<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 SEPTEMBER 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 November 8, 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 SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3 - 4
Consolidated Statements of Operations for the Three
Months Ended September 30, 1999 and 1998, and the
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statement of Stockholder's Equity
for the Nine Months Ended September 30, 1999 6
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1999 and 1998, and the
Nine Months Ended September 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 16 - 27
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 27 - 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
</TABLE>
2
<PAGE> 3
Item 1. Financial Statements
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,841 $ 5,347
Accounts receivable, net 13,483 16,198
Current portion of program rights 6,947 7,770
Other current assets 4,474 1,191
-------- --------
Total current assets 27,745 30,506
-------- --------
PROPERTY AND EQUIPMENT, net 74,328 82,179
-------- --------
INTANGIBLE ASSETS, net
FCC licenses 85,677 71,657
Network affiliation agreements 180,784 175,505
Other 4,361 3,482
-------- --------
Net intangible assets 270,822 250,644
-------- --------
OTHER ASSETS
Deferred financing and acquisition costs, net 9,507 11,016
Program rights, net of current portion 11,257 10,167
-------- --------
Total other assets 20,764 21,183
-------- --------
Total assets $393,659 $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>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,064 $ 6,887
Accrued expenses 2,395 2,806
Accrued interest expense 458 3,269
Current portion of long-term debt 4,500 1,500
Current portion of program rights payable 7,167 8,230
Deferred gain on sale of WROC 4,504 --
--------- ---------
Total current liabilities 23,088 22,692
--------- ---------
LONG-TERM DEBT 225,500 209,500
DEFERRED INCOME TAXES 17,568 25,410
PROGRAM RIGHTS PAYABLE, net of current portion 11,734 10,817
CONTINGENCIES (note 7)
REDEEMABLE PREFERRED STOCK SERIES A,
300,000 shares authorized, issued and outstanding,
liquidation preference of $30,000 41,664 37,364
STOCKHOLDER'S EQUITY:
Common stock, par value $.01 per share, 1,000 shares
authorized, issued and outstanding -- --
Additional paid-in capital 112,212 97,212
Accumulated deficit (38,107) (18,483)
--------- ---------
Net stockholder's equity 74,105 78,729
--------- ---------
Total liabilities and stockholder's equity $ 393,659 $ 384,512
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES $ 18,223 $ 15,726 $ 59,844 $ 44,053
OPERATING EXPENSES:
Station operating 6,063 5,454 19,047 14,480
Selling, general and administrative 4,496 3,606 14,943 10,473
Trade and barter 671 458 2,026 1,380
Depreciation of property and equipment 3,194 2,015 9,901 5,270
Amortization of intangibles and
other assets 5,616 4,436 17,108 12,020
Corporate expenses 858 522 2,347 1,482
-------- -------- -------- --------
Total operating expenses 20,898 16,491 65,372 45,105
-------- -------- -------- --------
OPERATING LOSS (2,675) (765) (5,528) (1,052)
OTHER (EXPENSE) INCOME:
Interest expense (5,038) (4,237) (15,016) (11,567)
Gain on asset swap -- -- -- 17,488
Expenses incurred in cancelled debt
offering -- -- (850) --
Other, net (182) 6 (215) 146
-------- -------- -------- --------
NET INCOME (LOSS) BEFORE INCOME
TAX BENEFIT (PROVISION) AND
EXTRAORDINARY ITEM (7,895) (4,996) (21,609) 5,015
INCOME TAX BENEFIT (PROVISION) 2,494 (504) 7,876 (876)
-------- -------- -------- --------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (5,401) (5,500) (13,733) 4,139
EXTRAORDINARY LOSS FROM EARLY
RETIREMENT OF DEBT, NET OF INCOME
TAX BENEFIT OF $1,726 -- (2,860) -- (2,860)
-------- -------- -------- --------
NET INCOME (LOSS) (5,401) (8,360) (13,733) 1,279
REDEEMABLE PREFERRED STOCK
DIVIDENDS AND ACCRETION:
SERIES A (1,482) (1,295) (4,300) (3,761)
SERIES B (674) -- (1,591) --
-------- -------- -------- --------
Total dividends and accretion (2,156) (1,295) (5,891) (3,761)
-------- -------- -------- --------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDER $ (7,557) $ (9,655) $(19,624) $ (2,482)
======== ======== ======== ========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (7,557) $ (9,655) $(19,624) $ (2,482)
======== ======== ======== ========
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 Nine Months Ended September 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 -- -- (19,624) (19,624)
Capital contribution by
Sunrise Television Corp. -- 15,000 -- 15,000
--------- -------- -------- --------
Balance, September 30, 1999 $ -- $112,212 $(38,107) $ 74,105
========= ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,401) $ (8,360) $(13,733) $ 1,279
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation of property and equipment 3,194 2,015 9,901 5,270
Amortization of intangibles and other assets 5,616 4,436 17,108 12,020
Amortization of program rights 1,420 1,448 4,705 3,937
Payments on program rights (1,455) (1,453) (4,857) (3,980)
Deferred tax benefit (2,309) (1,200) (7,716) (900)
Gain on asset swap -- -- -- (17,488)
Loss on disposal of property and equipment 264 2 383 10
Extraordinary loss on early retirement of debt -- 4,586 -- 4,586
Other -- 71 -- --
Change in operating assets and liabilities
net of effects from acquired and disposed
stations:
Accounts receivable 3,194 2,807 403 4,345
Other current assets 157 (603) (864) 313
Accounts payable and accrued expenses (3,892) (1,956) (6,774) (2,974)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities 788 1,793 (1,444) 6,418
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of WUPW-TV (39) -- (74,487) --
Acquisition of Abilene Radio & Television Company -- -- -- (8,164)
Net assets acquired in swaps -- (101) -- (58,096)
Capital expenditures (1,474) (1,767) (3,862) (3,231)
Other (5) 32 94 46
-------- -------- -------- --------
Net cash provided by (used in) investing
activities (1,518) (1,836) (78,255) (69,445)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under senior credit agreement 21,000 72,500 62,000 84,500
Decrease in payable related to swap transactions -- (55,847) -- --
Repayment of senior credit agreement (1,000) (24,500) (43,000) (26,500)
Deferred refinancing and acquisition
costs incurred (20) (55) (183) (552)
Payment of loan costs upon refinancing -- (2,164) -- (2,164)
Capital contribution by parent 15,000 10,400 15,000 10,400
Retirement of Preferred Stock Series B (37,500) -- (37,500) --
Payment of Preferred Stock Dividend Series B (291) -- (1,191) --
Proceeds from sale of WROC, net of deferred gain (3) -- 44,967 --
Proceeds from sale of Redeemable
Preferred Stock Series B, net of expenses of $400 -- -- 37,100 --
-------- -------- -------- --------
Net cash provided by (used in) financing
activities (2,814) 334 77,193 65,684
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,544) 291 (2,506) 2,657
CASH AND CASH EQUIVALENTS,
BEGINNING BALANCE 6,385 3,998 5,347 1,632
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
ENDING BALANCE $ 2,841 $ 4,289 $ 2,841 $ 4,289
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non cash items
Preferred dividends and accretion $ 1,865 $ 1,296 $ 4,700 $ 3,761
New program rights contracts $ 1,058 $ 744 $ 5,835 $ 1,233
Cash paid for interest $ 7,850 $ 7,035 $ 17,827 $ 14,403
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
STC BROADCASTING, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 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. ("STC") and
Subsidiaries (the "Company"). STC 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 September 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
</TABLE>
(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 most of the available time on WROC and retains the revenues from
the sale of advertising time. (see note 4)
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.
8
<PAGE> 9
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Senior Subordinated Notes $ 100,000 $ 100,000
Senior Credit Agreement 130,000 111,000
---------- ---------
Total long-term debt 230,000 211,000
Less: current portion (4,500) (1,500)
---------- ---------
Long-term debt, net of current portion $ 225,500 $ 209,500
========== =========
</TABLE>
The following table shows interest expense for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1999 1998
-------- --------
<S> <C> <C>
Senior Subordinated Notes $ 8,250 $ 8,250
Senior Credit Agreement 6,766 2,374
Hearst-Argyle Loan (note 4) -- 943
-------- --------
Total $ 15,016 $ 11,567
======== ========
</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 September 30, 1999, the Company had drawn
$100,000 on the term loan facility and $30,000 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 September 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 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
<PAGE> 10
transactions outside the ordinary course of business, amendments or waivers of
certain specified agreements and the issuance of guarantees or other credit
enhancements. At September 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, 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 of
Redeemable Preferred Stock Series B to investors to fund the acquisition and an
escrow account for dividends. The Redeemable Preferred Stock Series B had 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 ranked on a
parity with the 14% Redeemable Preferred Stock Series A. Cash dividends were
payable monthly at either: (i) LIBOR for the applicable dividend period plus
125 basis points; or (ii) the ABR rate.
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<PAGE> 11
On August 5, 1999, the Company repaid 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 $1,500 of available cash. The availability for selling
additional preferred stock under the Preferred Agreement was cancelled on
August 5, 1999.
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 $74,500. 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 ("FCC"). 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 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. The application is still pending before the FCC, and accordingly,
the Company cannot be sure when the application will be granted, if at all.
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 most of the available 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 $4,504 at September 30, 1999, and will recognize such gain at the license
closing.
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<PAGE> 12
1998 Transactions
On April 1, 1998, the Company acquired 100% of the outstanding stock
of Abilene Radio and Television Company ("ARTC") for $8,164, 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 $17,488 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.
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.
12
<PAGE> 13
<TABLE>
<CAPTION>
Net
Net (Loss) Total
Segment Groups Period Revenues Income (1) Assets (3)
- -------------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C>
50 - 75 DMA 1999 $30,411 $ (3,426) $162,905
1998 14,161 381 120,602
75 - 125 DMA 1999 14,337 (3,680) 59,458
1998 22,042 13,339 103,316
125 and above DMA 1999 15,096 (4,745) 74,930
1998 7,850 359 80,044
License Companies 1999 -- 2,638 85,677
1998 (2) -- -- 71,655
Corporate 1999 -- (4,520) 10,689
1998 -- (12,800) 8,895
------- --------- --------
Company Totals 1999 $59,844 $ (13,733) $393,659
1998 $44,053 $ 1,279 $384,512
======= ========= ========
</TABLE>
(1) The Company does not allocate income taxes to segments.
(2) During 1998, net (loss) income was not allocated to license corporations
until year end.
(3) 1998 numbers are as of December 31, 1998.
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 the Preferred
Agreement. Sunrise and the Company subsequently determined that they will
attempt to fund the Sinclair Agreement through an additional borrowing under the
Senior Credit Agreement and by an additional capital contribution by Sunrise.
The results of operations for the nine months ended September 30, 1999 include a
charge of $850 for expenses incurred in the cancelled private placement.
7. CONTINGENCIES
Due to the delay in the license closing on the sale of WROC, the delay
in the purchase of the Sinclair stations and operating results being below
budgeted levels, the Company anticipates that the Company will not be able to
meet the maximum consolidated leverage ratio requirement under the Senior
Credit Agreement at December 31, 1999. The Company presently is discussing
several options (including additional capital contributions from Sunrise and/or
obtaining a waiver under the Senior Credit Facility) with Hicks Muse and the
lenders under the Senior Credit Facility to ensure that the Company is not in
default under the Senior Credit Agreement at December 31, 1999.
On August 5, 1999, the Federal Communications Commission ("FCC")
adopted changes in several of its broadcast ownership rules (collectively, the
"FCC Ownership Rules"). These rule changes will become effective on November
16, 1999; however, several petitions have been filed with the FCC seeking
reconsideration of the new rules, so the rules may change. While the following
discussion does not describe all of the ownership rules or rule changes, it
attempts to summarize those rules that appear to be most relevant to the
Company.
The FCC relaxed its "television duopoly" rule, which barred any entity
from having an attributable interest in more than one television station with
overlapping service areas. Under the new rules, one entity may have
attributable interests in two television stations in the same Nielsen
Designated Market Area ("DMA") provided that: (1) one of the two stations is
not among the top four in audience share and (2) at least eight independently
owned and operated commercial and noncommercial television stations will remain
in the DMA if the proposed
13
<PAGE> 14
transaction is consummated. The new rules also will permit common ownership of
television stations in the same DMA where one of the stations to be commonly
owned has failed, is failing or is unbuilt or where extraordinary public
interest factors are present. In order to transfer ownership in two commonly
owned television stations in the same DMA, it will be necessary to once again
demonstrate compliance with the new rules. Lastly, the new rules authorize the
common ownership of television stations with overlapping signal contours as
long as the stations to be commonly owned are located in different DMAs.
Similarly, the FCC relaxed its "one-to-a-market" rule, which restricts
the common ownership of television and radio stations in the same market. One
entity now may own up to two television stations and six radio stations or one
television station and seven radio stations in the same market provided that
(1) 20 independent media voices (including certain newspapers and a single
cable system) will remain in the relevant market following consummation of the
proposed transaction, and (2) the proposed combination is consistent with the
television duopoly and local radio ownership rules. If fewer than 20 but more
than 9 independent voices will remain in a market following a proposed
transaction, and the proposed combination is otherwise consistent with the
Commission's rules, a single entity may have attributable interests in up to
two television stations and four radio stations. If these various "independent
voices" tests are not met, a party generally may have an attributable interest
in no more than one television station and one radio station in a market.
The FCC made other changes to its rules that determine what
constitutes "cognizable interest" in applying the FCC Ownership Rules (the
"Attribution Rules"). Under the new Attribution Rules, a party will be deemed
to have a cognizable interest in a television or radio station, cable system or
daily newspaper that triggers the FCC's cross-ownership restrictions if (1) it
is a non-passive investor and it owns 5% or more of the voting stock in the
media outlet; (2) it is a passive investor (i.e., bank trust department,
insurance company or mutual fund) and it owns 20% or more of the voting stock;
or (3) its interests (which may be in the form of debt or equity (even if
non-voting), or both) exceeds 33% of the total asset value of the media outlet
and it either (i) supplies at least 15% of a station's weekly broadcast hours
or (ii) has an attributable interest in another media outlet in the same
market.
The FCC also declared that local marketing agreements, or "LMAs", now
will be attributable interests for purposes of the FCC Ownership Rules. The FCC
will grandfather LMAs that were in effect prior to November 5, 1996, until it
has completed the review of its attribution regulations in 2004. Parties may
seek the permanent grandfathering of such an LMA, on a non-transferable basis,
by demonstrating that the LMA is in the public interest and that it otherwise
complies with FCC Rules.
Finally, the FCC eliminated its "cross interest" policy, which had
prohibited common ownership of a cognizable interest in one media outlet and a
"meaningful" non-cognizable interest in another media outlet serving
essentially the same market.
It is difficult to assess how these changes in the FCC ownership
restrictions will affect the Company's broadcast business.
The recent changes to the FCC Ownership Rules may affect the Company's
relationship with Smith Acquisition Company ("SAC"). The Company owns a
substantial non-voting equity stake in SAC, which, with a wholly owned
subsidiary, owns WNAC-TV, Providence, Rhode Island, and WTOV-TV, Steubenville,
Ohio. Under the new FCC Ownership Rules, the Company's formerly non-attributable
interest in SAC will be attributable. Accordingly, the Company, and parties to
the Company, must consider whether their other broadcast interests, when viewed
in combination with those of SAC, are consistent with all relevant FCC Ownership
Rules. The Company is in the process of conducting that review. The Company's
preliminary assessment suggests that SAC may continue to own WNAC-TV, but that
it may not be able to continue to own WTOV-TV without affecting changes in its
ownership or obtaining a waiver from the FCC. To the extent the recent changes
require the Company to modify its broadcast interests or ownership structure,
the Company expects to act as necessary to remain in compliance with all
relevant FCC Ownership Rules.
The recent changes to the FCC Ownership Rules also may affect the
Company's proposed acquisition of stations under the Sinclair Agreement (the
"Sinclair Stations"). The Company has proposed to assign the licenses of the
Sinclair Stations to a separate entity; however, it may seek to operate one or
more of the Sinclair Stations pursuant to one or more local marketing
agreements. In light of the recent changes to the FCC Ownership Rules, it is
not clear to what extent the Company will be able to operate the Sinclair
Stations pursuant to these proposed agreements.
14
<PAGE> 15
Once the changes in the FCC Ownership Rules take effect, the Company
no longer will need to maintain its waiver to own both KRBC-TV, Abilene, Texas,
and KACB-TV, San Angelo, Texas, as the common ownership of these stations will
be consistent with the Commission's Rules.
On October 2, 1999, AMFM Inc. ("AMFM") entered into an Agreement and
Plan of Merger with Clear Channel Communications, Inc. ("Clear Channel") and
CCU Merger Sub, Inc. ("Merger Sub"), pursuant to which AMFM will be merged with
and into Merger Sub and will become a wholly-owned subsidiary of Clear Channel
(the "AMFM Merger"). Thomas O. Hicks, who is the Company's ultimate controlling
shareholder, has an attributable interest in AMFM and currently is the Chairman
and Chief Executive Officer of AMFM. AMFM and Clear Channel have announced that
Mr. Hicks will serve as Vice Chairman of the combined entity. The Company is in
the process of analyzing the impact of this AMFM Merger on the Company's
operations and regulatory obligations. However, because of the ownership by
Clear Channel of numerous broadcast stations within the Company's markets, it
is anticipated that divestitures will be required by the Company and/or Clear
Channel.
15
<PAGE> 16
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, programming expenditures and promotional costs. A significant
proportion of the operating expenses of the Stations are considered fixed in
nature.
The 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 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 generally 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 second and fourth
quarters in the even years (e.g. 1998 and 2000).
Broadcast Cash Flow is defined as operating 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, pay interest and make
capital expenditures. 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 (the "FCC")
policies, and changes in general economic 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 nine months ended
September 30, 1999 and 1998,
16
<PAGE> 17
WTOV, WEYI, and WJAC will be referred to as Core Stations. The acquisition of
television stations KVLY, KFYR, KUMV, KQCD, 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. 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
sale of the non-license assets of WROC, and the entering into of a time
brokerage 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------- -------------------- -------------------- -------------------
$ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Revenues:
Local $ 11,151 53.5% $ 8,830 48.3% $ 35,934 52.2% $ 25,226 49.0%
National 6,667 31.9% 5,695 31.2% 23,050 33.5% 17,434 33.9%
Political 50 0.2% 1,014 5.6% 218 0.3% 2,167 4.2%
Network Compensation 1,329 6.4% 1,325 7.2% 4,118 6.0% 3,448 6.7%
Trade and barter 656 3.1% 498 2.7% 2,035 3.0% 1,515 2.9%
Joint operating agreement (1) 638 3.1% 755 4.1% 2,263 3.2% 1,082 2.1%
Other 382 1.8% 167 0.9% 1,281 1.8% 611 1.2%
-------- ----- -------- ----- -------- ----- -------- -----
Total 20,873 100.0% 18,284 100.0% 68,899 100.0% 51,483 100.0%
Agency and national
representative commissions (2,650) (12.7%) (2,558) (14.0%) (9,055) (13.1%) (7,430) (14.4%)
-------- ------ -------- ----- -------- ----- -------- -----
Net revenue $ 18,223 87.3% $ 15,726 86.0% $ 59,844 86.9% $ 44,053 85.6%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
(1) Represents 50% of the broadcast cash flow of WNAC and WPRI.
Net revenues increased by $2.497 million or 15.9% to $18.223 million
for the three months ended September 30, 1999 from $15.726 million for the
three months ended September 30, 1998. The following table summarizes the
increase in net revenue:
<TABLE>
<CAPTION>
<S> <C>
Core stations $ (448)
Swap transaction (476)
Station acquisitions 5,837
WROC sale (2,416)
--------
$ 2,497
========
</TABLE>
17
<PAGE> 18
Net revenues increased by $15.791 million or 35.8% to $59,844 million
for the nine months ended September 30, 1999 from $44.053 million for the nine
months ended September 30, 1998. The following table summarizes the increase in
net revenues:
<TABLE>
<CAPTION>
<S> <C>
Core stations $ (306)
Swap transaction 2,592
Station acquisitions 19,296
WROC sale (5,791)
---------
$ 15,791
=========
</TABLE>
Political revenues decreased by $.964 and $1.949 for the three months
and nine months ended September 30, 1999 from the prior comparable time
periods. All of the Core Stations and the Swap Stations acquired showed revenue
decreases during the third quarter of 1999.
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------- -------------------- -------------------- --------------------
$ % of $ % of $ % of $ % of
Revenues Revenues Revenues Revenues
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues: $ 18,223 100.0% $ 15,726 100.0% $ 59,844 100.0% $ 44,053 100.0%
Operating Expenses:
Station operating 6,063 33.3% 5,454 34.7% 19,047 31.8% 14,480 32.9%
Selling, general & administrative 4,496 24.7% 3,606 23.0% 14,943 25.0% 10,473 23.8%
Trade and barter 671 3.7% 458 2.9% 2,026 3.4% 1,380 3.1%
Depreciation 3,194 17.5% 2,015 12.8% 9,901 16.5% 5,270 12.0%
Amortization 5,616 30.8% 4,436 28.2% 17,108 28.6% 12,020 27.3%
Corporate expenses 858 4.7% 522 3.3% 2,347 3.9% 1,482 3.3%
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 20,898 114.7% 16,491 104.9% 65,372 109.2% 45,105 102.4%
======== ===== ======== ===== ======== ===== ======== =====
Operating loss $ (2,675) (14.7%) $ (765) (4.9%) $ (5,528) (9.2%) $ (1,052) (2.4%)
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Operating expenses increased by $4.407 million or 26.7% to $20.898
million for the three months ended September 30, 1999 from $16.491 million for
the three months ended September 30, 1998. The following table summarizes the
increase in operating expenses:
<TABLE>
<CAPTION>
<S> <C>
Core stations $ 20
Swap transaction (55)
Station acquisitions 6,524
WROC sale (2,802)
Corporate expenses and depreciation 347
License corporations amortization 373
--------
$ 4,407
========
</TABLE>
18
<PAGE> 19
Operating expenses increased by $20.267 million or 44.9% to $65.372
million for the nine months ended September 30, 1999 from $45.105 million for
the nine months ended September 30, 1998. The following table summarizes the
increase in operating expenses:
<TABLE>
<CAPTION>
<S> <C>
Core stations $ 223
Swap transaction 2,541
Station acquisitions 20,455
WROC sale (5,580)
Corporate expenses and depreciation 716
License corporations amortization 1,912
-----------
$ 20,267
===========
</TABLE>
Interest Expense
Interest expense increased by $.801 million or 18.9% to $5.038 million
for the three months ended September 30, 1999, from $4.237 million for the
three months ended September 30, 1998 and increased by $3.449 million or 29.8%
to $15.017 million for the nine months ended September 30, 1999, from $11.567
for the nine months ended September 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 a gain of $17.5 million on the Swap
Transactions for the nine months ended September 30, 1998, with no gain in the
comparable period for 1999.
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 would attempt to fund
the Sinclair Agreement through an additional borrowing under the Senior Credit
Agreement and by an additional capital contribution by Sunrise. The nine months
ended September 30, 1999 includes an $.850 million charge for the cancelled
offering.
Income Tax Benefit
Income tax benefit increased by $2.998 million to $2.494 million for
the three months ended September 30, 1999 from $.504 million tax provision for
the three months ended September 30, 1998 and increased by $8.752 million to
$7.876 million for the nine months ended September 30, 1999 from an $.876
million tax provision for the nine months ended September 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.
Extraordinary Item
Extraordinary loss for early retirement of debt was $4.586 million
(net of income tax benefit, it was $2.860 million) for the three and nine
months ended September 30, 1998 with no extraordinary item for the comparable
periods of 1999. The loss consisted of $2.422 million of cost incurred on the
issuance of the former Bank Credit Agreement and $2.164 million of fees
incurred on the issuance of the New Senior Credit Agreement.
Net Loss
Net loss decreased by $2.959 million to $5.401 million for the three
months ended September 30, 1999 from a net loss of $8.360 million for the three
months ended September 30, 1998 and increased by $15.012 million to a loss of
$13.733 million for the nine months ended September 30, 1999 from a net income
of $1.279 million for the nine months ended September 30, 1998 for the reasons
stated above.
19
<PAGE> 20
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Operating Loss $ (2,675) $ (765) $ (5,528) $(1,052)
Add: Amortization of program rights 1,420 1,448 4,705 3,937
Depreciation of property and equipment 3,194 2,015 9,901 5,270
Amortization of intangibles 5,616 4,436 17,108 12,020
Corporate expenses 858 522 2,347 1,482
Less: Payments for program rights (1,455) (1,453) (4,857) (3,980)
-------- ------ ------- -------
Broadcast Cash Flow 6,958 6,203 23,676 17,677
Less: Corporate expenses (858) (522) (2,347) (1,482)
-------- ------ ------- -------
EBITDA $ 6,100 $5,681 $21,329 $16,195
======== ====== ======= =======
Broadcast Cash Flow margin 38.2% 39.4% 39.6% 40.1%
======== ====== ======= =======
EBITDA margin 33.5% 36.1% 35.6% 36.8%
======== ====== ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had $2.841 million in cash
balances and net working capital of $4.657 million. The Company's primary
sources of liquidity are cash provided by operations, availability under the
Senior Credit Agreement and the equity contributions by Sunrise.
Net cash flows used in operating activities increased by $7.862 million
to $1.444 million for the nine months ended September 30, 1999 from cash
provided by operations of $6.418 million for the nine months ended September 30,
1998. The Company made interest and film payments of $17.827 million and $4.857
million, respectively, during the nine months ended September 30, 1999 compared
to payments of $14.403 million and $3.980 million for the nine months ended
September 30, 1998.
Net cash flows used in investing activities increased by $8.810
million to $78.255 million for the nine months ended September 30, 1999 from
$69.445 million for the nine months ended September 30, 1998. In 1999, the
Company expended $74.487 million to complete the acquisition of WUPW and in
1998 approximately $66.260 million on acquisitions and swaps.
Net cash flows provided by financing activities increased by $11.509
million to $77.193 million for the nine months ended September 30, 1999 from
$65.684 million for the nine months ended September 30, 1998. In 1999, the
Company received a capital contribution of $15.000 million from Sunrise, sold
Redeemable Preferred Stock Series B for $37.100 million, borrowed a net $19.000
million under the Senior Credit Agreement, received net proceeds of $44.967
million on the sale of WROC and repaid $37.500 million of Redeemable Preferred
Stock Series B. In 1998, the Company received a capital contribution of $10.400
million from Sunrise and borrowed a net of $58.000 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 potential acquisitions. The Company may incur
additional indebtedness in the future, subject to certain limitations contained
in the Senior Credit Agreement and the Senior Subordinated 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 from Sunrise.
Principal and interest payments under the Senior Credit Agreement and
the Senior Subordinated Notes
20
<PAGE> 21
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.
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 September 30, 1999, the
Company had outstanding $99.250 million on the term loan facility and $30.750
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 September 30, 1999, the Company was
in compliance with the financing and operating covenants of both the Senior
Credit Agreement and the Senior Subordinated Notes.
Due to the delay in the license closing on the sale of WROC, the delay
in the purchase of the Sinclair stations and operating results being below
budgeted levels, the Company anticipates that the Company will not be able to
meet the maximum consolidated leverage ratio requirement under the Senior
Credit Agreement at December 31, 1999. The Company presently is discussing
several options (including additional capital contributions from Sunrise and/or
obtaining a waiver under the Senior Credit Facility) with Hicks Muse and the
lenders under the Senior Credit Facility to ensure that the Company is not in
default under the Senior Credit Agreement at December 31, 1999.
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.
On August 5, 1999, the Company repaid all amounts outstanding under
the Preferred Agreement by borrowing $21.000 million under the Senior Credit
Agreement, receiving a $15.000 million capital contribution from Sunrise and
using $1.500 in available cash. The borrowing availability under the Preferred
Agreement was
21
<PAGE> 22
cancelled effective August 5, 1999.
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 potential additional capital contributions from Sunrise 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. See additional
disclosures related to regulatory issues facing the Company under the caption
"FCC Issues."
CAPITAL EXPENDITURES
Capital expenditures were $3.862 million and $3.231 million for the
nine month periods ended September 30, 1999 and 1998, respectively. Capital
expenditures are anticipated to be $6.000 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 in the Senior Credit Agreement
and the availability of additional equity capital, and/or earnings from
operations.
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 September 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 a minor positive
effect on the results of 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 substantial net losses
for the foreseeable future.
INFLATION
The Company believes that its business is affected by inflation to an
extent no greater than other
22
<PAGE> 23
businesses are generally affected.
EMPLOYEES
As of September 30, 1999, the Stations had 599 full-time and 87
part-time employees. The Company is a party to collective bargaining agreements
which apply to approximately 162 full time and 28 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 with both union and non union
employees.
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, 2000. Management has not determined what effect this Statement
will have 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 acquired in station acquisitions to gain significant
operational efficiencies and, through these same efforts, year 2000 compliant
equipment and applications have been installed. Total expenditures at September
30, 1999 amount to less than $1.500 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 was 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 was 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.
23
<PAGE> 24
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, inventory management, accounting and
production. Each station operates these systems independently on separate
hardware platforms. Nearly all critical systems have been modified and are
compliant. 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 is not economically or technically feasible for the Company to
fully test all 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 have been 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 and
results of operations.
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.
The preceding Year 2000 disclosure is designated a "Year 2000
Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure
Act.
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 does
not expect its broadcast cash flow to decrease a significant amount.
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 does not expect its broadcast cash flow to decrease
by a significant amount.
FCC ISSUES
On August 5, 1999, the Federal Communications Commission ("FCC")
adopted changes in several of its broadcast ownership rules (collectively, the
"FCC Ownership Rules"). These rule changes will become effective on November
16, 1999; however, several petitions have been filed with the FCC seeking
reconsideration of the new rules, so the rules may change. While the following
discussion does not describe all of the ownership rules or
24
<PAGE> 25
rule changes, it attempts to summarize those rules that appear to be most
relevant to the Company.
The FCC relaxed its "television duopoly" rule, which barred any entity
from having an attributable interest in more than one television station with
overlapping service areas. Under the new rules, one entity may have
attributable interests in two television stations in the same Nielsen
Designated Market Area ("DMA") provided that: (1) one of the two stations is
not among the top four in audience share and (2) at least eight independently
owned and operated commercial and noncommercial television stations will remain
in the DMA if the proposed transaction is consummated. The new rules also will
permit common ownership of television stations in the same DMA where one of the
stations to be commonly owned has failed, is failing or is unbuilt or where
extraordinary public interest factors are present. In order to transfer
ownership in two commonly owned television stations in the same DMA, it will be
necessary to once again demonstrate compliance with the new rules. Lastly, the
new rules authorize the common ownership of television stations with
overlapping signal contours as long as the stations to be commonly owned are
located in different DMAs.
Similarly, the FCC relaxed its "one-to-a-market" rule, which restricts
the common ownership of television and radio stations in the same market. One
entity now may own up to two television stations and six radio stations or one
television station and seven radio stations in the same market provided that
(1) 20 independent media voices (including certain newspapers and a single
cable system) will remain in the relevant market following consummation of the
proposed transaction, and (2) the proposed combination is consistent with the
television duopoly and local radio ownership rules. If fewer than 20 but more
than 9 independent voices will remain in a market following a proposed
transaction, and the proposed combination is otherwise consistent with the
Commission's rules, a single entity may have attributable interests in up to
two television stations and four radio stations. If these various "independent
voices" tests are not met, a party generally may have an attributable interest
in no more than one television station and one radio station in a market.
The FCC made other changes to its rules that determine what
constitutes "cognizable interest" in applying the FCC Ownership Rules (the
"Attribution Rules"). Under the new Attribution Rules, a party will be deemed
to have a cognizable interest in a television or radio station, cable system or
daily newspaper that triggers the FCC's cross-ownership restrictions if (1) it
is a non-passive investor and it owns 5% or more of the voting stock in the
media outlet; (2) it is a passive investor (i.e., bank trust department,
insurance company or mutual fund) and it owns 20% or more of the voting stock;
or (3) its interests (which may be in the form of debt or equity (even if
non-voting), or both) exceeds 33% of the total asset value of the media outlet
and it either (i) supplies at least 15% of a station's weekly broadcast hours
or (ii) has an attributable interest in another media outlet in the same
market.
The FCC also declared that local marketing agreements, or "LMAs", now
will be attributable interests for purposes of the FCC Ownership Rules. The FCC
will grandfather LMAs that were in effect prior to November 5, 1996, until it
has completed the review of its attribution regulations in 2004. Parties may
seek the permanent grandfathering of such an LMA, on a non-transferable basis,
by demonstrating that the LMA is in the public interest and that it otherwise
complies with FCC Rules.
Finally, the FCC eliminated its "cross interest" policy, which had
prohibited common ownership of a cognizable interest in one media outlet and a
"meaningful" non-cognizable interest in another media outlet serving
essentially the same market.
It is difficult to assess how these changes in the FCC ownership
restrictions will affect the Company's broadcast business.
The recent changes to the FCC Ownership Rules may affect the Company's
relationship with Smith Acquisition Company ("SAC"). The Company owns a
substantial non-voting equity stake in SAC, which, with a wholly owned
subsidiary, owns WNAC-TV, Providence, Rhode Island, and WTOV-TV, Steubenville,
Ohio. Under the new FCC Ownership Rules, the Company's formerly
non-attributable interest in SAC will be attributable. Accordingly, the
Company, and parties to the Company, must consider whether their other
broadcast interests, when viewed in combination with those of SAC, are
consistent with all relevant FCC Ownership Rules. The Company is in the process
of conducting that review. The Company's preliminary assessment suggests that
SAC may continue to own WNAC-TV, but that it may not be able to continue to own
WTOV-TV without affecting changes in its ownership or obtaining a waiver from
the FCC. To the extent the recent changes require the Company to modify its
broadcast interests or ownership structure, the Company expects to act as
necessary to remain in compliance with all relevant FCC Ownership Rules.
25
<PAGE> 26
The recent changes to the FCC Ownership Rules also may affect the
Company's proposed acquisition of stations under the Sinclair Agreement (the
"Sinclair Stations"). The Company has proposed to assign the licenses of the
Sinclair Stations to a separate entity; however, it may seek to operate one or
more of the Sinclair Stations pursuant to one or more local marketing
agreements. In light of the recent changes to the FCC Ownership Rules, it is
not clear to what extent the Company will be able to operate the Sinclair
Stations pursuant to these proposed agreements.
Once the changes in the FCC Ownership Rules take effect, the Company
no longer will need to maintain its waiver to own both KRBC-TV, Abilene, Texas,
and KACB-TV, San Angelo, Texas, as the common ownership of these stations will
be consistent with the Commission's Rules.
On October 2, 1999, AMFM Inc. ("AMFM") entered into an Agreement and
Plan of Merger with Clear Channel Communications, Inc. ("Clear Channel") and
CCU Merger Sub, Inc. ("Merger Sub"), pursuant to which AMFM will be merged with
and into Merger Sub and will become a wholly-owned subsidiary of Clear Channel
(the "AMFM Merger"). Thomas O. Hicks, who is the Company's ultimate controlling
shareholder, has an attributable interest in AMFM and currently is the Chairman
and Chief Executive Officer of AMFM. AMFM and Clear Channel have announced that
Mr. Hicks will serve as Vice Chairman of the combined entity. The Company is in
the process of analyzing the impact of this AMFM Merger on the Company's
operations and regulatory obligations. However, because of the ownership by
Clear Channel of numerous broadcast stations within the Company's markets, it
is anticipated that divestitures will be required by the Company and/or Clear
Channel.
PRO FORMA BASIS
The pro forma financial information presents the results of operations
of the Stations owned by the Company at September 30, 1999, after considering
the WROC disposition. The following pro forma financial 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.
PRO FORMA NET REVENUES.
Set forth below are the principal types of pro forma television
revenues that the Company has generated for the periods indicated and the
percentage contribution of each to total revenues.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998 1998
----------------------- -------------------------- ---------------------
$ % $ % $ %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues:
Local $35,073 52.5% $36,317 53.0% $50,214 51.7%
National 22,166 33.2% 20,220 29.6% 27,863 28.7%
Political 218 0.3% 1,199 1.8% 4,593 4.7%
Network compensation 3,991 6.0% 4,194 6.1% 5,496 5.7%
Trade and barter 1,954 2.9% 2,362 3.5% 3,165 3.2%
Joint operating agreements 2,263 3.4% 2,753 4.0% 4,193 4.3%
Other 1,144 1.7% 1,339 2.0% 1,677 1.7%
------- ----- ------- ----- ------- ------
Total 66,809 100.0% 68,384 100.0% 97,201 100.0%
Agency and national
representative commissions (8,752) (13.1%) (8,966) (13.1%) (12,846) (13.2%)
------- ----- ------- ------ -------- ------
Net revenues $58,057 86.9% $59,418 86.9% $ 84,355 86.8%
======= ===== ======= ====== ======== ======
</TABLE>
26
<PAGE> 27
PRO FORMA RESULTS OF OPERATIONS.
Set forth below is a summary of the pro forma results of operations of
the Company for the periods indicated and their percentages of net revenue.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998 1998
------------------------- ------------------------- ---------------------
$ % of $ % of $ % of
Revenues Revenues Revenues
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues: $ 58,057 100.0% $ 59,418 100.0% $ 84,355 100.0%
Station Operating Expenses:
Station operating 18,085 31.1% 17,930 30.2% 23,933 28.4%
Selling, general and administrative 14,495 24.9% 14,547 24.5% 20,982 24.9%
Trade and barter 1,975 3.4% 2,089 3.5% 1,624 1.9%
Depreciation 9,675 16.7% 9,218 15.5% 12,318 14.6%
Amortization 16,695 28.8% 16,951 28.5% 22,113 26.2%
Corporate expenses 2,550 4.4% 2,550 4.3% 3,400 4.0%
-------- ----- -------- ----- -------- -----
Total station operating expenses 63,475 109.3% 63,285 106.5% 84,370 100.0%
-------- ----- -------- ----- -------- -----
Operating (loss) income $ (5,418) (9.3%) $ (3,867) (6.5%) $ (15) --
======== ====== ======== ====== ======== =====
</TABLE>
PRO FORMA BROADCAST CASH FLOW AND EBITDA:
The following table sets forth a computation of pro forma Broadcast
Cash Flow and EBITDA.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Operating loss $ (5,418) $ (3,867) $ (15)
Add: Amortization of program rights 4,345 4,555 6,136
Depreciation of property and equipment 9,675 9,218 12,318
Amortization of intangibles 16,695 16,951 22,113
Corporate overhead 2,550 2,550 3,400
Less: Payments for program rights (4,466) (4,894) (6,471)
-------- -------- --------
Broadcast cash flow 23,381 24,513 37,481
Less: Corporate expenses (2,550) (2,550) (3,400)
-------- -------- --------
EBITDA $ 20,831 $ 21,963 $ 34,081
======== ======== ========
Broadcast Cash Flow Margin 40.3% 41.3% 44.4%
======== ======== ========
EBITDA Margin 35.9% 37.0% 40.4%
======== ======== ========
</TABLE>
PART II
Item 5 Other Information
On March 16, 1999, the Company and 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
27
<PAGE> 28
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 DOJ and FCC. In April, 1999, 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. (1)
2.2 Purchase Agreement by and among Sinclair Communications, Inc.,
and STC Broadcasting, Inc., dated March 16, 1999 (1)
12 Statement of fixed charge ratio (1)
21.1 Subsidiaries of STC Broadcasting, Inc. (1)
27.1 Financial Data Schedule (2)
(1) Incorporated by reference to the Form 10-K of STC Broadcasting, Inc.
for the period January 1, 1998 to December 31, 1998.
(2) Filed herewith
(B) Reports on Form 8-K
No 8-K filings were made by the Company in the third quarter
of 1999.
28
<PAGE> 29
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: November 8,1999 By: /s/ David A. Fitz
----------------------------------
David A. Fitz
Senior Vice-President/
Chief Financial Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,841
<SECURITIES> 0
<RECEIVABLES> 14,067
<ALLOWANCES> 584
<INVENTORY> 0
<CURRENT-ASSETS> 27,745
<PP&E> 91,649
<DEPRECIATION> 17,321
<TOTAL-ASSETS> 393,659
<CURRENT-LIABILITIES> 23,088
<BONDS> 225,500
41,664
0
<COMMON> 0
<OTHER-SE> 112,212
<TOTAL-LIABILITY-AND-EQUITY> 393,659
<SALES> 59,844
<TOTAL-REVENUES> 59,844
<CGS> 33,990
<TOTAL-COSTS> 65,372
<OTHER-EXPENSES> 1,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,016
<INCOME-PRETAX> (21,609)
<INCOME-TAX> 7,876
<INCOME-CONTINUING> (13,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5,891)
<NET-INCOME> (19,624)
<EPS-BASIC> (19,624)
<EPS-DILUTED> (19,624)
</TABLE>
