.
In March 1997, the Company amended its put option contracts from physically
settled in cash to physically or net physically settled in shares, at the
election of the Company, and reclassified amounts reflected as Equity Put
Options to "Additional paid in capital - equity put options" as reflected in the
accompanying balance sheet as of June 30, 1997.
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 550,000
European style (that is, exercisable on the expiration date only) put options
for common stock with a strike price of $25.78 per share which provide for
settlement in cash or in shares, at the election of the Company. The Company
entered into 550,000 American style (that is, exercisable any time before the
expiration date) call options for common stock with a strike price of $25.78 per
share which provide for settlement in cash or in shares, at the election of the
Company. The option premium amount of $3.4 million for these contracts, which
was recorded as a reduction of additional paid in capital, is payable in
quarterly installments of 8.1% per annum through the maturity date, July 13,
2000.
6. 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 "Preferred Securities") of Sinclair Capital, a subsidiary trust
of the Company. The Preferred Securities were issued March 12, 1997, mature
March 15, 2009, and provide for quarterly distributions to be paid in arrears
beginning June 15, 1997. The Preferred Securities 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 million of the approximately
$193.4 million net proceeds of the private placement to repay outstanding debt
and retained the remainder for general corporate purposes, which may include
acquisitions and repurchases of shares of the Company's Class A Common Stock.
9
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the Preferred Securities, the Company has offered holders
of the Preferred Securities the right to exchange the Preferred Securities for
new Preferred Securities having the same terms as the existing securities,
except that the exchange of the new Preferred Securities for the existing
Preferred Securities has been registered under the Securities Act and the new
Preferred Securities will not be subject to an increase in distributions thereon
as a consequence of a failure to take certain actions in connection with their
registration under the Securities Act. The Company was required to file the
registration statement prior to May 11, 1997 and is required to complete the
exchange offer by August 9, 1997 in order to avoid being subject to increased
distributions on the securities issued in the private placement.
On May 2, 1997, the Company filed a registration statement on Form S-4 with the
Securities and Exchange Commission for the purpose of registering $200 million
aggregate liquidation value of 11 5/8% High Yield Trust Offered Preferred
Securities to be offered in exchange for the aforementioned existing Preferred
Securities issued by the Company in March 1997. On July 14, 1997, the Securities
and Exchange Commission declared the Company's Exchange Offer on Form S-4
effective. The Exchange Offer and Withdrawal Rights will expire on August 11,
1997, unless extended.
7. ACQUISITIONS:
In January 1997, the Company entered into a purchase agreement to acquire the
license and non-license assets of KUPN-TV, the UPN affiliate in Las Vegas,
Nevada, for a purchase price of $87 million. Under the terms of this agreement,
the Company made cash deposit payments of $9.0 million and in May 1997, the
Company closed on the acquisition making a cash payment of $78 million for the
remaining balance of the purchase price. The Company financed the transaction by
utilizing indebtedness under the Third Amended and Restated Credit Agreement
("the Bank Credit Agreement").
In January 1997, the Company entered into an agreement to acquire the license
and non-license assets of WGR-AM and WWWS-AM in Buffalo, New York for a purchase
price of approximately $1.5 million. In March 1997, the Company paid the
remaining balance of $959,000 and closed on the acquisition in April 1997. In
January 1997, the Company acquired the license and non-license assets of WWFH-FM
and WILP-AM in Wilkes-Barre, Pennsylvania for a purchase price of approximately
$770,000.
In April 1997, the Company received FCC approval for the transfer of the FCC
licenses of KOVR-TV in Sacramento, California and KDSM-TV in Des Moines, Iowa.
The Company exercised its options to acquire the license assets of KOVR-TV and
KDSM-TV for exercise prices of $1.5 million and $1.5 million, respectively.
In May 1997, the Company received FCC approval for the transfer of the FCC
licenses of KDNL-TV, KPNT-FM and WVRV-FM in St. Louis, Missouri. The Company
exercised its options to acquire the television and radio license assets for
exercise prices of $1.9 million and $1.2 million, respectively.
In June 1997, the Company received FCC approval for the transfer of the FCC
license of KABB-TV in San Antonio, Texas. The Company exercised its option to
acquire the license assets of KABB-TV for an exercise price of $2.3 million.
10
8. INTEREST RATE DERIVATIVE AGREEMENTS:
The Company has entered into interest rate derivative agreements to reduce the
impact of changing interest rates on its floating rate debt, primarily relating
to the Bank Credit Agreement. In May 1996, the Company amended its Bank Credit
Agreement. The agreement requires the Company to enter into Interest Rate
Protection Agreements at rates not to exceed 9.5% per annum as to a notional
principal amount at least equal to 66 2/3% of the Tranche A term loans scheduled
to be outstanding from time to time and 9.75% per annum as to a notional
principal amount of 66 2/3% of the aggregate amount of Tranche B term loans
scheduled to be outstanding from time to time.
At June 30, 1997, the Company had several interest rate swap agreements relating
to the Bank Credit Agreement which expire from June 30, 1997 to June 30, 2000.
The swap agreements set rates in the range of 5.55% to 8.00%. The notional
amounts related to these agreements were $988.4 million at June 30, 1997, and
decrease to $50.0 million through the expiration dates. The Company has no
intentions of terminating these instruments prior to their expiration dates
unless it were to prepay a portion of its bank debt.
The floating interest rates are based upon the three month London Interbank
Offered Rate (LIBOR) rate, and the measurement and settlement is performed
quarterly. Settlements of these agreements are recorded as adjustments to
interest expense in the relevant periods. The Company estimates the aggregate
cost to retire these instruments at June 30, 1997 to be $351,000.
9. AMENDMENT TO BANK CREDIT AGREEMENT:
The Company amended its Bank Credit Agreement on May 20, 1997. The Bank Credit
Agreement consists of two classes: Tranche A Term Loan and a Revolving Credit
Commitment.
The Tranche A Term Loan is a term loan in a principal amount not to exceed $600
million and is scheduled to be paid in quarterly installments through December
31, 2004. The Revolving Credit Commitment is a revolving credit facility in a
principal amount not to exceed $400 million and is scheduled to have reduced
availability quarterly beginning March 31, 2000 through December 31, 2004. As of
June 30, 1997, outstanding indebtedness under the Tranche A Term Loan and the
Revolving Credit Commitment were $600 million and $16.5 million, respectively.
The Company incurred amendment acquisition costs of approximately $4.7 million
associated with this indebtedness which are being amortized over the life of the
debt.
The applicable interest rate for the Tranche A Term Loan and the Revolving
Credit Tranche is either LIBOR plus 0.5% to 1.875% or the base rate plus zero to
0.625%. The applicable interest rate for the Tranche A Term Loan and the
Revolving Credit Tranche is adjusted based on the ratio of total debt to four
quarters' trailing earnings before interest, taxes, depreciation and
amortization.
10. SUBSEQUENT EVENTS:
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 (the "1997 Notes"). The 1997
Notes were offered July 2, 1997, mature July 15, 2007, and provide for interest
payments payable semi-annually on January 15 and July 15 of each year,
commencing January 15, 1998. The 1997 Notes were sold to "qualified
11
institutional buyers" (as defined in Rule 144A under the Securities Act) and a
limited number of institutional "accredited investors" and the offering was
exempt from registration under the Securities Act, pursuant to Section 4(2) of
the Securities Act and Rule 144A thereunder. The Company utilized $162.5 million
of the approximately $196 million net proceeds of the private issuance to repay
outstanding debt and retained the remainder for general corporate purposes,
which may include acquisitions and repurchases of shares of the Company's Class
A Common Stock.
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the 1997 Notes, the Company is obligated to offer to
holders of the 1997 Notes the right to exchange the 1997 Notes with new 1997
Notes having the same terms as the existing notes, except that the exchange of
the new 1997 Notes for the existing 1997 Notes will be registered under the
Securities Act and the new 1997 Notes will not be subject to an increase in
interest payable as a consequence of a failure to take certain actions in
connection with their registration under the Securities Act. The Company is
required to file the registration statement prior to August 31, 1997 and is
required to complete the exchange offer by December 14, 1997 in order to avoid
being subject to increased interest payable on the 1997 Notes.
AGREEMENT TO ACQUIRE HERITAGE MEDIA GROUP RADIO AND TELEVISION STATIONS
In July 1997, the Company entered into a purchase agreement to acquire the
license and non-license assets of the radio and television stations of Heritage
Media Group, Inc. ("Heritage") for $630 million in cash upon the closing of
Heritage's merger agreement with The News Corporation Limited, which remains
subject to regulatory approval. The acquisition is expected to occur in the
first quarter of 1998. The Company anticipates that it will finance the Heritage
acquisition through additional bank financing, or through a combination of
additional bank financing and proceeds from an offering of securities.
EXERCISE AND ASSIGNMENT OF FCC LICENSE OPTIONS
In July 1997, the Company received FCC approval for the transfer of the FCC
license of WLOS-TV in Asheville, North Carolina. The Company exercised its
option to acquire the license assets of WLOS-TV for an exercise price of $2.1
million.
In July 1997, the Company made an option exercise payment of $.5 million to
River City Broadcasting, L.P. related to the license assets of WFBC-TV in
Greenville, South Carolina. Simultaneously, the Company assigned its option to
acquire the license assets of WFBC-TV to Glencairn, Ltd. for an option
assignment fee of $2.0 million and entered into an LMA with Glencairn, Ltd.
whereby the Company, in exchange for an hourly fee, obtained the right to
program and sell advertising on substantially all of the station's inventory of
broadcast time.
12
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 the Company's Form 10-K, as amended, for the fiscal year
ended December 31, 1996.
The matters discussed below include forward-looking statements. Such statements
are subject to a number of risks and uncertainties, such as the impact of
changes in national and regional economies, successful integration of acquired
television and radio stations (including achievement of synergies and cost
reductions), pricing fluctuations in local and national advertising,
availability of capital and volatility in programming costs. Additional risk
factors regarding the Company are set forth in the Company's registration
statement on Form S-4 filed with the Securities and Exchange Commission on July
14, 1997.
13
The following table sets forth certain operating data for comparison of the
three months and six months ended June 30, 1996 and 1997:
OPERATING DATA (dollars in thousands, except per share data):
- --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1996 1997 1996 1997
---- ---- ---- ----
Net broadcast revenues ....................... $ 73,163 $ 120,792 $ 117,339 $ 219,701
Barter revenues .............................. $ 5,978 $ 10,555 $ 9,571 $ 19,870
--------- --------- --------- ---------
Total revenues ............................... $ 79,141 $ 131,347 $ 126,910 $ 239,571
--------- --------- --------- ---------
Operating expenses, excluding depreciation,
amortization and amortization of deferred
compensation ............................... 32,955 59,505 52,826 114,697
Depreciation and amortization ................ 25,634 35,950 45,493 76,650
Amortization of deferred compensation ........ 506 116 506 233
--------- --------- --------- ---------
Broadcast operating income ................... 20,046 35,776 28,085 47,991
Interest expense ............................. (16, 750) (24,928) (27,646) (51,993)
Subsidiary trust minority interest expense ... -- (5,797) -- (7,007)
Interest and other income .................... 1,196 541 3,172 1,087
Net income (loss) before income tax benefit .. 4,492 5,592 3,611 (9,922)
Income tax (provision) benefit ............... (2,523) (3,800) (2,100) 4,100
--------- --------- --------- ---------
Net income (loss) ............................ $ 1,969 $ 1,792 $ 1,511 $ (5,822)
========= ========= ========= =========
BROADCAST CASH FLOW (BCF) DATA:
Television BCF (a) .................... $ 40,509 $ 56,832 $ 63,309 $ 98,032
Radio BCF (a) ......................... 1,770 5,984 1,770 7,568
--------- --------- --------- ---------
Consolidated BCF (a) .................. $ 42,279 $ 62,816 $ 65,079 $ 105,600
========= ========= ========= =========
Television BCF margin (b) ............. 59.3% 54.5% 56.3% 51.2%
Radio BCF margin (b) .................. 36.4% 36.3% 36.4% 26.7%
Consolidated BCF margin (b) ........... 57.8% 52.0% 55.5% 48.1%
OTHER DATA:
Adjusted EBITDA (c) ................... $ 40,548 $ 59,315 $ 62,013 $ 98,615
Adjusted EBITDA margin (b) ............ 55.4% 49.1% 52.8% 44.9%
After tax cash flow (d) ............... $ 21,916 $ 25,486 $ 30,441 $ 32,737
Program contract payments ............. $ 5,638 $ 12,527 $ 12,071 $ 26,259
Corporate expense ..................... $ 1,731 $ 3,501 $ 3,066 $ 6,985
- ---------------------------------------------- --------- --------- --------- ---------
a) "Broadcast cash flow" is defined as broadcast operating income plus
corporate expenses, depreciation and amortization (including film
amortization and amortization of deferred compensation), less cash payments
for program rights. Cash program payments represent cash payments made for
current programs payable and do not necessarily correspond to program
usage. The Company has presented broadcast cash flow data, which the
Company believes 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, broadcast cash flow does not
purport to represent cash provided by operating activities as reflected in
the Company's consolidated statements of cash flows, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
b) "BCF margin" is defined as broadcast cash flow divided by net broadcast
revenues. "Adjust EBITDA margin" is defined as adjusted EBITDA divided by
net broadcast revenues.
14
c) "Adjusted EBITDA" is defined as broadcast cash flow less corporate expenses
and is a commonly used measure of performance for broadcast companies.
Adjusted EBITDA does not purport to represent cash provided by operating
activities as reflected in the Company's consolidated statements of cash
flows, is not a measure of financial performance under generally accepted
accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
d) "After tax cash flow" is defined as net income (loss) plus depreciation and
amortization (excluding film amortization), non-cash deferred compensation
expense, and the deferred tax provision (or minus the deferred tax
benefit). After tax cash flow is presented here not as a measure of
operating results and does not purport to represent cash provided by
operating activities. After tax cash flow should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
Total revenues increased to $131.3 million for the three months ended June 30,
1997 from $79.1 million for the three months ended June 30, 1996, or 66.0%.
After excluding the effects of non-cash barter transactions, net broadcast
revenues for the three months ended June 30, 1997 increased by 65.3% over the
three months ended June 30, 1996. Total revenues increased to $239.6 million for
the six months ended June 30, 1997 from $126.9 million for the six months ended
June 30, 1996 or 88.8%. After excluding the effects of non-cash barter
transactions, net broadcast revenues for the six months ended June 30, 1997
increased by 87.2% over the six months ended June 30, 1997. These increases in
broadcast revenues were primarily the result of acquisitions and LMA
transactions consummated by the Company in 1996 (the "1996 Acquisitions") and to
a lesser extent, market growth in television broadcast revenue and television
broadcast revenue on a same stations basis.
Operating expenses excluding depreciation, amortization of intangible assets and
amortization of deferred compensation increased to $59.5 million for the three
months ended June 30, 1997 from $33.0 million for the three months ended June
30, 1996 or 80.3%. Operating expenses excluding depreciation, amortization of
intangible assets and amortization of deferred compensation increased to $114.7
million for the six months ended June 30, 1997 from $52.8 million for the six
months ended June 30, 1996 or 117.2%. These increases in expenses for the three
and six months ended June 30, 1997 as compared to the three and six months ended
June 30, 1996 were primarily attributable to operating costs associated with the
1996 Acquisitions (93.2% and 92.9% of increase for the three month period and
six month period, respectively) and an increase in corporate overhead expenses
(6.7% and 6.3% of increase for the three month period and six month period,
respectively) related primarily to the additional expense of managing a larger
base of operations.
Broadcast operating income increased to $35.8 million for the three months ended
June 30, 1997, from $20.0 million for the three months and six months ended June
30, 1996, or 79.0%. Broadcast operating income increased to $48.0 million for
the six months ended June 30, 1997 from $28.1 million for the six months ended
June 30, 1996 or 70.8%. The increase in broadcast operating income for the three
months and six months ended June 30, 1997 as compared to the three months and
six months ended June 30, 1996 was primarily attributable to the 1996
Acquisitions.
Interest expense increased to $24.9 million for the three months ended June 30,
1997 from $16.8 million for the three months ended June 30, 1996, or 48.2%.
Interest expense increased to $52.0 million for the six months ended June 30,
1997 from $27.6 million for the six months ended June 30, 1996 or 88.4%. The
increase in interest expense for the three months and six months ended June 30,
1997 primarily related to indebtedness incurred by the Company to finance the
acquisitions consummated in 1997 (the "1997 Acquisitions"). Subsidiary Trust
Minority Interest Expense of $5.8 million for the three months ended June 30,
1997 and $7.0 million for the six months ended June 30, 1997 are related to the
private placement of $200 million aggregate liquidation rate of 11 5/8% High
Yield Trust Offered Preferred Securities (the "Preferred Securities") completed
March 12, 1997. Subsidiary Trust Minority Interest Expense distributions will be
partially offset by reductions in interest expense because a portion of the
proceeds of the sale of the Preferred Securities was used to reduce indebtedness
under the Company's Bank Credit Agreement.
Interest and other income decreased to $541,000 for the three months ended June
30, 1997 from $1.2 million for the three months ended June 30, 1996 or 55.0%.
Interest and other income decreased to $1.1 million for the six
15
months ended June 30, 1997 from $3.2 million for the six months ended June 30,
1996 or 65.6%. These decreases were primarily due to lower average cash balances
and related interest income.
Income tax provision increased to $3.8 million for the three months ended June
30, 1997 from $2.5 million for the three months ended June 30, 1996. Income tax
benefit increased to $4.1 million for the six months ended June 30, 1997 from a
provision of $2.1 million for the six months ended June 30, 1996. The increase
in income tax provision for the three months ended June 30, 1997 as compared to
the three months ended June 30, 1996 primarily related to the increase in
pre-tax income. The Company's effective tax rate decreased to a benefit of 41.3%
for the six months ended June 30, 1997 from a provision of 58.2% for the six
months ended June 30, 1996.
The net deferred tax asset increased to $8.2 million as of June 30, 1997 from
$782,000 at December 31, 1996. The increase in the Company's net deferred tax
asset as of June 30, 1997 as compared to December 31, 1996 primarily results
from the anticipation that the pre-tax losses incurred in the first six months
of 1997 will be used to offset future taxable income.
Net income for the three months ended June 30, 1997 was $1.8 million or $ 0.05
per share compared to net income of $2.0 million or $0.05 per share for the
three months ended June 30, 1996. Net loss for the six months ended June 30,
1997 was $5.8 million or $(0.17) per share compared to net income of $1.5
million or $0.04 per share.
Broadcast cash flow increased to $62.8 million for the three months ended June
30, 1997 from $42.3 million for the three months ended June 30, 1996, or 48.5%.
Broadcast cash flow increased to $105.6 million for the six months ended June
30, 1997 from $65.1 million for the six months ended June 30, 1996 or 62.2%.
These increases in broadcast cash flow primarily resulted from the 1996 and 1997
Acquisitions and to a lesser extent, increases in net broadcast revenues on a
same station basis. The Company's broadcast cash flow margin decreased to 52.0%
for the three months ended June 30, 1997 from 57.8% for the three months ended
June 30, 1996. The Company's broadcast cash flow margin decreased to 48.1% for
the six months ended June 30, 1997 from 55.5% for the six months ended June 30,
1996. Excluding the effect of radio station broadcast cash flow, television
station broadcast cash flow margin decreased to 54.5% for the three months ended
June 30, 1997 as compared to 59.3% for the three months ended June 30, 1996.
Excluding the effect of radio station broadcast cash flow, television broadcast
cash flow margin decreased to 51.2% for the six months ended June 30, 1997 from
56.3% for the six months ended June 30, 1996. Decrease in broadcast cash flow
margins for the three and six months ended June 30, 1997 as compared to the
three and six months ended June 30, 1996 primarily resulted from the lower
margins of the acquired radio broadcasting assets and lower margins of certain
television stations acquired during 1996. For television stations owned,
operated or programmed for the three months ending June 30, 1996 and the three
months ending June 30, 1997, broadcast cash flow margin increased from 58.7% to
59.2%, respectively. For television stations owned, operated or programmed for
the six months ended June 30, 1996 and the six months ending June 30, 1997,
broadcast cash flow margins increased from 55.5% to 57.0%, respectively. These
increases primarily resulted from expense savings related to synergies realized
from the 1996 Acquisitions combined with increases in net broadcast revenue.
Adjusted EBITDA increased to $59.3 million for the three months ended June 30,
1997 from $40.5 million for the three months ended June 30, 1996, or 46.4%.
Adjusted EBITDA increased to $98.6 million for the six months ended June 30,
1997 from $62.0 million for the six months ended June 30, 1996, or 59.0%. These
increases in adjusted EBITDA for the three and six months ended June 30, 1997 as
compared to the three and six months ended June 30, 1996 resulted from the 1996
and 1997 Acquisitions. The Company's adjusted EBITDA margin decreased to 49.1%
for the three months ended June 30, 1997 from 55.4% for the three months ended
June 30, 1996. The Company's adjusted EBITDA margin decreased to 44.9% for the
six months ended June 30, 1997 from 52.8% for the six months ended June 30,
1996. Decreases in adjusted EBITDA margins for the three and six months ended
June 30, 1997 as compared to the three and six months ended June 30, 1996
primarily resulted from operating cost structures at certain of the acquired
stations and increases in corporate overhead expenses. Management has begun to
implement and will continue to implement operating and programming expense
savings resulting from synergies realized from the businesses acquired in and
prior to
16
1996 and 1997 and believes that the benefits of the implementation of these
methods will result in improvement in broadcast cash flow margin and adjusted
EBITDA margin.
After tax cash flow increased to $25.5 million for the three months ended June
30, 1997 from $21.9 million for the three months ended June 30, 1996 , or 7.3%.
After tax cash flow increased to $32.7 million for the six months ended June 30,
1997 from $30.4 million for the six months ended June 30, 1996 or 7.6%. The
increase in after tax cash flow for the three and six months ended June 30, 1997
as compared to the three and six months ended June 30, 1996 primarily resulted
from the 1996 and 1997 Acquisitions and internal growth, offset by interest
expense on the debt incurred to consummate the 1996 and 1997 Acquisitions and
trust distributions related to the private placement of the Preferred Securities
issued during March 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had $2.7 million in cash balances and a working
capital deficit of approximately $9.3 million. The Company's working capital
deficit primarily results from the accelerated method of amortization of program
contract costs and the even payment streams of program contract liabilities.
Excluding the effect of current program contract costs and current program
contract liabilities, the Company's working capital at June 30, 1997, would have
been $5.7 million. The Company's primary source of liquidity is cash provided by
operations and availability under the Bank Credit Agreement. As of August 11,
1997, the Company's cash balances were approximately $1.9 million with
approximately $254 million available for borrowing under the Bank Credit
Agreement. In addition, the Bank Credit Agreement provides for a Tranche C term
loan in the amount of up to $400 million which can be utilized upon approval by
the agent bank the raising of sufficient commitments from banks to fund the
additional loans. In July 1997, the Company entered into a purchase agreement to
acquire the license and non-license assets of the radio and television stations
of Heritage Media Group, Inc. ("Heritage") for $630 million. The Company has
entered into a letter of intent to sell one of the Heritage television stations
for $60 million (the sale of which is required pursuant to the acquisition
agreement relating to the remaining Heritage television and radio properties).
The Company anticipates that it will finance the Heritage acquisition through
additional bank financing (including a draw under Tranche C described above) or
through a combination of additional bank financing and proceeds from an offering
of securities.
Net cash flows from operating activities increased to $42.5 million for the six
months ended June 30, 1997 from $26.4 million for the six months ended June 30,
1996. The Company made income tax payments of $5.3 million for the six months
ended June 30, 1997 as compared to $5.6 million for the six months ended June
30, 1996 due to anticipated tax benefits generated by the 1996 Acquisitions. The
Company made interest payments on outstanding indebtedness of $55.7 million
during the six months ended June 30, 1997 as compared to $29.5 million for the
six months ended June 30, 1996. Additional interest payments for the six months
ended June 30, 1997 as compared to the six months ended June 30, 1996 primarily
related to additional interest costs on indebtedness incurred to finance the
1996 Acquisitions. The Company made subsidiary trust minority interest expense
payments of $6.0 million for the six months ended June 30, 1997 related to the
private placement of the Preferred Securities completed in March 1997. Program
rights payments increased to $26.3 million for the six months ended June 30,
1997 from $12.1 million for the six months ended June 30, 1996, primarily as a
result of the 1996 Acquisitions.
Net cash flows used in investing activities decreased to $112.4 million for the
six months ended June 30, 1997 from $942.1 million for the six months ended June
30, 1996. During January 1997, the Company purchased the license and non-license
assets of WWFH-FM and WILP-AM in Wilkes-Barre, Pennsylvania for approximately
$770,000. In January and March 1997, the Company made cash payments of $9.0
million and $1.5 million relating to the acquisition of the license and
non-license assets of KUPN-TV and WGR-AM and WWWS-AM, respectively, utilizing
indebtedness under the Bank Credit Agreement and existing cash balances. In May
1997, the Company made cash payments of $78 million to acquire the license and
non-license assets of KUPN-TV utilizing indebtedness under the Bank Credit
Agreement and existing cash balances. During the six months ended June 30, 1997,
the Company made purchase option extension payments of $6.5 million relating to
WSYX-TV. The Company made payments totaling $8.5 million during the six months
ended June 30, 1997 in order to exercise options to acquire certain FCC
licenses. The Company made payments for property and
17
equipment of $8.3 million for the six months ended June 30, 1997. Other than the
Heritage acquisition, the Company has no outstanding commitments for capital
expenditures. The Company anticipates that future requirements for capital
expenditures will include other acquisitions if suitable acquisitions can be
identified on acceptable terms.
Net cash flows provided by financing activities decreased to $70.3 million for
the six months ended June 30, 1997 from $807.4 million for the six months ended
June 30, 1996. In March 1997, the Company completed a private placement of the
Preferred Securities. The Company utilized $135 million of the approximately
$193.4 million net proceeds of the private offering to repay outstanding debt
and retained the remainder for general corporate purposes, which may include
acquisitions and repurchases of shares of the Company's Class A Common Stock.
The Company made payments totaling $4.6 million to repurchase 186,000 shares of
Class A Common Stock for the six months ended June 30, 1997. In May 1997, the
Company made payments of $4.7 million related to the amendment of its Bank
Credit Agreement. In the fourth quarter of 1996, the Company negotiated the
prepayment of syndicated program contract liabilities for excess syndicated
programming assets. In the first quarter of 1997, the Company made final cash
payments of $1.4 million related to these negotiations. In July 1997, the
Company issued the 1997 Notes utilizing $162.5 million of the approximately $196
million proceeds to repay outstanding indebtedness, retaining the remainder for
the general corporate purposes.
The Company anticipates that funds from operations, existing cash balances and
availability of the revolving credit facility under the Bank Credit Agreement
will be sufficient to meet its working capital, capital expenditure commitments
and debt service requirements for the foreseeable future. However, to the extent
such funds are not sufficient, or if the Company commits to additional capital
expenditures (including additional acquisitions), the Company may need to incur
additional indebtedness, refinance existing indebtedness or raise funds from the
sale of additional equity. The Bank Credit Agreement and the indentures relating
to the Company's 9% Senior Subordinated Notes due 2007, 10% Senior Subordinated
Notes due 2003 and 10% Senior Subordinated Notes due 2005 restrict the
incurrence of additional indebtedness and the use of proceeds of an equity
issuance. In 1996, the Company filed a registration statement with the
Securities and Exchange Commission with respect to the sale by the Company of
5,750,000 shares of Class A Common Stock. The Company has not yet made such an
offering but may make such an offering at such time as it believes market
conditions warrant. There can be no assurance as to the timing of such an
offering or whether such an offering will in fact occur.
18
PART II
ITEM 1. LEGAL PRECEEDINGS
On July 14, 1997, Sinclair publicly announced that it had reached an agreement
for certain of its owned and/or programmed television stations which are
currently affiliated with the United Paramount Television Network Partnership
("UPN") to become affiliated with The WB Television Network ("The WB") beginning
January 16, 1997. On August 1, 1997, UPN informed Sinclair that it did not
believe Sinclair or its affiliates had provided proper notice of its intention
not to extend these affiliation agreements beyond January 15, 1998, and,
accordingly, that these agreements had been automatically renewed through
January 15, 2001.
On August 6, 1997, certain of Sinclair's subsidiaries filed an action in the
Circuit Court for Baltimore City against UPN and its general partners. This
action seeks a declaratory judgement that proper notice of non-renewal had been
provided with respect to Sinclair's owned and /or programmed stations in
Baltimore, Pittsburgh, San Antonio, Oklahoma City and Cincinnati and that the
affiliation agreements with UPN for these stations will terminate on January 15,
1998.
On August 5, 1997, UPN filed an action in the Los Angeles Superior Court
against, inter alia, Sinclair, and certain of its affiliates. This action
relates to the above referenced stations, as well as to each of the other
stations indirectly owned and/or programmed by Sinclair subsidiaries which are
affiliated with UPN. With respect to each of these stations, the UPN lawsuit
requests a declaratory judgement that the affiliation has been renewed with a
termination date of January 15, 2001 and a judgement compelling specific
performance with such affiliation. Alternatively, UPN is seeking unspecified
damages for breach of contract.
ITEM 5. OTHER INFORMATION
ACQUISTION OF LICENSE ASSETS OF RADIO AND TELEVISION STATIONS
Since March 31, 1997, the FCC has granted approval for transfer of FCC licenses
with respect to the following television stations: KDNL-TV (St. Louis,
Missouri), KOVR-TV (Sacramento, California), WLOS-TV (Asheville, North
Carolina), KABB-TV (San Antonio, Texas) and KDSM-TV (Des Moines, Iowa). The
Company exercised options to acquire the License Assets (the television and
radio assets essential for broadcasting a television or radio signal in
compliance with regulatory guidelines) of each of these stations from River City
Broadcasting, L.P. ("River City") for aggregate option exercise payments of $9.3
million. In July 1997, the Company made an option extension payment of $.5
million to River City related to the license assets of WFBC-TV (Greenville,
South Carolina) and simultaneously assigned its option to acquire the License
Assets of WFBC-TV to Glencairn, Ltd. ("Glencairn") for an option assignment fee
of $2.0 million. The Company entered into a local marketing agreement ("LMA")
with Glencairn whereby the Company, in exchange for an hourly fee, obtained the
right to program and sell advertising on substantially all of the station's
inventory of broadcast time. The Company also received FCC approval for the
transfer of the FCC licenses of KPNT-FM and WVRV-FM in St. Louis, Missouri, and
exercised its option to acquire the License Assets of these radio stations for
an exercise price of $1.2 million. As a result of these license approvals and
option exercises, the Company now owns the License Assets of (or has entered
into an LMA with Glencairn with respect to) all of the television and radio
stations with respect to which it acquired Non-License Assets (assets involved
in the operation of radio and television stations other than License Assets)
from River City, other than WTTV-TV and WTTK-TV in Indianapolis, Indiana.
ACQUISITION OF KUPN-TV
In May 1997, the Company completed the acquisition of the License and
Non-License Assets of KUPN-TV in Las Vegas, Nevada. The Company made a cash
payment of $78.0 million, which was in addition to the $9.0 million deposit
previously paid. The Company financed the acquisition by utilizing indebtedness
under its bank credit facility.
AMENDMENT OF BANK CREDIT AGREEMENT
On May 20, 1997, the Company entered into an Amended and Restated Credit
Agreement with the Chase Manhattan Bank, as Agent (as amended from time to time,
"the Bank Credit Agreement"). The terms of the Bank Credit Agreement as amended
and restated are summarized below. The summary set forth below does not purport
to be complete and is qualified in its entirety by reference to the provisions
of the Bank Credit Agreement. A copy of the Bank Credit Agreement is filed as an
exhibit to this Report on Form 10-Q.
The Company entered into the Bank Credit Agreement with The Chase Manhattan Bank
as Agent, and certain lenders (collectively, the "Banks"). The Bank Credit
Agreement is comprised of two components, consisting of (i) the $400 million
Revolving Credit Facility and (ii) the $600 million Term Loan. An additional
term loan in the amount of $400 million (the "Incremental Facility") is
available to the Company under the Bank Credit Agreement. The Company has
borrowed no funds with respect to this additional term loan. Beginning March 31,
2000, the commitment under the Revolving Credit Facility is subject to mandatory
quarterly reductions to the following percentages of the initial amount: 90% at
December 31, 2000, 69.2% at December 31, 2001, 48.4% at December 31, 2002, 27.5%
at December 31, 2003 and 0% at December 31, 2004. The Term Loan is required to
be repaid by the Company in equal quarterly installments beginning on September
30, 1997 with the quarterly payment escalating annually through the final
maturity date of December 31, 2004.
The Company is entitled to prepay the outstanding amounts under the Revolving
Credit Facility and the Term Loan subject to certain prepayment conditions and
certain notice provisions at any time and from time to time. Partial prepayments
of the Term Loan are applied in the inverse order of maturity to the outstanding
loans on a pro rata basis. Prepaid amounts of the Term Loan may not be
reborrowed. In addition, the Company is required
19
to pay an amount equal to (i) 100% of the net proceeds from the sale of assets
(other than in the ordinary course of business) not used within 270 days; (ii)
insurance recoveries and condemnation proceeds not used for permitted uses
within 270 days; (iii) 80% of net Equity Issuance (as defined in the Bank Credit
Agreement), net of prior approved uses and certain other exclusions not used
within 270 days unless the Company has a contract to reinvest the proceeds
within 90 days of the 270 days; and (iv) 50% of Excess Cash Flow so long as
Total Debt/Adjusted EBITDA (each as defined in the Bank Credit Agreement) is
greater than or equal to 5.0x, to the Banks for application first to prepay the
Term Loan, pro rata in inverse order of maturity, and then to prepay outstanding
amounts under the Revolving Credit Facility with a corresponding reduction in
commitment.
In addition to the Revolving Credit Facility and the Term Loans, the Bank Credit
Agreement provides that the Banks may, but are not obligated to, loan the
Company up to an additional $400 million at any time prior to September 29, 1998
pursuant to the Incremental Facility. This additional loan, if agreed to by the
Agent Bank, would be in the form of a senior secured standby multiple draw term
loan. The Incremental Facility would be available to fund the acquisition of
WSYX and certain other acquisitions and would be repayable in equal quarterly
installments beginning September 30, 1998, with the quarterly payment escalating
annually through the final maturity date of December 30, 2004.
The Company's obligations under the Bank Credit Agreement are secured by a
pledge of substantially all of the Company's assets, including the stock of all
of the Company's subsidiaries other than KDSM, Inc., KDSM Licensee, Inc.,
Sinclair Capital and Cresap Enterprises, Inc. The subsidiaries of the Company
(other than KDSM, Inc., KDSM Licensee, Inc., Cresap Enterprises, Inc. and
Sinclair Capital) as well as Gerstell Development Corporation, Keyser Investment
Group, Inc. and Cunningham Communications (each a "Stockholder Affiliate"), have
guaranteed the obligations of the Company. In addition, all subsidiaries of the
Company (other than Cresap Enterprises, Inc., KDSM, Inc., KDSM Licensee, Inc.
and Sinclair Capital) have pledged, to the extent permitted by the law, all of
their assets to the Banks and Gerstell Development Corporation. Keyser
Investment Group, Inc., and Cunningham Communications have pledged certain real
property to the Banks.
The Company has caused the FCC license for each television station (to the
extent such license has been transferred or acquired) or the option to acquire
such licenses to be held in a single-purpose entity utilized solely for such
purpose (the "TV License Subsidiaries") with the exception of the options for
WTTV and WTTK in Indianapolis, both of which are held by a single entity. The TV
License Subsidiaries are in all instances owned by wholly-owned indirect
subsidiaries of the Company. Additionally, the Company has caused the FCC
licenses of the radio stations in each local market to be held by a single
purpose entity utilized solely for that purpose (the "Radio License
Subsidiaries"). The Radio License Subsidiaries are in all instances owned by
wholly-owned indirect subsidiaries of the Company.
Interest on amounts drawn under the Bank Credit Agreement is, at the option of
the Company, equal to (i) the London Interbank Offered Rate plus a margin of
.50% to 1.875% for the Revolving Credit Facility and 2.75% for the Term Loan, or
(ii) the Base Rate, which equals the higher of the Federal Funds Rate plus 1/2
of 1% or the Prime Rate of Chase, plus a margin of zero to .625% for the
Revolving Credit Facility and the Term Loan. The Company must maintain interest
rate hedging arrangements or instruments for at least 60% of the principal
amount of the facilities until May 20, 1999.
The Bank Credit Agreement contains a number of covenants which restrict the
operations of the Company and its subsidiaries, including the ability to: (i)
merge, consolidate, acquire or sell assets; (ii) create additional indebtedness
or liens; (iii) pay dividends on the Parent Preferred; (iv) enter into certain
arrangements with or investments in affiliates; and (v) change the business or
ownership of the Company. The Company and its subsidiaries are also prohibited
under the Bank Credit Agreement from incurring obligations relating to the
acquisition of programming if, as a result of such acquisition, the cash
payments on such programming exceed specified amounts set forth in the Bank
Credit Agreement.
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In addition, the Company must comply with certain other financial convenants in
the Bank Credit Agreement which include: (i) Fixed Charges Ratio (as defined in
the Bank Credit Agreement) of no less than 1.05 to 1 at any time; (ii) Interest
Coverage Ratio (as defined in the Bank Credit Agreement) of no less than 1.8 to
1 from the Restatement Effective Date (as defined in the Bank Credit Agreement)
to December 30, 1998 and increasing each fiscal year to 2.20 to 1 from December
31, 2000 and thereafter; and (iii) a Senior Indebtedness Ratio (as defined in
the Bank Credit Agreement) of no greater than 5.0x from the Restatement
Effective Date declining to 4.0x by December 31, 2001 and at all times
thereafter and (iv) a Total Indebtedness Ratio (as defined in the Bank Credit
Agreement) of no greater than 6.75 to 1 from the Restatement Effective Date
declining to 4.00 to 1 by December 31, 2001 and at all times thereafter.
The Events of Default under the Bank Credit Agreement include, among others: (i)
the failure to pay principal, interest or other amounts when due; (ii) the
making of untrue representations and warranties in connection with the Bank
Credit Agreement; (iii) a default by the Company or the subsidiaries in the
performance of its obligations under the Bank Credit Agreement or certain
related security documents; (iv) certain events of insolvency or bankruptcy; (v)
the rendering of certain money judgements against the Company or its
subsidiaries; (vi) the incurrence of certain liabilities to certain plans
governed by the Employee Retirement Income Security Act of 1974; (vii) a change
of control or ownership of the Company or its subsidiaries; (viii) the security
documents being terminated and ceasing to be in full force and effect; (ix) any
broadcast license (other than a non-material license) being terminated,
forfeited or revoked or failing to be renewed for any reason whatsoever or for
any reason a subsidiary shall at any time cease to be a licensee under any
broadcast license (other than a non-material broadcast license); (x) any LMA or
options to acquire License Assets being terminated for any reason whatsoever;
(xi) any amendment, modification, supplement or waiver of the provisions of the
Indenture without the prior written consent of the majority lenders; and (xii) a
payment default on any other indebtedness of the Company if the principal amount
of such indebtedness exceeds $5 million.
RESIGNATION OF MEMBER OF BOARD OF DIRECTORS
On July 30, 1997, William F. Brock resigned his position on the Company's Board
of Directors. The Company has yet to fill this vacancy on the Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Third Amended and Restated Credit Agreement dated as of May
31, 1996 by and among Sinclair Broadcast Group, Inc., Certain
Subsidiary Guarantors, Certain Lenders and The Chase
Manhattan Bank as Agent.
10.2 Indenture, dated as of July 2, 1997, among Sinclair Broadcast
Group, Inc., Certain Subsidiary Guarantors and First Union
Bank of Maryland as trustee.
10.3 Registration Rights Agreement dated as of July 2, 1997 by and
among the Company, Certain Subsidiary Guarantors and Smith
Barney, Inc., Chase Securities, Inc., Saloman Brothers, Inc.,
and Furman Selz
10.4 Asset Purchase Agreement dated as of July 16, 1997 by and
between Heritage Broadcasting Group, Inc. and the Company.
10.5 Asset Purchase Agreement dated as of July 16, 1997 by and
among WEAR-TV, Ltd., Rollins Telecasting, Inc., WNNE-TV,
Inc., KOKH, Inc., WCHS, Ltd., WVAE-FM, Inc., KCFX-FM, Inc.,
Heritage-Wisconsin Broadcasting Corp., KKSN, Inc., WBBF,
Inc., WIL Music, Inc., and KIHT-FM, Inc. and the Company
(Confidential treatment has been requested with respect to
portions of this document. The copy filed omits the
information for which confidential treatment has been
requested.)
11 Computation of Earnings per Share
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27 Financial Data Schedule
B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated July 29, 1997 reporting on
items 5 and 7 as an update on the acquisition of the license and non-license
assets of the television and radio stations of Heritage Media Group, Inc. ("the
Heritage acquisition")
The company filed a Current Report on Form 8-K dated July 17, 1997 reporting on
items 5 and 7 with respect to the Heritage acquisition.
The Company filed a Current Report on Form 8-K dated July 14, 1997 reporting on
items 5 and 7 with respect to the change in network affiliations for certain
television stations.
The Company filed a Current Report on Form 8-K dated July 2, 1997 reporting on
items 5 and 7 in connection with its $200 million private offering of 9% Senior
Subordinated Notes due 2007.
The Company filed a current report on Form 8-K dated June 27, 1997 reporting on
items 5 and 7 to reflect an updated description of recent developments regarding
its business relating to a $200 million private offering of 9% Senior
Subordinated Notes due 2007.
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SIGNATURES
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 11th day of August, 1997.
SINCLAIR BROADCAST GROUP, INC.
by: /s/ David B. Amy
------------------------------
David B. Amy
Chief Financial Officer
Principal Accounting Officer
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