UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
One)
[X] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
Incorporation or organization) Identification No.)
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 November 9, 1998 there are 46,928,331 shares of Class A Common Stock, $.01
par value, 49,585,328 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 September 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998................................................ 3
Consolidated Statements of Operations for the Three Months and Nine
Months Ended September 30, 1997 and 1998............................ 4
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1998............................................ 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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....................... 15
PART II. OTHER INFORMATION
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, SEPTEMBER 30,
ASSETS 1997 1998
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents ............................................................ $ 139,327 $ 7,408
Accounts receivable, net of allowance for doubtful accounts .......................... 123,018 153,094
Current portion of program contract costs ............................................ 46,876 66,930
Prepaid expenses and other current assets ............................................ 4,673 47,476
Deferred barter costs ................................................................ 3,727 6,882
Refundable income taxes .............................................................. 10,581 10,581
Broadcast assets held for sale ....................................................... -- 34,242
Deferred tax asset .................................................................. 2,550 7,070
----------- -----------
Total current assets .......................................................... 330,752 333,683
PROGRAM CONTRACT COSTS, less current portion ............................................. 40,609 61,599
LOANS TO OFFICERS AND AFFILIATES ......................................................... 11,088 10,242
PROPERTY AND EQUIPMENT, net .............................................................. 161,714 285,422
OTHER ASSETS ............................................................................. 168,095 46,930
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net ............................................. 1,321,976 3,109,953
----------- -----------
Total Assets ......................................................................... $ 2,034,234 $ 3,847,829
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................................... $ 5,207 $ 30,682
Accrued liabilities .................................................................. 40,532 104,418
Current portion of long-term liabilities-
Notes payable and commercial bank financing ...................................... 35,215 37,500
Notes and capital leases payable to affiliates ................................... 3,073 3,481
Program contracts payable ........................................................ 66,404 92,522
Deferred barter revenues ............................................................. 4,273 6,873
----------- -----------
Total current liabilities ............................................... 154,704 275,476
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing .......................................... 1,022,934 2,265,497
Notes and capital leases payable to affiliates ....................................... 19,500 20,417
Program contracts payable ............................................................ 62,408 95,254
Deferred tax liability ............................................................... 24,092 127,242
Other long-term liabilities .......................................................... 3,611 31,170
----------- -----------
Total liabilities ........................................................ 1,287,249 2,815,056
----------- -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ........................................... 3,697 3,643
----------- -----------
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 46,855,622 shares issued and outstanding, respectively ............ 274 469
Class B Common stock, $.01 par value, 70,000,000 and 140,000,000 shares authorized
and 50,872,864 and 49,621,364 shares issued and outstanding .......................... 510 496
Additional paid-in capital ............................................................. 552,557 767,905
Additional paid-in capital - equity put options ........................................ 23,117 113,502
Additional paid-in capital - deferred compensation ..................................... (954) (6,924)
Accumulated deficit .................................................................... (32,261) (46,353)
----------- -----------
Total stockholders' equity ............................................... 543,288 829,130
----------- -----------
Total Liabilities and Stockholders' Equity ............................... $ 2,034,234 $ 3,847,829
=========== ===========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
1997 1998 1997 1998
------ ------ ----- -----
REVENUES:
Station broadcast revenues, net of agency commissions .................. $ 113,327 $ 184,945 $ 333,028 $ 451,210
Revenues realized from station barter arrangements ..................... 11,419 20,036 31,289 45,135
--------- --------- --------- ---------
Total revenues .................................................. 124,746 204,981 364,317 496,345
--------- --------- --------- ---------
Program and production ................................................. 22,016 39,145 68,776 95,213
Selling, general and administrative .................................... 27,003 45,296 78,637 105,004
Expenses realized from station barter arrangements ..................... 9,976 17,005 26,279 37,967
Amortization of program contract costs and net
realizable value adjustments ....................................... 16,151 20,046 47,069 50,589
Stock-based compensation ............................................... 117 956 350 2,327
Depreciation and amortization of property and equipment ................ 4,446 9,100 12,786 19,366
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets ............. 14,325 31,009 51,717 66,180
--------- --------- --------- ---------
Total operating expenses ........................................ 94,034 162,557 285,614 376,646
--------- --------- --------- ---------
Broadcast operating income ...................................... 30,712 42,424 78,703 119,699
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense ..................... (25,349) (40,414) (77,342) (95,315)
Subsidiary trust minority interest expense ............................. (5,813) (5,813) (12,820) (17,438)
Gain on sale of broadcast assets ....................................... -- 6,798 -- 12,036
Unrealized loss on derivative instrument (see Note 11) ................. -- (10,150) -- (10,150)
Interest income ........................................................ 292 896 1,332 4,113
Other income (expense) ................................................. (11) 585 36 689
--------- --------- --------- ---------
Income (loss) before income tax provision ....................... (169) (5,674) (10,091) 13,634
INCOME TAX (PROVISION) BENEFIT ............................................. 70 3,500 4,170 (8,900)
--------- --------- --------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ................................ (99) (2,174) (5,921) 4,734
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt net of related income tax
benefit of $7,370 .................................................. -- -- -- (11,063)
--------- --------- --------- ---------
NET LOSS ................................................................... $ (99) $ (2,174) $ (5,921) (6,329)
========= ========= ========= =========
Net loss available to common stockholders .................................. $ (274) $ (4,762) $ (6,096) (14,092)
========= ========= ========= =========
Basic loss per share before extraordinary item ............................. $ -- $ (0.05) $ (0.09) $ (0.03)
========= ========= ========= =========
Basic loss per common share ................................................ $ -- $ (0.05) $ (0.09) $ (0.15)
========= ========= ========= =========
Basic weighted average common shares outstanding ........................... 70,050 97,734 69,736 93,582
========= ========= ========= =========
Diluted loss per share before extraordinary item ........................... $ -- $ (0.05) $ (0.09) $ (0.03)
========= ========= ========= =========
Diluted loss per common share .............................................. $ -- $ (0.05) $ (0.09) $ (0.15)
========= ========= ========= =========
Diluted weighted average common and common equivalent shares
outstanding ............................................................. 78,538 99,339 77,858 95,540
========= ========= ========= =========
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 NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
ADDITIONAL
PAID-IN
SERIES B SERIES D CLASS A CLASS B ADDITIONAL CAPITAL -
PREFERRED PREFERRED COMMON COMMON PAID-IN EQUITY PUT
STOCK STOCK STOCK STOCK CAPITAL OPTIONS
---------- ---------- --------- -------- ---------- ----------
BALANCE, December 31, 1997 as previously
reported ................................ $ 10 $ 35 $ 137 $ 255 $ 552,949 $ 23,117
Two-for-one stock split .................. -- -- 137 255 (392) --
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1997 as adjusted .... 10 35 274 510 552,557 23,117
Class B Common Stock converted
into Class A Common Stock ......... -- -- 14 (14) -- --
Series B Preferred Stock converted
into Class A Common Stock ......... (10) -- 76 -- (66) --
Dividends payable on Series D
Preferred Stock ................... -- -- -- -- -- --
Stock option grants ................... -- -- -- -- 7,196 --
Stock option grants exercised ......... -- -- -- -- 1,064 --
Class A Common Stock shares issued
pursuant to employee benefit
plans ............................... -- -- -- -- 1,482 --
Equity Put Options .................... -- -- -- -- (90,385) 90,385
Repurchase of 1,505,000 shares of
Class A Common Stock .............. -- -- (15) -- (26,650) --
Equity Put Option Premiums ............ -- -- -- -- (12,408) --
Issuance of Class A Common Stock ...... -- -- 120 -- 335,115 --
Amortization of deferred
compensation ...................... -- -- -- -- -- --
Net loss .............................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE, September 30, 1998 ............... $ -- $ 35 $ 469 $ 496 $ 767,905 $ 113,502
========= ========= ========= ========= ========= =========
ADDITIONAL
PAID-IN
CAPITAL- TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
------------- ----------- -----------
BALANCE, December 31, 1997 as previously
reported ................................... $ (954) $ (32,261) $ 543,288
Two-for-one stock split ................... -- -- --
--------- --------- ---------
BALANCE, December 31, 1997 as adjusted ...... (954) (32,261) 543,288
Class B Common Stock converted
into Class A Common Stock ........... -- -- --
Series B Preferred Stock converted
into Class A Common Stock ........... -- -- --
Dividends payable on Series D
Preferred Stock ..................... -- (7,763) (7,763)
Stock option grants ..................... (7,196) -- --
Stock option grants exercised ........... -- -- 1,064
Class A Common Stock shares issued
pursuant to employee benefit
plans ................................. -- -- 1,482
Equity Put Options ...................... -- -- --
Repurchase of 1,505,000 shares of
Class A Common Stock ................ -- -- (26,665)
Equity Put Option Premiums .............. -- -- (12,408)
Issuance of Class A Common Stock ........ -- -- 335,235
Amortization of deferred
compensation ........................ 1,226 -- 1,226
Net loss ................................ -- (6,329) (6,329)
--------- --------- ---------
BALANCE, September 30, 1998 ................. $ (6,924) $ (46,353) $ 829,130
========= ========= =========
The accompanying notes are an integral part of these unaudited consolidated
statements.
6
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................................. $ (5,921) $ (6,329)
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 .................................................. -- (12,036)
Loss on derivative instrument ..................................................... -- 10,150
Amortization of debt discount ..................................................... -- 74
Depreciation and amortization of property and equipment ........................... 12,786 19,366
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets ......................... 51,717 66,180
Amortization of program contract costs and net realizable value adjustments ....... 47,069 50,589
Amortization of deferred compensation ............................................. 350 1,226
Deferred tax benefit .............................................................. (4,751) (4,520)
Changes in assets and liabilities, net of effects of acquisitions and dispositions-
Decrease in accounts receivable, net .............................................. 15,421 7,275
Increase in prepaid expenses and other current assets ............................. (2,107) (1,011)
Increase (decrease) in accounts payable and accrued liabilities ................... (10,814) 33,779
Decrease in income taxes payable .................................................. (730) --
Net effect of change in deferred barter revenues
and deferred barter costs ...................................................... 695 (64)
Increase (decrease) in other long-term liabilities ................................ (169) 678
Decrease in minority interest ..................................................... (43) (54)
Payments on program contracts payable ................................................. (38,134) (45,082)
----------- -----------
Net cash flows from operating activities ...................................... 65,369 138,654
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ................................................. (13,240) (13,949)
Payments for acquisition of television and radio stations ............................. (184,813) (2,062,349)
Proceeds from sale of broadcasting assets ............................................. 2,000 273,298
Loans to officers and affiliates ...................................................... (832) (1,467)
Repayments of loans to officers and affiliates ........................................ 1,110 2,313
Distributions from Joint Venture ...................................................... 380 655
Payments relating to future acquisitions .............................................. -- (10,019)
----------- -----------
Net cash flows used in investing activities ....................................... (195,395) (1,811,518)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases ............. 126,500 1,799,670
Repayments of notes payable, commercial bank financing and capital leases ............ (684,632) (554,802)
Payments of costs relating to financing ............................................... (4,705) (11,169)
Proceeds from exercise of stock options ............................................... -- 1,064
Payment received upon execution of derivative instrument .............................. -- 9,450
Repurchases of the Company's Class A Company Stock .................................... (4,599) (26,665)
Net proceeds from issuance of Class A Common Stock .................................... 151,596 335,235
Net proceeds from the issuance of Series D Preferred Stock ............................ 167,472 --
Net proceed from issuance of 1997 Notes ............................................... 195,600 --
Net proceeds from subsidiary trust securities offering ................................ 192,849 --
Dividends paid on Series D Convertible Preferred Stock ................................ -- (7,763)
Payment of equity put option premium .................................................. (251) (1,499)
Repayments of notes and capital leases to affiliates .................................. (1,809) (2,576)
----------- -----------
Net cash flows from financing activities .......................................... 138,021 1,540,945
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................................. 7,995 (131,919)
CASH AND CASH EQUIVALENTS, beginning of period ............................................ 2,341 239,327
----------- -----------
CASH AND CASH EQUIVALENTS, end of period .................................................. $ 10,336 $ 107,408
=========== ===========
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 nine months ended September 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 a
program contract which becomes 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.
After reviewing these developments to date, it is Management's 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 September 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 51 radio stations in 10 geographically diverse markets.
Substantially all revenues represent income from unaffiliated companies.
TELEVISION TELEVISION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
Net broadcast revenues............................................ $ 96,245 $ 151,996 $ 287,616 $ 377,755
Barter revenues................................................... 10,842 18,433 29,622 41,724
------------ ------------ ----------- ------------
Total revenues.................................................... 107,087 170,429 317,238 419,479
------------ ------------ ----------- ------------
Station operating expenses........................................ 47,915 81,377 140,562 191,133
Depreciation, program amortization and stock-based
compensation.................................................. 19,151 27,862 57,518 68,331
Amortization of intangibles and other assets...................... 13,461 26,658 44,362 54,760
------------ ------------ ---------- -----------
Station broadcast operating income................................ $ 26,560 $ 34,532 $ 74,796 $ 105,255
============ =========== ========== ===========
Total assets...................................................... $ 1,575,512 $ 3,319,940 $1,575,512 $ 3,319,940
============ =========== ========== ===========
Capital expenditures.............................................. $ 4,549 $ 4,873 $ 10,790 $ 11,003
============ =========== ========== ===========
RADIO RADIO
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
Net broadcast revenues............................................ $ 17,082 $ 32,949 $ 45,412 $ 73,455
Barter revenues................................................... 577 1,603 1,667 3,411
------------ ----------- ----------- ------------
Total revenues.................................................... 17,659 34,552 47,079 76,866
------------ ----------- ----------- ------------
Station operating expenses........................................ 11,080 20,069 33,130 47,051
Depreciation, program amortization and stock-based
compensation.................................................. 1,563 2,240 2,687 3,951
Amortization of intangibles and other assets...................... 864 4,351 7,355 11,420
------------ ----------- ---------- -----------
Station broadcast operating income................................ $ 4,152 $ 7,892 $ 3,907 $ 14,444
============ =========== ========== ===========
Total assets...................................................... $ 305,264 $ 527,889 $ 305,264 $ 527,889
============ =========== ========== ===========
Capital expenditures.............................................. $ 405 $ 777 $ 2,450 $ 2,946
============ =========== =========== ===========
9
4. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
During the nine months ended September 30, 1997 and 1998, the Company's
supplemental cash flow information is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
---- ----
Interest payments............................................................... $ 83,279 $ 101,610
============ ===========
Subsidiary trust minority interest payments..................................... $ 11,819 $ 17,438
============ ===========
Income tax payments............................................................. $ 5,798 $ 1,930
============ ===========
Capital lease obligations incurred.............................................. $ 10,973 $ 3,807
============ ===========
5. EARNINGS PER SHARE:
The basic and diluted earnings per share and related computations are as follows
(in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
Weighted-average number of common shares...................... 70,050 97,734 69,736 93,582
Diluted effect of outstanding stock options .................. 404 1,317 34 1,670
Diluted effect of conversion of preferred shares.............. 8,084 288 8,088 288
------------- ------------ ------------- -----------
Diluted weighted-average number of common and common
equivalent shares outstanding............................. 78,538 99,339 77,858 95,540
============ ============ ============ ===========
Net loss...................................................... $ (99) $ (2,174) $ (5,921) $ (6,329)
Preferred stock dividends payable............................. (175) (2,588) (175) (7,763)
------------- ------------- ------------- ------------
Net loss available to common stockholders..................... $ (274) $ (4,762) $ (6,096) $ (14,092)
============= ============= ============= ============
Basic loss per common share
before extraordinary items............................... $ - $ (0.05) $ (0.09) $ (0.03)
============= ============ ============ ============
Basic loss per common share................................... $ - $ (0.05) $ (0.09) $ (0.15)
============= ============ ============ ============
Diluted loss per common share
before extraordinary items............................... $ - $ (0.05) $ (0.09) $ (0.03)
============= ============ ============ ============
Diluted loss per common share................................. $ - $ (0.05) $ (0.09) $ (0.15)
============= ============ ============ ============
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
10
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
split of its Class A and Class B Common Stock to be distributed in the form of a
stock dividend. As a result of this action, 23,963,013 and 24,984,432 shares of
Class A and Class B Common Stock, respectively, were issued to shareholders of
record as of May 14, 1998. The stock split has been retroactively reflected in
the accompanying consolidated financial statements and related notes thereto.
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.
11
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 the Centennial
Disposition below).
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 $70.0 million. During the third quarter of 1998,
the Company sold the license assets for a sales price of $2.0 million.
12
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 $33.0 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 and Sale of WTTE License Assets. In April 1998, the Company
exercised its option to acquire the non-license assets of WSYX-TV in Columbus,
Ohio from River City Broadcasting, LP ("River City") for an option exercise
price and other costs of approximately $228.6 million. In August 1998, the
Company exercised its option to acquire the WSYX License Assets for an option
exercise price of $2.0 million and simultaneously sold the WTTE license assets
to Glencairn, Ltd. for a sales price of $2.3 million. In connection with the
sale of the WTTE license assets, the Company recognized a $2.3 million gain.
SFX Disposition. In May 1998, the Company completed the sale of three radio
stations to SFX Broadcasting, Inc. for aggregate consideration of approximately
$35.0 million ("the SFX Disposition"). The radio stations sold are located in
the Nashville, Tennessee market. In connection with the disposition, the Company
recognized a $5.2 million gain on the sale.
Lakeland Acquisition. In May 1998, the Company acquired 100% of the stock of
Lakeland Group Television, Inc. ("Lakeland") for cash payments of approximately
$53.0 million (the "Lakeland Acquisition"). In connection with the Lakeland
Acquisition, the Company now owns television station KLGT-TV in Minneapolis/St.
Paul, Minnesota.
Entercom Disposition. In June 1998, the Company completed the sale of seven
radio stations acquired in the Heritage acquisition. The seven stations are
located in the Portland, Oregon and Rochester, New York markets and were sold
for aggregate consideration of approximately $126.9 million. .
Sullivan Acquisition. In July 1998, the Company acquired 100% of the stock of
Sullivan Broadcast Holdings, Inc. and Sullivan Broadcasting Company II, Inc. for
cash payments of approximately $962.3 million (the "Sullivan Acquisition"). The
Company financed the acquisition by utilizing indebtedness under the 1998 Bank
Credit Agreement. In connection with the acquisition, the Company has acquired
the right to program 12 additional television stations in 10 separate markets.
In a subsequent closing, which is expected to occur in the fourth 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 four of the stations and will continue to
program two 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 $252.2 million (the
"Max Media Acquisition"). The Company financed the acquisition by utilizing
existing cash balances and indebtedness
13
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 $16.1 million in cash and recognized a loss on
the sale of $2.7 million. The Company acquired KMEZ-FM in connection with the
River City Acquisition in May of 1996 and acquired WRNO-FM and WBYU-AM in New
Orleans from Heritage Media Group, Inc. ("Heritage") in July 1998. The Company
was required to divest WRNO-FM, KMEZ-FM and WBYU-AM to meet certain regulatory
ownership guidelines.
Greenville Acquisition. In July 1998, the Company acquired three radio stations
in the Greenville/Spartansburg market from Keymarket Radio of South Carolina,
Inc. for a purchase price consideration involving the forgiveness of
approximately $8.0 million of indebtedness to Sinclair. Concurrently with the
acquisition, the Company acquired an additional two radio stations in the same
market from Spartan Broadcasting for a purchase price of approximately $5.2
million.
Radio Unica Disposition. In July 1998, the Company completed the sale of KBLA-AM
in Los Angeles, California to Radio Unica, Corp. for approximately $21.0 million
in cash. In connection with the disposition, the Company recognized a $8.4
million gain.
PENDING ACQUISITIONS AND DISPOSITIONS
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 Disposition"). FCC restrictions required the Company to agree to
divest certain of the radio stations it owns in the Norfolk, Virginia market by
the time it completed the Max Media acquisition. The Company expects to complete
the Petracom Disposition in the fourth quarter of 1998.
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.
14
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.
Guy Gannett Acquisition. In September 1998, the Company agreed to acquire from
Guy Gannett Communications its television broadcasting assets for a purchase
price of $310 million in cash (the "Guy Gannett Acquisition"). As a result of
this transaction, the Company will acquire seven television stations in six
markets. The FCC must approve the Guy Gannet Acquisition, which the Company
expects to complete in the first quarter of 1999. The Company expects to finance
the acquisition with a combination of bank borrowings, the issuance of debt or
equity securities and the use of cash proceeds resulting from the Company's
planned disposition of certain broadcast assets.
Ackerly Disposition. In September 1998, the Company agreed to sell WOKR-TV in
Rochester, New York to the Ackerly Group, Inc. for a purchase price of $125
million (the "Ackerly Disposition"). The Company previously entered into an
agreement to acquire WOKR-TV as part of the Guy Gannett Acquisition. The FCC
must approve the disposition, which the Company expects to close in the first
quarter of 1999.
15
10. INTEREST RATE DERIVATIVE AGREEMENTS:
As of September 30, 1998, the Company had several interest rate swap agreements
relating to the Company's indebtedness that expire from July 7, 1999 to July 15,
2007. The swap agreements set rates in the range of 5.48% to 8.13%. The notional
amounts related to these agreements were $1.5 billion at September 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. Premiums paid under certain of these
agreements were approximately $146,000 in 1998 and are amortized over the life
of the agreements as a component of interest expense. The counter parties to
these agreements are major national financial institutions. The Company
estimates the aggregate cost to retire these instruments at September 30, 1998
to be $14.0 million.
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.
11. TREASURY OPTION DERIVATIVE INSTRUMENT:
In August 1998, the Company entered into a treasury option derivative contract
(the "Option Derivative"). The Option Derivative contract provides for 1) an
option exercise date of September 30, 2000, 2) a notional amount of $300 million
and 3) a five-year treasury strike rate of 6.14%. If the interest rate yield on
five year treasury securities is less than the strike rate on the option
exercise date, the Company would be obligated to pay five consecutive annual
payments in an amount equal to the strike rate less the five year treasury rate
multiplied by the notional amount beginning September 30, 2001 through September
30, 2006. If the interest rate yield on five year treasury securities is greater
than the strike rate on the option exercise date, the Company would not be
obligated to make any payments.
Upon the execution of the Option Derivative contract, the Company received a
cash payment representing an option premium of $9.5 million which was recorded
in "Other long-term liabilities" in the accompanying balance sheets. The Company
is required to periodically adjust its liability to the present value of the
future payments of the settlement amounts based on the forward five year
treasury rate at the end of an accounting period. This fair market value
adjustment resulted in an unrealized loss of $10.2 million for the three and
nine months ended September 30, 1998.
12. EQUITY PUT AND CALL OPTIONS
16
In July 1998, the Company entered into put and call option contracts related to
the Company's common stock (the "July Options"). In September 1998, the Company
entered into additional put and call option contracts related to the Company's
common stock (the "September Options"). These option contracts are settled in
cash or net physically in shares, at the election of the Company. The Company
entered into these option contracts for the purpose of hedging the dilution of
the Company's common stock upon the exercise of stock options granted. The July
Options included 2,700,000 call options for common stock and 2,700,000 put
options for common stock, with a strike price of $33.27 and $28.93 per common
share, respectively. The September Options included 700,000 call options for
common stock and 467,000 put options for common stock, with a strike price of
$17.53 and $28.00 per common share, respectively. In connection with the July
Options, the Company is required to make quarterly payments of $1.1 million
beginning October 2, 1998 through July 2, 2001. The Company recorded this
obligation as a liability and a reduction of additional paid-in capital in the
accompanying balance sheet. In addition, an option premium amount of $700,000
was paid related to the September Options which was recorded as a reduction of
additional paid-in capital. 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 September 30, 1998.
13. UNAUDITED PRO FORMA SUMMARY RESULTS OF OPERATIONS:
The following unaudited pro forma summary presents the consolidated results of
operations for the nine months ended September 30, 1997 and 1998 as if
significant acquisitions and dispositions completed through September 30, 1998
had occurred at the beginning of 1997. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had significant acquisitions and dispositions been made
as of that date or of results which may occur in the future.
September, 30,
1997 1998
---- ----
Net revenues.................................. $551,250 $ 597,710
========= ===========
Loss before extraordinary item................ $(27,766) $ (9,899)
========= ============
Net Loss...................................... $(34,046) $ (20,962)
========= ===========
Basic and diluted loss per common share before
extraordinary item.......................... $ (0.51) $ (0.19)
========= ===========
Net loss available to common shareholders..... $(41,809) $ (28,725)
========= ===========
Basic and diluted loss per common share....... $ (0.60) $ (0.31)
========= ===========
17
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.
18
The following table sets forth certain operating data for the three months and
nine months ended September 30, 1997 and 1998:
OPERATING DATA (dollars in thousands, except per share data):
- - -----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1998 1997 1998
----------- ----------- ----------- -----------
Net broadcast revenues (a) ........................ $ 113,327 $ 184,945 $ 333,028 $ 451,210
Barter revenues ................................... 11,419 20,036 31,289 45,135
----------- ----------- ----------- -----------
Total revenues .................................... 124,746 204,981 364,317 496,345
----------- ----------- ----------- -----------
Operating costs (b) ............................... 49,019 84,441 147,413 200,217
Expenses from barter arrangements ................. 9,976 17,005 26,279 37,967
Depreciation, amortization and stock-based
compensation (c) ............................... 35,039 61,111 111,922 138,462
----------- ----------- ----------- -----------
Broadcast operating income ........................ 30,712 42,424 78,703 119,699
Interest expense .................................. (25,349) (40,414) (77,342) (95,315)
Subsidiary trust minority interest expense (d) .... (5,813) (5,813) (12,820) (17,438)
Interest and other income ......................... 281 1,481 1,368 4,802
Net gain on sale of assets ........................ -- 6,798 -- 12,036
Unrealized loss on derivative instrument .......... -- (10,150) -- (10,150)
----------- ----------- ----------- -----------
Net income (loss) before income taxes ............. (169) (5,674) (10,091) 13,634
Income tax (provision) benefit .................... 70 3,500 4,170 (8,900)
----------- ----------- ----------- -----------
Net income (loss) before extraordinary item ....... (99) (2,174) (5,921) 4,734
Extraordinary item ................................ -- -- -- (11,063)
----------- ----------- ----------- -----------
Net loss .......................................... $ (99) $ (2,174) $ (5,921) $ (6,329)
=========== =========== =========== ===========
BROADCAST CASH FLOW (BCF) DATA:
Television BCF (e) ............................. $ 50,508 $ 78,886 $ 148,540 $ 196,552
Radio BCF (e) .................................. 6,829 14,750 14,397 30,230
----------- ----------- ----------- -----------
Consolidated BCF (e) ........................... $ 57,337 $ 93,636 $ 162,937 $ 226,782
=========== =========== =========== ===========
Television BCF margin (f) ...................... 52.5% 51.9% 51.6% 52.0%
Radio BCF margin (f) ........................... 40.0% 44.8% 31.7% 41.2%
Consolidated BCF margin (f) .................... 50.6% 50.6% 48.9% 50.3%
OTHER DATA:
Adjusted EBITDA (g) ............................ $ 53,876 $ 88,918 $ 152,491 $ 213,079
Adjusted EBITDA margin (f) ..................... 47.5% 48.1% 45.8% 47.2%
After tax cash flow (h) ........................ $ 21,269 $ 33,106 $ 54,006 $ 85,809
Program contract payments ...................... 11,875 14,617 38,134 45,082
Corporate expense .............................. 3,461 4,718 10,446 13,703
Capital expenditures ........................... 4,954 5,650 13,240 13,949
Cash flows from operating activities ........... 22,886 71,151 65,369 138,654
Cash flows from investing activities ........... (81,593) (1,163,190) (195,395) (1,811,518)
Cash flows from financing activities ........... 66,303 779,314 138,021 1,540,945
- - -----------------------------------------------------------------------------------------------------------------------------
19
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, unrealized loss on derivative instrument, 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 $184.9 million for the three months ended
September 30, 1998 from $113.3 million for the three months ended September 30,
1997, or 63.2%. The increase in net broadcast revenues for the three months
ended September 30, 1998 comprised $71.1
20
million related to businesses acquired or disposed of by the Company in 1998
(the "1998 Transactions") and $0.5 million related to an increase in net
broadcast revenue on a same station basis. On a same station basis, revenues
were negatively impacted by a decrease in revenues in the Baltimore, Milwaukee,
Norfolk and Raleigh markets. The Company's television stations in these markets
experienced a decrease in ratings which resulted in a loss in revenues and
market revenue share. In the Raleigh and Norfolk television markets, the
Company's affiliation agreements with Fox expired on August 31, 1998 which
further contributed to a decrease in ratings and revenues. In the Baltimore
market, the addition of a new UPN affiliate competitor contributed to a loss in
ratings and market revenue share. An additional factor which negatively impacted
station revenues for the three month period was the loss of General Motors
advertising revenues caused by a strike of its employees. These decreases in
revenue on a same station basis were offset by revenue growth at certain of the
Company's other television and radio stations combined with an increase in
network compensation revenue and political advertising revenue.
Net broadcast revenues increased to $451.2 million for the nine months ended
September 30, 1998 from $333.0 million for the nine months ended September 30,
1997, or 35.5%. The increase in net broadcast revenues for the nine months ended
September 30, 1998 comprised $112.5 million related to the 1998 Transactions and
$5.7 million related to an increase in net broadcast revenues on a same station
basis, which increased by 1.7%. On a same station basis, revenues were affected
by the same circumstances noted above.
Operating costs increased to $84.4 million for the three months ended September
30, 1998 from $49.0 million for the three months ended September 30, 1997, or
72.2%. Operating costs increased to $200.2 million for the nine months ended
September 30, 1998, from $147.4 million for the nine months ended September 30,
1997, or 35.8%. The increase in operating costs for the three months ended
September 30, 1998 as compared to the three months ended September 30, 1997
comprised $34.2 million related to the 1998 Transactions, $1.3 million related
to an increase in corporate overhead expenses, offset by a $0.1 million decrease
in operating costs on a same station basis. The increase in operating costs for
the nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997 comprised $49.5 million related to the 1998 Transactions and
$3.3 million related to an increase in corporate overhead expenses. Operating
costs on a same station basis remained relatively unchanged during these
periods. The increase in corporate expenses for the three and nine months ended
September 30, 1998 primarily resulted from an increase in legal fees and an
increase in salary costs incurred to managing a larger base of operations.
Interest expense increased to $40.4 million for the three months ended September
30, 1998 from $25.3 million for the three months ended September 30, 1997, or
59.7%. Interest expense increased to $95.3 million for the nine months ended
September 30, 1998 from $77.3 million for the nine months ended September 30,
1997, or 23.3%. The increase in interest expense for the three months and nine
months ended September 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 September 30, 1998
and $17.4 million for the nine months ended September 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
21
nine month period ended September 30, 1998 as compared to the nine month period
ended September 30, 1997 related to the HYTOPS being outstanding for a partial
period during 1997.
Interest and other income increased to $1.5 million for the three months ended
September 30, 1998 from $0.3 million for the three months ended September 30,
1997. Interest and other income increased to $4.8 million for the nine months
ended September 30, 1998 from $1.4 million for the nine months ended September
30, 1997. These increases were primarily due to higher average cash balances and
related interest income for the nine month period ended September 30, 1998.
Income tax benefit increased to $3.5 million for the three months ended
September 30, 1998 from an income tax benefit of $0.1 million for the three
months ended September 30, 1997. The increase in the income tax benefit for the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997 primarily related to an increase in pre-tax loss. For the
nine months ended September 30, 1998, the Company recorded a tax provision of
$8.9 million on pre-tax income before extraordinary item of $13.6 million, an
effective tax rate of 65.4%. In addition, the Company recorded an extraordinary
loss of $11.1 million net of a related tax benefit of $7.4 million. The
Company's effective tax rate on income before taxes and extraordinary items
increased to 65.4% for the nine months ended September 30, 1998 as compared to
41.3% for the nine months ended September 30, 1997 because permanent differences
between book and tax income are a higher percentage of pre-tax income for the
nine month period ended September 30, 1998 than for the prior year period. This
increase in permanent items primarily resulted from stock acquisitions
consummated during 1998 including the Lakeland, Sullivan and Max Media
acquisitions.
The net deferred tax liability increased to $120.2 million as of September 30,
1998 from $21.5 million as of December 31, 1997. The increase in the Company's
net deferred tax liability as of September 30, 1998 as compared to December 31,
1997 primarily resulted from the Company recording a net deferred tax liability
related to the stock acquisitions noted above.
Net loss for the three months ended September 30, 1998 was $2.2 million or $.02
per share compared to net loss of $0.1 million for the three months ended
September 30, 1997. Net loss for the nine months ended September 30, 1998 was
$6.3 million or $.07 per share compared to a net loss of $5.9 million or $.08
per share for the nine months ended September 30, 1997. Net loss increased for
the nine months ended September 30, 1998 as compared to the nine months ended
September 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, the recognition of an unrealized loss of $10.2 million on a
derivative instrument and the recognition of an extraordinary loss. The
Company's extraordinary loss of $11.1 million net of a related tax benefit of
$7.4 million resulted from the write-off of debt acquisition costs associated
with indebtedness replaced by the 1998 Bank Credit Agreement. Net loss increased
for the three months ended September 30, 1998 as compared to the three months
ended September 30, 1997 because of the same factors noted above with the
exception of subsidiary trust minority interest expense, which remained
consistent for the periods.
As noted above, the Company's net loss for the three and nine months ended
September 30, 1998 included recognition of a loss of $10.2 million on a treasury
option derivative instrument. Upon execution of the treasury option derivative
instrument, the Company received a cash
22
payment of $9.5 million. The treasury option derivative instrument will require
the Company to make five annual payments equal to the difference between 6.14%
and the interest rate yield on five year treasury securities on September 30,
2000 times the $300 million notional amount of the instrument. The loss
recognized for the three months ended September 30, 1998 reflects an adjustment
of the Company's liability under this instrument to the present value of future
payments based on the two year forward five year treasury rate as of September
30, 1998. If the yield on five year treasuries at September 30, 2000 were to
equal the two year forward five year treasury rate on September 30, 1998
(4.53%), Sinclair would be required to make five annual payments of
approximately $4.8 million each. If the yield on five year treasuries declines
further in periods before September 30, 2000, Sinclair will be required to
recognize further losses. In any event, Sinclair will not be required to make
any payments until September 30, 2000, and will never be required to make any
payment if the five year treasury rate on that date is greater than 6.14%. Any
payments on the instrument would likely be offset by reductions in the Company's
interest rate on its floating rate debt or on any debt issued to redeem its 10%
Senior Subordinated Notes due 2005, which are first callable on September 30,
2000.
Broadcast cash flow increased to $93.6 million for the three months ended
September 30, 1998 from $57.3 million for the three months ended September 30,
1997, or 63.4%. Broadcast cash flow increased to $226.8 million for the nine
months ended September 30, 1998 from $162.9 million for the nine months ended
September 30, 1997, or 39.2%. The increase in broadcast cash flow for the three
months ended September 30, 1998 comprised $36.6 million related to the 1998
Transactions offset by a $0.3 million decrease in broadcast cash flow on a same
station basis, which decreased by 0.4%. The increase in broadcast cash flow for
the nine months ended September 30, 1998 was comprised of $61.1 million related
to the 1998 Transactions and $2.8 million related to an increase in broadcast
cash flow on a same station basis, which increased by 1.6%. Broadcast cash flow
for the three and six month periods on a same station basis was negatively
impacted by decreases in revenue at certain of the Company's stations offset by
certain other revenue increases as noted above.
The Company's broadcast cash flow margin remained consistent at 50.6% for the
three months ended September 30, 1998 and 1997. The Company's broadcast cash
flow margin increased to 50.3% for the nine months ended September 30, 1998 from
48.9% for the nine months ended September 30, 1997. The increase in broadcast
cash flow margins for the nine months ended September 30, 1998 as compared to
the nine months ended September 30, 1997 primarily resulted from a lag in
program contract payments for certain of the television broadcasting assets
acquired during 1998 of approximately $4.3 million and an increase in radio
station broadcast cash flow margins. When comparing broadcast cash flow margins
on a same station basis for the three months ended September 30, 1997 and 1998
margins decreased from 50.7% to 50.2%. When comparing broadcast cash flow
margins on a same station basis for the nine months ended September 30, 1997 and
1998, margins remained consistent at 49.1%.
Adjusted EBITDA increased to $88.9 million for the three months ended September
30, 1998 from $53.9 million for the three months ended September 30, 1997, or
64.9%. Adjusted EBITDA increased to $213.1 million for the nine months ended
September 30, 1998 from $152.5 million for the nine months ended September 30,
1997, or 39.7%. These increases in Adjusted EBITDA for the three and nine months
ended September 30, 1998 as compared to the three and nine months ended
September 30, 1997 resulted from the 1998 Acquisitions. The Company's Adjusted
EBITDA margin increased to 48.1% for the three months ended September 30, 1998
23
from 47.5% for the three months ended September 30, 1997. The Company's Adjusted
EBITDA margin increased to 47.2% for the nine months ended September 30, 1998
from 45.8% for the nine months ended September 30, 1997. Increases in Adjusted
EBITDA margins for the three and nine months ended September 30, 1998 as
compared to the three and nine months ended September 30, 1997 primarily
resulted from the same circumstances affecting broadcast cash flow margin as
noted above.
After tax cash flow increased to $33.1 million for the three months ended
September 30, 1998 from $21.3 million for the three months ended September 30,
1997, or 55.4%. After tax cash flow increased to $85.8 million for the nine
months ended September 30, 1998 from $54.0 million for the nine months ended
September 30, 1997 or 58.9%. The increase in after tax cash flow for the three
and nine months ended September 30, 1998 as compared to the three and nine
months ended September 30, 1997 primarily resulted from an increase in broadcast
operating income relating to the 1998 Transactions offset by an increase in
interest expense and subsidiary trust minority interest expense related to the
HYTOPS.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $7.4 million in cash balances and
excluding the effect of assets held for sale, working capital of approximately
$24.0 million. The Company's decrease in cash to $7.4 million at September 30,
1998 from $139.3 million at December 31, 1997 primarily resulted from the 1998
Acquisitions. As of November 4, 1998 and based on trailing cash flow levels for
the twelve months ended September 30, 1998, the Company had approximately $173.0
million available of current borrowing capacity under the Revolving Credit
Facility (which represents the remaining balance available). 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 has current acquisition commitments of approximately $241.0 million
net of proceeds anticipated from the sale of WOKR-TV to the Ackerly Group for
$125.0 million (collectively, the "Pending Transactions"). In order to complete
the Pending Transactions during the first quarter of 1999 and also remain in
compliance with certain of its debt covenants, the Company estimates that it
would be required to generate proceeds from station dispositions of
approximately $100 million or alternatively raise proceeds from common or
preferred stock securities issuances of approximately $50 million. The Company
has announced that it intends to enter into agreements to sell selected
television and radio stations with a value of up to $500 million during the
fourth quarter of 1998 and early 1999 though it has not entered into any
agreements for such sales, other than the WOKR-TV disposition referred to above.
The Company's other primary sources of liquidity are cash provided by operations
and availability under the Bank Credit Agreement. The Company anticipates that
funds from operations, existing cash balances, the availability of the Revolving
Credit Facility under the 1998 Bank Credit Agreement and the proceeds from the
sale of certain stations 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 $138.7 million for the
nine months ended September 30, 1998 from $65.4 million for the nine months
ended September 30, 1997 primarily as a result of the 1998 Transactions. The
Company made payments of interest on outstanding
24
indebtedness and subsidiary trust minority interest expense totaling $119.0
million during the nine months ended September 30, 1998 as compared to $95.1
million for the nine months ended September 30, 1997. Program rights payments
for the nine months ended September 30, 1998 increased $6.9 million or 18.2%.
This increase in program rights payments was comprised of $4.1 million related
to the 1997 and 1998 Transactions and $2.9 million related to an increase in
programming costs on a same station basis which increased 7.6%.
Net cash flows used in investing activities increased to $1.8 billion for the
nine months ended September 30, 1998 from $195.4 million for the nine months
ended September 30, 1997. For the nine months ended September 30, 1998, the
Company made cash payments of approximately $2.1 billion related to the
acquisition of television and radio broadcast assets primarily by utilizing
available indebtedness under the 1998 Bank Credit Agreement. These payments
included $230.6 million related to the WSYX Acquisition, $53.0 million related
to the Lakeland Acquisition, $570.4 million related to the Heritage Acquisition,
$962.3 million related to the Sullivan Acquisition, $239.4 million related to
the Max Media Acquisition and $6.6 million related to other acquisitions. For
the nine months ended September 30, 1998, the Company received approximately
$273.3 million of cash proceeds related to the sale of certain television and
radio broadcast assets which was primarily utilized to repay indebtedness under
the 1998 Bank Credit Agreement. These cash proceeds included $126.9 million
related to the Entercom Disposition, $72.0 million related to the STC
Disposition, $35.0 million related to the SFX Disposition, $21.0 million related
to the Radio Unica Disposition, $16.1 million related to the Centennial
Disposition and $2.3 million related to the sale of other broadcast assets. For
the nine months ended September 30, 1998, the Company made cash payments related
to the Buffalo Acquisition of $3.3 million and made cash payments of $6.7
million for deposits and other costs related to other future acquisitions. The
Company made payments for property and equipment of $13.9 million for the nine
months ended September 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 $1.5 billion for
the nine months ended September 30, 1998 from $138.0 million for the nine months
ended September 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 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.
In addition, during September 1998, the Company repurchased 1,505,000 shares of
its Class A Common Stock for an aggregate purchase price of $26.7 million, an
average share price of $17.72.
25
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 has substantially completed this phase as of the
date hereof.
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 completed the
compliance request phase of its plan as of the date hereof. In addition,
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 and second quarters 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 third 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.
26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.1 Employment Agreement by and between Sinclair Broadcast Group, Inc. and
J. Duncan Smith dated as of June 12, 1998
10.2 Employment Agreement by and between Sinclair Broadcast Group, Inc. and
Frederick G. Smith dated as of June 30, 1998
10.3 Amended Employment Agreement by and between Sinclair Broadcast Group,
Inc. and David B. Amy dated as of September 15, 1998
10.4 Purchase Agreement by and between Guy Gannett Communications and
Sinclair Communications, Inc. dated as of September 4, 1998
10.5 Purchase Agreement by and between Sinclair Communications, Inc. and the
Ackerly Group, Inc. dated as of September 25, 1998
27 Financial Data Schedule
B) REPORTS ON FORM 8-K
The Company filed a current Report on Form 8-K/A dated September 14, 1998
reporting on items 5 and 7 to update pro forma financial information for the
Company showing the effect of the Sullivan and Max Media acquisitions since
January 1, 1997.
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 13th day of November, 1998.
SINCLAIR BROADCAST GROUP, INC.
by: /s/ David B. Amy
------------------------------
David B. Amy
Chief Financial Officer
Principal Accounting Officer
28