<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
COMMISSION FILE NUMBER: 333-29555
STC BROADCASTING, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2676358
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
3839 4th STREET NORTH, SUITE 420 (727) 821-7900
ST. PETERSBURG, FLORIDA 33703 (Registrant's telephone
(Address of principal executive offices) number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 7, 1999, the registrant had 1000 shares of common stock, par value
$.01 outstanding.
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STC BROADCASTING, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3 - 4
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statement of Stockholder's Equity
for the Three Months Ended March 31, 1999 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
</TABLE>
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Item 1. Financial Statements
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,957 $ 5,347
Accounts receivable, net 15,211 16,198
Current portion of program rights 7,995 7,770
Other current assets 1,366 1,191
-------- --------
Total current assets 29,529 30,506
-------- --------
PROPERTY AND EQUIPMENT, net 84,242 82,179
INTANGIBLE ASSETS, net
FCC licenses 96,926 71,657
Network affiliation agreements 213,176 175,505
Other 3,957 3,482
-------- --------
Net intangible assets 314,059 250,644
-------- --------
OTHER ASSETS
Deferred financing and acquisition costs, net 12,042 11,016
Program rights, net of current portion 14,856 10,167
-------- --------
Total other assets 26,898 21,183
-------- --------
Total assets $454,728 $384,512
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets (continued)
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,712 $ 6,887
Accrued expenses 3,310 2,806
Accrued interest 489 3,269
Current portion of long-term debt 2,750 1,500
Current portion of program rights payable 7,843 8,230
--------- ---------
Total current liabilities 19,104 22,692
LONG-TERM DEBT 249,250 209,500
DEFERRED INCOME TAXES 22,873 25,410
PROGRAM RIGHTS PAYABLE, net of current portion 15,916 10,817
REDEEMABLE PREFERRED STOCK SERIES A,
300,000 shares authorized, issued and outstanding,
liquidation preference of $30,000 38,749 37,364
REDEEMABLE PREFERRED STOCK SERIES B,
90,000 shares authorized, 37,500 issued, and outstanding,
liquidation preference of $37,500 37,107 --
STOCKHOLDER'S EQUITY:
Common stock, par value $.01 per share, 1,000 shares
authorized, issued and outstanding -- --
Additional paid-in capital 97,212 97,212
Accumulated deficit (25,483) (18,483)
--------- ---------
Net stockholder's equity 71,729 78,729
--------- ---------
Total liabilities and stockholder's equity $ 454,728 $ 384,512
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 1998
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET REVENUES $ 20,414 $ 11,335
OPERATING EXPENSES:
Station operating 6,966 4,098
Selling, general and administrative 5,363 2,980
Trade and barter 643 388
Depreciation of property and equipment 3,425 1,353
Amortization of intangibles and other assets 5,887 3,399
Corporate expenses 740 461
-------- --------
Total operating expenses 23,024 12,679
-------- --------
OPERATING LOSS (2,610) (1,344)
OTHER (EXPENSE) INCOME:
Interest expense (5,162) (3,052)
Other (expense) income, net (49) 38
-------- --------
NET LOSS BEFORE INCOME TAX BENEFIT (7,821) (4,358)
INCOME TAX BENEFIT 2,525 264
-------- --------
NET LOSS (5,296) (4,094)
REDEEMABLE PREFERRED STOCK DIVIDENDS AND ACCRETION:
SERIES A (1,386) (1,212)
SERIES B (318) --
-------- --------
Total dividends and accretion (1,704) (1,212)
-------- --------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDER $ (7,000) $ (5,306)
======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (7,000) $ (5,306)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,000 1,000
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statement of Stockholder's Equity
For the Three Months Ended March 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Net
Common Additional Accumulated Stockholder's
Stock Paid-In Capital Deficit Equity
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ -- $ 97,212 $(18,483) $ 78,729
Net loss applicable to
common shareholder -- -- (7,000) (7,000)
------- -------- -------- --------
Balance, March 31, 1999 $ -- $ 97,212 $(25,483) $ 71,729
======= ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,296) $ (4,094)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation of property and equipment 3,425 1,353
Amortization of intangibles and other assets 5,887 3,399
Amortization of program rights 1,866 1,093
Payments on program rights (1,870) (1,103)
Deferred tax benefit (2,537) (300)
Loss on disposal of property and equipment 119 3
Change in operating assets and liabilities
net of effects from acquired station:
Accounts receivable 987 2,212
Other current assets (519) 288
Accounts payable and accrued expenses (4,925) (4,093)
-------- --------
Net cash used in operating activities (2,863) (1,242)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of WUPW-TV (74,171) --
Capital expenditures (1,017) (286)
Other 98 3
-------- --------
Net cash used in investing activities (75,090) (283)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under credit agreement 41,000 12,000
Repayment of credit agreement -- (1,000)
Deferred acquisition and debt refinancing
costs incurred (226) (19)
Payment of Preferred Stock Dividend Series B (311) --
Proceeds from sale of Redeemable Preferred Stock
Series B, net of expenses 37,100 --
-------- --------
Net cash provided by financing activities 77,563 10,981
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (390) 9,456
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE 5,347 1,632
-------- --------
CASH AND CASH EQUIVALENTS, ENDING BALANCE $ 4,957 $ 11,088
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non cash items
Preferred dividends and accretion $ 1,393 $ 1,212
New program contracts $ 3,680 $ 28
Cash paid for interest $ 7,943 $ 5,876
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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STC BROADCASTING, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 1999
(dollars in thousands, except for per share data and percentages)
1. PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements are of STC
Broadcasting, Inc. and subsidiaries (the Company). STC Broadcasting, Inc. was
incorporated on November 1, 1996, in the state of Delaware, commenced operations
on March 1, 1997, and is a wholly owned subsidiary of Sunrise Television Corp.
(Sunrise). All of the common stock of Sunrise is owned by Sunrise Television
Partners, L.P., of which the managing general partner is Thomas O. Hicks, an
affiliate of Hicks, Muse, Tate and Furst, Incorporated (Hicks Muse). At March
31, 1999, the Company operated the following commercial television stations (the
Stations):
<TABLE>
<CAPTION>
Network
Station Acquisition Date Market Affiliation
- ------- ---------------- ------ -----------
<S> <C> <C> <C>
WEYI March 1, 1997 Flint, Saginaw-Bay City, Michigan NBC
WROC March 1, 1997 Rochester, New York CBS
WTOV March 1, 1997 Wheeling, West Virginia and
Steubenville, Ohio NBC
WJAC October 1, 1997 Johnstown, Altoona, State College,
Pennsylvania NBC
KRBC April 1, 1998 Abilene-Sweetwater, Texas NBC
KACB April 1, 1998 San Angelo, Texas NBC
WDTN June 1, 1998 Dayton, Ohio ABC
WNAC June 1, 1998 Providence, Rhode Island and
New Bedford, Massachusetts FOX
KVLY November 1, 1998 Fargo-Valley City, North Dakota NBC
KFYR November 1, 1998 Minot-Bismarck-Dickinson, North Dakota NBC
KUMV November 1, 1998 Minot-Bismarck-Dickinson, North Dakota NBC
KQCD November 1, 1998 Minot-Bismarck-Dickinson, North Dakota NBC
KMOT November 1, 1998 Minot-Bismarck-Dickinson, North Dakota NBC
WUPW February 1, 1999 Toledo, Ohio FOX
</TABLE>
(1) On April 1, 1999, STC Broadcasting completed the non-license sale of the
WROC assets to Nexstar Broadcasting of Rochester, Inc. (see notes 4 and 6).
Various subsidiaries hold the assets of the Stations. One subsidiary,
Smith Acquisition Company (SAC) has a one percent equity interest controlled by
Smith Broadcasting Group, Inc. (SBG). SBG is controlled by Robert N. Smith, the
Chief Executive Officer and a Director of Sunrise and the Company. SBG's
interest in SAC, which include WTOV and WNAC, represents an immaterial portion
of the Company's total assets.
Significant intercompany transactions and accounts have been
eliminated. As permitted under the applicable rules and regulations of the
Securities and Exchange Commission, these financial statements are condensed
interim financial statements and do not include all disclosures and footnotes
required by generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto as of December 31, 1998
included in the Company's previously filed Annual Report on Form 10-K. The
interim financial statements are unaudited but include all adjustments, which
are of a normal recurring nature, that the Company considers necessary for a
fair presentation of results for such period. Operating results of interim
periods are not necessarily indicative of results for a full year.
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2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Senior Subordinated Notes $100,000 $100,000
Senior Credit Agreement 152,000 111,000
-------- --------
Total long-term debt 252,000 211,000
Less: current portion 2,750 1,500
-------- --------
Net long-term debt $249,250 $209,500
======== ========
</TABLE>
The following table shows interest expense for the periods indicated:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Senior Subordinated Notes $2,719 $2,719
Senior Credit Agreement 2,443 333
------ ------
Total $5,162 $3,052
====== ======
</TABLE>
In 1997, the Company completed a private placement of $100,000
principal amount of its 11% Senior Subordinated Notes (Senior Subordinated
Notes), which subsequently were exchanged for registered Senior Subordinated
Notes having substantially identical terms. Interest on the Senior Subordinated
Notes is payable on March 15 and September 15 of each year.
On July 2, 1998, the Company entered into the Senior Credit Agreement
which provides a $100,000 term loan facility and $65,000 revolving credit
facility. The term loan facility is payable in quarterly installments commencing
on September 30, 1999 and ending June 30, 2006. The revolving loan facility
requires scheduled annual reductions of the commitment amount commencing on
September 30, 2001. At March 31, 1999, the Company had drawn $100,000 on the
term loan facility and $52,000 under the revolving loan facility. The loan under
the Senior Credit Agreement bears interest at floating rates based upon the
interest rate option selected by the Company.
The Company has entered into interest rate swap agreements to reduce
the impact of changing interest rates on $110,000 of its variable rate borrowing
under the Senior Credit Agreement. The base interest rate was fixed at 5.06% to
5.15% plus the applicable borrowing margin (currently 1.875%) for an overall
borrowing rate of 6.935% to 7.025% at March 31, 1999.
The Senior Credit Agreement provides for first priority security
interest in all of the tangible and intangible assets of the Company and its
direct and indirect subsidiaries. In addition, the loans under the Senior Credit
Agreement are guaranteed by Sunrise and the Company's current direct and
indirect and any future subsidiaries. The Amended Credit Agreement and the
Senior Subordinated Notes contain certain financial and operating maintenance
covenants including a maximum consolidated leverage ratio (initially 7.0:1), a
minimum consolidated fixed charge coverage ratio (initially 1.05:1), and a
consolidated interest coverage ratio (initially 1.35:1). The Company is limited
in the amount of annual payments that may be made for corporate expenses and
capital expenditures.
The operating covenants of the Senior Credit Agreement and the Senior
Subordinated Notes include limitations on the ability of the Company to: (i)
incur additional indebtedness, other than certain permitted indebtedness; (ii)
permit additional liens or encumbrances, other than certain permitted liens;
(iii) make any investments in other persons, other than certain permitted
investments; (iv) become obligated with respect to contingent obligations, other
than certain permitted contingent obligations; and (v) make restricted payments
(including dividends on its common stock). The operating covenants also include
restrictions on certain specified
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fundamental changes, such as mergers and asset sales, transactions with
shareholders and affiliates and transactions outside the ordinary course of
business as currently conducted, amendments or waivers of certain specified
agreements and the issuance of guarantees or other credit enhancements. At March
31, 1999, the Company was in compliance with the financing and operating
covenants of both the Senior Credit Agreement and the Senior Subordinated Notes.
3. REDEEMABLE PREFERRED STOCK:
Series A
In March 1997, the Company issued 300,000 shares of Redeemable
Preferred Stock Series A with an aggregate liquidation preference of $30,000, or
$100 per share, which is entitled to quarterly dividends that will accrue at a
rate per annum of 14%. Prior to February 28, 2002, dividends may be paid in
either additional whole shares of Redeemable Preferred Stock Series A or cash,
at the Company's option , and only in cash following that date. The Amended
Credit Agreement and Senior Subordinated Notes prohibit the payment of cash
dividends until May 31, 2002. Dividends have been accrued but are unpaid on the
Redeemable Preferred Stock Series A.
The Redeemable Preferred Stock Series A is subject to mandatory
redemption in whole on February 28, 2008, at a price equal to the then effective
liquidation preference thereof, plus all accumulated and unpaid dividends to the
date of redemption. Prior to February 28, 2008, the Company has various options
on redemption of the Redeemable Preferred Stock Series A at various redemption
prices exceeding the liquidation preference.
The Company may, at its option, subject to certain conditions,
including its ability to incur additional indebtedness under the Senior
Subordinated Notes and the Senior Credit Agreement, on any scheduled dividend
payment date occurring on or after the Redeemable Preferred Stock Series A
issuance date, exchange the Redeemable Preferred Stock Series A, in whole but
not in part, for 14% Subordinated Exchange Debentures due 2008 (the Exchange
Debentures). Holders of the Redeemable Preferred Stock Series A will be entitled
to receive $1.00 principal amount of Exchange Debentures for each $1.00 in
liquidation preference of Redeemable Preferred Stock Series A.
Holders of the Redeemable Preferred Stock Series A have no voting
rights, except as otherwise required by law; however, the holders of the
Redeemable Preferred Stock Series A, voting together as a single class with the
holders of the Redeemable Preferred Stock Series B, shall have the right to
elect the lesser of the two directors or 25% of the total number of directors
constituting the Board of Directors of the Company upon the occurrence of
certain events, including but not limited to, the failure by the Company on or
after February 28, 2002, to pay cash dividends in full on the Redeemable
Preferred Stock Series A for six or more quarterly dividend periods, the failure
by the Company to discharge any mandatory redemption or repayment obligation
with respect to the Redeemable Preferred Stock Series A, the breach or violation
of one or more of the covenants contained in the Certificate of Designation, or
the failure by the Company to repay at final stated maturity, or the
acceleration of the final stated maturity of, certain indebtedness of the
Company.
The Certificate of Designation for the Redeemable Preferred Stock
Series A and the indenture for the Exchange Debentures contain covenants
customary for securities comparable to the Redeemable Preferred Stock Series A
and the Exchange Debentures, including covenants that restrict the ability of
the Company and its subsidiaries to incur additional indebtedness, pay dividends
and make certain other restricted payments, to merge or consolidate with any
other person or to sell, assign, transfer, lease, convey, or otherwise dispose
of all or substantially all of the assets of the Company. Such covenants are
substantially identical to those covenants contained in the Senior Subordinated
Notes.
Series B
On February 5, 1999, the Company entered into a $90,000 Redeemable
Preferred Stock Series B Bridge Financing Agreement (Preferred Agreement). The
Redeemable Preferred Stock Series B has a par value of $0.01 per share with a
liquidation preference of $1,000 per share. With respect to dividends and
distributions upon liquidation, winding up and dissolution of the Company, the
Redeemable Preferred Stock Series B ranks on a parity with the 14% Redeemable
Preferred Stock Series A. Cash dividends are payable monthly at either: (i)
LIBOR for the applicable dividend period plus 125 basis points; or (ii) the ABR
rate. At the option of the Company, any dividends payable on any dividend
payment date after August 5, 1999, may be paid in additional whole shares of
Redeemable Preferred Stock Series B.
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At any time, the Company may redeem the shares of Redeemable Preferred
Stock Series B at a redemption price equal to 100% of the liquidation preference
per share plus all accumulated and unpaid dividends per share (Redemption
Value). On December 31, 2008, the Company will have an obligation to redeem the
then outstanding shares and concurrently with the consummation of any offering
of any debt or equity securities of the Company or Sunrise use the net cash
proceeds of such offering to redeem the Redeemable Preferred Stock Series B at
the Redemption Value. The holders of Redeemable Preferred Stock Series B, have
no voting rights, except as otherwise required by law; however, the holders of
the Redeemable Preferred Stock Series B, voting together as a single class with
the holders of the Redeemable Preferred Stock Series A, shall have the right to
elect the lessor of two directors or 25% of the total directors constituting the
Board of Directors of the Company upon the occurrence of certain events,
including but not limited to, the failure by the Company on or after February 5,
1999, to pay dividends in full or the failure by the Company to discharge any
mandatory redemption or repayment obligation with respect to the Redeemable
Preferred Stock Series B.
On February 5, 1999, Hicks, Muse, Tate and Furst Equity Fund III, L.P.
(the Fund) and other related Hicks Muse entities entered into a Put and Call
Agreement with the purchasers of the Redeemable Preferred Stock Series B. At the
time of a Trigger Event, such purchasers may require the Fund to purchase
outstanding shares of the Redeemable Preferred Stock Series B at the Redemption
Price. Trigger Events are defined as the earliest to occur of: (i) the
occurrence of an event of default under the Senior Subordinated Notes, the
Senior Credit Agreement or the Preferred Agreement; (ii) a failure to comply
with any terms of the Certificate of Designation with respect to the Redeemable
Preferred Stock Series B; or (iii) August 5, 1999. The Fund has the right to
call the Redeemable Preferred Stock Series B at the Redemption Value at any
time.
4. ACQUISITIONS AND DISPOSITION
1998 Transactions
During the first quarter of 1998, the Company did not complete any
acquisition or disposition transactions.
1999 Transactions
Toledo Acquisition
On February 5, 1999, the Company completed the acquisition of the
assets related to WUPW-TV from Raycom Media, Inc. pursuant to the terms of an
asset purchase agreement dated July 24, 1998. The purchase price including fees
and expenses was approximately $74,400. WUPW, Channel 36, is the UHF
FOX-affiliated television station serving the Toledo, Ohio market. The Company
financed the acquisition with $40,000 of borrowings under the Senior Credit
Agreement and the sale of $35,000 of Redeemable Preferred Stock Series B.
Pending Transactions
Sinclair Acquisition
On March 16, 1999, the Company and Sinclair Communications, Inc.
(Sinclair) entered into a purchase agreement (the Sinclair Agreement). Pursuant
to the Sinclair Agreement, the Company will purchase from Sinclair: WICS,
Channel 20, Springfield, Illinois; WICD, Channel 15, Champaign, Illinois; and
KGAN, Channel 2, Cedar Rapids, Iowa for a total purchase price of approximately
$87,000, including working capital, fees and expenses. WICS and WICD are NBC
affiliates and KGAN is a CBS affiliate. Closing of this purchase is subject to
customary conditions, including review by the Department of Justice and the
Federal Communications Commission. On April 29,1999, the Antitrust Division of
the United States Department of Justice (the DOJ) issued a request for
additional information under the HSR Act in connection with the acquisition. The
Company and Sinclair are negotiating with the DOJ regarding this transaction and
the waiting period under the HSR Act has been extended pending completion of
these discussions. Accordingly at this time, the Company cannot be sure of the
terms on which this transaction will be completed, if at all.
Rochester Disposition
On March 3, 1999, the Company, STC License Company, and Nexstar
Broadcasting of Rochester, Inc. (Nexstar) entered into an asset purchase
agreement (the Rochester Agreement) to sell to Nexstar the television broadcast
license and operating assets of WROC, Rochester, New York (WROC). The total
purchase price for WROC will be approximately
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$46,000 subject to adjustment for certain customary proration amounts. Closing
of this sale is subject to customary conditions, including review by the Federal
Communications Commission.
5. SEGMENT INFORMATION
The Company has 11 reportable segments, two license corporations and
a corporate office in accordance with SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." These segments are television stations
in designated market areas (DMA) as defined by A. C. Nielsen Company.
Substantially all of each segments' revenues are broadcast related. WUPW was a
new reporting segment during the first quarter of 1999. In the second quarter
of 1998, the Company acquired and traded television stations WNNE and WPTZ, the
NBC affiliates for Burlington, Vermont and Plattsburgh, New York.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (see Note 2 to the Company's
December 31, 1998 Annual Report on Form 10K). Company senior corporate
management evaluates performance based on operating income before interest
income, interest expenses, income taxes, nonrecurring gains and losses, and
extraordinary items.
The Company has no significant intersegment revenues or transfers other
than that interest is allocated to subsidiaries of the Company but not
divisions. All segments have local distinct management separate from senior
corporate management. Each management team is evaluated based upon the results
of operations of their station.
The following table sets forth information by segments and reconciles
segment information to consolidated financial statements.
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<TABLE>
<CAPTION>
Net Net Total
Segment Period Revenues (Loss)(1) Assets
- ------- ------ -------- ------ ------
<S> <C> <C> <C> <C>
WDTN 1999 $4,509 $ (165) $ 61,632
1998 - - 60,931
WEYI 1999 2,104 (22) 27,974
1998 1,881 (111) 28,768
WTOV 1999 1,771 (532) 22,600
1998 1,696 58 23,203
WJAC 1999 2,278 (1,083) 44,810
1998 2,243 (1,568) 46,222
WNAC/WPRI 1999 711 (967) 30,040
1998 - - 30,903
KRBC/KACB 1999 973 (477) 13,139
1998 - - 13,474
KVLY 1999 1,540 (98) 17,026
1998 - - 17,895
KFYR and satellites 1999 2,373 (579) 42,069
1998 - - 43,367
WUPW 1999 1,716 (232) 52,384
1998 - - -
License Corps(2) 1999 - 883 96,926
1998 - - 71,657
Corporate 1999 - (1,485) 8,218
1998 - (2,385) 8,893
KSBW 1999 - - -
1998 2,625 (53) -
WROC 1999 2,439 (539) 37,910
1998 2,890 (35) 39,199
------- ------- --------
Company Totals 1999 $20,414 $(5,296) $454,728
1998 $11,335 $(4,094) $384,512
======= ======= ========
</TABLE>
(1) The Company allocates income taxes to the corporate office.
(2) During 1998, amounts were not allocated to license corporations until year
end.
6. SUBSEQUENT EVENT:
On April 1, 1999, STC Broadcasting completed the non-license sale of
WROC assets to Nexstar for $43,000. The sale of license assets is expected to
close during the third quarter of 1999. The company repaid $42,000 of the amount
outstanding under the Senior Credit Agreement with the net proceeds.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The operating revenues of the Stations are derived primarily from
advertising revenues and, to a much lesser extent, compensation paid by the
networks to the Stations for broadcasting network programming. The Stations'
primary operating expenses are employee compensation and related benefits, news
gathering costs, film and syndicated programming expenditures and promotional
costs. A significant proportion of the operating expenses of the Stations are
fixed.
In general, television stations receive revenues from advertising sold
for placement within and adjoining its local and network programming.
Advertising is sold in time increments and is priced primarily on the basis of a
program's popularity within the demographic group an advertiser desires to
reach, as measured principally by audience surveys conducted in February, May
and November of each year. The ratings of local television stations affiliated
with a national television network are affected by ratings of network
programming. Advertising rates are affected by the number of advertisers
competing for the available time, the size and demographic makeup of the markets
served by the television station and the availability of alternative advertising
media in the market areas. Advertising rates are highest during the most
desirable viewing hours, generally during local news programming, access (the
hour before prime time), early fringe (3:00 p.m. to 5:00 p.m.) and prime time.
Most advertising contracts are short-term and generally run for only a
few weeks. A majority of the revenues are generated from local advertising,
which is sold primarily by a Station's sales staff, and the remainder of the
advertising revenues represents national advertising, which is sold by national
advertising sales representatives. The Stations generally pay commissions to
advertising agencies on local and national advertising, and on national
advertising the Stations pay additional commissions to the national sales
representatives operating under an agreement that provides for exclusive
representation within the particular market of the Station. The spot broadcast
revenues of the Stations are generally highest in the second and fourth quarters
of each year, due in part to increases in consumer advertising in the spring and
retail advertising in the period leading up to and including the holiday season.
Advertising spending by political candidates is typically heaviest during the
fourth quarter in the even years (e.g. 1998 and 2000).
Broadcast Cash Flow is defined as operating income (loss) plus
depreciation of property and equipment, amortization of intangible assets,
corporate overhead and amortization of program rights, less payments for
program rights. EBITDA is defined as operating income (loss) plus depreciation
of property and equipment, amortization of intangible assets, and amortization
of program rights, less payments for program rights. The Company has included
broadcast cash flow and EBITDA data because such data are commonly used as a
measure of performance for broadcast companies and are used by investors to
measure a company's ability to service debt. Broadcast cash flow and EBITDA are
not, and should not be used as an indicator or alternative to operating income,
net loss or cash flow as reflected in the accompanying financial statements, is
not intended to represent funds available for debt service, dividends,
reinvestment or other discretionary uses, 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.
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve a number of risks and uncertainties. When used in this Quarterly
Report on Form 10-Q the words "believes," "anticipated," and similar expressions
are intended to identify forward-looking statements. There are a number of
factors that could cause the Company's actual results to differ materially from
those forecasted or projected in such forward-looking statements. These factors
include, without limitation, competition from other local free over-the-air
broadcast stations, acquisition of additional broadcast properties and future
debt service obligations. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date hereof. The
Company undertakes no obligations to publicly release the result of any
revisions to these forward-looking statements which may be made to reflect
events or circumstance after the date hereof or to reflect the occurrence of
unanticipated events.
In the discussion comparing the three months ended March 31, 1999 and
1998, WTOV, WEYI and WROC, the original stations acquired by the Company in
March 1997 and still owned by the Company at March 31, 1999, and WJAC, which was
acquired on October 1, 1997, will be referred to as the Core Stations. The
effect of the acquisition of television stations KRBC and KACB; KVLY and KFYR
(the Meyer Stations); and WUPW will be referred to as the Station Acquisitions.
The KRBC and KACB acquisition closed on April 1, 1998, the Meyer
14
<PAGE> 15
Stations acquisition closed on November 1, 1998, and the WUPW acquisition closed
on February 1, 1999. The Company continues to own all of the stations acquired
in the Station Acquisitions. In April of 1998, the Company acquired WPTZ and
WNNE, the NBC affiliates serving the Burlington, Vermont and Plattsburgh, New
York television markets from Sinclair Broadcasting Group, Inc.. Effective June
1, 1998, the Company swapped KSBW, the NBC affiliate for Salinas, California
acquired in March 1997, WPTZ and WNNE to Hearst-Argyle Television, Inc. for
WDTN, WNAC and WNAC's interest in the Joint Marketing Agreement with WPRI, the
CBS affiliate for Providence, Rhode Island, which is owned by Clear Channel
Communications, Inc. These transactions will be referred to as the Swap
Transaction.
HISTORICAL PERFORMANCE
NET REVENUES.
Set forth below are the principal types of television revenues that the
Company has generated for the periods indicated and the percentage contribution
of each to net revenues.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------------------- ----------------------
$ % $ %
-------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross Revenues:
Local $ 12,133 51.5% $ 6,568 49.5%
National 8,052 34.1% 4,852 36.6%
Political 49 0.2% 236 1.8%
Network compensation 1,467 6.2% 947 7.1%
Trade and barter 652 2.8% 418 3.2%
Income from joint operating agreement (1) 711 3.0% -- --
Other 524 2.2% 243 1.8%
-------- ----- -------- -----
Total 23,588 100.0% 13,264 100.0%
Agency and national
representative commissions (3,174) (13.5%) (1,929) (14.5%)
-------- ----- -------- -----
Net revenues $ 20,414 86.5% $ 11,335 85.5%
======== ===== ======== =====
</TABLE>
(1) Represents 50% of the broadcast cash flow of WNAC and WPRI.
15
<PAGE> 16
RESULTS OF OPERATIONS.
Set forth below is a summary of the operations of the Company for the
periods indicated and their percentages of net revenues.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------------------- -------------------------
$ % of $ % of
Revenues Revenues
-------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net Revenues: $ 20,414 100.0% $ 11,335 100.0%
Operating Expenses:
Station operating (1) 6,966 34.1% 4,098 36.2%
Selling, general and administrative 5,363 26.3% 2,980 26.3%
Trade and barter 643 3.2% 388 3.4%
Depreciation 3,425 16.8% 1,353 11.9%
Amortization 5,887 28.8% 3,399 30.0%
Corporate expenses 740 3.6% 461 4.1%
-------- ----- -------- -----
Total Operating Expenses 23,024 112.8% 12,679 111.9%
-------- ----- -------- -----
Operating loss $ (2,610) (12.8%) $ (1,344) (11.9%)
======== ===== ======== =====
Broadcast cash flow $ 7,438 36.4% $ 3,859 34.0%
======== ===== ======== =====
EBITDA $ 6,698 32.8% $ 3,398 30.0%
======== ===== ======== =====
</TABLE>
(1) Includes amortization of program rights.
BROADCAST CASH FLOW AND EBITDA:
The following table sets forth a computation of broadcast cash flow and EBITDA
for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------- -------
(Dollars in thousands)
<S> <C> <C>
Operating Loss $(2,610) $(1,344)
Add: Amortization of program rights 1,866 1,093
Depreciation of property and equipment 3,425 1,353
Amortization of intangibles 5,887 3,399
Corporate overhead 740 461
Less: Payments for program rights (1,870) (1,103)
------- -------
Broadcast cash flow 7,438 3,859
Less: Corporate Expenses (740) (461)
------- -------
EBITDA $ 6,698 $ 3,398
======= =======
</TABLE>
16
<PAGE> 17
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Revenues
Net revenues increased by $9.1 million or 80.1% to $20.4 million for
the three months ended March 31, 1999 from $11.3 million for the three months
ended March 31, 1998. An increase of $6.6 million is attributable to the
Acquisitions and an increase of $2.6 million is attributable to the Swap
Transactions. A decrease of $0.1 million for the Core Stations is represented by
a decrease of $0.4 million at WROC due to the loss of Olympic revenue in 1999
offset by an increase of $0.3 million at the other Core Stations.
Station Operating Expenses
Station operating expenses were $7.0 million for the three months ended
March 31, 1999 compared to $4.1 million for the three months ended March 31,
1998, an increase of $2.9 million or 70.0% over the comparable period. An
increase of $2.1 million is attributable to the Acquisitions and an increase of
$0.8 million is attributable to the Swap Transactions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5.4 million for the
three months ended March 31, 1999 compared to $3.0 million for the three months
ended March 31, 1998, an increase of $2.4 million or 80.0% over the comparable
period. An increase of $2.1 million is attributable to the Acquisitions, an
increase of $0.4 million is attributable to the Swap Transactions and a decrease
of $0.1 million is attributable to the Core Stations.
Trade and Barter Expense
Trade and barter expenses were $0.6 million for the three months ended
March 31, 1999 compared to $0.4 million for the three months ended March 31,
1998, an increase of $0.2 million or 65.7% over the comparable period. The
increase of $0.2 million is attributable to the Acquisitions.
Depreciation
Depreciation increased by $2.1 million or 153.1% to $3.4 million for
the three months ended March 31, 1999 from $1.3 million for the comparable
period in 1998. An increase of $1.6 million is attributable to the Acquisitions,
an increase of $0.4 million is attributable to the Swap Transactions and a
increase of $0.1 million is attributable to the Core Stations.
Amortization
Amortization increased by $2.5 million or 73.2% to $5.9 million for the
three months ended March 31, 1999 from $3.4 million for the comparable period in
1998. An increase of $1.6 million is attributable to the Acquisitions, an
increase of $1.0 million is attributable to the Swap Transactions and a decrease
of $0.1 million is attributable to the Core Stations.
Corporate expenses
Corporate overhead increased by $0.2 million or 60.5% to $0.7 million
for the three months ended March 31, 1999 from $0.5 million for the three months
ended March 31, 1998. Cost increases related mostly to salary and travel costs
as the Company added staff for anticipated expansion.
Operating Income
Operating income decreased by $1.3 million or 94.2% to a loss of $2.6
million for the three months ended March 31, 1999 from a loss of $1.3 million
for the three months ended March 31, 1998, due to the reasons outlined above.
17
<PAGE> 18
Interest Expense
Interest expense increased by $2.1 million or 69.1% to $5.2 million for
the three months ended March 31, 1999, from $3.1 million for the three months
ended March 31, 1998. An increase of $1.3 million is attributable to the
Acquisitions and an increase of $0.8 million is attributable to the Swap
Transactions.
Income Tax Benefit
Income tax benefit increased by $2.3 million to $2.5 million for the
three months ended March 31, 1999 from $0.3 million for the three months ended
March 31, 1998. This increase is attributable to the acquisition of WJAC, KRBC
and KACB, and the related amortization of the step up in basis of their assets
for purchase accounting and the reduction in deferred taxes due to the
recognition of loss carryforwards.
Net Loss
Net loss increased by $1.2 million to $5.3 million for the three months
ended March 31, 1999, from $4.1 million for the three months ended March 31,
1998 for the reasons stated above.
Liquidity and Capital Resources
As of March 31, 1999, the Company had $5.0 million in cash balances and
net working capital of approximately $10.4 million. The Company's primary
sources of liquidity are cash provided by operations, and availability under the
Senior Credit Agreement and the Preferred Stock Agreement.
Net cash flows used in operating activities increased by $1.6 million
to $2.9 million for the three months ended March 31, 1999 from $1.3 million for
the three months ended March 31, 1998. The Company made interest and film
payments of $7.9 million and $1.9 million, respectively, during the period ended
March 31, 1999 compared to payments of $5.9 million and $1.1 million for the
three months ended March 31, 1998.
Net cash flows used in investing activities increased by $74.8 million
to $75.1 million for the three months ended March 31, 1999 from $0.3 million for
the three months ended March 31, 1998. In 1999, the Company expended
approximately $74.2 million to complete the acquisition of WUPW. In 1998, no
acquisitions occurred in the first quarter.
Net cash flows provided by financing activities increased by $66.6
million to $77.6 million for the three months ended March 31, 1999 from $11.0
million for the three months ended March 31, 1998. In 1999, the Company sold
$37.1 million in Redeemable Preferred Stock Series B net of expense and borrowed
$41.0 million under the Senior Credit Agreement.
The Company's liquidity needs consist primarily of debt service
requirements for the Senior Credit Agreement and the 11% Senior Subordinated
Notes (Senior Subordinated Notes), working capital needs, the funding of capital
expenditures and acquisitions. The Company may incur additional indebtedness in
the future, subject to certain limitations contained in the Senior Credit
Agreement and the Senior Subordinate Notes and intends to do so in order to
fund future acquisitions as part of its business strategy. The Company has
historically funded its acquisition activities through a combination of
borrowings and issuances of preferred and common stock. The Company's primary
sources of liquidity are cash provided by operations, and availability under its
Senior Credit Agreement.
Principal and interest payments under the Senior Credit Agreement and
the Senior Subordinated Notes will represent significant liquidity requirements
for the Company. Loans under the Senior Credit Agreement bear interest at
floating rates based upon the interest rate option selected by the Company. The
Senior Credit Agreement and the Senior Subordinated Notes will limit the
Company's ability to pay cash dividends prior to 2002. The Senior Credit
Agreement and the Senior Subordinated Notes impose certain limitations on the
ability of the Company and its subsidiaries to, among other things, pay
dividends or make restricted payments, consummate certain asset sales, enter
into transactions with affiliates, incur liens, impose restrictions on the
ability of a subsidiary to pay dividends or make certain payments to Sunrise,
merge or consolidate with any person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company.
18
<PAGE> 19
In 1997, the Company completed a private placement of $100.0 million
principal amount of its Senior Subordinated Notes, which subsequently were
exchanged for registered Senior Subordinated Notes having substantially
identical terms. Interest on the Senior Subordinated Notes is payable on March
15 and September 15 of each year.
On July 2, 1998, the Company entered into the Senior Credit Agreement
with various lenders which provides a $100.0 million Term Loan Facility and
$65.0 million Revolving Credit Facility. The term loan facility is payable in
quarterly installments commencing on September 30, 1999 and ending June 3, 2006.
The revolving loan facility requires scheduled annual reductions of the
commitment amount commencing on September 30, 2001. At March 3, 1999, the
Company had drawn $100.0 million on the term loan facility and $52.0 million
under the revolving loan facility. The loan under the Senior Credit Agreement
bears interest at floating rates based upon the interest rate option selected by
the Company.
The Senior Credit Agreement provides for first priority security
interest in all of the tangible and intangible assets of the Company and its
direct and indirect subsidiaries. In addition, the loans under the Senior Credit
Agreement are guaranteed by Sunrise and the Company's current direct and
indirect and any future subsidiaries. The Senior Credit Agreement and the Senior
Subordinated Notes contain certain financial operating maintenance covenants
including a maximum consolidation leverage ratio (initially 7.0:1), a minimum
consolidated fixed charge coverage ratio (initially 1.05:1), and a consolidated
interest coverage ratio (initially 1.3:1). The Company is limited in the amount
of annual payments that may be made for capital expenditures and corporate
overhead.
The operating covenants of the Senior Credit Agreement and the Senior
Subordinated Notes include limitations on the ability of he Company to (i) incur
additional indebtedness, other than certain permitted indebtedness; (ii) permit
additional liens or encumbrances, other than certain permitted liens; (iii) make
any investments in other persons, other than certain permitted investments; (iv)
become obligated with respect to contingent obligations, other than certain
permitted contingent obligations; and (v) make restricted payments (including
dividends on its common stock). The operating covenants also include
restrictions on certain specified fundamental changes, such as mergers and asset
sales, transactions with shareholders and affiliates and transactions outside
the ordinary course of business as currently conducted, amendments or waivers of
certain specified agreements and the issuance of guarantees or other credit
enhancements. At March 31, 1999, the Company was in compliance with the
financing and operating covenants of both the Senior Credit Agreement and the
Senior Subordinated Notes.
On February 5, 1999, the Company entered into an agreement (the Series
B Agreement) to sell up to $90.0 million of Series B Redeemable Preferred Stock
in order to finance acquisitions by the Company from time to time. An aggregate
of $37.5 million of Series B Redeemable Preferred Stock was sold on February 5,
1999 to finance the Toledo Acquisition ($35.0 million) and to fund an escrow
account ($2.5 million) to pay dividends on such Series B Redeemable Preferred
Stock.
Based on the current level of operations and anticipated future
internally generated growth, the Company anticipates that its cash flow from
operations, together with available borrowings under the Senior Credit Agreement
and the Preferred Stock Agreement will be sufficient to meet its anticipated
requirements for working capital, capital expenditures, and debt service
requirements. The Company's future operating performance and ability to service
or refinance the Senior Credit Agreement will be subject to future economic
conditions and to financial, business, and other factors, many of which are
beyond the control of the Company. The ability of the Company to implement its
business strategy, and to consummate future acquisitions will require additional
debt and equity capital and no assurance can be given as to whether, and on what
terms, such additional debt and / or equity capital will be available, including
additional equity contributions from the Company's stockholder. The degree to
which the Company is leveraged could have a significant effect on its results of
operations.
Capital Expenditures
Capital expenditures were $1.0 million and $0.3 million for the three
month periods ended March 31, 1999 and 1998, respectively. Capital expenditures
are anticipated to be $5.8 million for the year ended December 31, 1999. We
anticipate that the digital television will require a minimum expenditure of
$3.0 million per station to develop facilities necessary for transmitting a
digital signal with initial expenditures required beginning in 2000. The
Company's ability to make capital expenditures is subject to certain
restrictions under the Bank Credit Agreement.
19
<PAGE> 20
Credit and Interest Rate Risks
The Company's financial instruments that constitute exposed credit
risks consist primarily of cash equivalents and trade receivables. The Company's
cash equivalents consist solely of high quality securities. Concentrations of
credit risks with respect to receivables are somewhat limited due to the large
number of customers and to their dispersion across the geographic areas served
by the Stations. No single customer amounts to 10% of the Company's total
outstanding receivables.
The Company was exposed to minimal market risk related to interest
rates as of December 31, 1998. The Company's Senior Subordinated Notes bear a
fixed rate of interest of 11% and are due and payable on March 15, 2007. On
September 11, 1998, the Company entered into a three year interest rate swap
agreement to reduce the impact of changing interest rates on $70.0 million of
its floating rate borrowings from the Senior Credit Agreement. The interest rate
was fixed at 5.15% plus the applicable borrowing margin (currently 1.875%) for
an overall borrowing rate of 7.025%. The floating interest rates are based upon
the three month London Interbank Offered Rate (LIBOR) and the measurement and
settlement is performed quarterly. The quarterly settlements of this agreement
will be recorded as an adjustment to interest expense and are anticipated to
have an immaterial effect on the operations of the Company for 1999. The counter
party to this agreement is one of the lenders under the Senior Credit Agreement.
On February 9, 1999, the Company entered into a two year interest rate
swap agreement, which is extendable by the other party for an additional two
years, to reduce the impact of changing interest rates on $40.0 million of its
floating rate borrowings from the Senior Credit Agreement. The interest rate was
fixed at 5.06% plus the applicable borrowing margin (currently 1.875%) for an
overall borrowing rate of 6.935%.The floating interest rates are based upon the
three month (LIBOR) and the measurement and settlement is performed quarterly.
The quarterly settlements of this agreement will be recorded as an adjustment to
interest expense and are anticipated to have an immaterial effect on the
operations of the Company for 1999. The counter party to this agreement is one
of the lenders under the Senior Credit Agreement.
Depreciation, Amortization and Interest
Because the Company has incurred substantial indebtedness in the
acquisition of stations, for which it will have significant debt service
requirements, and because the Company will have significant non-cash charges
relating to the depreciation and amortization expense of the property,
equipment, and intangibles that were acquired in the multiple station
acquisitions, the Company expects that it will report net losses for the
foreseeable future.
Inflation
The Company believes that its business is affected by inflation to an
extent no greater than other businesses are generally affected.
Employees
As of March 31, 1999, the Stations had approximately 692 full-time and
87 part-time employees. The company is a party to collective bargaining
agreements which apply to approximately 210 full time and 32 part time employees
at WROC, WEYI, WTOV, WJAC and WDTN. The Company's agreement with unions are
renegotiated from time to time, but there can be no assurances that the
Company's collective bargaining agreements will be renewed in the future or that
the Company will not experience a prolonged labor dispute. However, the Company
believes that its employee relations are generally good.
Environmental Regulation
As the owner, lessee or operator of various real properties and
facilities, the company is subject to various federal, state and local
environmental laws and regulations. Historically, compliance with such laws and
regulations has not had a material adverse effect on the Company's business.
There can be no assurance, however, that compliance with existing or new
environmental laws and regulations will not require the Company to make
significant expenditures of funds.
20
<PAGE> 21
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures that may create an inability for the Stations to broadcast their
daily programming and generate revenues.
Since its inception, the Company has been replacing and enhancing its
computer systems to gain significant operational efficiencies and, through these
same efforts, year 2000 compliant equipment and applications have been
installed. Total expenditures to March 31, 1999 have amounted to approximately
$0.8 million for the replacement and enhancement of these systems. In October
of 1998, Company management initiated a company-wide program to prepare the
Company's operations for the year 2000.
The Company's program consists of two phases. The first phase is an
assessment of the Company's systems with respect to year 2000 compliance and the
formulation of an action plan. During the assessment phase, the Company will be
reviewing individual applications, as well as the computer hardware and
satellite delivery systems. The assessment will include information technology
(IT) and non-information technology systems. A comprehensive review and
inventory was conducted in the first quarter of 1999. This phase involves an
assessment of the readiness of third party vendors and suppliers. The Company
issued year 2000 readiness questionnaires to some vendors, however, responses to
these inquiries are expected to be limited. The assessment of the Company's IT
and non-IT systems, and an action plan for remediation is expected to be
substantially completed by the end of the second quarter of 1999. Until our
assessment has been completed, the Company cannot properly determine the impact
of system failures related to year 2000 non-compliance.
The second phase of the Company's program will be the implementation
and testing of the remediations required based upon the conclusions reached from
the assessments completed during the first phase. The Company's IT environment
is comprised of two distinct layers of technology: equipment and applications.
During this second phase, the Company anticipates that it will perform a series
of tests. Unit testing will confirm the readiness of the equipment and of the
applications for the year 2000. System testing ensures that a specific
application is year 2000 compliant in conjunction with its supporting equipment.
Finally, integration testing determines whether a set of applications and the
equipment, when operated on a combined basis, deliver services that are year
2000 ready.
It may not be economically or technically feasible for the Company to
fully test certain systems, and it is possible that not all IT and non-IT
systems can be prepared for the year 2000. Therefore, the readiness plan will
provide priority to those applications and equipment critical to the operation
of the Stations and will identify contingency plans that need to be in place for
functions which could be adversely impacted. The contingency plans covering
these systems are in the process of being developed. The Company already has, as
a matter of course, many contingency plans to provide continuation of critical
business functions in the event that systems become unavailable for any reason:
including, for example, satellite failures, power outages, or major equipment
failures.
It is difficult for the Company to estimate the costs incurred to date
related specifically to remediating year 2000 issues, since the Company has been
replacing and enhancing its computer systems in the ordinary course of business.
Estimated future costs of remediation are not currently known but the Company
expects to have a cost estimate by the end of the second quarter of 1999 when
the assessment phase of the Company's year 2000 readiness plan is completed.
The Company recognizes that the scope of effort to fully execute its
year 2000 readiness plan is significant. The Company is utilizing internal
resources and, where appropriate, external resources to provide the tools and
resources to complete the plan. Despite these efforts, there can be no assurance
that the Company's systems will be timely remediated or that a failure by the
Company's vendors or suppliers to be year 2000 ready would not have a material
adverse effect on the Company's systems, or the Company's business financial
condition, cash flows, and results of operations.
21
<PAGE> 22
PRO FORMA BASIS
The pro forma information presents the results of operations of the
Stations owned by the Company at March 31, 1999, after the Rochester
disposition. The following pro forma information is not indicative of the actual
results that would have been achieved had each Station been owned and the
Rochester Disposition had occurred on January 1, 1998, nor is it indicative of
the future results of operations.
PRO FORMA NET REVENUES.
Set forth below are the principal types of television revenues that the
Company has generated for the periods indicated and the percentage contribution
of each to net revenues.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31
1999 1998 1998
---------------------------------------------------- -------------------
$ % $ % $ %
------ ----- ------ ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues:
Local $11,272 52.1% $11,316 53.5% $50,214 51.7%
National 7,169 33.2% 6,094 28.8% 27,863 28.7%
Political 49 0.2% 9 0.0% 4,593 4.7%
Network Compensation 1,335 6.2% 1,414 6.7% 5,496 5.7%
Trade and barter 570 2.6% 708 3.3% 3,165 3.2%
Income from joint operating
agreement (1) 711 3.3% 903 4.3% 4,193 4.3%
Other 511 2.4% 705 3.4% 1,677 1.7%
------ ----- ------- ----- ------- -----
Total 21,617 100.0% 21,149 100.0% 97,201 100.0%
Agency and national
representative commissions (2,872) (13.3%) (2,679) (12.7%) (12,846) (13.2%)
------- ----- ------- ----- ------- -----
Net revenue $18,745 86.7% $18,470 87.3% $84,355 86.8%
======= ===== ======= ===== ======= =====
</TABLE>
(1) Represents 50% of the broadcast cash flow of WNAC and WPRI.
22
<PAGE> 23
PRO FORMA RESULTS OF OPERATIONS.
Set forth below is a summary of the operations of the Company for the
periods indicated and their percentages of net revenue.
<TABLE>
<CAPTION>
Year Ended
Three Months Ended March 31, December 31,
1999 1998 1998
----------------------- ----------------------- -----------------------
$ % of $ % of $ % of
Revenues Revenues Revenues
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Revenues: $ 18,745 100.0% $ 18,470 100.0% $ 84,355 100.0%
Station Operating Expenses:
Station operating 6,043 32.2% 5,936 32.1% 23,933 28.4%
Selling, general and administrative 4,917 26.2% 4,885 26.4% 20,982 24.9%
Trade and barter 592 3.2% 617 3.4% 1,624 1.9%
Depreciation 3,194 17.0% 3,030 16.4% 12,318 14.6%
Amortization 5,541 29.6% 5,586 30.3% 21,773 25.8%
Corporate expenses 850 4.6% 850 4.6% 3,400 4.0%
-------- ----- -------- ----- -------- -----
Total station operating expenses 21,137 112.8% 20,904 113.2% 84,030 99.6%
-------- ----- -------- ----- -------- -----
Operating (loss) income $ (2,392) (12.8%) $ (2,434) (13.2%) $ 325 0.4%
======== ===== ======== ===== ======== =====
Broadcast cash flow $ 7,221 38.5% $ 6,921 37.5% $ 37,481 44.4%
======== ===== ======== ===== ======== =====
EBITDA $ 6,371 34.0% $ 6,071 32.9% $ 34,081 40.4%
======== ===== ======== ===== ======== =====
</TABLE>
PRO FORMA BROADCAST CASH FLOW AND EBITDA:
The following table sets forth a computation of broadcast cash flow and EBITDA
for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
1999 1998 1998
------- ------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating (Loss) Income $ (2,392) $ (2,434) $ 325
Add: Amortization of program right 1,507 1,527 6,136
Depreciation of property and equipment 3,194 3,030 12,318
Amortization of intangibles 5,541 5,586 21,773
Corporate overhead 850 850 3,400
Less: Payments for program rights (1,479) (1,638) (6,471)
-------- -------- --------
Broadcast cash flow 7,221 6,921 37,481
Less: Corporate expenses (850) (850) (3,400)
-------- -------- --------
EBITDA $ 6,371 $ 6,071 $ 34,081
======== ======== ========
</TABLE>
ITEM 5. OTHER INFORMATION
On March 16, 1999, the Company and Sinclair Communications, Inc.
(Sinclair) entered into a purchase agreement (the Sinclair Agreement). Pursuant
to the Sinclair Agreement, the Company will purchase from Sinclair: WICS,
Channel 20, Springfield, Illinois; WICD, Channel 15, Champaign, Illinois; and
KGAN, Channel 2, Cedar Rapids, Iowa for a total purchase price of approximately
$87,000, including working capital, fees and expenses. WICS and WICD are NBC
affiliates and KGAN is a CBS affiliate. Closing of this purchase is subject to
customary conditions, including review by the Department of Justice and the
Federal Communications Commission. On April 29, 1999, the Antitrust Division of
the United States Department of Justice (the DOJ) issued a request for
additional information under the HSR Act in connection with the acquisition. The
Company and Sinclair are negotiating with the DOJ regarding this transaction and
the waiting period under the HSR Act has been extended pending completion of
these discussions. Accordingly at this time, the Company cannot be sure of the
terms on which this transaction will be completed, if at all.
23
<PAGE> 24
PART II
Item 6 Exhibits and Reports on Form 10-Q
<TABLE>
<CAPTION>
(a) Exhibits
--------
<S> <C> <C>
2.1 Asset Purchase Agreement by and between Elcom of Ohio, Inc.,
and STC Broadcasting, Inc. dated as of July 24, 1998. (1)
2.2 Asset Purchase Agreement by and among STC Broadcasting, Inc.
and STC License Company and Nexstar Broadcasting of Rochester,
Inc. dated March 3, 1999. (3)
2.3 Purchase Agreement by and among Sinclair Communications, Inc.,
and STC Broadcasting, Inc., dated March 16, 1999 (3)
10.1 Second Amendment, dated as of January 29, 1999 to the Amended
and Restated Credit Agreement, dated as of July 2, 1998 among
Sunrise Television Corp., STC Broadcasting, Inc. and Chase
Manhattan Bank, NationsBank NA, and Salomon Brothers Holding
Company, Inc. (3)
10.2 Securities Purchase Agreement by and among the Company and
Chase Manhattan Corporation, Credit Suisse First Boston
Corporation, and Salomon Brothers Holding Company, Inc. dated
February 5, 1999 (3)
10.3 Certificate of Designation of the Powers, Preferences and
Relative Participating, optional and other special
rights of Preferred Stock, Series B dated February 5, 1999 (3)
10.4 Put and Call Agreement dated February 5, 1999 among Hicks Muse
Tate & Furst Equity Fund III, L.P. Chase Manhattan
Corporation, Credit Suisse First Boston Corporation and
Salomon Brothers Holding Company, Inc. (3)
10.5 Escrow Agreement dated February 5, 1999 by and between Company
and the Chase Manhattan Bank (3)
10.6 Engagement letter dated February 5, 1999 between Sunrise
Television Corp., the Company and Chase Securities, Inc.,
Credit Suisse First Boston Corporation and Salomon Smith
Barney, Inc. (3)
10.7 Station Affiliation Agreement between FOX Broadcasting Company
and STC License Company for station WUPW-TV dated February 2,
1999 (3)
12 Statement of fixed charge ratio (3)
21.1 Subsidiaries of STC Broadcasting, Inc. (3)
27.2 Financial Data Schedule (4) (for SEC use only)
</TABLE>
(1) Incorporated by reference to the Form 10-Q of STC Broadcasting, Inc.
for the period April 1, 1998 to June 30, 1998.
(2) Incorporated by reference to the Form 10-Q of STC Broadcasting, Inc.
for the period July 1, 1998 to September 30, 1998.
(3) Incorporated by reference to the Form 10-K of STC Broadcasting, Inc.
for the period January 1, 1998 to December 31, 1998.
(4) Filed herewith
(B) Reports on Form 8-K
On February 16, 1999, the Company filed an 8-K relating to the
consummation of the WUPW-TV acquisition. The filing included historical
financial statements for WUPW-TV and pro forma statements for the
Company.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STC Broadcasting, Inc.
----------------------
Registrant
Date: May 7, 1999 By: /s/ David A. Fitz
---------------------------------
David A. Fitz
Senior Vice-President/
Chief Financial Officer
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STC BROADCASTING FOR THE THREE MONTH PERIOD ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,957
<SECURITIES> 0
<RECEIVABLES> 15,211
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,529
<PP&E> 97,470
<DEPRECIATION> 13,228
<TOTAL-ASSETS> 454,728
<CURRENT-LIABILITIES> 19,104
<BONDS> 249,250
37,107
0
<COMMON> 0
<OTHER-SE> 71,729
<TOTAL-LIABILITY-AND-EQUITY> 454,728
<SALES> 20,414
<TOTAL-REVENUES> 20,414
<CGS> 12,972
<TOTAL-COSTS> 23,024
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 130
<INTEREST-EXPENSE> 5,162
<INCOME-PRETAX> (9,525)
<INCOME-TAX> (2,525)
<INCOME-CONTINUING> (7,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,000)
<EPS-PRIMARY> (7.00)
<EPS-DILUTED> (7.00)
</TABLE>
