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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For
the transition period from ____________ to ____________.
Commission File Number : 000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------------
MARYLAND 52-1494660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MARYLAND 21030
(Address of principal executive offices)
(410) 568-1500
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year-if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
As of November 3, 1999 there were 48,882,013 shares of Class A Common Stock,
$.01 par value, 48,103,647 shares of Class B Common Stock, $.01 par value; and
3,450,000 shares of Series D preferred stock, $.01 par value, convertible into
7,561,710 shares of Class A Common Stock of the Registrant issued and
outstanding.
In addition, 2,000,000 shares of $200 million aggregate liquidation value
11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc. are issued and outstanding.
1
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended September 30, 1999
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999..................................................................... 3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1998 and 1999...................................................... 4
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1999............................................................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1999...................................................... 6
Notes to Unaudited Consolidated Financial Statements.......................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................... 21
Signature..................................................................................... 22
2
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1999
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents .................................................................. $ 3,268 $ 8,362
Accounts receivable, net of allowance for doubtful accounts ................................ 196,880 183,689
Current portion of program contract costs .................................................. 60,795 86,248
Prepaid expenses and other current assets .................................................. 5,542 6,790
Deferred barter costs ...................................................................... 5,282 5,830
Broadcast assets related to discontinued operations ........................................ 499,786 516,212
Broadcast assets held for sale ............................................................. 33,747 223,938
Deferred tax asset ......................................................................... 19,209 11,933
----------- -----------
Total current assets ................................................................ 824,509 1,043,002
PROGRAM CONTRACT COSTS, less current portion ................................................... 45,608 68,462
LOANS TO OFFICERS AND AFFILIATES ............................................................... 10,041 9,233
PROPERTY AND EQUIPMENT, net .................................................................... 243,684 250,434
OTHER ASSETS ................................................................................... 82,544 98,610
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net ................................................... 2,646,366 2,515,261
----------- -----------
Total Assets ............................................................................... $ 3,852,752 $ 3,985,002
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................................... $ 18,065 $ 9,583
Accrued liabilities ........................................................................ 96,350 82,941
Current portion of long-term liabilities-
Notes payable and commercial bank financing ............................................ 50,007 68,758
Notes and capital leases payable to affiliates ......................................... 4,063 5,979
Program contracts payable .............................................................. 94,780 121,168
Deferred barter revenues ................................................................... 5,625 6,301
----------- -----------
Total current liabilities ........................................................... 268,890 294,730
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ................................................ 2,254,108 2,338,524
Notes and capital leases payable to affiliates ............................................. 19,043 35,368
Program contracts payable .................................................................. 74,152 99,170
Deferred tax liability ..................................................................... 184,736 184,736
Other long-term liabilities ................................................................ 32,181 25,154
----------- -----------
Total liabilities ................................................................... 2,833,110 2,977,682
----------- -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ................................................. 3,599 3,575
----------- -----------
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 39,581
and 14,774 shares issued and outstanding, respectively ................................. -- --
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 47,445,731 and 48,819,241 shares issued and outstanding, respectively .............. 474 488
Class B Common stock, $.01 par value, 35,000,000 and 140,000,000 shares authorized
and 49,075,428 and 48,208,447 shares issued and outstanding ............................ 491 482
Additional paid-in capital ................................................................. 768,648 779,602
Additional paid-in capital - equity put options ............................................ 113,502 108,358
Additional paid-in capital - deferred compensation ......................................... (7,616) (6,314)
Accumulated deficit (59,491) (78,906)
----------- -----------
Total stockholders' equity 816,043 803,745
----------- -----------
Total Liabilities and Stockholders' Equity .......................................... $ 3,852,752 $ 3,985,002
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated statements.
3
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
REVENUES:
Station broadcast revenues, net of agency commissions ...................... $ 151,996 $ 160,880 $ 377,755 $ 484,235
Revenues realized from station barter arrangements ......................... 18,433 15,231 41,724 44,855
--------- --------- --------- ---------
Total revenues ...................................................... 170,429 176,111 419,479 529,090
--------- --------- --------- ---------
OPERATING EXPENSES:
Program and production ..................................................... 30,512 35,874 75,067 103,628
Selling, general and administrative ........................................ 33,860 35,864 78,099 99,968
Expenses realized from station barter arrangements ......................... 17,005 14,101 37,967 41,098
Amortization of program contract costs and net
realizable value adjustments ........................................... 18,958 20,120 49,501 60,091
Stock-based compensation ................................................... 850 668 2,064 2,342
Depreciation of property and equipment ..................................... 8,054 7,800 16,766 23,592
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets ................. 26,658 23,766 54,760 78,521
--------- --------- --------- ---------
Total operating expenses ............................................ 135,897 138,193 314,224 409,240
--------- --------- --------- ---------
Broadcast operating income .......................................... 34,532 37,918 105,255 119,850
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense ......................... (40,414) (45,344) (95,315) (132,622)
Subsidiary trust minority interest expense ................................. (5,813) (5,813) (17,438) (17,438)
Gain on sale of broadcast assets ........................................... 1,248 233 1,248 233
Unrealized gain (loss) on derivative instrument ............................ (10,150) 716 (10,150) 12,302
Interest income ............................................................ 896 840 4,113 2,443
Other income (expense) ..................................................... 558 (45) 668 286
--------- --------- --------- ---------
Loss before income taxes ............................................ (19,143) (11,495) (11,619) (14,946)
INCOME TAX BENEFIT (PROVISION) ................................................. 9,480 (5,403) 543 (8,893)
--------- --------- --------- ---------
NET LOSS FROM CONTINUING OPERATIONS ............................................ (9,663) (16,898) (11,076) (23,839)
Net Income from discontinued operations, net of related income tax
provision of $5,980, $2,914, $9,443, and $8,124, respectively .............. 7,489 5,557 15,810 12,187
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt net of income tax
benefit of $7,370 ...................................................... -- -- (11,063) --
NET LOSS ....................................................................... $ (2,174) $ (11,341) $ (6,329) $ (11,652)
========= ========= ========= =========
Net loss available to common stockholders ...................................... $ (4,762) $ (13,929) $ (14,092) $ (19,415)
========= ========= ========= =========
Basic loss per share from continuing operations ................................ $ (0.13) $ (0.20) $ (0.20) $ (0.33)
========= ========= ========= =========
Basic earnings per share from discontinued operations .......................... $ 0.08 $ 0.06 $ 0.17 $ 0.13
========= ========= ========= =========
Basic loss per share from extraordinary item ................................... $ -- $ -- $ (0.12) $ --
========= ========= ========= =========
Basic loss per common share .................................................... $ (0.05) $ (0.14) $ (0.15) $ (0.20)
========= ========= ========= =========
Basic weighted average common shares outstanding ............................... 97,734 96,575 93,582 96,511
========= ========= ========= =========
Diluted loss per share from continuing operations .............................. $ (0.13) $ (0.20) $ (0.20) $ (0.33)
========= ========= ========= =========
Diluted earnings per share from discontinued operations ........................ $ 0.08 $ 0.06 $ 0.17 $ 0.13
========= ========= ========= =========
Diluted loss per share from extraordinary item ................................. $ -- $ -- $ (0.12) $ --
========= ========= ========= =========
Diluted loss per common share .................................................. $ (0.05) $ (0.14) $ (0.15) $ (0.20)
========= ========= ========= =========
Diluted weighted average common and common equivalent shares
Outstanding ................................................................ 99,339 96,949 95,540 96,718
========= ========= ========= =========
The accompanying notes are an integral part of these
unaudited consolidated statements.
4
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
ADDITIONAL
PAID-IN
SERIES B SERIES D CLASS A CLASS B ADDITIONAL CAPITAL -
PREFERRED PREFERRED COMMON COMMON PAID-IN EQUITY PUT
STOCK STOCK STOCK STOCK CAPITAL OPTIONS
-------------------------------------------------------------------------------------
BALANCE, December 31, 1998 ........... $ -- $ 35 $ 474 $ 491 $ 768,648 $ 113,502
Class B Common Stock converted ...
into Class A Common Stock .... 9 (9)
Series B Preferred Stock converted
into Class A Common Stock .... (1) 8 (7)
Class A common stock converted
into Class B Preferred Stock . 1 (6) 5
Dividends payable on Series D
Preferred Stock...............
Stock option grants exercised .... 1 1,768
Class A Common Stock
issued pursuant to employee
benefit plans ................ 2 2,793
Equity Put Options ............... 5,144 (5,144)
Net payments relating to
equity put options ........... 1,251
Amortization of deferred
compensation..................
Net loss .........................
-------------------------------------------------------------------------------------
BALANCE, September 30, 1999 .......... $ -- $ 35 $ 488 $ 482 $ 779,602 $ 108,358
=====================================================================================
ADDITIONAL
PAID-IN
CAPITAL - TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
----------------------------------------------
BALANCE, December 31, 1998 ........... $ (7,616) $ (59,491) $ 816,043
Class B Common Stock converted ...
into Class A Common Stock ....
Series B Preferred Stock converted
into Class A Common Stock ....
Class A common stock converted
into Class B Preferred Stock .
Dividends payable on Series D
Preferred Stock............... (7,763) (7,763)
Stock option grants exercised .... 1,769
Class A Common Stock
issued pursuant to employee
benefit plans ................ 2,795
Equity Put Options ...............
Net payments relating to
equity put options ........... 1,251
Amortization of deferred
compensation.................. 1,302 1,302
Net loss ......................... (11,652) (11,652)
----------------------------------------------
BALANCE, September 30, 1999 .......... (6,314) $ (78,906) $ 803,745
==============================================
The accompanying notes are an integral part of these
unaudited consolidated statements.
5
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (6,329) $ (11,652)
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) (233)
Loss (gain) on derivative instrument .......................................... 10,150 (12,302)
Amortization of debt discount ................................................. 74 74
Depreciation and amortization of property and equipment ....................... 19,366 27,030
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets ..................... 66,180 91,982
Amortization of program contract costs and net realizable value adjustments ... 50,589 61,248
Amortization of deferred compensation ......................................... 1,226 1,302
Deferred tax (benefit) provision .............................................. (4,520) 7,276
Changes in assets and liabilities, net of effects of acquisitions and dispositions-
Decrease in accounts receivable, net .......................................... 7,275 20,485
Increase in prepaid expenses and other current assets ......................... (1,011) (4)
Increase (decrease) in accounts payable and accrued liabilities ............... 32,507 (17,701)
Net effect of change in deferred barter revenues
and deferred barter costs .................................................. (64) (725)
Increase in other long-term liabilities ....................................... 678 4,978
Decrease in minority interest ................................................. (54) (24)
Payments on program contracts payable ............................................. (43,810) (59,852)
----------- -----------
Net cash flows from operating activities ...................................... 138,654 111,882
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ............................................. (13,949) (19,048)
Payments for acquisition of television and radio stations ......................... (2,072,368) (226,746)
Costs related to future acquisitions and dispositions ............................. -- (6,114)
Proceeds from sale of broadcasting assets ......................................... 273,298 61,771
Loans to officers and affiliates .................................................. (1,467) (673)
Repayments of loans to officers and affiliates .................................... 2,313 1,481
Equity investments ................................................................ -- (11,842)
Distributions from joint venture
655 --
----------- -----------
Net cash flows used in investing activities ................................ (1,811,518) (201,171)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases ......... 1,799,670 298,500
Repayments of notes payable, commercial bank financing and capital leases ........ (554,802) (195,399)
Payments of costs relating to financing ........................................... (11,169) --
Proceeds from exercise of stock options ........................................... 1,064 1,769
Payment received upon execution of derivative instrument ........................ 9,450 --
Repurchases of the Company's Class A Company Stock ................................ (26,665) --
Net proceeds from issuance of Class A Common Stock .............................. 335,235 --
Dividends paid on Series D Convertible Preferred Stock ............................ (7,763) (7,763)
Net payments (proceeds) related to equity put option contracts .................. (1,499) 1,251
Repayments of notes and capital leases to affiliates .............................. (2,576) (3,975)
----------- -----------
Net cash flows from financing activities ................................... 1,540,945 94,383
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................................. (131,919) 5,094
CASH AND CASH EQUIVALENTS, beginning of period ........................................ 139,327 3,268
----------- -----------
CASH AND CASH EQUIVALENTS, end of period .............................................. $ 7,408 $ 8,362
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated statements.
6
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sinclair Broadcast Group, Inc., Sinclair Communications, Inc. and all other
consolidated subsidiaries, which are collectively referred to hereafter as "the
Company, Companies, 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,
1998 and 1999 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, 1997, and 1998 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
DISCONTINUED OPERATIONS
During the third quarter of 1999, the Company began to execute its strategy to
divest of its radio broadcast segment. In July 1999, the Company entered into an
agreement to sell 46 of its radio stations in nine markets to Entercom
Communications Corporation ("Entercom") for $824.5 million in cash. In addition,
the Company is currently engaged in formal negotiations with Emmis
Communications Corporation ("Emmis") for the sale of its remaining radio
stations serving the St. Louis market (see Note 5). Subject to the Company's
strategy to divest of its radio broadcasting segment, "Discontinued Operations"
accounting has been adopted for the periods presented in the accompanying
financial statements and the notes thereto. As such, the results from operations
of the radio broadcast segment, net of related income taxes, has been
reclassified from income from operations and reflected as income from
discontinued operations in the accompanying income statements for all periods
presented. In addition, assets relating to the radio broadcast segment are
reflected in "Broadcast assets related to discontinued operations" in the
accompanying balance sheets for all periods presented.
7
2. CONTINGENCIES AND OTHER COMMITMENTS:
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages,
and no judgments or decisions have been rendered by hearing boards or courts.
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. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
During the nine months ended September 30, 1998 and 1999, the Company's
supplemental cash flow information is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
---- ----
Interest payments............................................................... $ 101,610 $ 144,419
=========== ===========
Subsidiary trust minority interest payments..................................... $ 17,438 $ 17,438
=========== ===========
Income tax payments............................................................. $ 1,930 $ 5,872
=========== ===========
Capital lease obligations incurred.............................................. $ 3,807 $ 22,208
=========== ===========
4. EARNINGS PER SHARE:
The basic and diluted earnings per share and related computations are as follows
(in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
Weighted-average number of common shares...................... 97,734 96,575 93,582 96,511
Diluted effect of outstanding stock options .................. 1,317 267 1,670 99
Diluted effect of conversion of preferred shares.............. 288 107 288 108
------------ ------------ ----------- -----------
Diluted weighted-average number of common and common
equivalent shares outstanding............................. 99,339 96,949 95,540 96,718
============ ============ =========== ===========
Net loss...................................................... $ (2,174) $ (11,341) $ (6,329) $ (11,652)
Preferred stock dividends payable............................. (2,588) (2,588) (7,763) (7,763)
------------- ------------- ------------ ------------
Net loss available to common stockholders..................... $ (4,762) $ (13,929) $ (14,092) $ (19,415)
============= ============= ============ ============
Basic loss per share from continuing operations............... $ (0.13) $ (0.20) $ (0.20) $ (0.33)
============= ============ ============ ============
Basic earnings per share from discontinued operations......... $ 0.08 $ 0.06 $ 0.17 $ 0.13
============= ============ ============ ============
Basic loss per share from extraordinary item.................. $ - $ - $ (0.12) $ -
============= ============ ============ ============
Basic loss per common share................................... $ (0.05) $ (0.14) $ (0.15) $ (0.20)
============= ============ ============ ============
Diluted loss per share from continuing operations .......... $ (0.13) $ (0.20) $ (0.20) $ (0.33)
============= ============ ============ ============
Diluted earnings per share from discontinued operations....... $ 0.08 $ 0.06 $ 0.17 $ 0.13
============= ============ ============ ============
Diluted loss per share from extraordinary item................ $ - $ - $ (0.12) $ -
============= ============ ============ ============
Diluted loss per common share................................. $ (0.05) $ (0.14) $ (0.15) $ (0.20)
============= ============ ============ ============
8
5. ACQUISITIONS AND DISPOSITIONS:
1999 ACQUISITIONS AND DISPOSITIONS
Guy Gannett Acquisition. In September 1998, the Company agreed to acquire from
Guy Gannett Communications its television broadcasting assets for a purchase
price of $317 million in cash (the "Guy Gannett Acquisition"). As a result of
this transaction and after the completion of related dispositions, the Company
acquired five television stations in five separate markets. In April 1999, the
Company completed the purchase of WTWC-TV, WGME-TV and WGGB-TV for a purchase
price of $111.0 million and in July 1999, the Company completed the purchase of
WICS/WICD-TV, and KGAN-TV for a purchase price of $81.0 million. The Company
financed the acquisitions by utilizing indebtedness under the 1998 Bank Credit
Agreement.
In September 1998, the Company agreed to sell the Guy Gannett television station
WOKR-TV in Rochester, New York to the Ackerley Group, Inc. for a sales price of
$125 million (the "Ackerley Disposition"). In April 1999, the Company closed on
the purchase of WOKR-TV and simultaneously completed the sale of WOKR-TV to
Ackerly.
CCA Disposition. In April 1999, the Company completed the sale of the
non-license assets of KETK-TV and KLSB-TV in Tyler-Longview, Texas to
Communications Corporation of America ("CCA") for a sales price of $36 million
(the "CCA Disposition"). In addition, CCA has an option to acquire the license
assets of KETK-TV for an option purchase price of $2 million.
St. Louis Acquisition. In August 1999, the Company completed the purchase of
radio station KXOK-FM in St. Louis, Missouri for a purchase price of $14.1
million in cash.
Barnstable Disposition. In August 1999, the Company completed the sale of the
radio stations WFOG-FM and WGH-AM/FM serving the Norfolk, Virginia market to
Barnstable Broadcasting, Inc. ("Barnstable") (the "Barnstable Disposition"). The
stations were sold to Barnstable for a sales price of $23.7 million.
PENDING DISPOSITIONS
STC Disposition. In March 1999, the Company entered into an agreement to sell to
STC the television stations WICS/WICD-TV in the Springfield, Illinois market and
KGAN-TV in the Cedar Rapids, Iowa market (the "STC Disposition"). In addition,
the Company agreed to sell the Non-License Assets and rights to program WICD in
the Springfield, Illinois market. The stations are being sold to STC for a sales
price of $81.0 million and were acquired by the Company in connection with the
Guy Gannett Acquisition. In April 1999, the Justice Department requested
additional information in response to STC's filing under the Hart-Scott-Rodino
Antitrust Improvements Act. The sale of the stations to STC has been delayed
pending resolution of the questions raised by the Justice Department. If STC is
unable to complete the purchase of these stations, the Company would continue to
own these stations. Either STC or the Company may terminate the agreement if the
transaction is not closed by March 15, 2000.
St. Louis Purchase Option. In connection with the acquisition of River City, the
Company entered into a five year agreement (the "Baker Agreement") with Barry
Baker (the Chief Executive Officer of River City) pursuant to which Mr. Baker
served as a consultant to the Company until terminating such services effective
March 8, 1999 (the "Termination Date"). As of February 8, 1999, the conditions
to Mr. Baker becoming an officer of the Company had not been satisfied, and on
that date Mr. Baker and the Company entered into a termination agreement
effective March 8, 1999. Mr. Baker had certain rights as a consequence of the
termination of the Baker Agreement. These rights included Mr. Baker's right to
purchase at fair market value the television and radio stations owned by the
Company serving the St. Louis, Missouri market.
9
In June 1999, the Company received a letter from Mr. Baker in which Mr. Baker
elected to exercise his option to purchase the radio and television properties
of Sinclair in the St. Louis market for their fair market value. In his letter,
Mr. Baker names Emmis Communications Corporation ("Emmis") as his designee.
Sinclair is evaluating the validity of Mr. Baker's designation of Emmis. In
light of the foregoing, the fact that negotiations of a definitive purchase
agreement are yet to commence, that a fair market value has not been determined,
and that approvals would be required from both the Department of Justice and the
Federal Communications Commission, there can be no assurance that the
transactions contemplated by the option will be consummated.
Entercom Disposition. In July 1999, the Company entered into an agreement to
sell 46 radio stations in nine markets to Entercom Communications Corporation
("Entercom") for $824.5 million in cash. The transaction does not include the
Company's radio stations in the St. Louis market which are subject to the St.
Louis Purchase Option as previously noted. The completion of this transaction is
subject to FCC and Department of Justice approval.
6. INTEREST RATE DERIVATIVE AGREEMENTS:
As of September 30, 1999, the Company had several interest rate swap agreements
which expire from July 23, 2000 to July 15, 2007. The swap agreements set rates
in the range of 5.5% to 8.1%. 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 notional amounts
related to these agreements were $1.6 billion at September 30, 1999, and
decrease to $200 million through the expiration dates. In addition, the Company
has entered into floating rate swaps with notional amounts totaling $750
million. As of September 30, 1999, $1.7 billion or 70% of the Company's
outstanding indebtedness was either partially or entirely hedged.
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
counter parties to these agreements are international financial institutions.
The Company estimates the fair value to retire these instruments at September
30, 1999 to be $5.1 million. The fair value of the interest rate hedging
derivative instruments is estimated by obtaining quotations from the financial
institutions which are a party to the Company's derivative contracts (the
"Banks"). The fair value is an estimate of the net amount that the Company would
pay at September 30, 1999 if the contracts were transferred to other parties or
canceled by the Banks.
7. EQUITY PUT AND CALL OPTIONS:
During September 1999, the Company entered into put and call option contracts
related to the Company's common stock which mature on June 28, 2000 and March
28, 2000, respectively. These option contracts were entered into for the purpose
of hedging the dilution of the Company's common stock upon the exercise of stock
options granted and can either be physically settled in cash or net physically
settled in shares, at the election of the Company. The Company entered into 1.0
million call options for common stock and 1.7 million put options for common
stock, with a strike price of $10.45 and $9.45 per common share, respectively.
8. 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.
10
Upon the execution of the Option Derivative contract in 1998, the Company
received a cash payment representing an option premium of $9.5 million which was
recorded in "Other long-term liabilities" in the accompanying 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.
As of September 30,1999, the Company's Option Derivative liability recorded in
"other long-term liabilities" in the accompanying consolidated balance sheet is
$6.2 million. The fair market value adjustment for the nine months ended
September 30,1999 resulted in an income statement benefit (unrealized gain) of
$12.3 million.
If the yield on five-year treasuries at September 30, 2000 were to equal the
forward five-year treasury rate on September 30, 1999 (6.02%), Sinclair would be
required to make five annual payments of approximately $360,000 each. If the
yield on five-year treasuries declines in periods before September 30, 2000,
Sinclair would be required to recognize losses. In any event, Sinclair will not
be required to make any payments until September 30, 2000.
11
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, 1998.
The matters discussed in this report include forward-looking statements. When
used in this report, the words "intends to," "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties.
Actual results in the future could differ materially and adversely from those
described in the forward-looking statements as a result of various important
factors, including 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, volatility in programming costs, the availability of
suitable acquisitions on acceptable terms, the timely completion of dispositions
on the terms agreed to and the other risk factors set forth in the Company's
prospectus filed with the Securities and Exchange Commission on April 19, 1998,
pursuant to rule 424(b)(5). The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect any future events or circumstances.
DISCONTINUED OPERATIONS
During the third quarter of 1999, the Company began to execute its strategy to
divest of its radio broadcast segment. In July 1999, the Company entered into an
agreement to sell 46 of its radio stations in nine markets to Entercom
Communications Corporation ("Entercom") for $824.5 million in cash. In addition,
the Company is currently engaged in formal negotiations with Emmis
Communications Corporation ("Emmis") for the sale of its remaining radio
stations serving the St. Louis market. Subject to the Company's strategy to
divest of its radio broadcasting segment, "Discontinued Operations" accounting
has been adopted for the periods presented in the accompanying financial
statements and the notes thereto. As such, the results from operations of the
radio broadcast segment, net of related income taxes, has been reclassified from
income from operations and reflected as income from discontinued operations in
the accompanying income statements for all periods presented. In addition,
assets relating to the radio broadcast segment are reflected in "Broadcast
assets related to discontinued operations" in the accompanying balance sheets
for all periods presented.
12
The following table sets forth certain operating data for the three months and
nine months ended September 30, 1998 and 1999:
OPERATING DATA (dollars in thousands, except per share data):
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
Net broadcast revenues (a) ..................... $ 151,996 $ 160,880 $ 377,755 $ 484,235
Barter revenues ................................ 18,433 15,231 41,724 44,855
----------- ----------- ----------- -----------
Total revenues ................................. 170,429 176,111 419,479 529,090
----------- ----------- ----------- -----------
Operating costs (b) ............................ 64,372 71,738 153,166 203,596
Expenses from barter arrangements .............. 17,005 14,101 37,967 41,098
Depreciation, amortization and stock-based
compensation (c) ............................ 54,520 52,354 123,091 164,546
----------- ----------- ----------- -----------
Broadcast operating income ..................... 34,532 37,918 105,255 119,850
Interest expense ............................... (40,414) (45,344) (95,315) (132,622)
Subsidiary trust minority interest expense (d) . (5,813) (5,813) (17,438) (17,438)
Interest and other income ...................... 1,454 795 4,781 2,729
Unrealized gain (loss) on derivative
instrument .................................. (10,150) 716 (10,150) 12,302
Gain on sale of broadcast assets ............... 1,248 233 1,248 233
----------- ----------- ----------- -----------
Loss before income taxes ....................... (19,143) (11,495) (11,619) (14,946)
Income tax benefit (provision) ................. 9,480 (5,403) 543 (8,893)
----------- ----------- ----------- -----------
Net loss from continuing operations ............ (9,663) (16,898) (11,076) (23,839)
Net income from discontinued operations,
net of income taxes ......................... 7,489 5,557 15,810 12,187
Extraordinary item, net of income taxes ........ -- -- (11,063) --
----------- ----------- ----------- -----------
Net loss ....................................... $ (2,174) $ (11,341) $ (6,329) $ (11,652)
=========== =========== =========== ===========
Net loss available to common stockholders ...... $ (4,762) $ (13,929) $ (14,092) $ (19,415)
=========== =========== =========== ===========
OTHER DATA:
Broadcast Cash Flow (e) ................. $ 78,886 $ 76,460 $ 196,552 $ 238,650
Broadcast Cash Flow margin (f) .......... 51.9% 47.5% 52.0% 49.3%
Adjusted EBITDA (g) ..................... $ 74,847 $ 71,096 $ 184,536 $ 224,544
Adjusted EBITDA margin (f) .............. 49.2% 44.2% 48.9% 46.4%
After tax cash flow (h) ................. $ 33,106 $ 27,970 $ 85,809 $ 97,040
Program contract payments ............... 14,205 19,176 43,810 59,852
Corporate expense ....................... 4,039 5,364 12,016 14,106
Capital expenditures .................... 5,650 7,478 13,949 19,048
Cash flows from operating activities .... 71,151 39,380 138,654 111,882
Cash flows from investing activities .... (1,163,190) (86,877) (1,811,518) (201,171)
Cash flows from financing activities .... 779,314 46,260 1,540,945 94,383
- ---------------------------------------------------------------------------------------------------------------
13
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, stock based compensation, 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
overhead 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 stockholders, 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
and unrealized gain on derivative instrument (or minus the unrealized
loss on derivative instrument). 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 $160.9 million for the three months ended
September 30, 1999 from $152.0 million for the three months ended September 30,
1998, or 5.9%. Net broadcast revenues increased to $484.2 million for the nine
months ended September 30, 1999 from $377.8 million for the nine months ended
September 30, 1998, or 28.2%. The increase in net broadcast revenues for the
three months ended September 30, 1999 as compared to the three months ended
September 30, 1998 comprised $5.1 million related to the acquisition and
disposition of television stations and LMA transactions consummated by the
Company in 1998 and 1999 (collectively the "1998 and 1999 Transactions") and
$3.8 million related to an increase in net broadcast revenue on a same station
basis, which increased by 2.6%.
14
The increase in net broadcast revenues for the nine months ended September 30,
1999 comprised $103.4 million related to the 1998 and 1999 Transactions and $3.0
million related to an increase in net broadcast revenues on a same station
basis, which increased by 1.0%. The increase in net broadcast revenues on a same
station basis for the three and nine months ended September 30, 1999 as compared
to the three and nine months ended September 30, 1998 primarily resulted from an
increase in market share and market revenue in certain of the Company's
television markets.
Operating costs increased to $71.7 million for the three months ended September
30, 1999 from $64.4 million for the three months ended September 30, 1998, or
11.3%. Operating costs increased to $203.6 million for the nine months ended
September 30, 1999, from $153.2 million for the nine months ended September 30,
1998, or 32.9%. The increase in operating costs for the three months ended
September 30, 1999 as compared to the three months ended September 30, 1998
comprised $4.0 million related to the 1998 and 1999 Transactions, $1.3 million
related to an increase in corporate overhead expenses and $2.0 million related
to an increase in operating costs on a same station basis, which increased 3.5%.
The increase in operating costs for the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998 comprised $47.3 million
related to the 1998 and 1999 Transactions, $2.1 million related to an increase
in corporate overhead expenses and $1.0 million related to an increase in
operating costs on a same station basis, which increased 0.8%. The increases in
corporate overhead for the three and nine month periods ended September 30,1999
primarily resulted from an increase in expenses associated with managing a
larger base of operations.
Interest expense increased to $45.3 million for the three months ended September
30, 1999 from $40.4 million for the three months ended September 30, 1998, or
12.1%. Interest expense increased to $132.6 million for the nine months ended
September 30, 1999 from $95.3 million for the nine months ended September 30,
1998, or 39.1%. The increase in interest expense for the three months and nine
months ended September 30, 1999 primarily resulted from higher interest expense
related to current year acquisitions and a higher applicable interest rate
margin for borrowing under the Company's Bank Credit Agreement.
Interest and other income decreased to $0.8 million for the three months ended
September 30, 1999 from $1.5 million for the three months ended September 30,
1998. Interest and other income decreased to $2.7 million for the nine months
ended September 30, 1999 from $4.8 million for the nine months ended September
30, 1998. These decreases were primarily due to a decrease in average cash
balance, for the three months and nine months ended September 30, 1999 when
compared to the same period in 1998.
Income tax provision was $5.4 million for the three months ended September 30,
1999 as compared to an income tax benefit of $9.5 million for the three months
ended September 30, 1998. For the nine months ended September 30, 1999, the
Company recorded a tax provision of $8.9 million on pre-tax income, an effective
tax rate of 315%. In accordance with FASB 109, "Accounting for Income Taxes",
the Company applies its projected income tax rate for the year ended December
31,1999 to intraperiod financial statements. The Company's high projected tax
rate for 1999 results from book income being projected to be less than permanent
differences between book and taxable income.
The net deferred tax liability increased to $172.8 million as of September 30,
1999 from $165.5 million as of December 31, 1998. The increase in the Company's
net deferred tax liability as of September 30, 1999 as compared to December 31,
1998 primarily resulted from the Company recording a net deferred tax provision
for the nine months ended September 30,1999.
Net loss available to common stockholders for the three months ended September
30, 1999 was $13.9 million or $.14 per share compared to net loss of $4.8
million or $.05 per share for the three months ended September 30, 1998. Net
loss available to common stockholders for the nine months ended September 30,
1999 was $19.4 million or $.20 per share compared to a net loss of $14.1 million
or $.15 per share for the nine months ended September 30, 1998. Net loss
available to common stockholders increased for the nine
15
months ended September 30, 1999 as compared to the nine months ended September
30, 1998 due to an increase in interest expense, a decrease in income from
discontinued operations, a decrease in interest income, and an extraordinary
loss incurred during 1998 offset by an increase in broadcast operating income
and an unrealized gain on derivative instrument. The Company's 1998
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 available to
common stockholders increased for the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998 because of the same
factors noted above with the exception of the extraordinary loss which was
incurred during the second quarter of 1998.
Net income from discontinued operations decreased to $5.6 million for the three
months ended September 30, 1999 from $7.5 million for the three months ended
September 30, 1998, or 25.3%. Net income from discontinued operations decreased
to $12.2 million for the nine months ended September 30, 1999 from $15.8 million
for the nine months ended September 30, 1998, or 22.8%. The decrease in net
income from discontinued operations for the three and nine months ended
September 30,1999 as compared to the same periods ended September 30, 1998
primarily resulted from dispositions consummated by the Company during the first
six months of 1998 partially offset by the acquisitions consummated by the
Company during the same period of 1998.
Broadcast cash flow decreased to $76.5 million for the three months ended
September 30, 1999 from $78.9 million for the three months ended September 30,
1998, or 3.0%. Broadcast cash flow increased to $238.7 million for the nine
months ended September 30, 1999 from $196.6 million for the nine months ended
September 30, 1998, or 21.4%. The decrease in broadcast cash flow for the three
months ended September 30, 1999 primarily resulted from an increase in operating
expenses as a percentage of net broadcast revenues and an increase in program
contract payments resulting from increased cash payments for program contracts
in the 1999 period that were not required in 1998 because sellers of stations we
acquired had, in accordance with industry practice, previously made program
contract payments relating to this period in advance of our acquisitions. The
increase in broadcast cash flow for the nine months ended September 30, 1999
primarily related to the 1998 and 1999 Transactions as broadcast cash flow on a
same station basis remained relatively consistent with the nine months ended
September 30,1998.
The Company's broadcast cash flow margin decreased to 47.5% for the three months
ended September 30, 1999 from 51.9% for the three months ended September
30,1998. The Company's broadcast cash flow margin decreased to 49.3% for the
nine months ended September 30, 1999 from 52.0% for the nine months ended
September 30, 1998. The decrease in broadcast cash flow margins for the three
and the nine months ended September 30, 1999 as compared to the three and the
nine months ended September 30, 1998 primarily resulted from increased cash
payments for program contracts in the 1999 periods that were not required in
1998 because sellers of stations we acquired had, in accordance with industry
practice, previously paid approximately $4.3 million of program contract
payments relating to these periods in advance of our acquisitions. When
comparing broadcast cash flow margins on a same station basis for the three
months ended September 30, 1998 and 1999 margins decreased from 50.1% to 49.1%.
When comparing broadcast cash flow margins on a same station basis for the nine
months ended September 30, 1998 and 1999, margins decreased from 51.2% to 50.7%.
Adjusted EBITDA decreased to $71.1 million for the three months ended September
30, 1999 from $74.8 million for the three months ended September 30, 1998, or
5.0%. Adjusted EBITDA increased to $224.5 million for the nine months ended
September 30, 1999 from $184.5 million for the nine months ended September 30,
1998, or 21.7%. The decrease in Adjusted EBITDA for the three months ended
September 30, 1999 as compared to the three months ended September 30, 1998
primarily resulted from a decrease in broadcast cash flow as noted above combine
with an increase in corporate overhead. The increases in Adjusted EBITDA for the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998 primarily resulted from the 1998 and 1999 Transactions. The
Company's Adjusted
16
EBITDA margin decreased to 44.2% for the three months ended September 30, 1999
from 49.2% for the three months ended September 30, 1998. The Company's Adjusted
EBITDA margin decreased to 46.4% for the nine months ended September 30, 1999
from 48.9% for the nine months ended September 30, 1998. Decreases in Adjusted
EBITDA margins for the three and nine months ended September 30, 1999 as
compared to the three and nine months ended September 30, 1998 primarily
resulted from increased cash payments for program contracts in the 1999 periods
that were not required in 1998 because sellers of stations we acquired had, in
accordance with industry practice, previously paid approximately $4.3 million of
program contract payments relating to these periods in advance of our
acquisitions and from the increases in corporate overhead expenses required
because of the Company's larger base of operations.
After tax cash flow decreased to $28.0 million for the three months ended
September 30, 1999 from $33.1 million for the three months ended September 30,
1998, or 15.4%. After tax cash flow increased to $97.0 million for the nine
months ended September 30, 1999 from $85.8 million for the nine months ended
September 30, 1998 or 13.1%. The decrease in after tax cash flow for the three
months ended September 30,1999 as compared to the three months ended September
30,1998 primarily resulted from an increase in interest expense resulting from
television assets acquired during 1999 and a slight increase in interest rates
on the Company's floating rate debt. The increase in after tax cash flow for the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998 primarily resulted from an increase in broadcast operating
income relating to the 1998 and 1999 Transactions offset by an increase in
interest expense.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity are cash provided by operations and
availability under the 1998 Bank Credit Agreement. As of September 30, 1999, the
Company had $8.4 million in cash balances and excluding the effect of assets
held for sale and broadcast assets related to discontinued operations, working
capital of approximately $8.1 million. As of November 4, 1999, the remaining
balance available under the Revolving Credit Facility was $56.5 million. Based
on pro forma trailing cash flow levels for the twelve months ended September 30,
1999, the Company had approximately $36.7 million available of current borrowing
capacity under the Revolving Credit Facility. 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.
In July 1999, the Company entered into an agreement to sell 46 radio stations in
nine markets to Entercom Communications Corp. ("Entercom") for $824.5 million in
cash. The transaction does not include Sinclair's radio stations in the St.
Louis market, which are subject to the St. Louis Purchase Option (see Note 5).
The transaction is subject to FCC and Department of Justice approval. The
Company intends to use proceeds from the sale to reduce debt levels which is
expected to give the Company additional borrowing capacity under the 1998 Bank
Credit Agreement. The Company may also use a portion of the proceeds to make
acquisitions or to repurchase shares of its Class A Common Stock.
In April and July 1999, the Company closed the acquisitions of the Guy Gannett
television stations. The Company has agreed to sell three of the stations to STC
for approximately $81.0 million in the STC Disposition. In April 1999, the
Justice Department requested additional information in response to STC's filing
under the Hart-Scott-Rodino Antitrust Improvements Act. The sale of the stations
to STC has been delayed pending resolution of the questions raised by the
Justice Department. If STC is unable to complete the purchase of these stations,
the Company would continue to own these stations. Either STC or the Company may
terminate the agreement if the transaction is not closed by March 15, 2000.
On April 19, 1999, the Company entered into an agreement (the "ATC Agreement")
with American Tower Corporation, an independent owner, operator and developer of
broadcast and wireless communication sites in the United States. Under the
agreement, the Company would provide American Tower access to tower sites in a
number of the Company's markets including Nashville, TN, Dayton, OH, Richmond,
VA, Mobile, AL, Pensacola, FL, San Antonio, TX, and Syracuse, NY. American Tower
would construct new towers in each of these markets and will lease space on the
towers to the Company. This is expected to provide the Company the additional
tower capacity required to develop its digital television transmission needs in
these markets at an initial capital outlay lower than would be required if the
Company constructed these towers itself. The form of the master lease has been
completed and agreed to; however, each market is subject to individual
negotiations on terms specific to that market, which are still being negotiated
with American Tower Corporation. If the Company and American Tower cannot agree
on the terms and conditions of the individual market leases, neither party will
have any obligation to the other under the ATC Agreement, which will then become
a nullity.
Net cash flows from operating activities decreased to $111.9 million for the
nine months ended September 30, 1999 from $138.7 million for the nine months
ended September 30, 1998 primarily as a result of the increase in program
contract payments. The Company made payments of interest on outstanding
indebtedness and subsidiary trust minority interest expense totaling $161.9
million during the nine months ended September 30, 1999 as compared to $119.0
million for the nine months ended September 30, 1998. Program rights payments
for the nine months ended September 30, 1999 increased $16.0 million or 36.6%.
This increase in program rights payments was comprised of $13.7 million related
to the 1998 and
18
1999 Transactions and $2.3 million related to an increase in programming costs
on a same station basis which increased 5.2%.
Net cash flows used in investing activities decreased to $201.2 million for the
nine months ended September 30, 1999 from $1.8 billion for the nine months ended
September 30, 1998. For the nine months ended September 30, 1999, the Company
made cash payments of approximately $232.9 million related to the acquisition of
television and radio broadcast assets primarily by utilizing available
indebtedness under the 1998 Bank Credit Agreement. For the nine months ended
September 30, 1999, the Company received approximately $61.8 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. During the nine months ended September 30, 1999, the Company made
equity interest investments of approximately $11.8 million. The Company made
payments for property and equipment of $19.0 million for the nine months ended
September 30, 1999. The Company anticipates that future requirements for capital
expenditures will include other acquisitions if suitable acquisitions can be
identified on acceptable terms.
Net cash flows provided by financing activities decreased to $94.4 million for
the nine months ended September 30, 1999 from $1.5 billion for the nine months
ended September 30, 1998. During the nine months ended September 30, 1999, the
Company repaid $156.0 million and $37.5 million under the 1998 Bank Credit
Agreement Revolving Credit Facility and Term Loan Facility, respectively. In
addition, the Company utilized borrowings under the Revolving Credit Facility of
$298.5 million primarily to fund acquisition activity including the Guy Gannett
Acquisition.
SEASONALITY
The Company's results usually are subject to seasonal fluctuations, which result
in fourth quarter broadcast operating income being greater usually than first,
second and third quarter broadcast operating income. This seasonality is
primarily attributable to increased expenditures by advertisers in anticipation
of holiday season spending and an increase in viewership during this period. In
addition, revenues from political advertising tend to be higher in even numbered
years.
YEAR 2000
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 third
quarter of 1998, and Management estimates it has completed approximately 90% of
this phase as of the date hereof. The Company expects to complete this phase
during of the fourth quarter of 1999.
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 has identified and begun 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 completed the process of ascertaining that all of its personal computers and
PC applications are compliant. Sinclair is currently reviewing its news room
systems, building control systems, security systems and other miscellaneous
systems. The Company expects to complete this phase during of the fourth quarter
of 1999.
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 aspects of this phase during the fourth quarter of 1999.
19
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 during the fourth quarter of 1999.
Follow up and documentation for the implementation of each phase has been
delayed from the originally scheduled completion dates due to turnover of MIS
personnel. The Company believes that it is now on schedule to complete the
documentation and remaining processes before the end of the year.
The Company has developed a contingency/emergency plan to address Year 2000
worst case scenarios. The contingency plan includes, but is not limited to,
addressing (i) regional power facilities, (ii) interruption of satellite
delivered programming, (iii) replacement or repair of equipment not discovered
or fixed during the year 2000 compliance process and (iv) local security
measures that may become necessary relating to the Company's properties. The
contingency plan involves obtaining alternative sources if existing sources of
these goods and services are not available. Although the contingency plan is
designed to reduce the impact of disruptions from these sources, there is no
assurance that the plan will avoid material disruptions in the event one or more
of these events occurs.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CHANGE IN MARKET RISK
As noted above, the Company's net loss for the nine months ended September 30,
1999 included recognition of a gain of $12.3 million on a treasury option
derivative instrument. Upon execution of the treasury option derivative
instrument during 1998, the Company received a cash 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% minus the interest rate
yield on five-year treasury securities on September 30, 2000 times the $300
million notional amount of the instrument. If the yield on five-year treasuries
is equal to or greater than 6.14% on September 30, 2000, the Company will not be
required to make any payment under the terms of this instrument. If the rate is
below 6.14% on that date, the Company will be required to make payments, as
described above, and the size of the payment will increase as the rate goes
down. For each accounting period, the Company recognizes unrealized gain on an
expense equal to the change in the projected liability under this arrangement
based on interest rates at the end of the period. The gain recognized in the
nine months ended September 30, 1999 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, 1999 for five
year treasury notes with a settlement date of September 30, 2000. If the yield
on five-year treasuries at September 30, 2000 were to equal the forward
five-year treasury rate on September 30, 1999 (6.02%), Sinclair would be
required to make five annual payments of approximately $360,000 each. If the
yield on five-year treasuries declines in periods before September 30, 2000,
Sinclair would be required to recognize losses. In any event, Sinclair will not
be required to make any payments until September 30, 2000.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.1 Second Modification Agreement dated April 30, 1999 by and
between Guy Gannett Communications and Sinclair Communications,
Inc., to modify the Purchase Agreement dated September 4, 1998
by and between Guy Gannett Communications and Sinclair
Communications, Inc., as thereafter amended and modified.
10.2 Asset Purchase Agreement dated August 18, 1999 by and between
Sinclair Communications, Inc. and certain of its affiliates
named therein and Entercom Communications Corp.
10.3 Asset Purchase Agreement dated August 20, 1999 among Sinclair
Communications, Inc., Sinclair Media III, Inc., Sinclair Radio
of Kansas City Licensee, LLC and Entercom Communications Corp.
10.4 Amendment to Purchase Agreement, dated March 16, 1999, to amend
Purchase Agreement dated as of September 4, 1998 by and between
Guy Gannett Communications and Sinclair Communications, Inc.
10.5 Modification Agreement dated April 12, 1999 by and between Guy
Gannett Communications and Sinclair Communications, Inc., to
modify the Purchase Agreement dated September 4, 1998 by and
between Guy Gannett Communications and Sinclair Communications,
Inc., as thereafter amended.
10.6 Purchase Agreement dated March 16, 1999, by and between Sinclair
Communications, Inc. and STC Broadcasting, Inc.
10.7 Amended and Restated Purchase Agreement dated August 20, 1999
among Sinclair Communications, Inc. and certain of its
affiliates named therein and Entercom Communications Corp.
27 FDS
B) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized in the city of Baltimore, Maryland
on the 12th day of November, 1999.
SINCLAIR BROADCAST GROUP, INC.
by: /s/ Thomas E. Severson
-----------------------
Thomas E. Severson
Chief Accounting Officer
Principal Accounting Officer
22