<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 JUNE 30, 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)
720 2nd AVENUE SOUTH (727) 821-7900
ST. PETERSBURG, FLORIDA 33701 ----------------------------
- ---------------------------------------- (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 August 2, 1999, the registrant had 1000 shares of common stock, par value
$.01 outstanding.
<PAGE> 2
STC BROADCASTING, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 3 - 4
Consolidated Statements of Operations for the
Three Months Ended June 30, 1999 and 1998,
and the Six Months Ended June 30, 1999 and 1998 5
Consolidated Statement of Stockholder's Equity
for the Six Months Ended June 30, 1999 6
Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1999 and 1998,
and the Six Months Ended June 30, 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 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24 - 25
</TABLE>
2
<PAGE> 3
Item 1. Financial Statements
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,385 $ 5,347
Accounts receivable, net 16,631 16,198
Current portion of program rights 6,789 7,770
Other current assets 4,530 1,191
-------- --------
Total current assets 34,335 30,506
-------- --------
PROPERTY AND EQUIPMENT, net 76,415 82,179
INTANGIBLE ASSETS, net
FCC licenses 87,247 71,657
Network affiliation agreements 184,139 175,505
Other 3,065 3,482
-------- --------
Net intangible assets 274,451 250,644
-------- --------
OTHER ASSETS
Deferred financing and acquisition costs, net 11,452 11,016
Program rights, net of current portion 12,132 10,167
-------- --------
Total other assets 23,584 21,183
-------- --------
Total assets $408,785 $384,512
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets (continued)
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,583 $ 6,887
Accrued expenses 2,855 2,806
Accrued interest 3,270 3,269
Current portion of long-term debt 4,000 1,500
Current portion of program rights payable 6,911 8,230
Deferred gain on sale of WROC 4,459 --
-------- --------
Total current liabilities 26,078 22,692
LONG-TERM DEBT 206,000 209,500
DEFERRED INCOME TAXES 20,003 25,410
PROGRAM RIGHTS PAYABLE, net of current portion 12,743 10,817
REDEEMABLE PREFERRED STOCK SERIES A,
300,000 shares authorized, issued and outstanding,
liquidation preference of $30,000 40,182 37,364
REDEEMABLE PREFERRED STOCK SERIES B,
90,000 shares authorized, 37,500 issued, and outstanding,
liquidation preference of $37,500 37,117 --
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 (30,550) (18,483)
-------- --------
Net stockholder's equity 66,662 78,729
-------- --------
Total liabilities and stockholder's equity $408,785 $384,512
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET REVENUES $21,207 $16,992 $ 41,621 $28,327
OPERATING EXPENSES:
Station operating 6,018 4,928 12,984 9,025
Selling, general and administrative 5,084 3,887 10,447 6,867
Trade and barter 712 533 1,355 922
Depreciation of property and equipment 3,282 1,902 6,707 3,255
Amortization of intangibles and other assets 5,605 4,186 11,492 7,585
Corporate expenses 749 500 1,489 961
------- ------- -------- -------
Total operating expenses 21,450 15,936 44,474 28,615
------- ------- -------- -------
OPERATING INCOME (LOSS) (243) 1,056 (2,853) (288)
OTHER (EXPENSE) INCOME:
Interest expense (4,816) (4,279) (9,978) (7,331)
Gain on asset swap -- 17,560 -- 17,560
Expenses incurred in cancelled debt offering (850) -- (850) --
Other, net 16 32 (33) 70
------- ------- -------- -------
NET INCOME (LOSS) BEFORE INCOME TAX BENEFIT (5,893) 14,369 (13,714) 10,011
INCOME TAX (PROVISION) BENEFIT 2,857 (636) 5,382 (372)
------- ------- -------- -------
NET INCOME (LOSS) (3,036) 13,733 (8,332) 9,639
REDEEMABLE PREFERRED STOCK
DIVIDENDS AND ACCRETION:
SERIES A (1,432) (1,253) (2,818) (2,465)
SERIES B (599) -- (917) --
------- ------- -------- -------
Total dividends and accretion (2,031) (1,253) (3,735) (2,465)
------- ------- -------- -------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDER $(5,067) $12,480 $(12,067) $ 7,174
======= ======= ======== =======
BASIC AND DILUTED NET INCOME (LOSS)
PER COMMON SHARE $(5,067) $12,480 $(12,067) $ 7,174
======= ======= ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,000 1,000 1,000 1,000
======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statement of Stockholder's Equity
For the Six Months Ended June 30, 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 -- -- (12,067) (12,067)
--- -------- -------- --------
Balance, June 30, 1999 $-- $ 97,212 $(30,550) $ 66,662
=== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,036) $ 13,733 $ (8,332) $ 9,639
Adjustments to reconcile net income (loss)
to net cash provided (used) in operating activities:
Depreciation of property and equipment 3,282 1,902 6,707 3,255
Amortization of intangibles and other assets 5,605 4,186 11,492 7,585
Amortization of program rights 1,419 1,397 3,285 2,489
Payments on program rights (1,532) (1,424) (3,402) (2,527)
Deferred tax provision (benefit) (2,870) 600 (5,407) 300
Gain on asset swap -- (17,560) -- (17,560)
Loss on disposal of property and equipment -- 4 119 8
Change in operating assets and liabilities
net of effects from acquired and disposed stations:
Accounts receivable (3,778) (674) (2,791) 1,538
Other current assets (502) 628 (1,021) 916
Accounts payable and accrued expenses 2,043 3,075 (2,882) (1,018)
-------- -------- -------- --------
Net cash provided (used) in operating activities 631 5,867 (2,232) 4,625
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of WUPW-TV (277) -- (74,448) --
Acquisition of Abilene Radio and Television -- (8,164) -- (8,164)
Net assets acquired in swaps -- (57,995) -- (57,995)
Capital expenditures (1,371) (1,178) (2,388) (1,464)
Proceeds from disposal of property and equipment 1 11 99 14
-------- -------- -------- --------
Net cash used in investing activities (1,647) (67,326) (76,737) (67,609)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under credit agreement -- -- 41,000 12,000
Increase in payable related to swap transactions -- 55,847 -- 55,847
Repayment of credit agreement (42,000) (1,000) (42,000) (2,000)
Deferred acquisition and debt refinancing
costs incurred 63 (478) (163) (497)
Payment of Preferred Stock Dividend Series B (589) -- (900) --
Proceeds from sale of WROC, net of deferred gain 44,970 -- 44,970 --
Proceeds from sale of Redeemable
Preferred Stock Series B, net of expenses -- -- 37,100 --
-------- -------- -------- --------
Net cash provided by financing activities 2,444 54,369 80,007 65,350
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,428 (7,090) 1,038 2,366
CASH AND CASH EQUIVALENTS,
BEGINNING BALANCE 4,957 11,088 5,347 1,632
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
ENDING BALANCE $ 6,385 $ 3,998 $ 6,385 $ 3,998
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non cash items
Preferred dividends and accretion $ 2,031 $ 1,253 $ 2,835 $ 2,465
New program contracts $ 1,097 $ 372 $ 4,777 $ 489
Cash paid for interest $ 2,035 $ 1,492 $ 9,977 $ 7,368
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
STC BROADCASTING, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 1999
(dollars in thousands, except for share data and percentages)
1. PRINCIPLES OF CONSOLIDATION:
The accompanying unaudited consolidated financial statements present
the consolidated financial statements 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 June 30, 1999, the Company owned
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 (1) 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
<FN>
(1) On April 1, 1999, the Company completed the non-license sale of the WROC
assets to Nexstar Broadcasting of Rochester, Inc. ("Nexstar") and entered
into a Time Brokerage Agreement with Nexstar under which Nexstar now
programs a majority of the time on WROC and retains the revenues from the
sale of advertising time. (see note 4) </FN>
</TABLE>
The Company and 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 material adjustments
that the Company considers necessary for a fair presentation of results of
operations for the periods presented. 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>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Senior Subordinated Notes $ 100,000 $ 100,000
Senior Credit Agreement 110,000 111,000
--------- ---------
Total long-term debt 210,000 211,000
Less: current portion (4,000) (1,500)
--------- ---------
Net long-term debt $ 206,000 $ 209,500
========= =========
</TABLE>
The following table shows interest expense for the periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
-------- --------
<S> <C> <C>
Senior Subordinated Notes $ 5,500 $ 5,500
Senior Credit Agreement 4,478 888
Hearst-Argyle Loan (note 4) -- 943
-------- --------
Total $ 9,978 $ 7,331
======== ========
</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 a Senior Credit Agreement
which provides a $100,000 term loan facility and a $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 June 30, 1999, the Company had drawn
$100,000 on the term loan facility and $10,000 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 June 30, 1999.
The Senior Credit Agreement provides for first priority security
interest in all of the tangible and intangible assets of the Company and its
subsidiaries. Loans under the Senior Credit Agreement are guaranteed by Sunrise
and the Company's current and any future subsidiaries. The Senior 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
include restrictions on certain specified fundamental changes, such as mergers
and asset sales, transactions with shareholders and affiliates,
9
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transactions outside the ordinary course of business, amendments or waivers of
certain specified agreements and the issuance of guarantees or other credit
enhancements. At June 30, 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. Each share is entitled to quarterly dividends that will
accrue at a 14% rate per annum. 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
Senior 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). Upon
the acquisition of WUPW-TV (see note 4), the Company sold $37,500 to investors
to fund the acquisition and an escrow account for dividends. 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 lesser 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 Subordinate 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.
It is anticipated that during August 1999, the Company will repay all
amounts outstanding under the Preferred Agreement by a borrowing of $21,000
under the Senior Credit Agreement, a $15,000 contribution from Sunrise in the
form of a capital contribution, and available cash.
4. ACQUISITIONS AND DISPOSITION
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. In April, 1999, the Antitrust Division of
the United States Department of Justice (the DOJ) issued various requests for
additional information under the Hart-Scott-Rodino Antitrust Improvement Act
(HSR Act) in connection with the acquisition. The Company and Sinclair are
in discussions 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.
The Company has assigned the right to acquire the broadcast licenses
and other license assets of the Sinclair Stations to SDF License Corp., an
entity separate from the Company, but owned by members of the Company's senior
management team. On April 2, 1999, SDF filed applications seeking FCC consent
to the assignment of the licenses of WICS, WICD, and KGAN. The application has
been accepted for filing, and no
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petitions to deny were filed by the May 13, 1999 deadline, although informal
objections advocating denial of the applications may be filed up until the date
that the FCC grants the applications.
Rochester Disposition
On March 3, 1999, the Company, STC License Company, a subsidiary of
the 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-TV, Rochester, New
York for approximately $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. On April 1, 1999,
the Company completed the non-license sale of WROC assets to Nexstar for
$43,000 and entered into a Time Brokerage Agreement with Nexstar under which
Nexstar now programs a majority of the time of WROC and retains the revenues
from the sale of advertising time. The license transfer is subject to the
approval of the FCC, which has not been received. The Company has deferred an
anticipated gain of $4,459 at June 30, 1999, and will recognize such gain at
the license closing.
1998 Transactions
On April 1, 1998, the Company acquired 100% of the outstanding stock
of Abilene Radio and Television Company ("ARTC") for $8,172, including working
capital, fees, and expenses. The transaction was funded by additional borrowing
under the Senior Credit Agreement.
In a series of transactions, the Company acquired certain assets from
Hearst-Argyle Stations, Inc., (Hearst) through transactions structured as an
exchange of assets (the Hearst Transaction). On February 3, 1998, the Company
agreed to acquire WPTZ, WNNE, and a local marketing agreement (LMA) for WFFF
from Sinclair Broadcast Group, Inc. for $72,000 with the intention of using
these assets in the Hearst Transaction. WPTZ and WNNE are the NBC affiliates
and WFFF is the FOX affiliate serving the Burlington, Vermont and Plattsburgh,
New York television market. On February 18, 1998, the Company agreed with
Hearst to trade KSBW, the NBC affiliate in Salinas, California, WPTZ and WNNE
for WDTN, the ABC affiliate in Dayton, Ohio, WNAC, the FOX affiliate in
Providence, Rhode Island, WNAC's interest in a Joint Marketing Programming
Agreement with WPRI, the CBS affiliate in Providence, Rhode Island, and
approximately $22,000 in cash. On April 24, 1998, the Company completed a
purchase of non-license assets (all operating assets other than FCC licenses
and other minor equipment) of WPTZ, WNNE and WFFF for $70,000. On April 24,
1998, WFFF was sold by the Company to an entity controlled by Robert Smith.
Under the purchase method of accounting, the accompanying financial statements
reflect the operations of WPTZ and WNNE for the period April 24, 1998 to May
31, 1998. Funds to complete the acquisition of WPTZ, WNNE, and WFFF were
provided by Hearst. The assets acquired were pledged to Hearst under the
related loan agreement which was repaid on July 3, 1998.
On June 1, 1998, the Company received contractually the benefits of
the operation of stations WDTN, and WNAC and its joint operating agreement with
WPRI. The accompanying financial statements reflect the asset swap using the
purchase method of accounting and include the results of operations from
June 1, 1998. The Company recorded a book gain of $17,560 on the asset swap.
The Hearst Transaction was closed in July 1998 and funded with borrowings of
$72,500 under the Senior Credit Agreement and an additional investment by
Sunrise in the amount of $10,400, which was in the form of an additional
capital contribution.
At June 30, 1998, the Company had recorded the following amounts as
payables related to the swap transactions.
<TABLE>
<S> <C>
Payable to Hearst-Argyle Stations, Inc. $ 50,188
Payable to Sinclair Broadcasting Group, Inc. 2,008
Transactions fees 3,651
---------
$ 55,847
=========
</TABLE>
The amount payable to Hearst represents approximately the difference between
the loan outstanding on the acquisition of WPTZ and WNNE, less the $22,000 in
cash owed the Company by Hearst, and plus the net working capital acquired on
June 1, 1998. The amount payable to Sinclair represents amounts due on the
license assets transfer.
12
<PAGE> 13
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 and WROC was disposed of
effective April 1, 1999. In the second quarter of 1998, the Company acquired
and traded WNNE and WPTZ, the NBC affiliates serving 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 Company has aggregated its operating segments based on the
aggregation criteria as defined in SFAS 131. The following table sets forth the
aggregate information by segment groups and reconciles segment information to
consolidated financial statements.
<TABLE>
<CAPTION>
Net
Net (Loss) Total
Segment Groups Period Revenues Income (1) Assets (3)
- -------------- ------ --------- ----------- ----------
<S> <C> <C> <C> <C>
50 - 75 DMA 1999 $ 20,623 $ (1,581) $ 169,557
1998 6,363 342 120,602
75 - 125 DMA 1999 8,126 (2,003) 61,130
1998 4,890 (2,786) 64,117
125 and above DMA 1999 10,374 (2,847) 76,816
1998 4,847 426 80,044
Stations sold or swapped 1999 2,498 (531) 751
1998 12,227 17,187 39,199
License Companies 1999 -- 1,760 87,247
1998 (2) -- -- 71,655
Corporate 1999 -- (3,130) 13,284
1998 -- (5,530) 8,895
--------- --------- ---------
Company Totals 1999 $ 41,621 $ (8,332) $ 408,785
1998 $ 28,327 $ 9,639 $ 384,512
========= ========= ========
<FN>
(1) The Company does not allocate income taxes to segments.
(2) During 1998, amounts were not allocated to license corporations until year end.
(3) 1998 numbers are as of December 31, 1998.
</FN>
</TABLE>
6. CANCELLED PRIVATE PLACEMENT
During 1999, the Company and Sunrise had plans to sell debt securities
of Sunrise or preferred stock of the Company in a private placement to complete
the Sinclair Agreement and repay the outstanding amounts under
13
<PAGE> 14
the Preferred Agreement. Sunrise and the Company subsequently determined that
they will fund the Sinclair Agreement through an additional borrowing under the
Senior Credit Agreement and by additional capital contributions by Sunrise. The
results of operations for the six months ended June 30, 1999 include a charge of
$850 for expenses incurred in the cancelled private placement.
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 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.
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,
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, prime time, access (the hour before prime time), and
early fringe (3:00 p.m. to 5:00 p.m.).
Most spot advertising contracts are short-term and generally run for
only a few weeks. A majority of the Company's spot revenues are generated from
local advertising, which is sold primarily by a Station's sales staff, and the
remainder of the spot 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 expenses and amortization of program rights, less payments for
program rights. EBITDA is defined as broadcast cash flow less corporate
expenses. 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. All statements other than statements of historical facts included
herein may constitute forward-looking statements. The Company has based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure you that our
assumptions and expectations will prove to have been correct. These
forward-looking statements are subject to various risks, uncertainties and
assumptions including increased competition, increased costs, changes in
network compensation agreements, impact of future acquisitions and
dispositions, loss or retirement of key members of management, inability to
realize our acquisition strategy, increases in costs of borrowings,
unavailability of additional debt and equity capital, adverse state or federal
legislation or changes in Federal Communications Commission policies, and
changes in general economic
14
<PAGE> 15
conditions. 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 obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In the discussion comparing the three months and six months ended June
30, 1999 and 1998, WTOV and WEYI, the original stations acquired by the Company
in March 1997 and still owned by the Company at June 30, 1999, and WJAC, which
was acquired on October 1, 1997, will be referred to as the Core Stations. The
acquisition of television stations KVLY, KFYR, KUMV, KQCD and KMOT (the Meyer
Stations) and KRBC, KACB and WUPW will be referred to as the Station
Acquisitions. The KRBC and KACB acquisition closed on April 1, 1998, the Meyer
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 (as defined in this paragraph). The
acquisition of WPTZ and WNNE from Sinclair, and the transfer to Hearst-Argyle
Television, Inc. ("Hearst") of KSBW, WPTZ and WNNE in exchange for WDTN, WNAC,
and WNAC's interest in a Joint Marketing Agreement with WPRI, will be referred
to as the Swap Transaction. The Company held WPTZ and WNNE for approximately
one month in anticipation of completing the Swap Transaction. The effect of the
sale of the non-license assets of WROC, and the entering into of a local
marketing agreement, will be referred to as the WROC Sale.
HISTORICAL PERFORMANCE
All dollars presented in table form are shown in thousands.
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 total revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------------- ----------------- ----------------- -------------------
$ % $ % $ % $ %
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Revenues:
Local $ 12,650 51.8% $ 9,828 49.3% $ 24,783 51.6% $ 16,396 49.4%
National 8,331 34.1% 6,887 34.6% 16,383 34.1% 11,739 35.4%
Political 119 0.5% 917 4.6% 168 0.3% 1,153 3.5%
Network Compensation 1,322 5.4% 1,176 5.9% 2,789 5.8% 2,123 6.4%
Trade and barter 727 3.0% 599 3.0% 1,379 2.9% 1,017 3.0%
Joint Operating Agreements (1) 914 3.7% 327 1.6% 1,625 3.4% 327 1.0%
Other 375 1.5% 201 1.0% 899 1.9% 444 1.3%
-------- ----- -------- ----- -------- ----- -------- -----
Total 24,438 100.0% 19,935 100.0% 48,026 100.0% 33,199 100.0%
Agency and national
representative commissions (3,231) (13.2%) (2,943) (14.8)% (6,405) (13.3%) (4,872) (14.7%)
-------- ----- -------- ----- -------- ----- -------- -----
Net revenue $ 21,207 86.8% $ 16,992 85.2% $ 41,621 86.7% $ 28,327 85.3%
======== ===== ======== ===== ======== ===== ======== =====
<FN>
(1) Represents 50% of the broadcast cash flow of WNAC and WPRI.
</FN>
</TABLE>
15
<PAGE> 16
Net revenues increased by $4.215 million or 24.8% to $21.207 million
for the three months ended June 30, 1999 from $16.992 million for the three
months ended June 30, 1998. The following table summarizes the increase in net
revenue:
<TABLE>
<S> <C>
Core stations $ (191)
Swap transaction 474
Station acquisitions 6,856
WROC sale (2,924)
-------
$ 4,215
=======
</TABLE>
Net revenues increased by $13.294 million or 46.9% to $41.621
million for the six months ended June 30, 1999 from $28.327 million for the six
months ended June 30, 1998. The following table summarizes the increase in net
revenues:
<TABLE>
<S> <C>
Core stations $ 142
Swap transaction 3,068
Station acquisitions 13,459
WROC sale (3,375)
--------
$ 13,294
========
</TABLE>
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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------- ------------------- ------------------ -----------------
$ % of $ % of $ % of $ % of
Revenues Revenues Revenues Revenues
-------------------- ------------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues: $ 21,207 100.0% $16,992 100.0% $ 41,621 100.0% $28,327 100.0%
Operating Expenses:
Station operating 6,018 28.4% 4,928 29.0% 12,984 31.2% 9,025 31.9%
Selling, General & Administrative 5,084 24.0% 3,887 22.9% 10,447 25.1% 6,867 24.2%
Trade and barter 712 3.4% 533 3.1% 1,355 3.3% 922 3.3%
Depreciation 3,282 15.5% 1,902 11.2% 6,707 16.1% 3,255 11.5%
Amortization 5,605 26.4% 4,186 24.6% 11,492 27.6% 7,585 26.8%
Corporate expenses 749 3.5% 500 2.9% 1,489 3.6% 961 3.4%
-------- ----- ------- ----- -------- ----- ------- -----
Total operating expenses $ 21,450 101.2% $15,936 93.7% $ 44,474 106.9% $28,615 101.1%
======== ===== ======= ===== ======== ===== ======= =====
Operating income (loss) $ (243) (1.2%) $ 1,056 6.3% $ (2,853) (6.9%) $ (288) (1.1%)
======== ===== ======= ===== ======== ===== ======= =====
</TABLE>
Operating expenses increased by $5.514 million or 34.6% to $21.450
million for the three months ended June 30, 1999 from $15.396 million for the
three months ended June 30, 1998. The following table summarizes the increase
in operating expenses:
<TABLE>
<S> <C>
Core stations $ 125
Swap transaction 340
Station acquisitions 6,947
WROC sale (2,729)
Corporate expenses and depreciation 162
License corporations amortization 669
--------
$ 5,514
========
</TABLE>
16
<PAGE> 17
Operating expenses increased by $15.859 million or 55.4% to $44.474
million for the six months ended June 30, 1999 from $28.615 million for the six
months ended June 30, 1998. The following table summarizes the increase in
operating expenses:
<TABLE>
<S> <C>
Core stations $ 203
Swap transaction 2,596
Station acquisitions 13,930
WROC sale (2,778)
Corporate expenses and depreciation 369
License corporations amortization 1,539
-------
$15,859
=======
</TABLE>
Interest Expense
Interest expense increased by $.537 million or 12.5% to $4.816 million
for the three months ended June 30, 1999, from $4.279 million for the three
months ended June 30, 1998 and increased by $2.647 million or 36.1% to $9.978
million for the six months ended June 30, 1999, from $7.331 for the three
months ended June 30, 1998. The majority of such increases were due to higher
outstanding balances on the Senior Credit Agreement related to the Station
Acquisitions and the Swap Transaction, offset slightly by lower interest rates.
Gain on Asset Swap
The Company recognized gain in connection with the Swap Transaction of
$17.560 million for the three and six months ended June 30, 1998 with no gain
in the comparable period for 1999. Subsequent to June 30, 1998, the Company had
a reduction in costs and expenses related to the Swap Transaction in the amount
of approximately $.103 million.
Expenses Incurred in Cancelled Debt Offering
During the second quarter of 1999, the Company and Sunrise
contemplated selling either debt securities of Sunrise or preferred stock of
the Company in a private placement to fund the acquisition under the Sinclair
Agreement and repay the outstanding amounts under the Preferred Agreement.
Sunrise and the Company subsequently determined that they will fund the
Sinclair Agreement through an additional borrowing under the Senior Credit
Agreement and by an additional capital contribution by Sunrise. The three
months and six months ended June 30, 1999 include an $.850 million charge for
the cancelled offering.
Income Tax Benefits
Income tax benefits increased by $3.493 million to $2.857 million for
the three months ended June 30, 1999 from $.636 million tax provision for the
three months ended June 30, 1998 and increased by $5.754 million to $5.382
million for the six months ended June 30, 1999 from $.372 million tax provision
for the six months ended June 30, 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 increase in
deferred tax benefits due to the recognition of future loss carryforwards.
Net Loss
Net loss increased by $16.769 million to $3.036 million for the three
months ended June 30, 1999 from a net income of $13.733 million for the three
months ended June 30, 1998 and increased by $17.971 million to a loss of $8.332
million for the six months ended June 30, 1999 from a net income of $9.639
million for the six months ended June 30, 1998 for the reasons stated above.
17
<PAGE> 18
BROADCAST CASH FLOW AND EBITDA:
The following table sets forth a computation of broadcast cash and EBITDA for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Operating (Loss) Income $ (243) $ 1,056 $ (2,853) $ (288)
Add: Amortization of program rights 1,419 1,397 3,285 2,489
Depreciation of property and equipment 3,282 1,902 6,707 3,255
Amortization of intangibles 5,605 4,186 11,492 7,585
Corporate expenses 749 500 1,489 961
Less: Payments for program rights (1,532) (1,424) (3,402) (2,527)
-------- -------- --------- --------
Broadcast Cash Flow 9,280 7,617 16,718 11,475
Less: Corporate expenses 749 500 (1,489) (961)
-------- -------- --------- --------
EBITDA $ 8,531 $ 7,117 $ 15,229 $ 10,514
======== ======== ========= ========
Broadcast cash flow margin 43.8% 44.8% 40.2% 40.5%
======== ======== ========= ========
EBITDA margin 40.2% 41.9% 36.6% 37.1%
======== ======== ========= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had $6.385 million in cash balances
and net working capital of $8.257 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 $6.857
million to $2.232 million for the six months ended June 30, 1999 from cash
provided by operations of $4.625 million for the six months ended June 30,
1998. The Company made interest and film payments of $9.977 million and $3.402
million, respectively, during the six months ended June 30, 1999 compared to
payments of $7.368 million and $2.527 million for the six months ended June 30,
1998.
Net cash flows used in investing activities increased by $9.128
million to $76.737 million for the six months ended June 30, 1999 from $67.609
million for the six months ended June 30, 1998. In 1999, the Company expended
approximately $74.448 million to complete the acquisition of WUPW and in 1998
approximately $66.159 million on acquisitions and swaps.
Net cash flows provided by financing activities increased by $14.657
million to $80.007 million for the six months ended June 30, 1999 from $65.350
million for the six months ended June 30, 1998. In 1999, the Company sold $37.1
million in Redeemable Preferred Stock Series B net of expense, repaid net
$1.000 million under the Senior Credit Agreement and received net proceeds of
approximately $44.970 million on the disposition of WROC-TV.
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 acquisitions through a combination of borrowings
and issuances of capital stock and receipt of additional capital contributions
by Sunrise.
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
18
<PAGE> 19
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 Subordinate 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.
In 1997, the Company completed a private placement of $100.000 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 a Senior Credit Agreement
with various lenders which provides a $100.000 million Term Loan Facility and
$65.000 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 June 30, 1999, the
Company had drawn $100.000 million on the term loan facility and $10.000
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 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 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 June 30, 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 $90.000 million of Series B Redeemable Preferred
Stock to finance acquisitions by the Company from time to time. An aggregate of
$37.500 million of Series B Redeemable Preferred Stock was sold on February 5,
1999 to finance the acquisition of WUPW-TV ($35.000 million) and to fund an
escrow account ($2.500 million) to pay dividends on such Series B Redeemable
Preferred Stock.
It is anticipated that during August 1999, the Company will repay all
amounts outstanding under the Preferred Agreement by borrowing $21.000 million
under the Senior Credit Agreement, receiving a $15.000 million capital
contribution by Sunrise and use of available cash.
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 available capital under 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
19
<PAGE> 20
degree to which the Company is leveraged could have a significant effect on its
results of operations.
CAPITAL EXPENDITURES
Capital expenditures were $2.400 million and $1.500 million for the
six month periods ended June 30, 1999 and 1998, respectively. Capital
expenditures are anticipated to be $5.7 million for the year ended December 31,
1999. We anticipate that digital television will require a minimum expenditure
of between $2.000 and $3.000 million per station to develop facilities necessary
for transmitting a digital signal with initial expenditures generally beginning
in 2000. The Company's ability to make capital expenditures is subject to
certain restrictions under the Senior Credit Agreement.
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 June 30, 1999. 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 $70.000 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%. 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 $40.000 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 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 during 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 June 30, 1999, the Stations had approximately 569 full-time and
90 part-time employees. The Company is a party to collective bargaining
agreements which apply to approximately 163 full time and 29 part time
employees at 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.
20
<PAGE> 21
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.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. In May 1999 the Financial Accounting Standards Board
issued an exposure draft proposing an extension of the Statement's effective
date. The extension would make the Statement effective for all fiscal quarters
beginning after June 15, 2000. Management does not anticipate that this
Statement will have a material impact on the Company's consolidated financial
statements.
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 at June 30, 1999 amount to less than $1.0 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 reviewed individual
applications, as well as the computer hardware and satellite delivery systems.
The assessment included information technology (IT) and non-information
technology systems. A comprehensive review and inventory was completed in the
first quarter of 1999. This phase involved an assessment of the readiness of
third party vendors and suppliers. The Company issued year 2000 readiness
questionnaires to vendors. However, responses to these inquiries have been
limited or qualified. The assessment of the Company's IT and non-IT systems,
and an action plan for remediation was substantially completed by June 30,
1999.
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 tested 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.
All internal software and hardware has been purchased or leased from
third party vendors. The Company does not employ or contract for computer
programmers to write Company specific applications.
The Company receives network and syndicated programming via satellite.
The Company's receipt of that programming is dependent upon the broadcast
networks and program syndicators resolving their Year 2000 compliance issues.
Based upon system tests and assurances from the networks and syndicators,
management does not anticipate any disruption in receiving programming from the
networks or syndicators.
The Company's television stations generally use standard purchase
software and systems for advertising,
21
<PAGE> 22
inventory management, accounting and production. Each station operates these
systems independently on separate hardware platforms. Nearly all critical
systems have been modified or are in the process of being upgraded as desired
technology becomes available for Year 2000 compliance. The Company inserts
advertising into program breaks with computer controlled equipment and uses
various broadcast and studio equipment to produce and transmit its broadcast
signals. Although much of this equipment includes embedded chips, the Company's
tests to date indicate it will continue to operate after 1999.
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
provided priority to those applications and equipment critical to the operation
of the Stations and has identified 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 all 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. As determined by the assessment phase, estimated future costs of
remediation are not considered material to the Company's financial position.
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.
Network Affiliation Agreements
In July 1999, the Fox Network entered into an agreement with WNAC-TV
and WUPW-TV which required the affiliates to buy prime time spots from the
network. The Company's agreements with Fox Network commenced on July 15, 1999
and terminate on June 30, 2002. As a result of this agreement, the Company
expects its broadcast cash flow on an annual basis will decrease by less than
$.200 million annually.
In July 1999, the ABC network entered into an agreement with WDTN-TV
which required that WDTN contribute approximately $.300 million to the network
in return for additional prime time spots. The agreement contains certain
additional items related to children clearances, NFL inventory, the Soap
Channel cable revenue sharing and entertainment sports and news exclusivity.
The agreement will be for three years beginning August 1, 1999. As a result of
this agreement, the Company expects its broadcast cash flow on an annual basis
will decrease by less than $.100 million annually.
PRO FORMA BASIS
The pro forma information presents the results of operations of the
Stations owned by the Company at June 30, 1999, after considering the WROC
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 WROC disposition had occurred on January 1, 1998, nor is it indicative of
the future results of operations.
22
<PAGE> 23
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 total revenues.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998 1998
------------------ --------------------- ---------------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues:
Local $ 23,923 52.0% $ 24,853 53.8% $ 50,214 51.7%
National 15,499 33.7% 13,608 29.4% 27,863 28.7%
Political 168 0.4% 423 0.9% 4,593 4.7%
Network Compensation 2,662 5.8% 2,777 6.0% 5,496 5.7%
Trade and barter 1,298 2.8% 1,555 3.4% 3,165 3.2%
Joint operating agreements 1,625 3.5% 1,998 4.3% 4,193 4.3%
Other 822 1.8% 994 2.2% 1,677 1.7%
-------- ----- -------- ----- -------- -----
Total 45,997 100.0% 46,208 100.0% 97,201 100.0%
Agency and national
representative commissions (6,103) (13.3%) (6,037) (13.1%) (12,846) (13.2%)
-------- ----- -------- ----- -------- -----
Net revenues $ 39,894 86.7% $ 40,171 86.9% $ 84,355 86.8%
======== ===== ======== ===== ======== =====
</TABLE>
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>
Six Months Ended Year Ended
June 30, December 31,
1999 1998 1998
--------------------- ----------------------- -------------------
$ % of $ % of $ % of
Revenues Revenues Revenues
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues: $ 39,894 100.0% $ 40,171 100.0% $84,355 100.0%
Station Operating Expenses:
Station operating 12,031 30.2% 11,904 29.6% 23,933 28.4%
Selling, general and administrative 9,980 25.0% 9,827 24.5% 20,982 24.9%
Trade and barter 1,304 3.3% 1,402 3.5% 1,624 1.9%
Depreciation 6,481 16.2% 6,111 15.2% 12,318 14.6%
Amortization 11,236 28.2% 11,363 28.3% 21,773 25.8%
Corporate expenses 1,700 4.3% 1,700 4.2% 3,400 4.0%
-------- ----- -------- ----- ------- -----
Total station operating expenses 42,732 107.2% 42,307 105.3% 84,030 99.6%
-------- ----- -------- ----- ------- -----
Operating (loss) income $ (2,838) (7.2%) $ (2,136) (5.3%) $ 325 .4%
======== ===== ======== ===== ======= =====
</TABLE>
23
<PAGE> 24
PRO FORMA BROADCAST CASH FLOW AND EBITDA:
The following table sets forth a computation of Broadcast Cash Flow and EBITDA.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Operating (loss) income $ (2,838) $ (2,136) $ 325
Add: Amortization of program rights 2,925 3,039 6,136
Depreciation of property and equipment 6,481 6,111 12,318
Amortization of intangibles 11,236 11,363 21,773
Corporate overhead 1,700 1,700 3,400
Less: Payments for program rights (3,011) (3,277) (6,471)
-------- -------- --------
Broadcast cash flow 16,493 16,800 37,481
Less: Corporate expenses 1,700 1,700 3,400
-------- -------- --------
EBITDA $ 14,793 $ 15,100 $ 34,081
======== ======== ========
Broadcast Cash Flow Margin 41.3% 41.8% 44.4%
======== ======== ========
EBITDA Margin 37.1% 37.6% 40.4%
======== ======== ========
</TABLE>
PART II
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 million, 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. In April, 1999, the Antitrust
Division of the United States Department of Justice (the DOJ) issued requests
for various information under the HSR Act in connection with the acquisition.
The Company and Sinclair are in discussions 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.
Item 6 Exhibits and Reports on Form 10-Q
(a) Exhibits
2.1 Asset Purchase Agreement by and among STC Broadcasting, Inc. and STC
License Company and Nexstar Broadcasting of Rochester, Inc. dated
March 3, 1999. (3)
2.2 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)
24
<PAGE> 25
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)
27.1 Financial Data Schedule (4)
(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
No 8-K filings were made by the Company in the second quarter of
1999.
25
<PAGE> 26
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: August 2, 1999 By: /s/ David A. Fitz
-------------------
David A. Fitz
Senior Vice-President/
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,385
<SECURITIES> 0
<RECEIVABLES> 17,314
<ALLOWANCES> 683
<INVENTORY> 0
<CURRENT-ASSETS> 34,335
<PP&E> 90,692
<DEPRECIATION> 14,277
<TOTAL-ASSETS> 408,785
<CURRENT-LIABILITIES> 26,078
<BONDS> 206,000
77,299
0
<COMMON> 0
<OTHER-SE> 97,212
<TOTAL-LIABILITY-AND-EQUITY> 408,785
<SALES> 41,621
<TOTAL-REVENUES> 41,621
<CGS> 23,431
<TOTAL-COSTS> 44,474
<OTHER-EXPENSES> 883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,978
<INCOME-PRETAX> (13,714)
<INCOME-TAX> (5,382)
<INCOME-CONTINUING> (8,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,735)
<NET-INCOME> (12,067)
<EPS-BASIC> (12,067)
<EPS-DILUTED> (12,067)
</TABLE>
