<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
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
ST. PETERSBURG, FLORIDA 33701 (727) 821-799
---------------------------------------- ---------------------------
(Address of principal executive offices) (Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 3, 2000 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 MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3 - 4
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statement of Stockholder's Equity
for the Three Months Ended March 31, 2000 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 7
Notes to Consolidated Financial Statements 8 - 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15 - 25
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
</TABLE>
2
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PART I. FINANCIAL STATEMENTS
Item 1. FINANCIAL STATEMENTS
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................... $ 1,652 $ 3,909
Accounts receivable, net .................... 13,586 15,195
Current portion of program rights ........... 5,732 6,356
Other current assets ........................ 843 1,407
-------- --------
Total current assets .................. 21,813 26,867
-------- --------
PROPERTY AND EQUIPMENT, net .................... 70,093 72,705
-------- --------
INTANGIBLE ASSETS, net
FCC licenses ................................ 82,538 84,107
Network affiliation agreements .............. 173,702 177,131
Other ....................................... 2,798 2,958
-------- --------
Net intangible assets ................. 259,038 264,196
-------- --------
OTHER ASSETS
Deferred financing and acquisition costs, net 9,465 10,082
Program rights, net of current portion ...... 9,690 10,323
-------- --------
Total other assets .................... 19,155 20,405
-------- --------
Total assets .......................... $370,099 $384,173
======== ========
</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>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable ................................... $ 3,667 $ 5,443
Accrued expenses ................................... 2,198 2,454
Accrued interest expense ........................... 489 3,291
Current portion of long-term debt .................. 5,750 5,000
Current portion of program rights payable .......... 5,960 6,534
--------- ---------
Total current liabilities .................... 18,064 22,722
--------- ---------
LONG-TERM DEBT ........................................ 194,750 194,750
DEFERRED INCOME TAXES ................................. 15,253 17,960
PROGRAM RIGHTS PAYABLE, net of current portion ........ 10,137 10,815
REDEEMABLE PREFERRED STOCK
Series A ........................................... 44,781 43,196
Series B ........................................... 25,205 24,305
STOCKHOLDER'S EQUITY:
Common stock, par value $.01 per share, 1,000 shares
authorized, issued and outstanding .............. -- --
Additional paid-in capital ......................... 112,212 112,212
Accumulated deficit ................................ (50,303) (41,787)
--------- ---------
Net stockholder's equity ..................... 61,909 70,425
--------- ---------
Total liabilities and stockholder's equity ... $ 370,099 $ 384,173
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three Months Ended
March 31, 2000 and 1999
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
2000 1999
------ -------
<S> <C> <C>
NET REVENUES ................................. $ 18,567 $ 20,414
OPERATING EXPENSES:
Station operating .......................... 6,086 6,966
Selling, general and administrative ........ 5,153 5,363
Trade and barter ........................... 641 643
Depreciation of property and equipment ..... 3,436 3,425
Amortization of intangibles and other assets 5,671 5,887
Corporate expenses ......................... 802 740
-------- --------
Total operating expenses ............ 21,789 23,024
-------- --------
OPERATING LOSS ............................... (3,222) (2,610)
OTHER EXPENSE:
Interest expense ........................... (4,687) (5,162)
Expenses incurred in cancelled
acquisition of Sinclair stations ....... (875) --
Other, net ................................. (47) (49)
-------- --------
LOSS BEFORE INCOME TAX BENEFIT ............... (8,831) (7,821)
INCOME TAX BENEFIT ........................... 2,800 2,525
-------- --------
NET LOSS ..................................... (6,031) (5,296)
REDEEMABLE PREFERRED STOCK
DIVIDENDS AND ACCRETION:
SERIES A ............................... (1,585) (1,386)
SERIES B ............................... (900) (318)
-------- --------
Total dividends and accretion ....... (2,485) (1,704)
-------- --------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDER ...................... $ (8,516) $ (7,000)
======== ========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE ........................ $ (8,516) $ (7,000)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ......................... 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 Three Months Ended March 31, 2000
(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, 1999 $ -- $112,212 $(41,787) 70,425
Net loss applicable to
common shareholder .... -- -- (8,516) (8,516)
-------- -------- -------- -------
Balance, March 31, 2000 .. $ -- $112,212 $(50,303) 61,909
======== ======== ======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
STC BROADCASTING, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (6,031) $ (5,296)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation of property and equipment ................................. 3,436 3,425
Amortization of intangibles and other assets ........................... 5,671 5,887
Amortization of program rights ......................................... 1,506 1,866
Payments on program rights ............................................. (1,501) (1,870)
Deferred tax benefit ................................................... (2,800) (2,525)
Loss on disposal of property and equipment ............................. 71 119
Proceeds on surrender of insurance policy .............................. 107 --
Change in operating assets and liabilities net of effects from acquired and
disposed stations:
Accounts receivable .................................................... 1,609 987
Other current assets ................................................... 564 (519)
Accounts payable and accrued expenses .................................. (4,834) (4,925)
-------- --------
Net cash used in operating activities ............................ (2,202) (2,851)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of WUPW-TV .................................................... -- (74,171)
Capital expenditures ...................................................... (917) (1,017)
Other ..................................................................... 112 86
-------- --------
Net cash used in investing activities ............................ (805) (75,102)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under senior credit agreement ..................... 2,000 41,000
Repayment of senior credit agreement ...................................... (1,250) --
Deferred refinancing and acquisition
costs incurred ......................................................... -- (226)
Payment of Preferred Stock Dividend Series B .............................. -- (311)
Preferred Stock Series B, net of expenses of $400 ......................... -- 37,100
-------- --------
Net cash provided by financing activities ........................ 750 77,563
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (2,257) (390)
CASH AND CASH EQUIVALENTS,
BEGINNING BALANCE .................................................... 3,909 5,347
-------- --------
CASH AND CASH EQUIVALENTS,
ENDING BALANCE ....................................................... $ 1,652 $ 4,957
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non cash items
Preferred dividends and accretion ..................................... $ 2,485 $ 1,393
New program rights contracts .......................................... $ 582 $ 3,680
Cash paid for interest .................................................... $ 7,489 $ 7,943
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
STC BROADCASTING, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 2000
(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 March 31, 2000, 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
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>
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, 1999
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>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Senior Subordinated Notes $ 100,000 $ 100,000
Senior Credit Agreement 100,500 99,750
--------- ---------
Total long-term debt 200,500 199,750
Less: current portion (5,750) (5,000)
--------- ---------
Long-term debt, net of current portion $ 194,750 $ 194,750
========= =========
</TABLE>
The following table shows interest expense for the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------ ------
Senior Subordinated Notes $2,719 $2,719
Senior Credit Agreement 1,968 2,443
------ ------
Total $4,687 $5,162
====== ======
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. 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 $95,000 of its variable rate borrowing under the
Senior Credit Agreement. The base interest rate was fixed at 5.00% to 5.15% plus
the applicable borrowing margin (currently 2.125%) for an overall borrowing rate
of 7.185% to 7.275% at March 31, 2000.
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 (currently 7.0:1), a minimum
consolidated fixed charge coverage ratio (currently 1.05:1), and a consolidated
interest coverage ratio (currently 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, transactions outside the
ordinary course of business, amendments or waivers of certain specified
agreements and the issuance of guarantees or other credit enhancements. At March
31, 2000, the Company was in compliance
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with the financing and operating covenants of both the Senior Credit Agreement
and the Senior Subordinated Notes.
3. REDEEMABLE PREFERRED STOCK :
SERIES A
In March 1997, the Company issued 300,000 shares of Redeemable
Preferred Stock Series A with an aggregate liquidation preference of $30,000, or
$100 per share, which is entitled to quarterly dividends that will accrue at a
rate per annum of 14%. Prior to February 28, 2002, dividends may be paid in
either additional whole shares of Redeemable Preferred Stock Series A or cash,
at the Company's option, and only in cash following that date. The Senior Credit
Agreement and Senior Subordinated Notes prohibit the payment of cash dividends
until May 31, 2002. At March 31, 2000, 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, exchange the Redeemable Preferred Stock Series A, in whole but not
in part, for the Company's 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. Cash
dividends were paid monthly at LIBOR for the applicable dividend period plus 125
basis points.
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.
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On December 30, 1999, the Company sold to Sunrise 25,000 shares of
Redeemable Preferred Stock Series B with an aggregate liquidation preference of
$25,000. Each share is entitled to quarterly dividends that will accrue at 14%
rate per annum. The Company's Senior Credit Agreement and Senior Subordinated
Notes prohibit the payment of cash dividends until May 31, 2002. At March 31,
2000, dividends have been accrued but are unpaid on the Redeemable Preferred
Stock Series B.
The Redeemable Preferred Stock Series B is subject to mandatory
redemption in whole on February 28, 2008 at a price equal to the then effective
liquidation preference per share plus an amount in cash equal to all accumulated
and unpaid dividends per share. Prior to February 28, 2008, the Company can
redeem the Redeemable Preferred Stock Series B at the then effective liquidation
preference per share plus an amount in cash equal to all accumulated and unpaid
dividend per share. In the event of a Change of Control (as defined in the
Certificate of Designation for the Redeemable Preferred Stock Series B), the
Company must offer to purchase all outstanding shares at the then effective
liquidation preference per share plus an amount in cash equal to all accumulated
and unpaid dividends per share.
With respect to dividends and distributions upon liquidation,
winding-up and dissolution of the Company, the Redeemable Preferred Stock Series
B ranks senior to all classes of common stock of the Company and the Redeemable
Preferred Stock Series A of the Company.
Holders of the Redeemable Preferred Stock Series B have no voting
rights, except as otherwise required by law or as expressly provided in the
Certificate of Designation for the Redeemable Preferred Stock Series B; however,
the holders of the Redeemable Preferred Stock Series B, voting together as a
single class, shall have the right to elect the lesser of 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 B for six or more quarterly
dividend periods or the failure by the Company to discharge any mandatory
redemption or repayment obligation with respect to the Redeemable Preferred
Stock Series B or 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 B contains covenants customary for securities comparable to the
Redeemable Preferred Stock Series B, 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.
4. ACQUISITIONS AND DISPOSITION
2000 TRANSACTIONS
During the first quarter of 2000, the Company did not enter into any
agreement relating to, or consummate any acquisition or disposition
transactions.
1999 TRANSACTIONS
TOLEDO ACQUISITION
On February 5, 1999, the Company acquired substantially all of the
assets related to WUPW-TV from Raycom Media, Inc. for approximately $74,487.
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.
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. On April 1, 1999, the
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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
programmed most of the available time of WROC and retained the revenues from the
sale of advertising time through the license closing on December 23, 1999.
The Company recognized a gain of $4,500 from the sale.
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.
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, 1999 Annual Report on Form 10K). The Company evaluates performance
based on operating income before interest income, interest expenses, income
taxes, nonrecurring gains and losses, and extraordinary items.
The Company has no significant intersegment revenues or transfers other
than that interest is allocated to subsidiaries of the Company but not
divisions. All segments have local distinct management separate from senior
corporate management. Each management team is evaluated based upon the results
of operations of their station.
The following table sets forth the aggregate information by segment
groups and reconciles segment information to consolidated financial statements.
<TABLE>
<CAPTION>
NET NET
SEGMENT GROUPS PERIOD REVENUES LOSS
- -------------- ------ -------- ----
<S> <C> <C> <C>
50 - 75 DMA 2000 $ 9,790 $ (3,269)
1999 $ 9,040 $ (1,386)
76 - 125 DMA 2000 3,738 (1,968)
1999 6,257 (1,720)
126 and above DMA 2000 5,039 (2,138)
1999 5,117 (1,588)
License Companies 2000 -- 2,970
1999 -- 883
Corporate 2000 -- (1,626)
1999 -- (1,485)
------------ -----------
Company Totals 2000 $ 18,567 $ (6,031)
1999 $ 20,414 $ (5,296)
============ ===========
</TABLE>
6. TERMINATED 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 agreed to acquire from Sinclair:
WICS, Channel 20, Springfield, Illinois; WICD, Channel 15, Champaign, Illinois;
and KGAN, Channel 2, Cedar Rapids, Iowa (collectively, the "Sinclair Stations")
for a total purchase price of $87,000 including working capital, fees, and
expenses. Closing of the purchase was subject to customary conditions, including
review by the Department of Justice and the Federal Communications Commission
("FCC"). In April 1999, and at various other times, the Antitrust Division of
the United States Department of Justice ("DOJ") issued various requests for
additional information under the Hart-Scott-Rodino Antitrust Improvements Act in
connection with the acquisition.
On March 14, 2000, the Company entered into a Termination Agreement
with Sinclair thereby ending the Company's plan to acquire the Sinclair
Stations. The approval by the Antitrust Division of the DOJ was not
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received on a timely basis. Attempts were made to comply with various
information requests of the DOJ, numerous compromises were offered to the DOJ
and offers the Company deemed reasonable were found unacceptable by the DOJ.
The Company incurred a one time charge of $875 in the first quarter
2000 related to its efforts to purchase the Sinclair Stations, respond to the
information requests of the DOJ, its extended negotiation with the DOJ and the
Company's subsequent effort to remarket WICS and WICD in an attempt to reach a
reasonable compromise with the DOJ.
7. CONTINGENCIES
On August 5, 1999, the FCC adopted changes in several of its broadcast
ownership rules (collectively, the "FCC Ownership Rules"). These rule changes
became effective on November 16, 1999; however, several petitions have been
filed with the FCC seeking reconsideration of the new rules, so the final 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 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.
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.
The recent changes to the FCC Ownership Rules may affect the Company's
relationship with Smith
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<PAGE> 14
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 concluded that a change was required to retain its interest in both WNAC
and WTOV. See below for actions taken by the Company and Hicks Muse.
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. Because of these
developments and the pending consummation of the AMFM Merger, the Company has
taken certain actions to ensure that the Company remains in compliance with the
FCC Ownership Rules.
On March 14, 2000, STC License Company filed an application with the
FCC for consent to the transfer of control of Sunrise to Smith Broadcasting
Partners, L.P. which is controlled by Robert N. Smith. This application is
currently pending at the FCC. The transfer of control of Sunrise by Hicks Muse
to Smith Broadcasting Partners, L.P. will result in Smith Broadcasting Partners,
L.P. holding all of the voting stock of Sunrise. On April 28, 2000, Hicks Muse
entered into an agreement to sell to an unrelated party its interest in the
Redeemable Preferred Stock Series A of the Company and Hicks Muse's interest in
Senior Subordinate Notes of Sunrise. Upon the transfer of control to Smith
Broadcasting Partners, L.P. and the sale of these interests by Hicks Muse, which
will be consummated at the time of the AMFM Merger, Hicks Muse's interest in
Sunrise and the Company will no longer be attributable under the FCC Ownership
Rules. Accordingly, Hicks Muse's other media interests should no longer restrict
the Company's ability to acquire other television stations.
On March 24, 2000, the Company filed an application with the FCC to
convert its non voting shares of SAC into voting stock. If approved, this
conversion will be consummated at the time of the AMFM Merger. A principal
effect of this transaction will allow SAC to file a consolidated tax return
with Sunrise and the Company.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The operating revenues of the Stations are derived primarily from
advertising revenues and, to a much lesser extent, compensation paid by the
networks to the Stations for broadcasting network programming. The Stations'
primary operating expenses are employee compensation and related benefits, news
gathering costs, film and syndicated programming expenditures and promotional
costs. A significant proportion of the operating expenses of the Stations are
fixed.
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. Advertising
rates are affected by the number of advertisers competing for the available
time, the size and demographic makeup of the markets served by the television
stations and the availability of alternative advertising media in the market
areas. Advertising rates are highest during the most desirable viewing hours,
generally during local news programming, access (the hour before prime time),
early fringe (3:00 p.m. to 5:00 p.m.) and prime time.
Most spot advertising contracts are short-term and generally run for
only a few weeks. A majority of the revenues of the Stations are generated from
local advertising, which is sold primarily by a Station's sales staff, and the
remainder of the advertising revenues represents national advertising, which is
sold by national advertising sales representatives. The Stations generally pay
commissions to advertising agencies on local and national advertising, and on
national advertising the Stations pay additional commissions to the national
sales representatives operating under an agreement that provides for exclusive
representation within the particular market of the Station. The spot broadcast
revenues of the Stations are generally highest in the second and fourth quarters
of each year, due in part to increases in consumer advertising in the spring and
retail advertising in the period leading up to and including the holiday season.
Advertising spending by political candidates is typically heaviest during the
second and fourth quarters 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 and
other assets, amortization of program rights and corporate expenses, 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 ended March 31, 2000 and
1999, WTOV, WEYI,
15
<PAGE> 16
WJAC, KRBC/KACB, WDTN, WNAC, KVLY, KFYR, KMOT, KUMV, and KQCD will be referred
to as Core Stations. The acquisition of television station WUPW will be referred
to as the Acquisition. The WUPW acquisition closed on February 1, 1999. 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 and was effective April 1, 1999.
HISTORICAL PERFORMANCE
All dollars presented in table form are shown in thousands.
BROADCAST CASH FLOW:
The following table sets forth certain data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Operating Loss $ (3,222) $ (2,610)
Add: Amortization of Program Rights 1,506 1,866
Depreciation of Property and Equipment 3,436 3,425
Amortization of Intangibles 5,671 5,887
Corporate Expenses 802 740
Less: Payments for Program Rights (1,501) (1,870)
---------- ----------
Broadcast Cash Flow 6,692 7,438
Less: Corporate Expenses (802) (740)
--------- ----------
EBITDA $ 5,890 $ 6,698
========= ==========
Margins:
Broadcast Cash Flow 36.0% 36.4%
========= ==========
EBITDA 31.7% 32.8%
========= ==========
</TABLE>
16
<PAGE> 17
NET REVENUES.
Set forth below are the principal types of television revenues that the
Company has generated for the periods indicated and the percentage contribution
of each to net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
2000 1999
--------------------------- -------------------------
$ % $ %
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Gross Revenues:
Local $ 10,978 51.5% $ 12,133 51.5%
National 6,757 31.7% 8,052 34.1%
Political 503 2.4% 49 0.2%
Network Compensation 1,199 5.6% 1,467 6.2%
Joint Operating Agreement (1) 616 2.9% 711 3.0%
Trade and Barter 712 3.3% 652 2.8%
Other 544 2.6% 524 2.2%
-------- ------- -------- -----
Total 21,309 100.0% 23,588 100.0%
Agency and National
Representative Commissions (2,742) (12.9)% (3,174) (13.5)%
-------- ------- -------- -----
Net Revenues $ 18,567 87.1% $ 20,414 86.5%
======== ======= ======== =====
</TABLE>
(1) Represents 50% of the broadcast cash flow of WNAC and WPRI.
RESULTS OF OPERATIONS.
Set forth below is a summary of the operations of the Company for the
periods indicated and their percentages of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
2000 1999
------------------- ------------------------
$ % OF $ % OF
REVENUES REVENUES
------------------- ------------------------
<S> <C> <C> <C> <C>
Net revenues: $ 18,567 100.0% $ 20,414 100.0%
Operating Expenses:
Station Operating 6,086 32.8% 6,966 34.1%
Selling, General & Administrative 5,153 27.8% 5,363 26.3%
Trade and Barter 641 3.5% 643 3.2%
Depreciation 3,436 18.5% 3,425 16.8%
Amortization 5,671 30.5% 5,887 28.8%
Corporate Expenses 802 4.3% 740 3.6%
-------- ----- -------- -----
Total Operating Expenses 21,789 117.4% 23,024 112.8%
-------- ----- -------- -----
Operating Loss $ (3,222) (17.4)% $ (2,610) (12.8)%
======== ===== ======== =====
</TABLE>
17
<PAGE> 18
SUMMARY INFORMATION
The following table details how the above transactions affected the
change in operating income between the three months ended March 31, 2000 and
March 31, 1999.
<TABLE>
<CAPTION>
CORE WROC
STATIONS ACQUISITION SALE TOTAL
-------- ----------- ---- -----
<S> <C> <C> <C> <C>
Net revenues $ (197) $ 789 $(2,439) $(1,847)
Operating Expenses:
Station Operating 51 240 (1,171) (880)
Selling, General and Administrative 88 326 (624) (210)
Trade and Barter 81 44 (127) (2)
Depreciation 214 82 (285) 11
Amortization 43 411 (670) (216)
Corporate Expenses 62 0 0 62
------- ------- ------- -------
Operating Income (Loss) $ (736) $ (314) $ 438 $ (612)
======= ======= ======= =======
</TABLE>
See Pro Forma Basis information later in this document which provides
same basis information on Stations owned at March 31, 2000.
INTEREST EXPENSE
Interest expense decreased by $0.5 million or 9.6% to $4.7 million for
the three months ended March 31, 2000, from $5.2 million for the three months
ended March 31, 1999. The majority of such decrease was due to lower outstanding
balances on the Senior Credit Agreement during the comparative periods.
EXPENSES INCURRED IN CANCELLED ACQUISITION OF SINCLAIR STATIONS
During the first quarter of 2000, the Company wrote off $0.9 million
related to its planned acquisition of three stations from Sinclair
Communications, Inc. due to not receiving an approval from the DOJ on a timely
basis.
INCOME TAX BENEFIT
Income tax benefit increased by $0.3 million to $2.8 million for the
three months ended March 31, 2000 from $2.5 million tax benefit for the three
months ended March 31, 1999, due primarily to an increase in loss before income
taxes.
DIVIDENDS
Redeemable preferred stock dividends and accretion increased by $0.8
million to $2.5 million for the three months ended March 31, 2000 from $1.7
million for the three months ended March 31, 1999. An increase of $0.6 million
is a result of the higher rate of interest on the Series B Preferred Stock
issued in December 1999 as compared to the initial issuance of the Series B
Preferred Stock in the first quarter of 1999 and the remaining amount of $0.2
million is attributable to higher outstanding balances on the Series A Preferred
Stock.
NET LOSS APPLICABLE TO COMMON SHAREHOLDER
Net loss increased by $1.5 million to $8.5 million for the three months
ended March 31, 2000 from a net loss of $7.0 million for the three months ended
March 31, 1999 for the reasons stated above.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had $1.7 million in cash balances and
net working capital of $3.7 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.
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<PAGE> 19
Net cash flows used in operating activities decreased by $0.7 million
to $2.2 million for the three months ended March 31, 2000 from cash used by
operations of $2.9 million for the three months ended March 31, 1999. The
Company made interest and film payments of $7.5 million and $1.5 million,
respectively, during the three months ended March 31, 2000 compared to payments
of $7.9 million and $1.9 million for the three months ended March 31, 1999.
Net cash flows used in investing activities decreased by $74.3 million
to $0.8 million for the three months ended March 31, 2000 from $75.1 million for
the three months ended March 31, 1999. In 1999, the Company expended $74.2
million to complete the acquisition of WUPW with no comparable activity during
the first quarter of 2000. Capital expenditures were $0.9 and $1.0 million for
the three months ended March 31, 2000 and 1999, respectively.
Net cash flows provided by financing activities decreased by $76.8
million to $0.8 million for the three months ended March 31, 2000 from $77.6
million for the three months ended March 31, 1999. In 1999, the Company sold
Redeemable Preferred Stock Series B for $37.1 million and borrowed a net $41.0
million under the Senior Credit Agreement.
The Company's liquidity needs consist primarily of debt service
requirements for the Senior Credit Agreement and the 11% Senior Subordinated
Notes ("Senior Subordinated Notes"), working capital needs, the funding of
capital expenditures and 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 receipt of additional capital contributions from 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 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 $100.0 million
principal amount of its Senior Subordinated Notes, which subsequently were
exchanged for registered Senior Subordinated Notes having substantially
identical terms. Interest on the Senior Subordinated Notes is payable on March
15 and September 15 of each year.
On July 2, 1998, the Company entered into a Senior Credit Agreement
with various lenders which provides a $100.0 million Term Loan Facility and
$65.0 million Revolving Credit Facility. The term loan facility is payable in
quarterly installments commencing on September 30, 1999 and ending June 3, 2006.
The revolving loan facility requires scheduled annual reductions of the
commitment amount commencing on September 30, 2001. At March 31, 2000, the
Company had outstanding $97.8 million on the term loan facility and $2.7 million
under the revolving loan facility.
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. Any 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 (currently 7.0:1) , a minimum consolidated
fixed charge coverage ratio (currently 1.05:1), and a consolidated interest
coverage ratio (currently 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
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<PAGE> 20
investments in other persons, other than certain permitted investments; (iv)
become obligated with respect to contingent obligations, other than certain
permitted contingent obligations; and (v) make restricted payments (including
dividends on its common stock). The operating covenants also include
restrictions on certain specified fundamental changes, such as mergers and asset
sales, transactions with shareholders and affiliates and transactions outside
the ordinary course of business as currently conducted, amendments or waivers of
certain specified agreements and the issuance of guarantees or other credit
enhancements. At March 31, 2000, the Company was in compliance with the
financing and operating covenants of both the Senior Credit Agreement and the
Senior Subordinated Notes.
On March 1, 1997, the Company issued 300,000 shares of Redeemable
Preferred Stock Series A with an aggregate liquidation preference of $30.0
million, or $100 per share, which are entitled to quarterly dividends that
accrue at a rate per annum of 14%. Prior to February 28, 2002, dividends may be
paid in either additional whole-shares of Redeemable Preferred Stock Series A or
cash, at the Company's option, and only in cash following that date.
On February 5, 1999, the Company entered into an agreement (the Series
B Agreement) to sell up to $90.0 million of Series B Redeemable Preferred Stock
to finance acquisitions by the Company from time to time. An aggregate of $37.5
million of Series B Redeemable Preferred Stock was sold on February 5, 1999 to
finance the acquisition of WUPW-TV ($35.0 million) and to fund an escrow account
($2.5 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 $21.0 million under the Senior Credit Agreement,
receiving a $15.0 million capital contribution from Sunrise and using $1.5 in
available cash. The borrowing availability under the Preferred Agreement was
cancelled.
On December 30, 1999, the Company issued and sold to Sunrise 25,000
shares of Redeemable Preferred Stock Series B with an aggregate liquidation
preference of $25.0 million. Each share is entitled to quarterly dividends that
will accrue at a 14% rate per annum.
The Certificates of Designation for the Redeemable Preferred Stock
Series A and B contain covenants customary for comparable securities 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. The Company's Senior
Credit Agreement and Senior Subordinated Notes prohibit the payment of cash
dividends until May 31, 2002 on Redeemable Preferred Stock Series A and B.
Based on the current level of operations and anticipated future
internally generated growth, additional borrowings under the Senior Credit
Agreements and additional equity contributions from Sunrise, the Company
anticipates that it will have sufficient funds to meet its anticipated
requirements for working capital, capital expenditures, interest payments, and
have funds available for additional acquisitions. The Company's future operating
performance and ability to service or refinance the Senior Credit Agreement and
Senior Subordinated Notes 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 significant
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 Sunrise. The degree to which the Company is
leveraged could have a significant effect on its results of operations.
CAPITAL EXPENDITURES
Capital expenditures were $0.9 million and $1.0 million for the three
month periods ended March 31, 2000 and 1999, respectively. Maintenance capital
expenditures are anticipated to be $5.0 million for the year ended December 31,
2000. The Company anticipates that digital television will require a minimum
expenditure of between $1.5 and $2.5 million per station to develop facilities
necessary for transmitting a digital signal with initial expenditures beginning
in 2000 in the amount of approximately $4.0 million.
20
<PAGE> 21
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 March 31, 2000. The Company's Senior Subordinate Debt is fixed at
11% and is due and payable on March 15, 2007. On September 11, 1998, the Company
entered into a three year interest rate swap agreement to reduce the impact of
changing interest rates on $70.0 million of its variable rate borrowings under
the Senior Credit Agreement. The base interest rate was fixed at 5.15% plus the
applicable borrowing margin (currently 2.125%) for an overall borrowing rate of
7.275% at March 31, 2000. On February 9, 1999, the Company entered into a
two-year interest rate swap agreement to reduce the impact of changing interest
rates on $40.0 million of its floating rate borrowings from the Senior Credit
Agreement. The interest rate was fixed at 5.06% plus applicable borrowing
margin. Due to the issuance by the Company on December 30, 1999 of $25.0 million
of Redeemable Preferred Stock Series B to Sunrise and the subsequent reduction
in outstanding balances under the Senior Credit Agreement, the Company
terminated the swap agreement , but simultaneously entered into a new swap
agreement that fixed the interest rate on $25.0 million of its floating rate
borrowings for 18 months at 5%, plus the applicable borrowing margin (currently
2.125%), for an overall borrowing rate of 7.125% at March 31, 2000. The variable
interest rates on these interest rate swap contracts are based upon the three
month London Interbank Offered Rate (LIBOR) and the measurement and settlement
are performed quarterly. The quarterly settlements of this agreement will be
recorded as an adjustment to interest expense and are not anticipated to have a
material effect on the operations of the Company. 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 businesses are generally affected.
EMPLOYEES
As of March 31, 2000, the Company had approximately 615 full-time and
84 part-time employees. WEYI has a contract with United Auto Workers that
expires on September 30, 2002 with respect to 44 employees. WTOV has a contract
with AFTRA that expires January 29, 2002 and a contract with International
Brotherhood of Electrical Workers (IBEW) that expires on November 30, 2000 with
respect to 26 and 19 employees, respectively. WJAC has a contract with
International Alliance of Theatrical Stage Employees that expires on September
30, 2002 with respect to 48 employees. WDTN has a contract with the IBEW that
expires July 1, 2003 with respect to 52 employees. KFYR has a contract with IBEW
that expires on September 9, 2003 with respect to 9 employees. No significant
labor problems have been experienced by the Stations. The Company considers its
overall labor relations to be good. However, there can be no assurance that the
Company's collective bargaining agreements will be renewed in the future or that
the Company will not experience a prolonged labor dispute, which could have a
material adverse effect on the Company's business, financial condition, or
results of operations.
ENVIRONMENTAL REGULATION
Prior to the Company's ownership or operation of its current
facilities, substances or wastes that are or might be considered hazardous under
applicable environmental laws may have been generated, used, stored or disposed
of at certain of those facilities. In addition, environmental conditions
relating to the soil and groundwater
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<PAGE> 22
at or under the Company's facilities may be affected by the proximity of nearby
properties that have generated, used, stored, or disposed of hazardous
substances. As a result, it is possible that the Company could become subject to
environmental liabilities in the future in connection with these facilities
under applicable environmental laws and regulations. Although the Company
believes that it is in substantial compliance with such environmental
requirements, and has not in the past been required to incur significant costs
in connection therewith, there can be no assurance that the Company's costs to
comply with such requirements will not increase in the future. The Company
presently believes that none of its properties have any condition that is likely
to have a material adverse effect on the Company's financial condition or
results of operations.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes 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, as amended by SFAS No. 137, 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.
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 FCC adopted changes in several of its broadcast
ownership rules (collectively, the FCC Ownership Rules). These rule changes
became effective on November 16, 1999; however, several petitions have been
filed with the FCC seeking reconsideration of the new rules, so the final 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 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.
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
22
<PAGE> 23
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.
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 concluded that a change was required to retain its interest
in both WNAC and WTOV. See below for actions taken by the Company.
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. Because of these
developments and the pending consummation of the AMFM Merger, the Company has
taken certain actions to ensure that the Company remains in compliance with the
FCC Ownership Rules.
On March 14, 2000, STC License Company filed an application with the
FCC for consent to the transfer of control of Sunrise to Smith Broadcasting
Partners, L.P. which is controlled by Robert N. Smith. This application is
currently pending at the FCC. The transfer of control of Sunrise by Hicks Muse
to Smith Broadcasting Partners, L.P. will result in Smith Broadcasting Partners,
L.P. holding all of the voting stock of Sunrise. On April 28, 2000, Hicks Muse
entered into an agreement to sell to an unrelated party its interest in the
Redeemable Preferred Stock Series A of the Company and Hicks Muse's interest in
Senior Subordinate Notes of Sunrise. Upon the transfer of control to Smith
Broadcasting Partners, L.P. and the sale of these interests by Hicks Muse, which
will be consummated at the time of the AMFM Merger, Hicks Muse's interest in
Sunrise and the Company will no longer be attributable under the FCC Ownership
Rules. Accordingly, Hicks Muse's other media interests should no longer restrict
the Company's ability to acquire other television stations.
On March 24, 2000, the Company filed an application with the FCC to
convert its non voting shares of SAC into voting stock. If approved, this
conversion will be consummated at the time of the AMFM Merger. A principal
effect of this transaction will allow SAC to file a consolidated tax return with
Sunrise and the Company.
23
<PAGE> 24
PRO FORMA BASIS
The pro forma financial information presents the results of operations
of the Stations owned by the Company at March 31, 2000. The following pro forma
financial information is not indicative of the actual results that would have
been achieved had each Station been owned on January 1, 1999, 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 net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
----------------------------------------- DECEMBER 31,
2000 1999 1999
------------------- ------------------- -------------------
$ % $ % $ %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues:
Local $ 10,978 51.5% $ 11,272 52.1% $ 48,260 53.0%
National 6,757 31.7% 7,169 33.2% 29,277 32.1%
Political 503 2.4% 49 0.2% 462 .5%
Network compensation 1,199 5.6% 1,335 6.2% 5,214 5.7%
Joint operating agreements 616 2.9% 711 3.3% 3,622 4.0%
Trade and barter 712 3.3% 570 2.6% 2,833 3.1%
Other 544 2.6% 511 2.4% 1,440 1.6%
-------- ---- -------- ---- -------- ----
Total 21,309 100.0% 21,617 100.0% 91,108 100.0%
Agency and national
representative commissions (2,742) (12.9%) (2,872) (13.3%) (11,778) (12.9%)
-------- ---- -------- ---- -------- ----
Net revenues $ 18,567 87.1% $ 18,745 86.7% $ 79,330 87.1%
======== ==== ======== ==== ======== ====
</TABLE>
Local and national revenues were generally down in each market and were
adversely affected by a $0.2 million loss of General Motors money in the first
quarter of 2000 as compared to the first quarter of 1999. Political revenues
were approximately $0.5 million higher during the first quarter of 2000 as
compared to 1999. Network compensation at WDTN was down due to a new contract
negotiated in 1999.
24
<PAGE> 25
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>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------------------------- ------------------
2000 1999 1999
----------------- ------------------ ------------------
% OF NET % OF NET % OF NET
$ REVENUES $ REVENUES $ REVENUES
---- -------- --- -------- --- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues: $ 18,567 100.0% $ 18,745 100.0% $ 79,330 100.0%
Station Operating Expenses:
Station operating 6,086 32.8% 6,043 32.2% 24,170 30.5%
Selling, general and administrative 5,153 27.8% 4,917 26.2% 18,866 23.8%
Trade and barter 641 3.5% 592 3.2% 2,896 3.7%
Depreciation 3,436 18.5% 3,194 17.0% 13,182 16.6%
Amortization 5,671 30.5% 5,541 29.6% 22,718 28.6%
Corporate expenses 802 5.3% 740 4.6% 3,500 4.4%
-------- ----- -------- ----- -------- -----
Total station operating expenses 21,789 118.4% 21,027 112.8% 85,332 107.6%
-------- ----- -------- ----- -------- -----
Operating (loss) income $ (3,222) (18.4%) $ (2,282) (12.8%) $ (6,002) (7.6%)
======== ===== ======== ===== ======== =====
</TABLE>
Station operating expenses other than depreciation, amortization and
corporate expenses increased by $0.3 million or 2.5% to $11.9 million for the
three months ended March 31, 2000 from $11.6 million for the three months ended
March 31, 1999.
PRO FORMA BROADCAST CASH FLOW AND EBITDA:
The following table sets forth a computation of pro forma Broadcast
Cash Flow and EBITDA.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------ ------------
2000 1999 1999
---- ---- ------------
<S> <C> <C> <C>
Operating loss $ (3,222) $ (2,282) $ (6,002)
Add: Amortization of program rights 1,506 1,507 5,818
Depreciation of property and equipment 3,436 3,194 13,182
Amortization of intangibles 5,671 5,541 22,718
Corporate overhead 802 740 3,500
Less: Payments for program rights (1,501) (1,479) (5,938)
-------- -------- --------
Broadcast cash flow 6,692 7,221 33,278
Less: Corporate expenses (802) (740) (3,500)
-------- -------- --------
EBITDA $ 5,890 $ 6,481 $ 29,778
======== ======== ========
Margins:
Broadcast Cash Flow 36.0% 38.5% 41.9%
======== ======== ========
EBITDA 31.7% 34.6% 37.5%
======== ======== ========
</TABLE>
25
<PAGE> 26
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 10-Q
(a) EXHIBITS
27.1 Financial Data Schedule (1)
(1) Filed herewith
(b) REPORTS ON FORM 8-K
On March 14, 2000 the Company filed an 8-K relating to the termination
of the plan to acquire the Sinclair Stations.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STC BROADCASTING, INC.
----------------------
Registrant
Date: May 3, 2000 By: /s/ DAVID A. FITZ
-------------------
David A. Fitz
Senior Vice-President/
Chief Financial Officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,652
<SECURITIES> 0
<RECEIVABLES> 13,586
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,813
<PP&E> 94,238
<DEPRECIATION> 24,145
<TOTAL-ASSETS> 370,099
<CURRENT-LIABILITIES> 18,064
<BONDS> 194,750
69,986
0
<COMMON> 0
<OTHER-SE> 61,909
<TOTAL-LIABILITY-AND-EQUITY> 370,099
<SALES> 18,567
<TOTAL-REVENUES> 18,567
<CGS> 11,239
<TOTAL-COSTS> 21,789
<OTHER-EXPENSES> 47
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,687
<INCOME-PRETAX> (11,316)
<INCOME-TAX> (2,800)
<INCOME-CONTINUING> (8,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,516)
<EPS-BASIC> (8,516)
<EPS-DILUTED> (8,516)
</TABLE>
