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, 1998
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 6, 1998, there are 48,013,362 shares of Class A Common Stock, $.01
par value, 49,968,864 shares of Class B Common Stock, $.01 par value and 39,581
shares of Series B Preferred Stock, $.01 par value, convertible into 287,898
shares of Class A Common Stock, of the Registrant issued and outstanding.
1
In addition, 2,000,000 shares of $200 million aggregate liquidation value 115/8%
High Yield Trust Offered Preferred Securities of Sinclair Capital, a subsidiary
trust of Sinclair Broadcast Group, Inc. are issued and outstanding.
2
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended June 30, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
June 30, 1998........................................................ 3
Consolidated Statements of Operations for the Three Months and Six Months
Ended June 30, 1997 and 1998........................................ 4
Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 1998................................................. 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998........................................ 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........................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders...................... 20
Item 5. Other.................................................................... 21
Item 6. Exhibits and Reports on Form 8-K......................................... 23
Signature..................................................................... 24
3
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
1997 1998
--------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 139,327 $ 320,133
Accounts receivable, net of allowance for doubtful accounts ....................... 123,018 129,088
Current portion of program contract costs ......................................... 46,876 33,369
Prepaid expenses and other current assets ......................................... 4,673 1,928
Deferred barter costs ............................................................. 3,727 5,737
Refundable income taxes ........................................................... 10,581 10,581
Broadcast assets held for sale .................................................... -- 30,639
Deferred tax asset ................................................................ 2,550 520
----------- -----------
Total current assets ....................................................... 330,752 531,995
PROGRAM CONTRACT COSTS, less current portion .......................................... 40,609 28,228
LOANS TO OFFICERS AND AFFILIATES ...................................................... 11,088 10,645
PROPERTY AND EQUIPMENT, net ........................................................... 161,714 195,100
OTHER ASSETS .......................................................................... 168,095 174,752
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net .......................................... 1,321,976 1,876,770
----------- -----------
Total Assets ...................................................................... $ 2,034,234 $ 2,817,490
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................. $ 5,207 $ 9,858
Accrued liabilities ............................................................... 40,532 51,069
Current portion of long-term liabilities-
Notes payable and commercial bank financing ................................... 35,215 25,000
Notes and capital leases payable to affiliates ................................ 3,073 2,878
Program contracts payable ..................................................... 66,404 64,415
Deferred barter revenues .......................................................... 4,273 6,111
----------- -----------
Total current liabilities .................................................. 154,704 159,331
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ....................................... 1,022,934 1,475,972
Notes and capital leases payable to affiliates .................................... 19,500 18,495
Program contracts payable ......................................................... 62,408 47,671
Deferred tax liability ............................................................ 24,092 36,242
Other long-term liabilities ....................................................... 3,611 3,948
----------- -----------
Total liabilities .......................................................... 1,287,249 1,741,659
----------- -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ........................................ 3,697 3,661
----------- -----------
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUB-
SIDIARY TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES ............................... 200,000 200,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B Preferred stock, $.01 par value, 10,000,000 shares authorized and 1,071,381
and 39,581 shares issued and outstanding, respectively ........................ 10 --
Series D Preferred stock, $.01 par value, 3,450,000 shares authorized, issued
and outstanding ............................................................... 35 35
Class A Common stock, $.01 par value, 100,000,000 and 500,000,000 shares authorized
and 27,466,860 and 47,992,548 shares issued and outstanding, respectively ..... 275 480
Class B Common stock, $.01 par value, 35,000,000 and 140,000,000 shares authorized
and 50,872,864 and 49,968,864 shares issued and outstanding ................... 510 500
Additional paid-in capital ........................................................ 552,556 897,048
Additional paid-in capital - equity put options ................................... 23,117 23,117
Additional paid-in capital - deferred compensation ................................ (954) (7,419)
Accumulated deficit
(32,261) (41,591)
----------- -----------
Total stockholders' equity
543,288 872,170
----------- -----------
Total Liabilities and Stockholders' Equity ................................. $ 2,034,234 $ 2,817,490
=========== ===========
The accompanying notes are an integral part
of these unaudited consolidated statements.
4
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,
1997 1998 1997 1998
---- ---- ---- ----
REVENUES:
Station broadcast revenues, net of agency commissions....... $120,792 $ 153,634 $ 219,701 $ 266,265
Revenues realized from station barter arrangements.......... 10,555 13,892 19,870 25,099
------ ---------- ---------- -----------
Total revenues....................................... 131,347 167,526 239,571 291,364
------- -- ------- -- ------- --- -------
OPERATING EXPENSES:
Program and production........................................ 24,253 30,256 46,760 56,068
Selling, general and administrative........................... 26,393 32,023 51,634 59,708
Expenses realized from station barter arrangements............. 8,859 11,685 16,303 20,962
Amortization of program contract costs and net
realizable value adjustments.............................. 13,400 14,532 30,918 30,543
Stock-based compensation....................................... 116 899 233 1,371
Depreciation and amortization of property and equipment........ 4,179 5,498 8,340 10,266
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets.. 18,371 19,037 37,392 35,171
------ ---------- ---------- -----------
Total operating expenses............................... 95,571 113,930 191,580 214,089
------ ---------- -- ------- -----------
Broadcast operating income............................. 35,776 53,596 47,991 77,275
------ ---------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense............. (24,928) (27,530) (51,993) (54,901)
Subsidiary trust minority interest expense..................... (5,813) (5,813) (7,007) (11,625)
Interest income................................................ 654 1,900 1,040 3,217
Gain on sale of broadcast assets............................... - 5,238 - 5,238
Other income (expense)......................................... (97) (4) 47 104
------ ----------- ----------- -----------
Income (loss) before income tax provision............. 5,592 27,387 (9,922) 19,308
INCOME TAX (PROVISION) BENEFIT..................................... (3,800) (17,200) 4,100 (12,400)
------ ----------- ----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM....................... 1,792 10,187 (5,822) 6,908
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt net of related income tax
benefit of $7,370......................................... - (11,063) - (11,063)
------ ----------- ----------- -----------
NET INCOME (LOSS)................................................ $ 1,792 $ (876) $ (5,822) $ (4,155)
======= =========== =========== ===========
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS................ $ 1,792 $ (3,463) $ (5,822) $ (9,330)
======= =========== =========== ===========
Basic income (loss) per share before extraordinary item........... $ .03 $ .08 $ (.08) $ .02
======= =========== =========== ===========
Basic income (loss) per common share............................. $ .03 $ (.04) $ (.08) $ (.10)
======= =========== =========== ===========
Basic weighted average common shares outstanding................. 69,278 96,889 69,492 91,480
======= =========== =========== ===========
Diluted income (loss) per share before extraordinary item........ $ .02 $ .08 $ (.08) $ 0.2)
======= =========== =========== ===========
Diluted income (loss) per common share........................... $ .02 $ (.04) $ (.08) $ (.10)
======= =========== =========== ===========
Diluted weighted average common and common equivalent shares
outstanding................................................. 77,580 99,242 77,826 93,645
======= =========== =========== ===========
The accompanying notes are an integral part
of these unaudited consolidated statements.
5
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
SERIES B SERIES B CLASS A CLASS B
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
----------- ----------- --------- ---------
BALANCE, December 31,
1997 as previously re-
ported ...................... $ 10 $35 $137 $255
Two-for-one-stock split...... -- -- 138 255
------ --- ---- ----
Balance, December 31,
1997 as adjusted ............ 10 35 275 510
Class B Common Stock
converted into Class A
Common Stock ............... -- -- 5 (5)
Series B Preferred Stock
converted into Class A
Common Stock ............... (10) -- 38 --
Dividends payable on Se-
ries D Preferred Stock, -- -- -- --
Stock option grants ......... -- -- -- --
Stock option grants exer-
cised ...................... -- -- -- --
Class A Common Stock
shares issued pursuant
to employee benefit
plans ...................... -- -- -- --
Two-for one stock split...... -- -- 102 (5)
Issuance of Class A Common
Stock ...................... -- -- 60 --
Amortization of
deferred compensation -- -- -- --
Net loss .................... -- -- -- --
------ --- ---- -----
BALANCE, June 30, 1998. $ -- $35 $480 $500
====== === ==== =====
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
ADDITIONAL CAPITAL- CAPITAL- TOTAL
PAID-IN EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDER'S
CAPITAL OPTIONS COMPENSATION DEFICIT EQUITY
------------ ------------ -------------- ------------- --------------
BALANCE, December 31,
1997 as previously
reported .................... $552,949 $23,117 $ (954) $(32,261) $543,288
Two-for-one-stock split...... (393) -- -- -- --
-------- ------- -------- --------- --------
Balance, December 31,
1997 as adjusted ............ 552,556 23,117 (954) (32,261) 543,288
Class B Common Stock
converted into Class A
Common Stock ............... -- -- -- -- --
Series B Preferred Stock
converted into Class A
Common Stock ............... (28) -- -- -- --
Dividends payable on Se-
ries D Preferred Stock, -- -- -- (5,175) (5,175)
Stock option grants ......... 7,196 -- (7,196) -- --
Stock option grants exer-
cised ...................... 969 -- -- -- 969
Class A Common Stock
shares issued pursuant
to employee benefit
plans ...................... 1,277 -- -- -- 1,277
Two-for one stock split...... (97) -- -- -- --
Issuance of Class A Common
Stock ...................... 335,175 -- -- -- 335,235
Amortization of
deferred compensation -- -- 731 -- 731
Net loss .................... -- -- -- (4,155) (4,155)
-------- ------- -------- --------- --------
BALANCE, June 30, 1998 ....... $897,048 $23,117 $ (7,419) $ (41,591) $872,170
======== ======= ======== ========= ========
The accompanying notes are an integral part
of these unaudited consolidated statements.
6
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (5,822) $ (4,155)
Adjustments to reconcile net loss to net cash flows from operating
activities--
Extraordinary loss on early extinguishment of debt ......................... -- 18,433
Gain on sale of broadcast assets ........................................... -- (5,238)
Amortization of debt discount .............................................. -- 49
Depreciation and amortization of property and equipment .................... 8,340 10,266
Amortization of acquired intangible broadcasting assets, non-compete
and consulting agreements and other assets ................................ 37,392 35,171
Amortization of program contract costs and net realizable value adjust-
ments ..................................................................... 30,918 30,543
Stock-based compensation ................................................... 233 1,371
Deferred tax provision (benefit) ........................................... (7,406) 2,030
Changes in assets and liabilities, net of effects of acquisitions and
dispositions--
Decrease in accounts receivable, net ....................................... 9,947 1,465
Decrease (increase) in prepaid expenses and other current assets ........... (358) 3,288
Increase (decrease) in accounts payable and accrued liabilities ............ (3,916) 5,094
Decrease in income taxes payable ........................................... (730) --
Net effect of change in deferred barter revenues and deferred barter
costs ..................................................................... 236 (66)
Decrease in other long-term liabilities .................................... (109) (247)
Increase (decrease) in minority interest ................................... 17 (36)
Payments on program contracts payable ........................................ (26,259) (30,465)
---------- ----------
Net cash flows from operating activities ................................... 42,483 67,503
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ....................................... (8,286) (8,299)
Payments for acquisition of television and radio stations .................... (97,906) (762,378)
Loans to officers and affiliates ............................................. (650) (1,021)
Repayments of loans to officers and affiliates ............................... 748 1,381
Distributions from Joint Venture ............................................. 381 608
Proceeds from sale of broadcasting assets .................................... -- 233,858
Payments relating to future acquisitions ..................................... (6,716) (112,477)
---------- ----------
Net cash flows used in investing activities ............................... (112,429) (648,328)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases 92,546 1,397,000
Repayments of notes payable, commercial bank financing and capital
leases ..................................................................... (204,193) (954,125)
Payments of costs relating to financing ...................................... (4,669) (10,863)
Proceeds from exercise of stock options ...................................... -- 969
Proceeds from issuance of stock related to compensation plans ................ -- 419
Repurchases of the Company's Class A Company Stock ........................... (4,599) --
Net proceeds from issuance of Class A Common Stock ........................... -- 335,235
Net proceeds from subsidiary trust securities offering ....................... 195,000 --
Dividends paid on Series D Convertible Preferred Stock ....................... -- (5,175)
Payment of equity put option premium ......................................... -- (528)
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 ......................... (717) (1,301)
------ ------
Net cash flows from financing activities .................................. 70,345 761,631
------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................................... 399 180,806
CASH AND CASH EQUIVALENTS, beginning of period ................................ 2,341 139,327
------ -------
CASH AND CASH EQUIVALENTS, end of period ...................................... $ 2,740 $320,133
The accompanying notes are an integral part
of these unaudited consolidated statements.
7
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, Sinclair 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, 1997 and
1998 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, 1996, and 1997 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
at an amount equal to its gross contractual commitment when the license period
begins and the program is available for its first showing. The portion of 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
8
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):
As of June 30, 1998, the Company consisted of two principal business segments -
television broadcasting and radio broadcasting. As of the date hereof, the
Company owns or provides programming services pursuant to LMAs to 56 television
stations located in 36 geographically diverse markets in the continental United
States. The Company owns or provides programming services pursuant to JSAs to 54
radio stations in 10 geographically diverse markets. Substantially all revenues
represent income from unaffiliated companies.
TELEVISION TELEVISION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
Total revenues.............................................. $ 114,377 $ 141,329 $ 210,151 $ 249,050
Station operating expenses.................................. 48,008 58,171 92,645 109,756
Depreciation, program amortization and stock-based
compensation............................................ 17,134 19,995 38,368 40,469
Amortization of intangibles and other assets................ 15,086 14,961 30,901 28,102
----------- ----------- ---------- -----------
Station broadcast operating income.......................... $ 34,149 $ 48,202 $ 48,237 $ 70,723
=========== =========== ========== ===========
Total assets................................................ $ 1,456,776 $ 2,378,764 $1,456,776 $ 2,378,764
=========== =========== ========== ===========
Capital expenditures........................................ $ 4,167 $ 3,649 $ 6,194 $ 6,130
=========== =========== ========== ===========
RADIO RADIO
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
Total revenues.................................................... $ 16,970 $ 26,197 $ 29,420 $ 42,314
Station operating expenses........................................ 11,497 15,793 22,052 26,982
Depreciation, program amortization and stock-based
Compensation.................................................. 561 934 1,123 1,711
Amortization of intangibles and other assets...................... 3,285 4,076 6,491 7,069
------------ ---------- ---------- -----------
Station broadcast operating income (loss)......................... $ 1,627 $ 5,394 $ (246) $ 6,552
============ ========== =========== ===========
Total assets...................................................... $ 305,729 $ 438,726 $ 305,729 $ 438,726
============ ========== ========== ===========
Capital expenditures.............................................. $ 1,874 $ 1,239 $ 2,092 $ 2,169
============ ========== ========== ===========
9
4. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
During the six months ended June 30, 1997 and 1998, the Company made certain
cash payments of the following:
SIX MONTHS ENDED
JUNE 30,
1997 1998
---- ----
Interest payments.................................. $ 55,723 $ 68,743
============ ===========
Subsidiary trust minority interest payments........ $ 6,006 $ 11,625
============ ===========
Income tax payments................................ $ 5,298 $ 1,288
============ ===========
5. EARNINGS PER SHARE:
The Company adopted SFAS 128 "Earnings per Share" which requires the disclosure
of basic and diluted earnings per share and related computations as follows (in
thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
Weighted-average number of common shares............... 69,278 96,889 69,492 91,480
Diluted effect of outstanding stock options ........... 22 2,065 54 1,877
Diluted effect of conversion of preferred shares....... 8,280 288 8,280 288
------------- ------------- ------------- -----------
Diluted weighted-average number of common and common
equivalent shares outstanding...................... 77,580 99,242 77,826 93,645
============ ============ ============ ===========
Net income (loss)...................................... $ 1,792 $ (876) $ (5,822) $ (4,155)
Preferred stock dividends payable...................... - (2,587) - (5,175)
------------ ------------- ------------ ------------
Net income (loss) available to common stockholders..... $ 1,792 $ (3,463) $ (5,822) $ (9,330)
============ ============= ============= ============
Basic earnings (loss) per common share
before extraordinary items........................ $ .03 $ .08 $ (.08) $ .02
Basic earnings (loss) per common share................. $ .03 $ (.04) $ (.08) $ (.10)
============ ============ ============ ===========
Diluted earnings (loss) per common share
before extraordinary items........................ $ .02 $ .08 $ (.08) .02
============================== ============ =============
Diluted earnings (loss) per common share............... $ .02 $ (.04) $ (.08) $ (.10)
============ ============ ============ =============
6. 1998 BANK CREDIT AGREEMENT:
In order to expand its borrowing capacity to fund future acquisitions and obtain
more favorable terms with its banks, the Company obtained a new $1.75 billion
senior secured credit facility (the "1998 Bank Credit Agreement"). The 1998 Bank
Credit Agreement was executed in May of 1998 and includes (i) a $750.0 million
term loan facility repayable in consecutive quarterly installments commencing on
March 31, 1999 and ending on September 15, 2005; and (ii) a $1.0 billion
reducing Revolving Credit Facility. Availability under the Revolving Credit
Facility reduces quarterly, commencing March 31, 2001 and terminating on
September 15, 2005. Not more than $350.0 million of the Revolving Credit
Facility will be available for issuances of letters of credit. The 1998 Bank
Credit Agreement also includes a standby uncommitted multiple draw term loan
facility of $400.0 million. The Company is required to prepay the term loan
facility and reduce the revolving credit facility with (i) 100% of the net
proceeds of any casualty loss or condemnation; (ii) 100% of the net proceeds of
any sale or other disposition by the Company of any assets in excess of $100.0
million in the aggregate for any fiscal year, to the extent not used to acquire
new assets; and (iii) 50% of excess cash flow (as defined) if the Company's
ratio of debt to EBITDA (as defined) exceeds a certain threshold. The 1998 Bank
Credit Agreement contains representations and warranties, and affirmative and
negative covenants, including limitations on additional indebtedness, customary
for credit facilities of this type. The 1998 Bank Credit Agreement is secured
only by a pledge of the stock of each subsidiary of the Company other than KDSM,
Inc., KDSM Licensee, Inc., Cresap Enterprises, Inc. and Sinclair Capital. The
Company is also required to satisfy certain financial covenants.
As a result of entering into the Company's 1998 Bank Credit Agreement, the
Company incurred debt acquisition costs of $10.9 million and recognized an
extraordinary loss of $11.1 million net of a tax benefit of $7.4 million. The
extraordinary loss represents the write-off of debt acquisition costs associated
with indebtedness replaced by the new facility.
7. COMMON STOCK SPLIT:
On April 30, 1998, the Company's Board of Directors approved a two-for-one stock
spilt of its Class A and Class B Common Stock to be distributed in the form of a
stock dividend. As a result of this action, 23,963,013 and 24,984,432 shares of
Class A and Class B Common Stock, respectively, were issued to shareholders of
record as of May 14, 1998. The stock split has been retroactively reflected in
the accompanying consolidated financial statements and related notes thereto.
8. EQUITY OFFERING:
On April 14, 1998, the Company and certain stockholders of the Company completed
a public offering of 12,000,000 and 4,060,374 shares, respectively of Class A
Common Stock (the Common Stock Offering). The shares were sold for an offering
price of $29.125 per share and generated proceeds to the Company of $335.2
million, net of underwriters' discount and other offering costs of approximately
$14.3 million. The Company utilized the proceeds to repay indebtedness under the
1997 Bank Credit Agreement.
10
9. ACQUISITIONS AND DISPOSITIONS:
1998 ACQUISITIONS AND DISPOSITIONS
Heritage Acquisition. In July 1997, the Company entered into a purchase
agreement to acquire certain assets of the radio and television stations of
Heritage for approximately $630 million (the "Heritage Acquisition"). Pursuant
to the Heritage Acquisition, and after giving effect to the STC Disposition,
Entercom Disposition and Centennial Disposition and a third party's exercise of
its option to acquire radio station KCAZ in Kansas City, Missouri, the Company
has acquired or is providing programming services to three television stations
in two separate markets and 13 radio stations in four separate markets. In July
1998, the Company acquired three radio stations in the New Orleans, Louisiana
market and simultaneously disposed of two of those stations (see Petracom
Disposition, Note 11).
STC Disposition. In February 1998, the Company entered into agreements to sell
to STC Broadcasting of Vermont, Inc. ("STC") two television stations and the
Non-License Assets and rights to program a third television station, all of
which were acquired in the Heritage Acquisition. In April 1998, the Company
closed on the sale of the non-license assets of the three television stations in
the Burlington, Vermont and Plattsburgh, New York market for aggregate
consideration of approximately $70 million. During the third quarter of 1998,
the Company sold the license assets for a sales price of $2 million.
Montecito Acquisition. In February 1998, the Company entered into an agreement
to acquire all of the capital stock of Montecito Broadcasting Corporation
("Montecito") for approximately $33 million (the "Montecito Acquisition").
Montecito owns all of the issued and outstanding stock of Channel 33, Inc. which
owns and operates KFBT-TV in Las Vegas, Nevada. Currently, the Company is a
Guarantor of Montecito Indebtedness of approximately $33 million. The Company
cannot acquire Montecito unless and until FCC rules permit SBG to own the
broadcast license for more than one station in the Las Vegas market, or unless
the Company no longer owns the broadcast license for KVWB-TV in Las Vegas. At
any time the Company, at its option, may transfer the rights to acquire the
stock of Montecito. In April 1998 the Company began programming KFBT-TV through
an LMA upon expiration of the applicable HSR Act waiting period.
WSYX Acquisition. In April 1998, the Company exercised its option to acquire the
non-license assets of WSYX-TV in Columbus, Ohio from River City Broadcasting, LP
("River City") for an option exercise price of $228 million. The Company entered
into a local marketing agreement with River City whereby the Company has
obtained the right to program and sell advertising on substantially all of the
station's
11
inventory of broadcast time. The Company's application for the transfer of the
WSYX license has been granted by the Federal Communications Commission (the
"FCC"). Upon the expiration of the applicable public notice period, the Company
intends to exercise its option to acquire the license assets for an option
exercise price of $2.0 million.
SFX Disposition. In May 1998, the Company completed the sale of three radio
stations to SFX Broadcasting, Inc. for aggregate consideration of approximately
$35 million ("the SFX Disposition"). The radio stations sold are located in the
Nashville, Tennessee market. In connection with the disposition, the Company
recognized a $5.2 million gain on the sale.
Lakeland Acquisition. In May 1998, the Company acquired 100% of the stock of
Lakeland Group Television, Inc. ("Lakeland") for a net purchase price of
approximately $49.6 million (the "Lakeland Acquisition"). In connection with the
Lakeland Acquisition, the Company now owns television station KLGT-TV in
Minneapolis/St. Paul, Minnesota.
Entercom Disposition. In June 1998, the Company completed the sale of seven
radio stations acquired in the Heritage acquisition. The seven stations are
located in the Portland, Oregon and Rochester, New York markets and were sold
for aggregate consideration of approximately $126.5 million. .
10. INTEREST RATE DERIVATIVE AGREEMENTS:
At June 30, 1998, the Company had several interest rate hedging agreements
relating to its outstanding indebtedness. The hedging agreements protect the
Company against rising interest rates, offering protection at levels ranging
from 5.48% to 9.00%. The notional amounts related to these agreements were $1.4
billion at June 30, 1998, and decrease to $200 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, 1998 to be $575 thousand.
During 1998, FASB issued SFAS 133 "Accounting for Derivative Instruments and for
Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and reporting
standards for derivative investments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. FAS 133 is
effective for the Company beginning January 1, 2000. The Company is evaluating
its eventual impact on its financial statements.
12
11. SUBSEQUENT EVENTS:
Sullivan Acquisition. In July 1998, the Company acquired 100% of the stock of
Sullivan Broadcast Holdings, Inc. and Sullivan Broadcasting Company II, Inc. for
a purchase price of approximately $1.0 billion (the "Sullivan Acquisition"). The
Company financed the acquisition by utilizing indebtedness under the 1998 Bank
Credit Agreement. In connection with the acquisition, the Company has acquired
the right to program 12 additional television stations in 10 separate markets.
In a subsequent closing, which is expected to occur in the third quarter of
1998, the Company will acquire the stock of a company that owns the license
assets of six of the stations. In addition, the Company expects to enter into
new LMA agreements with respect to 4 of the stations and will continue to
program 2 of the television stations pursuant to existing LMA agreements.
Max Media Acquisition. In July 1998, the Company directly or indirectly acquired
all of the equity interests of Max Media Properties LLC, for $252 million (the
"Max Media Acquisition"). The Company financed the acquisition by utilizing
existing cash balances and indebtedness under the 1998 Bank Credit Agreement. In
connection with the acquisition, the Company now owns or provides programming
services to nine additional television stations in six separate markets and
eight radio stations in two separate markets.
Centennial Disposition. In July 1998, the Company completed the sale of the
assets of radio stations WRNO-FM, KMEZ-FM and WBYU-AM in New Orleans, Louisiana
to Centennial Broadcasting for $16 million in cash. The Company acquired KMEZ-FM
in connection with the River City Acquisition in May of 1996 and acquired
WRNO-FM and WBYU-AM in New Orleans from Heritage Media Group, Inc. ("Heritage")
in July 1998. The Company was required to divest WRNO-FM, KMEZ-FM and WBYU-AM to
meet certain regulatory ownership guidelines.
Petracom Disposition. In July 1998, the Company entered into an agreement to
sell to Petracom Media, Inc. the radio stations WGH-AM, WGH-FM and WFOG-FM in
the Norfolk, Virginia market for approximately $23 million in cash (the
"Petracom Acquisition"). Due to FCC restrictions, the Company was required to
have in place an agreement to divest of certain of the radio stations it owns in
the Norfolk, Virginia market prior to or simultaneously with the Max Media
acquisition. The Petracom transaction is expected to occur in the fourth quarter
of 1998.
Greenville Acquisition. In July 1998, the Company acquired three radio stations
in the Greenville/Spartansburg market from Keymarket Radio of South Carolina,
Inc. for a purchase price consideration involving the forgiveness of
approximately $8.0 million of indebtedness to Sinclair. Concurrently with the
acquisition, the Company acquired an additional two radio stations in the same
market from Spartan Broadcasting for a purchase price of approximately $5.2
million.
Radio Unica Disposition. In July 1998, the Company completed the sale of KBLA-AM
in Los Angeles, California to Radio Unica, Corp. for approximately $21 million
in cash.
Buffalo Acquisition. In August 1998, the Company entered into an agreement with
Western New York Public Broadcasting Association to acquire the television
station WNEQ in Buffalo, NY for a purchase price of $33 million in cash (the
"Buffalo Acquisition"). The Company expects to close the sale upon FCC approval
and the termination of the applicable waiting period under the HSR Act. In
addition, the sale is contingent upon FCC de-reservation of the station for
commercial use.
13
Albany Acquisition. In August 1998, the Company entered into an agreement with
WMHT Educational Telecommunications to acquire the television station WMHQ in
Albany, NY for a purchase price of $23 million in cash (the "Albany
Acquisition"). The Company expects to close the sale upon FCC approval and
termination of the applicable waiting period under the HSR Act.
14
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, 1997.
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 prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) on April 19,
1998.
15
The following table sets forth certain operating data for the three months and
six months ended June 30, 1997 and 1998:
OPERATING DATA (dollars in thousands, except per share data):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
Net broadcast revenues (a).................. $120,792 $153,634 $219,701 $266,265
Barter revenues............................. 10,555 13,892 19,870 25,099
--------------- --------------- --------------- ---------------
Total revenues.............................. 131,347 167,526 239,571 291,364
--------------- --------------- --------------- ---------------
Operating costs (b)......................... 50,646 62,279 98,394 115,776
Expenses from Barter Arrangements........... 8,859 11,685 16,303 20,962
Depreciation, amortization and stock-based
Compensation (c)......................... 36,066 39,966 76,883 77,351
--------------- --------------- ------------- ---------------
Broadcast operating income.................. 35,776 53,596 47,991 77,275
Interest expense............................ (24,928) (27,530) (51,993) (54,901)
Subsidiary trust minority interest expense (d) (5,813) (5,813) (7,007) (11,625)
Interest and other income................... 557 1,896 1,087 3,321
Net gain on sale of assets.................. - 5,238 - 5,238
--------------- --------------- --------------- ---------------
Net income (loss) before income taxes....... 5,592 27,387 (9,922) 19,308
Income tax (provision) benefit.............. (3,800) (17,200) 4,100 (12,400)
--------------- -------------- --------------- ---------------
Net income before extraordinary item........ 1,792 10,187 (5,822) 6,908
Extraordinary item.......................... - (11,063) - (11,063)
--------------- --------------- --------------- ---------------
Net income (loss)........................... $ 1,792 $ (876) $ (5,822) $ (4,155)
=============== ======= =============== ===============
BROADCAST CASH FLOW (BCF) DATA:
Television BCF (e)................... $ 56,832 $ 71,879 $ 98,032 $117,666
Radio BCF (e)........................ 5,984 10,894 7,568 15,480
--------------- --------------- --------------- ---------------
Consolidated BCF (e)................. $ 62,816 $ 82,773 $ 105,600 $ 133,146
=============== ======== =============== =========
Television BCF margin (f)............ 54.5% 56.0% 51.2% 52.1%
Radio BCF margin (f)................. 36.3% 43.2% 26.7% 38.2%
Consolidated BCF margin (f).......... 52.0% 53.9% 48.1% 50.0%
OTHER DATA:
Adjusted EBITDA (g).................. $ 59,315 $ 78,394 $ 98,615 $ 124,161
Adjusted EBITDA margin (f)........... 49.1% 51.0% 44.9% 46.6%
After tax cash flow (h).............. $ 25,486 $ 42,496 $ 32,737 $ 52,703
Program contract payments............ $ 12,527 $ 15,168 $ 26,259 $ 30,465
Corporate expense.................... $ 3,501 $ 4,379 $ 6,985 $ 8,985
Capital expenditures................. $ 6,042 $ 4,888 $ 8,286 $ 8,299
Cash flows from operating activities. $ 14,163 $ 25,151 $ 42,483 $ 67,503
Cash flows from investing activities. $(98,527) $(124,156) $(112,429) $(648,328)
Cash flows from financing activities. $ 50,399 $412,283 $ 70,345 $ 761,631
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
16
a) "Net broadcast revenue" is defined as broadcast revenue 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,
amortization of acquired intangible broadcasting assets and other assets
and stock-based compensation related to the issuance of common stock
pursuant to stock option and other employee benefit plans.
d) Subsidiary trust minority interest expense represents distributions on the
HYTOPS.
e) "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, there can be no assurance
that it is comparable. 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. Management believes the presentation of broadcast cash flow
(BCF) is relevant and useful because 1) BCF is a measurement utilized by
lenders to measure the Company's ability to service its debt, 2) BCF is a
measurement utilized by industry analysts to determine a private market
value of the Company's television and radio stations and 3) BCF is a
measurement industry analysts utilize when determining the operating
performance of the Company.
f) "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.
g) "Adjusted EBITDA" is defined as broadcast cash flow less corporate expenses
and is a commonly used measure of performance for broadcast companies. The
Company has presented Adjusted EBITDA 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, there can be no assurances that it is comparable.
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. Management believes the
presentation of Adjusted EBITDA is relevant and useful because 1) Adjusted
EBITDA is a measurement utilized by lenders to measure the Company's
ability to service its debt, 2) Adjusted EBITDA is a measurement utilized
by industry analysts to determine a private market value of the Company's
television and radio stations and 3) Adjusted EBITDA is a measurement
industry analysts utilize when determining the operating performance of the
Company.
h) "After tax cash flow" 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, the deferred tax provision (or minus the deferred
tax benefit) and minus the gain on sale of assets. The Company has
presented after tax 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, there can be no assurances that it is comparable. 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. Management believes the presentation of after tax
cash flow is relevant and useful because 1) ATCF is a measurement utilized
by lenders to measure the Company's ability to service its debt, 2) ATCF is
a measurement utilized by industry analysts to determine a private market
value of the Company's television and radio stations and 3) ATCF is a
measurement analysts utilize when determining the operating performance of
the Company.
Net broadcast revenues increased to $153.6 million for the three months ended
June 30, 1998 from $120.8 million for the three months ended June 30, 1997, or
27.2%. Net broadcast revenues increased to $266.3 million for the six months
ended June 30, 1998 from $219.7 million for the six months ended June 30, 1997
or 21.2%. The increase in net broadcast revenues for the three months ended June
30, 1998 was comprised of $28.0 million related to the businesses acquired or
disposed of by the Company in 1998 or operated for a partial period during 1997
(the "1997 and 1998 Transactions") and $4.8 million related to an increase in
net broadcast revenue on a same station basis, which increased by 4.0%. The
increase in net broadcast revenues for the six months ended June 30, 1998 was
comprised of $37.3 million related to the 1997 and 1998
17
Transactions and $9.3 million related to an increase in net broadcast revenues
on a same station basis, which increased by 4.3%.
Operating costs increased to $62.3 million for the three months ended June 30,
1998 from $50.6 million for the three months ended June 30, 1997, or 23.1%.
Operating costs increased to $115.8 million for the six months ended June 30,
1998, from $98.4 million for the six months ended June 30, 1997, or 17.7%. The
increase in operating costs for the three months ended June 30, 1998 as compared
to the three months ended June 30, 1997 was comprised of $10.7 million related
to the 1997 and 1998 Transactions, $0.9 million related to an increase in
corporate overhead expenses, and $0.1 million related to an increase in
operating costs on a same station basis, which increased 0.2%. The increase in
operating costs for the six months ended June 30, 1998 as compared to the six
months ended June 30, 1997 was comprised of $14.0 million related to the 1997
and 1998 Transactions, $2.0 million related to an increase in corporate overhead
expenses and $1.4 million related to an increase in operating costs on a same
station basis, which increased 1.6%. The increase in corporate expenses for the
three and six months ended June 30, 1998 primarily resulted from an increase in
legal fees and an increase in salary costs relating to managing a larger base of
operations.
Interest expense increased to $27.5 million for the three months ended June 30,
1998 from $24.9 million for the three months ended June 30, 1997, or 10.4%.
Interest expense increased to $54.9 million for the six months ended June 30,
1998 from $52.0 million for the six months ended June 30, 1997, or 5.6%. The
increase in interest expense for the three months and six months ended June 30,
1998 primarily related to indebtedness incurred by the Company to finance
acquisitions and LMA transactions consummated by the Company during 1998 (the
"1998 Acquisitions"). Subsidiary Trust Minority Interest Expense of $5.8 million
for the three months ended June 30, 1998 and $11.6 million for the six months
ended June 30, 1998 is related to the private placement of $200 million
aggregate liquidation rate of 115/8% High Yield Trust Offered Preferred
Securities (the "HYTOPS") completed March 12, 1997. The increase in Subsidiary
Trust Minority Interest Expense for the six month period ended June 30, 1998 as
compared to the six month period ended June 30, 1997 related to the HYTOPS being
outstanding for a partial period during 1997.
Interest and other income increased to $1.9 million for the three months ended
June 30, 1998 from $0.6 million for the three months ended June 30, 1997.
Interest and other income increased to $3.3 million for the six months ended
June 30, 1998 from $1.1 million for the six months ended June 30, 1997. These
increases were primarily due to higher average cash balances and related
interest income for the six month period ended June 30, 1998.
Income tax provision increased to $17.2 million for the three months ended June
30, 1998 from $3.8 million for the three months ended June 30, 1997. Income tax
provision increased to $12.4 million for the six months ended June 30, 1998 from
a benefit of $4.1 million for the six months ended June 30, 1997. The increase
in income tax provision for the three months and the six months ended June 30,
1998 as compared to the three months and the six months ended June 30, 1997
primarily related to the increase in pre-tax income before extraordinary items.
The Company's effective tax rate increased to a provision of 64.2% for the six
months ended June 30, 1998 from a benefit of 41.3% for the six months ended June
30, 1997. The Company's effective tax rate increased for the six months ended
June 30, 1998 as compared the six months ended June 30, 1997 because permanent
differences between book and tax income are a higher
18
percentage of pre-tax income for the six month period ended June 30, 1998 than
for the prior year period.
The net deferred tax liability increased to $35.7 million as of June 30, 1998
from $21.5 million as of December 31, 1997. The increase in the Company's net
deferred tax liability as of June 30, 1998 as compared to December 31, 1997
primarily resulted from the Company recording a net deferred tax liability
related to the purchase of 100% of the stock of Lakeland Group Television, Inc.
during the second quarter of 1998.
During the three month period ended June 30, 1998, the Company recorded an
extraordinary loss related to an early extinguishment of debt. In May 1998, the
Company entered into the 1998 Bank Credit Agreement and repaid its outstanding
indebtedness under the 1997 Bank Credit Agreement. As a result of entering into
the 1998 Bank Credit Agreement, the Company recognized an extraordinary loss of
$11.1 million net of a tax benefit of $7.4 million. This extraordinary loss
represents the write-off of debt acquisition costs associated with indebtedness
replaced by the new facility.
Net loss for the three months ended June 30, 1998 was $0.9 million or $.04 per
share compared to net income of $1.8 million or $.03 per share for the three
months ended June 30, 1997. Net loss for the six months ended June 30, 1998 was
$4.2 million or $.10 per share compared to net loss of $5.8 million or $.08 per
share. Net loss decreased for the six months ended June 30, 1998 as compared to
the six months ended June 30, 1997 due to an increase in broadcast operating
income, a gain on the sale of broadcast assets, an increase in interest and
other income, offset by an increase in interest expense, an increase in
subsidiary trust minority interest expense and the recognition of an
extraordinary loss. The change from net income for the three months ended June
30, 1997 to a net loss for the 1998 period was the result of the same factors
noted above with the exception of subsidiary trust minority interest expense,
which remained consistent for the periods.
Broadcast cash flow increased to $82.8 million for the three months ended June
30, 1998 from $62.8 million for the three months ended June 30, 1997, or 31.8%.
Broadcast cash flow increased to $133.1 million for the six months ended June
30, 1998 from $105.6 million for the six months ended June 30, 1997, or 26.0%.
The increase in broadcast cash flow for the three months ended June 30, 1998 was
comprised of $17.1 million related to the 1997 and 1998 Transactions and $2.9
million related to an increase in broadcast cash flow on a same station basis,
which increased by 4.6%. The increase in broadcast cash flow for the six months
ended June 30, 1998 was comprised of $22.6 million related to the 1997 and 1998
Transactions and $4.9 million related to an increase in broadcast cash flow on a
same station basis, which increased by 4.6%.
The Company's broadcast cash flow margin increased to 53.9% for the three months
ended June 30, 1998 from 52.0% for the three months ended June 30, 1997. The
Company's broadcast cash flow margin increased to 50.0% for the six months ended
June 30, 1998 from 48.1% for the six months ended June 30, 1997. The increases
in broadcast cash flow margins for the three and six months ended June 30, 1998
as compared to the three and six months ended June 30, 1997 primarily resulted
from a lag in program contract payments for certain of the television
broadcasting assets acquired during 1998, an increase in radio station broadcast
cash flow margins and an increase in broadcast cash flow margins on a same
station basis. When comparing broadcast cash flow margins on a same station
basis for the three months ended June 30, 1997 and 1998 and the six months ended
June
19
30, 1997 and 1998, margins increased from 52.4% to 52.6% and from 48.5% to
48.6%, respectively.
Adjusted EBITDA increased to $78.4 million for the three months ended June 30,
1998 from $59.3 million for the three months ended June 30, 1997, or 32.2%.
Adjusted EBITDA increased to $124.2 million for the six months ended June 30,
1998 from $98.6 million for the six months ended June 30, 1997, or 26.0%. These
increases in Adjusted EBITDA for the three and six months ended June 30, 1998 as
compared to the three and six months ended June 30, 1997 resulted from the 1998
Acquisitions. The Company's Adjusted EBITDA margin increased to 51.0% for the
three months ended June 30, 1998 from 49.1% for the three months ended June 30,
1997. The Company's Adjusted EBITDA margin increased to 46.6% for the six months
ended June 30, 1998 from 44.9% for the six months ended June 30, 1997. Increases
in Adjusted EBITDA margins for the three and six months ended June 30, 1998 as
compared to the three and six months ended June 30, 1997 primarily resulted from
the same circumstances affecting broadcast cash flow margin as noted above.
After tax cash flow increased to $42.5 million for the three months ended June
30, 1998 from $25.5 million for the three months ended June 30, 1997, or 66.7%.
After tax cash flow increased to $52.7 million for the six months ended June 30,
1998 from $32.7 million for the six months ended June 30, 1997 or 61.2%. The
increase in after tax cash flow for the three and six months ended June 30, 1998
as compared to the three and six months ended June 30, 1997 primarily resulted
from an increase in broadcast operating income relating to the 1997 and 1998
Transactions and internal growth, offset by an increase in interest expense and
subsidiary trust minority interest expense related to the HYTOPS.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had $320.1 million in cash balances and
excluding the effect of assets held for sale, working capital of approximately
$342.0 million. The Company's increase in cash to $320.1 million at June 30,
1998 from $139.3 million at December 31, 1997 primarily resulted from the Common
Stock Offering in April 1998. After giving effect for the Sullivan Acquisition
and Max Media Acquisition and certain other acquisitions and dispositions
discussed below, the Company had total outstanding indebtedness of $2.4 billion
as of August 10, 1998 and cash balances of approximately $5.3 million. In
addition as of August 10, 1998, the Company had approximately $272.6 million
available of current borrowing capacity under the 1998 Bank Credit Agreement. An
additional $191.0 million is available to the Company under its Revolving Credit
Facility to the extent acquisitions provide incremental EBITDA. The 1998 Bank
Credit Agreement also provides for an incremental term loan commitment in the
amount of up to $400 million which can be utilized upon approval by the Agent
bank and the raising of sufficient commitments from banks to fund the additional
loans. The Company's primary source of liquidity is cash provided by operations
and availability under the Bank Credit Agreement. The Company anticipates that
funds from operations, existing cash balances and availability of the Revolving
Credit Facility under the 1998 Bank Credit Agreement will be sufficient to meet
its working capital, capital expenditure commitments, debt service requirements
and current acquisition commitments.
Net cash flows from operating activities increased to $67.5 million for the six
months ended June 30, 1998 from $42.5 million for the six months ended June 30,
1997 primarily as a result of the 1997 and 1998 Transactions. The Company made
payments of interest on outstanding
20
indebtedness and subsidiary trust minority interest expense totaling $80.4
million during the six months ended June 30, 1998 as compared to $61.7 million
for the six months ended June 30, 1997. Program rights payments increased to
$30.5 million for the six months ended June 30, 1998 from $26.3 million for the
six months ended June 30, 1997 or 16.0%. This increase in program rights
payments was comprised of $1.1 million related to the 1997 and 1998 Transactions
and $3.1 million related to an increase in programming costs on a same station
basis.
Net cash flows used in investing activities increased to $648.3 million for the
six months ended June 30, 1998 from $112.4 million for the six months ended June
30, 1997. For the six months ended June 30, 1998, the Company made cash payments
of approximately $762.4 million related to the acquisition of television and
radio broadcast assets. These payments included $228.5 million related to the
WSYX Acquisition, $49.7 million related to the Lakeland Acquisition and $484.2
million related to the Heritage Acquisition. For the six months ended June 30,
1998, the Company received approximately $233.9 of cash proceeds related to the
sale of certain television and radio broadcast assets. These cash proceeds
included $126.5 million related to the Entercom Disposition, $70.0 million
related to the STC Disposition, $35.0 million related to the SFX Disposition and
$2.4 million related to the sale of other broadcast assets. For the six months
ended June 30, 1998, the Company made cash payments related to the Sullivan
Acquisition (completed in July 1998) of $106.8 million and made cash payments of
$5.7 million for deposits and other costs related to other future acquisitions.
In July 1998, the Company completed the Sullivan Acquisition, the Max Media
Acquisition, the Greenville Acquisition and the acquisition of the Heritage
radio stations in the New Orleans market for cash payments totaling $1.2
billion. The Company funded these acquisitions with existing cash balances and
indebtedness under the 1998 Bank Credit Agreement. In July 1998, the Company
completed the Centennial Disposition and the Radio Unica Disposition and
received cash proceeds of $16.0 million and $21.0 million, respectively. These
proceeds were used to repay indebtedness under the 1998 Bank Credit Agreement.
The Company made payments for property and equipment of $8.3 million for the six
months ended June 30, 1998. 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 increased to $761.6 million for
the six months ended June 30, 1998 from $70.3 million for the six months ended
June 30, 1997. In April 1998, the Company and certain Series B Preferred
stockholders of the Company completed a public offering of 12,000,000 and
4,060,374 shares, respectively of Class A Common Stock. The shares were sold for
an offering price of $29.125 per share and generated proceeds to the Company of
$335.2 million, net of underwriters' discount and other offering costs of
approximately $14.3 million. The Company utilized proceeds to repay indebtedness
under the 1997 Bank Credit Agreement. In May 1998, the Company entered into the
1998 Bank Credit Agreement (described in detail in Item 5 below) in order to
expand its borrowing capacity for future acquisitions and obtain more favorable
terms with its banks. A portion of the proceeds of the initial borrowing under
the 1998 Bank Credit Agreement was used to repay all outstanding indebtedness
related to the 1997 Bank Credit Agreement.
21
YEAR 2000 COMPLIANCE
The Company has commenced a process to assure Year 2000 compliance of all
hardware, software, broadcast equipment and ancillary equipment that are date
dependent. The process involves four phases:
Phase I - Inventory and Data Collection. This phase involves an identification
of all items that are date dependent. Sinclair commenced this phase in the
second quarter of 1998, and expects to finish it before the end of the third
quarter of 1998.
Phase II - Compliance Requests. This phase involves requests to information
technology systems vendors for verification that the systems identified in Phase
I are Year 2000 compliant. Sinclair will identify and begin to replace items
that cannot be updated or certified as compliant. Sinclair has commenced this
phase and expects to complete this phase before the end of the third quarter of
1998. To date, Sinclair has verified that its accounting, traffic, payroll, and
local and wide area network hardware and software systems are compliant. In
addition, Sinclair has determined that substantially all of its personal
computers and PC applications are compliant. Sinclair is currently reviewing its
newsroom systems, building control systems, security systems and other
miscellaneous systems.
Phase III - Test, Fix and Verify. This phase involves testing all items that are
date dependent and upgrading all non-compliant devices. Sinclair expects to
complete this phase during the first quarter of 1999.
Phase IV - Final Testing, New Item Compliance. This phase involves review of all
inventories for compliance and retesting as necessary. During this phase, all
new equipment will be tested for compliance. Sinclair expects to complete this
phase by the end of the second quarter of 1999.
To date, Sinclair believes that its major systems are Year 2000 compliant. This
substantial compliance has been achieved without the need to acquire new
hardware, software or systems other than in the ordinary course of replacing
such systems. Sinclair is not aware of any non-compliance that would be material
to repair or replace or that would have a material effect on Sinclair's business
if compliance were not achieved. Sinclair does not believe that non-compliance
in any systems that have not yet been reviewed would result in material costs or
disruption. Neither is Sinclair aware of any non-compliance by its customers or
suppliers that would have a material impact on Sinclair's business.
Nevertheless, there can be no assurance that unanticipated non-compliance will
not occur, and such non-compliance could require material costs to repair or
could cause material disruptions if not repaired.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 14, 1997, Sinclair publicly announced that it had reached an agreement
for certain of its owned and/or programmed television stations which were
affiliated with UPN to become affiliated with WB beginning January 16, 1998. On
August 1, 1997, UPN informed Sinclair that it did not believe Sinclair or its
affiliates had provided proper notice of their intention not to extend the UPN
affiliation agreements beyond January 15, 1998, and, accordingly, that these
agreements had been automatically renewed through January 15, 2001.
In August 1997, UPN filed an action (the "California Action") in Los Angeles
Superior Court against Sinclair, seeking declaratory relief and specific
performance or, in the alternative, unspecified damages and alleging that
neither Sinclair nor its affiliates provided proper notice of their intention
not to extend the current UPN affiliations beyond January 15, 1998. Certain
subsidiaries of Sinclair filed an action (the "Baltimore Action") in the Circuit
Court for Baltimore City seeking declaratory relief that their notice was
effective to terminate the affiliations on January 15, 1998. On December 9,
1997, the court in the Baltimore Action ruled that Sinclair gave timely and
proper notice to effectively terminate the affiliation as of January 15, 1998
and granted Sinclair's motion for summary judgement. Based on the decision in
the Baltimore Action, the court in the Los Angeles Superior Court has stayed all
proceedings in the California Action. Following an appeal by UPN, the court of
Special Appeals of Maryland upheld the ruling in the Baltimore Action and the
Maryland Court of Appeals has declined to review the rulings. UPN therefore has
no further recourse in the Baltimore Action. UPN has taken no action to lift the
stay in the California Action, and Sinclair does not believe it is likely that
any further proceedings will be held in the California Action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OS SECURITY HOLDERS
The Annual Meeting of stockholders of Sinclair Broadcast Group, Inc. was held on
May 11, 1998. At the meeting, five items, as set forth in the Company's proxy
statement dated April 10, 1998, were submitted to the stockholders for a vote:
1) the stockholders elected, for one-year terms, all persons nominated for
directors as set forth in the Company's proxy statement dated April 10, 1998; 2)
the stockholders voted to amend the Company's Amended and Restated Charter to
increase: a) the number of shares of the Company's Class A common stock, $.01
par value per share, authorized for issuance by 400,000,000 to 500,000,000; b)
the number of shares of the Company's Class B common stock, par value $.01 per
share, authorized for issuance by 105,000,000 to 140,000,000 shares; and, c) the
number of shares of Preferred Stock authorized for issuance by 40,000,000 to
50,000,000 shares; 3) the stockholders voted to amend the Company's Amended and
Restated Charter to increase the maximum size of the board of directors from
nine to 13; 4) the stockholders voted to increase the number of shares that may
be issued pursuant to options granted under the 1996 Long-Term Incentive Plan of
Sinclair (the "1996 LTIP") by 4,926,327 to 7,000,000 and 5) the stockholders
voted to ratify the selection of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year 1998 audit. Approximately 88%
of the eligible proxies were returned for voting. The table below sets forth the
results of the voting at the Annual Meeting:
23
Against or Broker
For Withheld Abstentions Non-votes
--- -------- ----------- ---------
(1) Election of Directors
David D. Smith 249,196,344 10,489 - -
Frederick G. Smith 249,196,344 10,489 - -
J. Duncan Smith 249,285,044 1,789 - -
Robert E. Smith 249,196,344 10,489 - -
Basil A. Thomas 249,195,769 11,066 - -
Lawrence E. McCanna 249,202,924 3,909 - -
(2) Charter amendment to increase
authorized Class A Common
Stock 246,193,952 1,877,867 59,596 -
(3) Charter amendment to increase
authorized Class B Common
Stock 247,497,858 1,649,428 59,547 -
(4) Charter amendment to increase
authorized Series B Preferred
Shares 240,657,077 6,277,359 60,156 2,218,241
(5) Charter amendment to increase
number of directors 248,849,631 345,202 12,000 -
(6) Amendment to 1996 LTIP 243,321,777 3,601,457 65,358 2,218,241
(7) Appointment of
Independent Accountants 249,184,569 10,569 11,695 -
ITEM 5. OTHER
1998 BANK CREDIT AGREEMENT
On May 28, 1998, the Company entered into the 1998 Bank Credit Agreement with
The Chase Manhattan Bank, as Agent. The terms of the 1998 Bank Credit Agreement
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
1998 Bank Credit Agreement. A copy of the 1998 Bank Credit Agreement has been
filed as an exhibit to this report on Form 10-Q.
The Company entered into the 1998 Bank Credit Agreement with The Chase Manhattan
Bank as Agent, and certain lenders (collectively, the "Banks"). The 1998 Bank
Credit Agreement is
24
comprised of (i) a $1.0 billion Revolving Credit Facility and (ii) a $750
million Term Loan (the "Term Loan"). An additional term loan in the amount of
$400 million (the "Incremental Facility") is available to the Company under the
1998 Bank Credit Agreement. As of the date hereof, the Company has borrowed no
funds with respect to this incremental facility. Beginning March 31, 2001, the
commitment under the Revolving Credit Facility is subject to mandatory quarterly
reductions to the following percentages of the initial amount: 85% at December
31, 2001, 70% at December 31, 2002, 55% at December 31, 2003, 40% at December
31, 2004 and 0% at September 15, 2005. The Term Loan is required to be repaid by
the Company in equal quarterly installments beginning on March 31, 1999 with the
quarterly payments escalating annually through the final maturity date of
September 15, 2005.
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 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 unless the Company has entered into
a binding contract within 180 days of disposition and notified the Agent of its
intent to use net proceeds to finance an acquisition, then 360 days from date of
disposition; (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 Loan, the 1998 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 December 31, 2000
pursuant to the Incremental Facility. The additional loans must be agreed to by
the Agent and a majority of the Banks and funded by a group of existing or new
banks. The Incremental Facility would be available to fund future acquisitions
and would be repayable in equal quarterly installments beginning March 31, 2001,
with the quarterly payment escalating annually through the final maturity date
of June 30, 2006.
The Company's obligations under the 1998 Bank Credit Agreement are secured by a
pledge of substantially all of the Company's stock in 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) have
guaranteed the obligations of the Company.
Interest on amounts drawn under the 1998 Bank Credit Agreement is, at the option
of the Company, equal to (i) the London Interbank Offered Rate ("LIBOR") 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 spread over
25
LIBOR or the Base Rate depends on the ratio of the Company's total indebtedness
to EBITDA. The Company must maintain interest rate hedging arrangements or
instruments for at least 60% of the outstanding principal amount of the
facilities and the senior subordinated notes until May 28, 2000.
The 1998 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 1998 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.
In addition, the Company must comply with certain other financial convenants in
the 1998 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 1.75 to 1 from the Effective Date (as defined in the Bank Credit
Agreement) to September 29, 1998, indebtedness to no less than 1.9 to 1 on
December 31, 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 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
7.0 to 1 from the Effective Date declining to 6.5 to 1 on December 31, 1998 and
thereafter declining to 5.00 to 1 by December 31, 2001 and at all times
thereafter.
DESCRETIONARY VOTING ON STOCKHOLDER PROPOSALS
Sinclair will be able to use proxies given to it for next year's Annual Meeting
to vote for or against any proposal submitted by a stockholder at Sinclair's
discretion unless the proposal is submitted to Sinclair on or before February
24, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation, as amended through
May 28, 1998.
10.1 Credit Agreement dated as of May 28, 1998 by and among Sinclair
Broadcast Group, Inc., Certain Subsidiary Guarantors, Certain Lenders,
The Chase Manhattan Bank as Administrative Agent, NationsBank of Texas,
N.A. as Documentation Agent and Chase Securities Inc. as Arranger.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
26
The Company filed a current Report on Form 8-K/A dated April 8, 1998 reporting
on items 5 and 7 with respect to the issuance and sale of 8,030,187 shares of
Class A Common Stock of the Company.
The company filed a current Report on Form 8-K dated April 10, 1998 reporting on
item 7 with respect to the issuance and sale of 8,030,187 shares of Class A
Common Stock of the Company
The Company filed a current Report on Form 8-K dated April 14, 1998 reporting on
items 5 and 7 with respect to the exercise of the Company's option to acquire
the non-license assets of WSYX-TV from River City Broadcasting, LP.
27
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 14th day of August, 1998.
SINCLAIR BROADCAST GROUP, INC.
by: /s/ David B. Amy
----------------------------
David B. Amy
Chief Financial Officer
Principal Accounting Officer
28