AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------
SINCLAIR BROADCAST GROUP, INC.
(Exact name of registrant as specified in its charter)
----------
MARYLAND
(State or other jurisdiction of incorporation or organization)
----------
52-1494660
(I.R.S. Employer Identification No.)
----------
4833
(Primary Standard Industrial Classification Code Number)
-------------
2000 WEST 41ST STREET
BALTIMORE, MARYLAND 21211
(410) 467-5005
(Address, including ZIP Code, and telephone number, including
area code, of registrants' principal executive offices)
-------------
DAVID D. SMITH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SINCLAIR BROADCAST GROUP, INC.
2000 WEST 41ST STREET
BALTIMORE, MARYLAND 21211
(410) 467-5005
(Name, address, including ZIP Code, and telephone
number, including area code, of agent for service)
-------------
Copies to:
<TABLE>
<S> <C>
George P. Stamas, Esq. Steven A. Thomas, Esq.
Wilmer, Cutler & Pickering Thomas & Libowitz, P.A.
2445 M Street, N.W. 100 Light Street -- Suite 1100
Washington, D.C. 20037 Baltimore, MD 21202
(202) 663-6000 (410) 752-2468
</TABLE>
Approximate date of commencement of proposed sale of the
securities to the public:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
-------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock .............. $1,634,650 $483
=========================================================================================
</TABLE>
(1) Proposed maximum aggregate offering price is equal to the proportion of the
total maximum consideration payable in the transaction that is payable in
shares of Class A Common Stock ($100,000,000 divided by $970,000,000) times
the book value of Sullivan Broadcast Holdings, Inc. on December 31, 1997
($15,855,000).
(2) Calculated pursuant to Rule 457(f)(2), on the basis of the book value of the
Sullivan securities to be converted into the right to receive shares of
Sinclair Class A Common Stock.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 5, 1998
SULLIVAN BROADCAST HOLDINGS, INC.
INFORMATION STATEMENT
------------------
SINCLAIR BROADCAST GROUP, INC.
PROSPECTUS
------------------
This Information Statement/Prospectus is being furnished to stockholders of
Sullivan Broadcast Holdings, Inc., a Delaware corporation ("Sullivan"), in
connection with the Agreement and Plan of Merger dated as of February 23, 1998
(as the same may be amended from time to time, the "Merger Agreement") providing
for the merger (the "Merger") of Sullivan with a wholly-owned subsidiary of
Sinclair Broadcast Group, Inc. ("Sinclair" or the "Company"), as described in
this Information Statement/Prospectus. The aggregate consideration in the Merger
(the "Merger Consideration") will be calculated based on the cash flow of
Sullivan (as defined in the Merger Agreement), amounts paid by Sullivan with
respect to the purchase of one of its stations from Sinclair earlier in 1998,
the working capital of Sullivan at the time of the closing of the Merger and
receivables of Sullivan collected after the Merger. If the Merger is
consummated, Sinclair may pay up to $100,000,000 of the aggregate consideration
paid in the Merger (the "Stock Consideration") in the form of Class A Common
Stock, par value $.01 per share, of Sinclair (the "Sinclair Class A Common
Stock"). Each holder of the Class B-1 common stock, the Class B-2 common stock
and the Class C common stock of Sullivan (collectively, the "Sullivan Common
Stock") or any security convertible into or exercisable for Sullivan Common
Stock (collectively with the Sullivan Common Stock, the "Sullivan Common
Equivalents") will receive a proportion of the Merger Consideration (the "Per
Share Merger Consideration") equal to the equity interest in Sullivan
represented by such holder's shares of Sullivan Common Stock on a fully diluted
basis. The Per Commmon Share Merger Consideration for each Sullivan Common
Equivalent will consist of Stock Consideration and cash in proportion equal to
the proportion the aggregate Stock Consideration and cash, respectively, bear to
the aggregate Merger Consideration for the Sullivan Common Equivalents. The
number of shares of Sinclair Class A Common Stock to be delivered for each share
of Common Stock will be determined based on the average of the closing trading
prices of Sinclair Class A Common Stock for the third business day prior to the
Effective Time of the Merger and the nine preceding business days.
SULLIVAN'S CONTROLLING STOCKHOLDER, ABRY BROADCAST PARTNERS II, L.P.
("ABRY"), HAS ALREADY APPROVED THE MERGER BY SIGNING A WRITTEN STOCKHOLDER'S
CONSENT. NO FURTHER VOTE OF SULLIVAN STOCKHOLDERS IS NECESSARY TO APPROVE THE
MERGER AND SULLIVAN AND SINCLAIR EXPECT THE MERGER TO OCCUR ON ____, 1998.
STOCKHOLDERS OF SULLIVAN (OTHER THAN ABRY) HAVE APPRAISAL RIGHTS WITH RESPECT TO
THE MERGER WHICH MUST BE EXERCISED BY FOLLOWING THE PROCEDURES DESCRIBED HEREIN.
IN ORDER TO EXERCISE YOUR APPRAISAL RIGHTS, YOU MUST NOTIFY SULLIVAN OF YOUR
INTENT TO EXERCISE YOUR RIGHTS BY ___, 1998. SEE "THE MERGER -- APPRAISAL AND
DISSENTERS' RIGHTS."
This Information Statement/Prospectus also constitutes a prospectus of
Sinclair with respect to shares of Sinclair Class A Common Stock to be issued to
Sullivan stockholders pursuant to the Merger Agreement.
All information contained in this Information Statement/Prospectus with
respect to Sinclair has been furnished by Sinclair and all information herein
with respect to Sullivan has been furnished by Sullivan.
Sinclair Class A Common Stock is listed for trading on the Nasdaq National
Market ("NNM") under the trading symbol "SBGI." On May 4, 1998, the last
reported sale price of a share of Sinclair Class A Common Stock on the NNM was
$54 1/2. There is no active trading market for shares of Sullivan Common Stock.
SEE "RISK FACTORS," BEGINNING ON PAGE 10 FOR INFORMATION
THAT SHOULD BE CONSIDERED REGARDING THE SINCLAIR
CLASS A COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECU-
RITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Information Statement/Prospectus is first being mailed to stockholders
of Sullivan on or about ________, 1998.
The date of this Information Statement/Prospectus is ________, 1998.
Information contained in this preliminary information statement/prospectus is
subject to completion or amendment. A registration statement relating to these
securities has been filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior to the time
that a final information statement/prospectus is delivered. This preliminary
information statement/prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
AVAILABLE INFORMATION
Sullivan and Sinclair are subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports and other information with the
Securities and Exchange Commission (the "Commission"). All such reports and
other information filed with the Commission are available for inspection and
copying at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
13th Floor, New York, New York 10048. Such reports and other information filed
with the Commission are also available at the Commission's site on the World
Wide Web located at http://www.sec.gov. Copies of such documents may also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, such materials and other information concerning Sinclair can be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
Sinclair has filed with the Commission, under the Securities Act of 1933,
as amended (the "Securities Act"), a Registration Statement on Form S-4
(together with all amendments, schedules and exhibits thereto, the "Registration
Statement") with respect to Sinclair Class A Common Stock issuable in connection
with the Merger. This Information Statement/Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. The
Registration Statement, including any amendments, schedules and exhibits
thereto, is available for inspection and copying as set forth above. Statements
contained in this Information Statement/Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS INFORMATION STATEMENT/ PROSPECTUS IN
CONNECTION WITH THE OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY SULLIVAN OR SINCLAIR. THIS INFORMATION STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE,
ANY SECURITIES, IN ANY JURISDICTION IN WHICH, OR TO OR FROM ANY PERSON TO OR
FROM WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS INFORMATION STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES BE DEEMED TO IMPLY THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF SINCLAIR OR SULLIVAN OR ANY OF THEIR
SUBSIDIARIES OR IN THE INFORMATION SET FORTH HEREIN SUBSEQUENT TO THE DATE
HEREOF.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGES
------
<S> <C>
Summary ................................................................................ 1
Risk Factors ........................................................................... 10
Comparative Historical and Unaudited Pro Forma Combined Per Share Data ................. 23
Capitalization ......................................................................... 24
The Merger ............................................................................. 25
Terms of the Merger Agreement .......................................................... 32
Stock Price and Dividend Information ................................................... 37
Industry Overview ...................................................................... 38
Sinclair
Business of Sinclair .................................................................. 41
Management of Sinclair ................................................................ 69
Executive Compensation of Sinclair .................................................... 76
Security Ownership of Certain Beneficial Owners and Management of Sinclair ............ 78
Certain Relationships and Related Transactions of Sinclair ............................ 79
Selected Financial Data of Sinclair ................................................... 83
Management's Discussion and Analaysis of Financial Condition and Results of Operations. 85
Pro Forma Consolidated Financial Information .......................................... 93
Sullivan
Business of Sullivan .................................................................. 101
Selected Consolidated Financial Data of Sullivan ...................................... 111
Management's Discussion and Analysis of Financial Condition and Results of Operations . 112
Management of Sullivan ................................................................ 118
Executive Compensation of Sullivan .................................................... 120
Security Ownership of Certain Beneficial Owners and Management of Sullivan ............ 124
Description of Capital Stock of Sinclair ............................................... 126
Comparative Rights of Sullivan Stockholders and Sinclair Stockholders .................. 134
Legal Matters .......................................................................... 140
Experts ................................................................................ 140
Glossary of Defined Terms .............................................................. G-1
Index to Financial Statements .......................................................... F-1
Annex A -- Section 262 of the General Corporation Law of the State of Delaware ......... A-1
</TABLE>
<PAGE>
SUMMARY
The following summary should be read in conjunction with the more detailed
information, financial statements and notes thereto appearing elsewhere in this
Information Statement/Prospectus. Unless the context otherwise indicates or
unless specifically defined otherwise, as used herein, the "Company" or
"Sinclair" means Sinclair Broadcast Group, Inc. and its direct and indirect
wholly-owned subsidiaries (collectively, the "Subsidiaries") and "Sullivan"
means Sullivan Broadcast Holdings, Inc. See "Glossary" beginning on page G-1 for
the definition of certain capitalized terms used herein.
THE COMPANIES
SINCLAIR
Sinclair is a diversified broadcasting company that currently owns or
programs pursuant to Local Marketing Agreements ("LMAs") 36 television stations
and, upon consummation of all pending acquisitions and dispositions, will own or
program pursuant to LMAs 57 television stations. Sinclair owns or programs
pursuant to LMAs 52 radio stations and upon consummation of all pending
acquisitions and dispositions, Sinclair will own or program pursuant to LMAs 51
radio stations. Sinclair also has options to acquire two additional radio
stations. Sinclair believes that upon completion of all pending acquisitions and
dispositions it will be one of the top 10 radio groups in the United States,
when measured by the total number of radio stations owned or programmed pursuant
to LMAs.
The 36 television stations Sinclair currently owns or programs pursuant to
LMAs are located in 24 geographically diverse markets, with 24 of the stations
in the top 51 television designated market areas ("DMAs") in the United States.
Upon consummation of all pending acquisitions and dispositions, Sinclair will
own or program television stations in 38 geographically diverse markets (with 31
of such stations in the top 51 DMAs) and will reach approximately 22.5% of the
television households in the United States. Sinclair currently owns or programs
10 stations affiliated with Fox Broadcasting Company ("Fox"), 13 with The WB
Television Network ("WB"), five with ABC, two with NBC, one with United
Paramount Television Network Partnership ("UPN") and one with CBS. Four stations
operate as independents. Upon consummation of all pending acquisitions and
dispositions and the transfer of affiliations pursuant to existing agreements,
21 of Sinclair's owned or programmed television stations will be Fox affiliates,
16 will be WB affiliates, six will be UPN affiliates, six will be ABC
affiliates, three will be NBC affiliates, one will be a CBS affiliate and four
will be operated as independents. Upon consummation of all pending acquisitions
and dispositions and transfers of affiliations pursuant to existing agreements,
Sinclair will own or program more stations affiliated with Fox than any other
broadcaster.
Sinclair's radio station group is geographically diverse with a variety of
programming formats including country, urban, news/talk/sports, rock and adult
contemporary. Of the 52 stations owned or provided programming services by
Sinclair, 19 broadcast on the AM band and 33 on the FM band. Sinclair owns
between three and ten stations in all but one of the 12 radio markets it serves.
Sinclair has undergone rapid and significant growth over the course of the
last seven years. Since 1991, Sinclair has increased the number of stations it
owns or provides programming services to from three television stations to 36
television stations and 52 radio stations. From 1991 to 1997, net broadcast
revenues and Adjusted EBITDA (as defined herein) increased from $39.7 million to
$471.2 million, and from $15.5 million to $229.0 million, respectively. Pro
forma for pending acquisitions and dispositions described below (except the
Montecito Acquisition, the Lakeland Acquisition and the execution of an LMA with
respect to WSYX-TV), net broadcast revenue and Adjusted EBITDA would have been
$715.1 million and $344.7 million, respectively.
Sinclair is a Maryland corporation formed in 1986. Sinclair's principal
offices are located at 2000 West 41st Street, Baltimore, Maryland 21211, and its
telephone number is (410) 467-5005.
1
<PAGE>
SULLIVAN
Sullivan owns, operates and/or programs ten television stations affiliated
with the Fox Broadcasting Co. ("Fox"), one television station affiliated with
the American Broadcasting Companies, Inc. ("ABC"), one low power television
station affiliated with the United Paramount Network ("UPN") and two independent
television stations that Sullivan programs under Local Marketing Agreements
("LMA"), also referred to as the Time Brokerage Agreements. With its ten owned
Fox affiliates, Sullivan is one of the largest owners of Fox-affiliated stations
in the United States. During 1997, four of the ten Fox affiliated stations also
received programming from UPN under secondary affiliation agreements, while the
one owned independent station and the two stations programmed pursuant to LMAs
remained primary UPN affiliates. In addition, Sullivan operates the only U.S.
television station to broadcast Fox programming into the Toronto, Ontario market
(WUTV). For the year ended December 31, 1997, Sullivan's net broadcast revenue
and broadcast cash flow were $120.1 million and $67.9 million, respectively.
GENERAL INFORMATION
On March 16, 1998, Sinclair and Sullivan entered into merger agreements
effective as of February 23, 1998, by which Sinclair agreed to acquire all of
the issued and outstanding capital stock of Sullivan and Sullivan Broadcasting
Company II, Inc. ("Sullivan II") (the "Sullivan Acquisition"). The aggregate
Merger Consideration will consist of four components: (i) a component calculated
on the basis of Sullivan's annualized cash flow through the end of the month
prior to closing; (ii) a component based on amounts paid by Sullivan to Sinclair
prior to the closing with respect to KOKH-TV in Oklahoma City, Oklahoma; (iii)
an adjustment based on the working capital of Sullivan at the time of closing;
and (iv) a payment in respect of receivables arising before closing but realized
after closing. Sinclair expects the aggregate Merger Consideration to be
approximately $950 million to $1 billion, less the amount of outstanding
indebtedness of Sullivan assumed by Sinclair. As part of the total consideration
to be paid at the closing of the Merger, Sinclair, at its option, expects to
issue to Sullivan stockholders up to $100 million of Sinclair Class A Common
Stock based on an average closing price of the Sinclair Class A Common Stock.
The Sullivan Acquisition will be accomplished by two separate merger
closings. At the closing of the Merger, Sinclair will acquire all of the issued
and outstanding capital stock of Sullivan, after which Sinclair will indirectly
own all of the operating assets (excluding the License Assets) of, and pursuant
to LMAs will provide programming services to, 13 television stations (the
"Sullivan Stations") in the following markets: Nashville, Tennessee; Buffalo,
New York; Oklahoma City, Oklahoma; Greensboro/Winston-Salem/High Point, North
Carolina; Dayton, Ohio; Charleston/ Huntington, West Virginia; Richmond,
Virginia; Charleston, South Carolina; Rochester, New York; Madison, Wisconsin;
and Utica, New York.
At the closing of the merger with Sullivan II, Sinclair will acquire all of
the issued and outstanding capital stock of Sullivan II. The second closing is
subject to, among other things, FCC approval and is expected to close during the
third quarter of 1998. FCC regulations require Sinclair to obtain waivers from
the FCC of multiple ownership rules prior to the second closing. Although
Sinclair is confident that it will receive FCC waivers for the merger with
Sullivan II, there can be no assurance that such waivers will be obtained. After
the closing of the merger with Sullivan II, Sinclair will indirectly own the
License Assets of six of the 13 Sullivan Stations, and will continue to program
the remaining seven Sullivan Stations pursuant to LMAs, five with Sullivan
Broadcasting Company III, Inc. ("Sullivan III"), which at the time of the
closing will hold the License Assets for five of the remaining seven stations,
and two with the existing owners of the License Assets of two of the remaining
seven stations.
In connection with the Sullivan Acquisition, Glencairn, Ltd. ("Glencairn")
has entered into a plan of merger with Sullivan III (the "Glencairn Merger")
which, if completed, would result in Glencairn's ownership of all the issued and
outstanding capital stock of Sullivan III. After the
2
<PAGE>
Glencairn Merger, Sinclair intends to enter into an LMA with Glencairn and
continue to provide programming services to the five stations the License Assets
of which are acquired by Glencairn in the Glencairn Merger. See "Risk Factors --
Conflicts of Interest."
3
<PAGE>
THE MERGER
MERGER CONSIDERATION..... In the Merger, each outstanding share of Sullivan
capital stock, each right to acquire Sullivan
capital stock, and each security convertible into or
exercisable for Sullivan capital stock (a "Sullivan
Share Equivalent") outstanding at the Effective Time
will be automatically converted into the right to
receive the Per Share Merger Consideration with
respect to such Sullivan Share Equivalents (as
defined below).
The aggregate Merger Consideration will consist of
four components: a cash flow component (the "Cash
Flow Component"); a component based on amounts paid
to Sinclair by Sullivan pursuant to a purchase
agreement relating to KOKH-TV in Oklahoma City,
Oklahoma (the "KOKH Component"); an adjustment
component based on the working capital of Sullivan
at the time of closing (the "Adjustment Component");
and a receivables component based on receivables in
existence at the time of closing and collected
within 120 days after closing (the "Receivables
Component"). The amount of the Merger Consideration
cannot be estimated until (and cannot be finally
determined until after) the closing of the Merger,
but Sinclair expects that the total consideration
will be approximately $950 million to $1 billion,
less the amount of outstanding indebtedness of
Sullivan assumed by Sinclair. See "The Merger --
Merger Consideration."
At the option of the Merger Sub, up to $100,000,000
of the aggregate Merger Consideration for the
Sullivan Common Equivalents will be paid in
validly-issued, fully-paid and nonassessable shares
of Sinclair Class A Common Stock.
The amount of the Merger Consideration that will be
received by each holder of a Sullivan Share
Equivalent (the "Per Share Merger Consideration")
will be determined by calculating the amount of the
Merger Consideration that would be distributed to
each stockholder of Sullivan if all existing rights
to acquire stock were exercised or converted and the
Merger Consideration were distributed to all
stockholders (but less the amount of any exercise or
conversion price for any rights to acquire Sullivan
stock). See "The Merger -- Per Share Merger
Consideration."
TIME OF PAYMENT.......... The initial payment of the Merger Consideration will
be based on estimates of the Cash Flow Component,
the KOKH Component and the Adjustment Component.
Final determinations of these amounts will be made
110 days following closing of the Merger (or later
if there are disputes as to the amounts). If the
final determination indicates that additional
amounts are owing to holders of Sullivan Share
Equivalents, such additional amounts will be paid at
that time. If the final determination indicates that
the estimated payment was too high, payments of
amounts relating to the Receivables Component may be
reduced. The Receivables Component will be
determined 150 days after the closing (or later if
there are disputes as to the amounts). Sinclair may
pay a portion of the payment relating to the
Receivables Component to an escrow agent to cover
indemnification of losses arising from breach of
representations
4
<PAGE>
and warranties or covenants in the Merger Agreement.
Sinclair may also pay a portion of the payment
relating to the Receivables Component to an escrow
agent to cover amounts that may be owed to Sinclair
based on the final determination of the Cash Flow
Component, the KOKH Component and the Adjustment
Component.
EFFECTIVE TIME & EXCHANGE OF
SHARES.................. The effective time of the Merger will be the date
and time of the filing of the Certificate of Merger,
and any other documents necessary to effect the
Merger, with the Secretary of State of the State of
Delaware or such subsequent date or time as shall be
agreed by Sinclair and Sullivan and specified in the
Certificate of Merger (the "Effective Time").
CONDITIONS............... Consummation of the Merger is subject to the
satisfaction or waiver of certain conditions,
including the accuracy of the representations and
warranties of the parties, compliance with certain
covenants by the parties, the obtaining of certain
governmental approvals, the registration of any
stock to be used as Merger Consideration, the
attainment of minimum gross revenues by Sullivan and
the exercise of dissenter's rights by stockholders
entitled to receive no more than 6% of the Aggregate
Merger Consideration.
ACCOUNTING TREATMENT..... The Merger will be accounted for as a purchase in
accordance with generally accepted accounting
principles.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............ The receipt of cash and Sinclair Class A Common
Stock for Sullivan Share Equivalents pursuant to the
Merger will be a taxable transaction for federal
income tax purposes with respect to which gain or
loss, if any, will be recognized. See "The Merger --
Certain Federal Income Tax Consequences."
RESALES OF SINCLAIR CLASS A
COMMON STOCK............ All shares of Class A Common Stock issued to
stockholders of Sullivan in the Merger who are not
affiliates of Sullivan (as defined in Rule 144(a)
(1) under the Securities Act) will be freely
transferable. Sinclair will register under the
Securities Act the resale of any shares issued to
affiliates.
APPRAISAL RIGHTS......... Under the Delaware General Corporation Law (the
"DGCL"), stockholders who do not vote in favor of
the Merger and who file demands for appraisal prior
to the twentieth day after the date of this
Information Statement/Prospectus have the right to
obtain, upon the consummation of the Merger, a cash
payment for the "fair value" of their Sullivan
Common Stock (excluding any element of value arising
from the accomplishment or expectation of the
Merger). In order to exercise such rights, a
stockholder must comply with all of the procedural
requirements of Section 262 ("Section 262") of the
DGCL, a description of which is provided in "The
Merger -- Appraisal and Dissenters' Rights" herein
and the full text of which is attached to this
Information Statement/ Prospectus as Annex A. Such
"fair value" would be determined in judicial
proceedings, the result of which cannot be
predicted.
5
<PAGE>
Failure to take any of the steps required under
Section 262 may result in a loss of such appraisal
rights. See "The Merger -- Appraisal and Dissenters'
Rights". IN ORDER TO PRESERVE THESE RIGHTS,
STOCKHOLDERS OF SULLIVAN MUST NOTIFY SULLIVAN OF
THEIR INTENTION TO EXERCISE THESE RIGHTS NO LATER
THAN ___, 1998.
SINCLAIR CLASS A COMMON STOCK
VOTING RIGHTS............ The holders of the Sinclair Class A Common Stock,
the Sinclair Class B Common Stock and the Sinclair
Series B Preferred Stock vote together as a single
class (except as may be otherwise required by
Maryland law) on all matters submitted to a vote of
stockholders, with each share of Sinclair Class A
Common Stock entitled to one vote, each share of
Sinclair Class B Common Stock entitled to one vote
on "going private" and certain other transactions
and to ten votes on all other matters, and each
share of Sinclair Series B Preferred Stock entitled
to 3.64 votes (subject to adjustment). The holders
of Series C Preferred Stock and the Sinclair Series
D Preferred Stock are not entitled to vote on
matters submitted to a vote of stockholders except
on matters that may adversely affect their rights
and except that holders of each such series have the
right to elect two directors of Sinclair in certain
circumstances. See "Description of Capital Stock --
Preferred Stock". Each share of Sinclair Class B
Common Stock converts automatically into one share
of Sinclair Class A Common Stock upon the sale or
other transfer of such share of Sinclair Class B
Common Stock to a person or entity other than a
Permitted Transferee (generally, related parties of
a Controlling Stockholder (as defined herein)). Each
share of Sinclair Series B Preferred Stock may be
converted at any time, at the option of the holder
thereof, into approximately 3.64 shares of Sinclair
Class A Common Stock (subject to adjustment). Each
class of Sinclair Common Stock otherwise has
identical rights. After giving effect to the Merger
contemplated hereby, approximately 90.6% of the
total voting power of the capital stock of Sinclair
will be owned by the Controlling Stockholders and
their Permitted Transferees. See "Risk Factors --
Voting Rights; Control by Controlling Stockholders;
Potential Anti-Takeover Effect of Disproportionate
Voting Rights."
NASDAQ NATIONAL MARKET SYSTEM
SYMBOL.................. SBGI
DIVIDEND POLICY.......... Sinclair generally has not paid a dividend on its
Common Stock and does not expect to pay cash
dividends on its Common Stock in the foreseeable
future. Sinclair's ability to pay cash dividends in
the future is subject to limitations and
prohibitions contained in certain debt instruments
to which Sinclair is a party. See "Risk Factors --
Dividend Restrictions."
6
<PAGE>
SINCLAIR BROADCAST GROUP, INC. -- SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary historical consolidated financial data for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from Sinclair's
audited Consolidated Financial Statements (the "Consolidated Financial
Statements"). The Consolidated Financial Statements for the years ended December
31, 1995, 1996 and 1997 are included herein. The summary pro forma statement of
operations data and other data of Sinclair reflect (i) completion of the
Heritage Acquisition and the Max Media Acquisition (the "Significant
Acquisitions"), (ii) the Merger, (iii) the issuance of $200,000,000 in principal
amount of Sinclair's 9% Senior Subordinated Notes due 2007 (the "July 1997
Notes") issued on July 2, 1997 (the "July 1997 Notes Issuance"), (iv) the
issuance of $200,000,000 in liquidation amount of Sinclair's 11 5/8% High Yield
Trust Offered Preferred Securities (the "HYTOPS") issued on March 14, 1997 (the
"HYTOPS Issuance"), (v) the issuance of 4,345,000 shares of Sinclair Class A
Common Stock in September 1997 (the "1997 Common Stock Issuance"); (vi) the
issuance of 3,450,000 shares of Series D Preferred Stock in September 1997 (the
"1997 Preferred Stock Issuance"); (vii) the issuance of $250,000,000 in
principal amount of Sinclair's 8 3/4% Senior Subordinated Notes due 2007 (the
"December 1997 Notes Issuance") and the December 1997 repurchase of $98.1
million in principal amount of Sinclair's 10% Senior Subordinated Notes due 2003
(the "Debt Repurchase" and, together with the July 1997 Notes Issuance, the
HYTOPS Issuance, the 1997 Common Stock Issuance, the 1997 Preferred Stock
Issuance and the December 1997 Notes Issuance, the "1997 Financings"); and
(viii) the issuance of 6,000,000 shares of Sinclair Class A Common Stock on
April 8, 1998 (the "April 1998 Common Stock Issuance") and with the 1997
Financing, the "Recent Financings" as though each occurred at the beginning of
the periods presented and are derived from the pro forma consolidated financial
statements of Sinclair included elsewhere in this Information
Statement/Prospectus. See "Pro Forma Consolidated Financial Information of
Sinclair." The information below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Sinclair", Sinclair's Consolidated Financial Statements and the
historical financial statements of Heritage, Max Media and Sullivan, all
included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1994(a) 1995(a) 1996(a) 1997(a)
---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcast revenues(c) ............................. $69,532 $118,611 $187,934 $346,459 $471,228
Barter revenues ....................................... 6,892 10,743 18,200 32,029 45,207
------- ------- -------- -------- --------
Total revenues ........................................ 76,424 129,354 206,134 378,488 516,435
------- ------- -------- -------- --------
Operating expenses, excluding depreciation and
amortization, deferred compensation and special
bonuses paid to executive officers ................... 32,295 50,545 80,446 167,765 236,376
Depreciation and amortization(d) ...................... 22,486 55,587 80,410 121,081 152,170
Amortization of deferred compensation ................. -- -- -- 739 1,636
Special bonuses paid to executive officers ............ 10,000 3,638 -- -- --
------- ------- -------- -------- --------
Broadcast operating income ............................ 11,643 19,584 45,278 88,903 126,253
------- ------- -------- -------- --------
Interest and amortization of debt discount expense 12,852 25,418 39,253 84,314 98,393
Interest and other income ............................. 2,131 2,447 4,163 3,478 2,228
Subsidiary trust minority interest expense(e) ......... -- -- -- -- 18,600
------- ------- -------- -------- --------
Income (loss) before (provision) benefit for in-
come taxes and extraordinary item .................... $ 922 $ (3,387) $ 10,188 $ 8,067 $ 11,488
======= ======== ======== ======== ========
Net income (loss) available to common share-
holders ............................................... $(7,945) $ (2,740) $ 76 $ 1,131 $(13,329)
======= ======== ======== ======== ========
Diluted earnings (loss) per share before ex-
traordinary items .................................... $ -- $ (0.09) $ 0.15 $ 0.03 $ (0.20)
======= ======== ======== ======== ========
Diluted earnings (loss) per share after extraor-
dinary items ......................................... $ (0.27) $ (0.09) $ -- $ 0.03 $ (0.37)
======= ======== ======== ======== ========
Diluted weighted average shares outstanding (in
thousands) ........................................... 29,000 29,000 32,205 37,381 40,078
======= ======== ======== ======== ========
OTHER DATA:
Broadcast cash flow(f) ................................ $37,498 $ 67,519 $111,124 $189,216 $243,406
Broadcast cash flow margin(g) ......................... 53.9% 56.9% 59.1% 54.6% 51.7%
Adjusted EBITDA(h) .................................... $35,406 $ 64,547 $105,750 $180,272 $229,000
Adjusted EBITDA margin(g) ............................. 50.9% 54.4% 56.3% 52.0% 48.6%
After tax cash flow(i) ................................ $20,850 $ 24,948 $ 54,645 $ 77,484 $104,884
Program contract payments ............................. 8,723 14,262 19,938 30,451 51,059
Capital expenditures .................................. 528 2,352 1,702 12,609 19,425
Corporate overhead expense ............................ 2,092 2,972 5,374 8,944 14,406
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
CONSOLIDATED HISTORICAL, RECENT
HISTORICAL, RECENT FINANCINGS
FINANCINGS SIGNIFICANT
AND ACQUISITIONS AND
SIGNIFICANT ACQUISITIONS THE MERGER
------------------------- -------------------
PRO FORMA YEAR ENDED DECEMBER 31, 1997(B)
---------------------------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcast revenues(c) ............................. $594,962 $715,086
Barter revenues ....................................... 54,565 72,215
-------- --------
Total revenues ........................................ 649,527 787,301
-------- --------
Operating expenses, excluding depreciation and
amortization, deferred compensation and special
bonuses paid to executive officers ................... 315,779 374,867
Depreciation and amortization(d) ...................... 203,271 263,185
Amortization of deferred compensation ................. 1,636 1,636
Special bonuses paid to executive officers ............ -- --
-------- --------
Broadcast operating income ............................ 128,841 147,613
-------- --------
Interest and amortization of debt discount expense 106,413 172,375
Interest and other income ............................. 19,379 19,391
Subsidiary trust minority interest expense(e) ......... 23,250 23,250
-------- --------
Income (loss) before (provision) benefit for in-
come taxes and extraordinary item ..................... $ 18,557 $(28,621)
======== ========
Net income (loss) available to common share-
holders ............................................... $(18,871) $(50,075)
======== ========
Diluted earnings (loss) per share before ex-
traordinary items .................................... $ (0.27) $ (0.90)
======== ========
Diluted earnings (loss) per share after extraor-
dinary items ......................................... $ (0.40) $ (1.02)
======== ========
Diluted weighted average shares outstanding (in
thousands) ........................................... 48,583 50,511
======== ========
OTHER DATA:
Broadcast cash flow(f) ................................ $281,897 $361,448
Broadcast cash flow margin(g) ......................... 47.4% 50.5%
Adjusted EBITDA(h) .................................... $266,052 $344,738
Adjusted EBITDA margin(g) ............................. 44.7% 48.2%
After tax cash flow(i) ................................ $126,776 $143,297
Program contract payments ............................. 67,696 67,696
Capital expenditures .................................. 32,558 32,558
Corporate overhead expense ............................ 15,845 16,710
</TABLE>
(Continued on following page)
7
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, AS OF
--------------------------------------------------------------------- DECEMBER 31,
1993 1994(a) 1995(a) 1996(a) 1997(a) 1997(b)
------------ ------------ ------------- --------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET AND CASH
FLOW DATA:
Cash and cash equivalents .................. $ 18,036 $ 2,446 $ 112,450 $ 2,341 $ 139,327 --
Total assets ............................... 242,917 399,328 605,272 1,707,297 2,034,234 $3,702,511
Total debt(j) .............................. 224,646 346,270 418,171 1,288,103 1,080,722 2,083,949
Company Obligated Mandatorily Re-
deemable Security of Subsidiary
Trust Holding Solely KDSM Senior
Debentures(k) ............................. -- -- -- -- 200,000 200,000
Total stockholders' equity (deficit) ....... (11,024) (13,723) 96,374 237,253 543,288 978,917
Cash flows from operating activities(l). 11,230 20,781 55,986 69,298 96,625 --
Cash flows from investing activities(l)..... 1,521 (249,781) (119,320) (1,012,225) (218,990) --
Cash flows from financing activities(l)..... 3,462 213,410 173,338 832,818 259,351 --
</TABLE>
NOTES TO SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(a) Sinclair made acquisitions in 1994, 1995, 1996 and 1997 as described in the
footnotes to the Consolidated Financial Statements included herein. The
statement of operations data and other data presented for periods preceding
the dates of acquisitions do not include amounts for these acquisitions and
therefore are not comparable to subsequent periods. Additionally, the years
in which the specific acquisitions occurred may not be comparable to
subsequent periods depending on when during the year the acquisition
occurred.
(b) The pro forma statement of operations information in this table reflects
the pro forma effect of the 1997 Financings, the completion of the
Significant Acquisitions, the April 1998 Common Stock Issuance and the
Merger as if such transactions occurred on January 1, 1997. The pro forma
balance sheet information gives effect to the Significant Acquisitions, the
April 1998 Common Stock Issuance and the Merger as if such transactions
occurred on December 31, 1997. See "Pro Forma Consolidated Financial
Information of Sinclair" included elsewhere herein.
(c) Net broadcast revenues are defined as broadcast revenues net of agency
commissions.
(d) Depreciation and amortization includes amortization of program contract
costs and net realizable value adjustments, depreciation and amortization
of property and equipment, and amortization of acquired intangible
broadcasting assets and other assets including amortization of deferred
financing costs and costs related to excess syndicated programming.
(e) Subsidiary trust minority interest expense represents the distributions on
the HYTOPS.
(f) "Broadcast cash flow" is defined as broadcast operating income plus
corporate overhead expense, special bonuses paid to executive officers,
depreciation and amortization (including film amortization and amortization
of deferred compensation, and excess syndicated programming), less cash
payments for program contract rights. Cash program payments represent cash
payments made for current program payables and do not necessarily
correspond to program usage. Special bonuses paid to executive officers are
considered unusual and non-recurring. Sinclair has presented broadcast cash
flow data, which Sinclair believes are comparable to the data provided by
other companies in the industry, because such data are commonly used as a
measure of performance for broadcast companies. However, broadcast cash
flow does not purport to represent cash provided by operating activities as
reflected in Sinclair's consolidated statements of cash flows, is not a
measure of financial performance under generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
(g) "Broadcast cash flow margin" is defined as broadcast cash flow divided by
net broadcast revenues. "Adjusted EBITDA margin" is defined as Adjusted
EBITDA divided by net broadcast revenues. "After tax cash flow margin" is
defined as after tax cash flow divided by net broadcast revenues. (notes
continued on following page).
8
<PAGE>
(h) "Adjusted EBITDA" is defined as broadcast cash flow less corporate overhead
expense and is a commonly used measure of performance for broadcast
companies. Adjusted EBITDA does not purport to represent cash provided by
operating activities as reflected in Sinclair's consolidated statements of
cash flows, is not a measure of financial performance under generally
accepted accounting principles and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(i) "After tax cash flow" is defined as net income (loss) available to common
shareholders plus extraordinary losses, minus extraordinary gains (before
the effects of related tax benefits) plus depreciation and amortization of
intangibles, (excluding film amortization), amortization of deferred
compensation, amortization of excess syndicated programming, special
bonuses paid to executive officers, and the deferred tax provision (or
minus the deferred tax benefit). After tax cash flow is presented here not
as a measure of operating results and does not purport to represent cash
provided by operating activities. After tax cash flow should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
(j) "Total debt" is defined as long-term debt, net of unamortized discount, and
capital lease obligations, including current portion thereof. In 1992 total
debt included warrants outstanding which were redeemable outside the
control of Sinclair. The warrants were purchased by Sinclair for $10,400 in
1993. Total debt as of December 31, 1993 included $100,000 in principal
amount of the 1993 Notes (as defined herein), the proceeds of which were
held in escrow to provide a source of financing for acquisitions that were
subsequently consummated in 1994 utilizing borrowings under the Bank Credit
Agreement. $100,000 of the 1993 Notes was redeemed from the escrow in the
first quarter of 1994. Total debt does not include the HYTOPS or Sinclair's
preferred stock.
(k) Company Obligated Mandatorily Redeemable Security of Subsidiary Trust
Holding Solely KDSM Senior Debentures represents $200,000 aggregate
liquidation value of the HYTOPS.
(l) These items are financial statement disclosures in accordance with
generally accepted accounting principles and are also presented in
Sinclair's consolidated financial statements included herein.
9
<PAGE>
RISK FACTORS
In addition to the other information contained in this Information
Statement/Prospectus, Sullivan stockholders should review carefully the
following risks concerning Sinclair, the Sinclair Class A Common Stock and the
broadcast industry in considering whether to approve the Merger Agreement.
RISKS RELATING TO THE MERGER
Uncertainty Regarding Value of Merger Consideration. Unless they validly
exercise their appraisal rights, stockholders of Sullivan will receive the Per
Share Merger Consideration in connection with the Merger. The amount of the Per
Share Merger Consideration will depend on a number of factors that cannot be
determined at this time, and will not be finally determined until at least 150
days after completion of the Merger. These include: cash flow of Sullivan
through the closing date of the Merger; the date of the Merger; the working
capital of Sullivan at the time of the Merger; and the collection of receivables
of Sullivan by Sinclair following the Merger. The amount of Per Share Merger
Consideration will also depend on the number of shares and share equivalents of
Sullivan that are issued and outstanding at the time of the Merger, and the
liquidation value of preferred stock of Sullivan and the exercise price or
conversion rate of rights to acquire Sullivan stock. Accordingly, stockholders
of Sullivan will have to make a decision whether to exercise their appraisal
rights before they know the amount of Per Share Merger Consideration they will
receive in the Merger. See "The Merger -- Merger Consideration" and "-- Time of
Payment."
Indemnification Rights. The representations and warranties contained in the
Merger Agreement will survive the closing of the Merger for a period of 150
days, and Sinclair will have the right to seek indemnification for losses
arising out of a breach of the representations and warranties or covenants of
Sullivan in the Merger Agreement. This indemnity will not permit Sinclair to
recover amounts paid to stockholders, but it may reduce the amount that would
otherwise be paid to stockholders upon final determination of the Merger
Consideration. See "The Merger -- Time of Payment" and "Terms of the Merger
Agreement -- Indemnification."
SUBSTANTIAL LEVERAGE AND PREFERRED STOCK OUTSTANDING
Sinclair has consolidated indebtedness that is substantial in relation to
its total stockholders' equity. As of March 31, 1998, Sinclair had outstanding
long-term indebtedness (including current installments) of approximately $1.4
billion and Sinclair Capital, a subsidiary trust of Sinclair (the "Trust"), had
outstanding $200 million aggregate liquidation amount of 11 5/8% High Yield
Trust Offered Preferred Securities (the "HYTOPS"), which are ultimately backed
by $206.2 million liquidation amount of Series C Preferred Stock, par value $.01
per share, of Sinclair (the "Series C Preferred Stock") each of which must be
redeemed in 2009. Sinclair may borrow additional amounts under a bank credit
facility governed by the Third Amended and Restated Credit Agreement dated as of
May 20, 1997 with The Chase Manhattan Bank, as agent (as amended from time to
time, the "Bank Credit Agreement"), under which $659.8 million was outstanding
as of March 31, 1998, and expects to do so to finance its pending acquisitions,
including, without limitation, the acquisition (the "Max Media Acquisition"),
directly or indirectly, of all of the equity interests of Max Media Properties,
LLC and the Merger. Sinclair also had outstanding 45,703 shares of its Series B
Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock"), with an aggregate liquidation preference of $8.7 million as of April
30, 1998 and 3,450,000 shares of Series D Convertible Exchangeable Preferred
Stock, par value $.01 per share (the "Series D Convertible Exchangeable
Preferred Stock"), with an aggregate liquidation preference of approximately
$172.5 million as of April 15, 1998, which is exchangeable at the option of
Sinclair in certain circumstances for subordinated debentures of Sinclair with
an aggregate principal amount of approximately $172.5 million as of April 30,
1998. Sinclair also has significant program contracts payable and commitments
for future programming. Moreover, subject to the restrictions contained in its
debt instruments and preferred stock, Sinclair may incur additional debt and
issue additional preferred stock in the future.
Sinclair and its Subsidiaries have and will continue to have significant
payment obligations relating to the Bank Credit Agreement, the 10% Senior
Subordinated Notes due 2003 (the "1993 Notes"), the 10% Senior Subordinated
Notes due 2005 (the "1995 Notes"), the 9% Senior Subordinated Notes due 2007
(the
10
<PAGE>
"July 1997 Notes"), the 8 3/4% Senior Subordinated Notes due 2007 (the "December
1997 Notes" and, together with the 1993 Notes, the 1995 Notes and the July 1997
Notes, the "Existing Notes"), and the HYTOPS, and a significant amount of
Sinclair's cash flow will be required to service these obligations. In addition,
Sinclair will be required to pay dividends on the Series D Convertible
Exchangeable Preferred Stock, and may be required to pay dividends on the Series
B Convertible Preferred Stock in certain circumstances. See "Description of
Capital Stock -- Preferred Stock." Sinclair, on a consolidated basis, reported
interest expense of $117.0 million for the year ended December 31, 1997. After
giving pro forma effect to acquisitions completed by Sinclair in 1997, the
issuance of the HYTOPS, the issuance of the July 1997 Notes and the December
1997 Notes, the acquisition (the "Heritage Acquisition") of certain assets of
Heritage Media Group, Inc. ("Heritage"), the Max Media Acquisition, the Merger,
and Sinclair's issuance in September 1997 of 4,345,000 shares (the "1997 Common
Stock Issuance") of Class A Common Stock, and 3,450,000 shares of Series D
Convertible Exchangeable Preferred Stock (the "1997 Preferred Stock Issuance")
and the offering of 6,000,000 shares of Class A Common Stock in April 1998 (the
"1998 Offering"), as though each occurred on January 1, 1997, and the use of the
net proceeds therefrom, the interest expense and subsidiary trust minority
interest expense would have been $196.1 million for the year ended December 31,
1997. The weighted average interest rate on Sinclair's indebtedness under the
Bank Credit Agreement during the year ended December 31, 1997 was 7.43%.
The revolving credit facility available to Sinclair under the Bank Credit
Agreement is subject to quarterly reductions with total availability as of April
15, 1998 of $543.9 million (subject to compliance with financial covenants), and
$659.8 million outstanding or subject to commitments under the revolving credit
facility as of March 31, 1998, and will mature on the last business day of
December 2004. Payment of portions of the $325 million term loan under the Bank
Credit Agreement began on September 30, 1997 and the term loan must be fully
repaid by December 31, 2004. In addition, the Bank Credit Agreement provides for
a Tranche C term loan in an amount up to $400 million which can be utilized upon
approval by the agent bank and upon raising sufficient commitments to fund the
additional loans. The 1993 Notes mature in 2003, the 1995 Notes mature in 2005
and the July 1997 Notes and the December 1997 Notes mature in 2007. The Series C
Preferred Stock must be redeemed in 2009. Required repayment of indebtedness of
Sinclair totaling approximately $1.4 billion will occur at various dates through
December 15, 2007.
Sinclair's current and future debt service obligations and obligations to
make distributions on and to redeem preferred stock could have adverse
consequences to holders of the Sinclair Class A Common Stock, including the
following: (i) Sinclair's ability to obtain financing for future working capital
needs or additional acquisitions or other purposes may be limited; (ii) a
substantial portion of Sinclair's cash flow from operations will be dedicated to
the payment of principal and interest on its indebtedness and payments related
to the HYTOPS, thereby reducing funds available for operations; (iii) Sinclair
may be vulnerable to changes in interest rates under its credit facilities; and
(iv) Sinclair may be more vulnerable to adverse economic conditions than less
leveraged competitors and, thus, may be limited in its ability to withstand
competitive pressures. If Sinclair is unable to service or refinance its
indebtedness or preferred stock, it may be required to sell one or more of its
stations to reduce debt service obligations.
Sinclair expects to be able to satisfy its future debt service and dividend
and other payment obligations and other commitments with cash flow from
operations. However, there can be no assurance that the future cash flow of
Sinclair will be sufficient to meet such obligations and commitments. If
Sinclair is unable to generate sufficient cash flow from operations in the
future to service its indebtedness and to meet its other commitments, it may be
required to refinance all or a portion of its existing indebtedness or to obtain
additional financing. There can be no assurance that any such refinancing or
additional financing could be obtained on acceptable terms. If Sinclair is
unable to service or refinance its indebtedness, it may be required to sell one
or more of its stations to reduce debt service obligations.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Existing Indentures and the Articles Supplementary relating to the
Series C Preferred Stock restrict, among other things, Sinclair's and its
Subsidiaries' (as defined in the Existing Indentures) ability to (i) incur
additional indebtedness, (ii) pay dividends, make certain other restricted
payments or con-
11
<PAGE>
summate certain asset sales, (iii) enter into certain transactions with
affiliates, (iv) incur indebtedness that is subordinate in priority and in right
of payment to any senior debt and senior in right of payment to the Existing
Notes, (v) merge or consolidate with any other person, or (vi) sell, assign,
transfer, lease, convey, or otherwise dispose of all or substantially all of the
assets of Sinclair. In addition, the Bank Credit Agreement contains certain
other and more restrictive covenants, including restrictions on redemption of
capital stock, a limitation on the aggregate size of future acquisitions
undertaken without lender consent, a requirement that certain conditions be
satisfied prior to consummation of future acquisitions, and a limitation on the
amount of capital expenditures permitted by Sinclair in future years without
lender consent. The Bank Credit Agreement also requires Sinclair to maintain
specific financial ratios and to satisfy certain financial condition tests.
Sinclair's ability to meet these financial ratios and financial condition tests
can be affected by events beyond its control, and there can be no assurance that
Sinclair will meet those tests. The breach of any of these covenants could
result in a default under the Bank Credit Agreement or the Existing Indentures.
In the event of a default under the Bank Credit Agreement or the Existing
Indentures, the lenders and the noteholders could seek to declare all amounts
outstanding under the Bank Credit Agreement, the Existing Notes, together with
accrued and unpaid interest, to be immediately due and payable. If Sinclair were
unable to repay those amounts, the lenders under the Bank Credit Agreement could
proceed against the collateral granted to them to secure that indebtedness. If
the indebtedness under the Bank Credit Agreement or the Existing Notes were to
be accelerated, there can be no assurance that the assets of Sinclair would be
sufficient to repay in full that indebtedness and the other indebtedness of
Sinclair. Substantially all of the assets of Sinclair and its Subsidiaries
(other than the assets of KDSM, Inc. which ultimately back up the HYTOPS) are
pledged as security under the Bank Credit Agreement. The Subsidiaries (with the
exception of Cresap Enterprises, Inc., KDSM, Inc., the Trust and KDSM Licensee,
Inc.) also guarantee the indebtedness under the Bank Credit Agreement and the
Existing Indentures.
In addition to a pledge of substantially all of the assets of Sinclair and
its Subsidiaries, Sinclair's obligations under the Bank Credit Agreement are
secured by mortgages on certain real property assets of certain non-Company
entities (the "Stockholder Affiliates") owned and controlled by Sinclair's
current majority stockholders (David D. Smith, Frederick G. Smith, J. Duncan
Smith and Robert E. Smith, collectively, the "Controlling Stockholders"),
including Cunningham Communications, Inc. ("CCI"), Gerstell Development
Corporation ("Gerstell"), Gerstell Development Limited Partnership ("Gerstell
LP") and Keyser Investment Group, Inc. ("KIG"). If Sinclair were to seek to
replace the Bank Credit Agreement, there can be no assurance that the assets of
these Stockholder Affiliates would be available to provide additional security
under a new credit agreement, or that a new credit agreement could be arranged
on terms as favorable as the terms of the Bank Credit Agreement without a pledge
of such Stockholder Affiliates' assets.
CONFLICTS OF INTEREST
In addition to their respective interests in Sinclair, the Controlling
Stockholders have interests in various non-Company entities which are involved
in businesses related to the business of Sinclair, including, among others, the
operation of a television station in St. Petersburg, Florida since 1991 and a
television station in Bloomington, Indiana since 1990. In addition, Sinclair
leases certain real property and tower space from and engages in other
transactions with the Stockholder Affiliates, which are controlled by the
Controlling Stockholders. Although the Controlling Stockholders have agreed to
divest interests in the Bloomington station that are attributable to them under
applicable regulations of the Federal Communications Commission (the "FCC"), the
Controlling Stockholders and the Stockholder Affiliates may continue to engage
in the operation of the St. Petersburg, Florida station and other already
existing businesses. However, under Maryland law, generally a corporate insider
is precluded from acting on a business opportunity in his or her individual
capacity if that opportunity is one which the corporation is financially able to
undertake, is in the line of the corporation's business and of practical
advantage to the corporation, and is one in which the corporation has an
interest or reasonable expectancy. Accordingly, the Controlling Stockholders
generally are required to engage in new business opportunities of Sinclair only
through Sinclair unless a majority of Sinclair's disinterested directors decide
under the standards discussed above, that it is not in the best interests of
Sinclair to pursue such opportunities. Non-Company activities of the Controlling
Stockholders such as those described
12
<PAGE>
above could, however, present conflicts of interest with Sinclair in the
allocation of management time and resources of the Controlling Stockholders, a
substantial majority of which is currently devoted to the business of Sinclair.
In addition, there have been and will be transactions between Sinclair and
Glencairn, Ltd. (with its subsidiaries, "Glencairn"), a corporation in which
relatives of the Controlling Stockholders beneficially own a majority of the
equity interests. Glencairn is the owner-operator and licensee of television
stations WRDC in Raleigh/Durham, WVTV in Milwaukee, WNUV in Baltimore, WABM in
Birmingham, KRRT in San Antonio, and WFBC in Asheville, North Carolina and
Greenville/Spartanburg/Anderson, South Carolina. Sinclair has also agreed to
sell the assets essential for broadcasting a television signal in compliance
with regulatory guidelines ("License Assets") relating to WTTE in Columbus, Ohio
to Glencairn and to enter into an LMA with Glencairn pursuant to which Sinclair
will provide programming services for this station after the acquisition of the
License Assets by Glencairn. See "Business of Sinclair -- Broadcasting
Acquisition Strategy." The FCC has approved this transaction. In April 1998,
Sinclair acquired the Non-License Assets of WSYX and expects to acquire the
License Assets of WSYX by the end of 1998, at which time Sinclair expects that
it will transfer control of the License Assets of WTTE to Glencairn and enter
into an LMA with Glencairn with respect to such station. Sinclair also expects
to enter into LMAs with Glencairn with respect to five television stations, the
License Assets of which Glencairn has the right to acquire through the merger
with Sullivan III.
Barry Baker, who is expected to become a director and executive officer of
Sinclair, owns direct and indirect interests in River City Broadcasting, L.P.
("River City"), from which Sinclair purchased certain assets in 1996 (the "River
City Acquisition"). In addition, in connection with the River City Acquisition,
Sinclair has entered into various ongoing agreements with River City, including
options to acquire assets that were not acquired at the time of the initial
closing of the River City Acquisition, and LMAs relating to stations for which
River City continues to own License Assets. See "Business -- Broadcasting
Acquisition Strategy." Mr. Baker was not an officer or director of Sinclair at
the time these agreements were entered into, but, upon his expected election to
the Board of Directors of Sinclair and his expected appointment as an executive
officer of Sinclair, Mr. Baker may have conflicts of interest with respect to
issues that arise under any continuing agreements and any other agreements with
River City.
The Bank Credit Agreement, the Existing Indentures and the Articles
Supplementary relating to the Series C Preferred Stock provide that transactions
between Sinclair and its affiliates must be no less favorable to Sinclair than
would be available in comparable transactions in arm's-length dealings with an
unrelated third party. Moreover, the Existing Indentures provide that any such
transactions involving aggregate payments in excess of $1.0 million must be
approved by a majority of the members of the Board of Directors of Sinclair and
Sinclair's independent directors (or, in the event there is only one independent
director, by such director), and, in the case of any such transactions involving
aggregate payments in excess of $5.0 million, Sinclair is required to obtain an
opinion as to the fairness of the transaction to Sinclair from a financial point
of view issued by an investment banking or appraisal firm of national standing.
VOTING RIGHTS; CONTROL BY CONTROLLING STOCKHOLDERS;
POTENTIAL ANTI-TAKEOVER EFFECT OF DISPROPORTIONATE VOTING RIGHTS
After the Merger, Sullivan stockholders will hold common stock with
substantially different voting rights than the Sullivan Common Stock. Sinclair's
Common Stock has been divided into two classes, each with different voting
rights. The Sinclair Class A Common Stock entitles a holder to one vote per
share on all matters submitted to a vote of the stockholders, whereas the
Sinclair Class B Common Stock, par value $.01 per share (the "Sinclair Class B
Common Stock" and together with the Sinclair Class A Common Stock, the "Sinclair
Common Stock"), 100% of which is beneficially owned by the Controlling
Stockholders, entitles a holder to ten votes per share, except for "going
private" and certain other transactions for which the holder is entitled to one
vote per share. The Class A Common Stock, the Class B Common Stock and the
Series B Preferred Stock vote together as a single class (except as otherwise
may be required by Maryland law) on all matters submitted to a vote of
stockholders, with each share of Series B Preferred Stock entitled to 3.64 votes
on all such matters. Holders of Sinclair
13
<PAGE>
Class B Common Stock may at any time convert their shares into the same number
of shares of Sinclair Class A Common Stock and holders of Series B Convertible
Preferred Stock may at any time convert each share of Series B Convertible
Preferred Stock into approximately 3.64 Shares of Sinclair Class A Common Stock.
The Controlling Stockholders own in the aggregate approximately 60% of the
outstanding voting capital stock (including the Series B Preferred Stock) of
Sinclair and control over 90% of all voting rights associated with Sinclair's
capital stock. As a result, any three of the Controlling Stockholders will be
able to elect a majority of the members of the board of directors of Sinclair
and, thus, will have the ability to maintain control over the operations and
business of Sinclair.
The Controlling Stockholders have entered into a stockholders' agreement
(the "Stockholders' Agreement") pursuant to which they have agreed, for a period
ending in 2005, to vote for each other as candidates for election to the board
of directors of Sinclair. In addition, in connection with the River City
Acquisition, the Controlling Stockholders and Barry Baker and Boston Ventures IV
Limited Partnership and Boston Ventures IVA Limited Partnership (collectively,
"Boston Ventures") entered into a voting agreement (the "Voting Agreement")
pursuant to which the Controlling Stockholders agreed to vote in favor of
certain specified matters including, but not limited to, the appointment of Mr.
Baker and Mr. Coppedge (or another designee of Boston Ventures) to Sinclair's
Board of Directors at such time as they are allowed to become directors pursuant
to FCC rules. Mr. Baker and Boston Ventures, in turn, agreed to vote in favor of
the reappointment of each of the Controlling Stockholders to Sinclair's board of
directors. The Voting Agreement will remain in effect with respect to Mr. Baker
for as long as he is a director of Sinclair and remained in effect with respect
to Mr. Coppedge (or another designee of Boston Ventures) until the first to
occur of (a) the later of (i) May 31, 2001 and (ii) the expiration of the
initial five-year term of Mr. Baker's employment agreement and (b) such time as
Boston Ventures no longer owns directly or indirectly through its interest in
River City at least 721,115 shares of Sinclair Class A Common Stock (including
shares that may be obtained on conversion of the Series B Preferred Stock). As
of April 30, 1998, Boston Ventures no longer owned the requisite number of
shares of Sinclair capital stock and the provisions of the Voting Agreement no
longer apply with respect to Boston Ventures. See "Management -- Employment
Agreements."
The disproportionate voting rights of the Sinclair Class B Common Stock
relative to the Sinclair Class A Common Stock and the Stockholders' Agreement
and the Voting Agreement may make Sinclair a less attractive target for a
takeover than it otherwise might be or render more difficult or discourage a
merger proposal, tender offer or other transaction involving an actual or
potential change of control of Sinclair. In addition, Sinclair has the right to
issue additional shares of preferred stock the terms of which could make it more
difficult for a third party to acquire a majority of the outstanding voting
stock of Sinclair and accordingly may be used as an anti-takeover device.
DEPENDENCE UPON KEY PERSONNEL; EMPLOYMENT AGREEMENTS WITH KEY PERSONNEL
Sinclair believes that its success will continue to be dependent upon its
ability to attract and retain skilled managers and other personnel, including
its present officers, regional directors and general managers. The loss of the
services of any of the present officers, especially its President and Chief
Executive Officer, David D. Smith, or Barry Baker, who is currently a consultant
to Sinclair and is expected to become President and Chief Executive Officer of
Sinclair Communications, Inc. (a wholly owned subsidiary of Sinclair that holds
all of the broadcast operations of Sinclair, "SCI") and Executive Vice President
and a director of Sinclair as soon as permissible under FCC rules, may have a
material adverse effect on the operations of Sinclair. Each of the Controlling
Stockholders has entered into an employment agreement with Sinclair, each of
which terminates June 12, 1998, unless renewed for an additional one year period
according to its terms, and Barry Baker has entered into an employment agreement
that terminates in 2001. See "Management--Employment Agreements." Sinclair has
key-man life insurance for Mr. Baker, but does not currently maintain key
personnel life insurance on any of its executive officers.
Mr. Baker is Chief Executive Officer of River City and devotes a
substantial amount of his business time and energies to those services. Mr.
Baker cannot be appointed as an executive officer or director of Sinclair until
such time as (i) either the Controlling Stockholders dispose of their
attributable interests
14
<PAGE>
(as defined by applicable FCC rules) in a television station in the Indianapolis
designated market area ("DMA") or Mr. Baker no longer has an attributable
interest in WTTV or WTTK in Indianapolis; and (ii) either Sinclair disposes of
its attributable interest in WTTE in Columbus or Mr. Baker no longer has an
attributable interest in WSYX in Columbus. These events have not occurred as of
the date of this Information Statement/Prospectus and, accordingly, Mr. Baker is
able to terminate his employment agreement at any time. If Mr. Baker's
employment agreement is terminated under certain specified circumstances, Mr.
Baker will have the right to purchase from Sinclair at fair market value either
(i) Sinclair's broadcast operations in either the St. Louis market or the
Asheville, North Carolina/Greenville/ Spartanburg, South Carolina market or (ii)
all of Sinclair's radio operations, either of which may also have a material
adverse effect on the operations of Sinclair.
RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH; FUTURE ACCESS TO CAPITAL
Sinclair has undergone rapid and significant growth over the course of the
last seven years primarily through acquisitions and the development of LMA
arrangements. Since 1991, Sinclair has increased the number of stations it owns
or provides programming services to from three television stations to 36
television stations and 52 radio stations. As Sinclair has grown, the size of
acquisitions that Sinclair seeks to pursue has grown and the number of
potentially attractive acquisitions has decreased, which may make it more
difficult for Sinclair to locate attractive acquisitions. There can be no
assurance that Sinclair will be able to continue to locate and complete
acquisitions on the scale of past acquisitions or larger, or in general. In
addition, acquisitions in the television and radio industry have come under
increased scrutiny from the Department of Justice, the Federal Trade Commission
and the FCC. See "Business of Sinclair--Federal Regulation of Television and
Radio Broadcasting." Accordingly, there is no assurance that Sinclair will be
able to maintain its rate of growth or that Sinclair will continue to be able to
integrate and successfully manage such expanded operations. Inherent in any
acquisitions are certain risks such as increasing leverage and debt service
requirements and combining company cultures and facilities which could have a
material adverse effect on Sinclair's operating results, particularly during the
period immediately following such acquisitions. Additional debt or capital may
be required in order to complete future acquisitions, and there can be no
assurance Sinclair will be able to obtain such financing or raise the required
capital.
DEPENDENCE ON ADVERTISING REVENUES; EFFECT OF LOCAL, REGIONAL AND NATIONAL
ECONOMIC CONDITIONS
Sinclair's operating results are primarily dependent on advertising
revenues which, in turn, depend on national and local economic conditions, the
relative popularity of Sinclair's programming, the demographic characteristics
of Sinclair's markets, the activities of competitors and other factors which are
outside Sinclair's control. Both the television and radio industries are
cyclical in nature, and Sinclair's revenues could be adversely affected by a
future local, regional or national recessionary environment.
RELIANCE ON TELEVISION PROGRAMMING
One of Sinclair's most significant operating cost components is television
programming. There can be no assurance that Sinclair will not be exposed in the
future to increased programming costs which may materially adversely affect
Sinclair's operating results. Acquisitions of program rights are usually made
two or three years in advance and may require multi-year commitments, making it
difficult to accurately predict how a program will perform. In some instances,
programs must be replaced before their costs have been fully amortized,
resulting in write-offs that increase station operating costs.
CERTAIN NETWORK AFFILIATION AGREEMENTS
All but four of the television stations owned or provided programming
services by Sinclair are affiliated with a network. Under the affiliation
agreements, the networks possess, under certain circumstances, the right to
terminate the agreement on prior written notice generally ranging between 15 and
45 days, depending on the agreement.
Ten of the stations currently owned or programmed by Sinclair are
affiliated with Fox and 36.0% of Sinclair's revenue in 1997 on a pro forma basis
for all acquisitions completed in 1997 was from Fox-affiliated stations. In
addition, Sinclair has been notified by Fox of Fox's intention to terminate
WLFL's
15
<PAGE>
affiliation with Fox in the Raleigh-Durham market and WTVZ's affiliation with
Fox in the Norfolk market, effective August 31, 1998, and Sinclair has entered
into an agreement with WB for those stations to become affiliated with WB at
that time. On August 20, 1996, Sinclair entered into an agreement with Fox
limiting Fox's rights to terminate Sinclair's affiliation agreements with Fox in
other markets, but there can be no assurance that the Fox affiliation agreements
will remain in place or that Fox will continue to provide programming to
affiliates on the same basis that currently exists. See "Business of
Sinclair--Television Broadcasting." Sinclair's one UPN affiliation agreement
expires in January 2001. The non-renewal or termination of affiliations with Fox
or any other network could have a material adverse effect on Sinclair's
operations.
The affiliation agreements relating to television stations that have been
acquired by Sinclair are terminable by the network upon transfer of the License
Assets of the stations. Sinclair does not generally seek consents of the
affected network to the transfer of License Assets in connection with its
acquisitions. As of the date of this Information Statement/Prospectus, no
network has terminated an affiliation agreement following transfer of License
Assets to Sinclair. These stations are continuing to operate as network
affiliates, but there can be no assurance that the affiliation agreements will
be continued, or that they will be continued on terms favorable to Sinclair. If
any affiliation agreements are terminated, the affected station could lose
market share, may have difficulty obtaining alternative programming at an
acceptable cost, and may otherwise be adversely affected.
One station owned or programmed by Sinclair is affiliated with UPN, a
network that began broadcasting in January 1995. Thirteen stations owned or
programmed by Sinclair are operated as affiliates of WB, a network that began
broadcasting in January 1995. There can be no assurance as to the future success
of UPN or WB programming or as to the continued operation of the UPN or WB
networks. In connection with the change of affiliation of certain of Sinclair's
stations from UPN to WB, in August 1997, UPN filed an action (the "California
Action") in Los Angeles Superior Court against Sinclair, seeking declaratory
relief and specific performance or, in the alternative, unspecified damages and
alleging that neither Sinclair nor its affiliates provided proper notice of
their intention not to extend the current UPN affiliations beyond January 15,
1998. Sinclair filed a cross complaint in the California Action seeking
declaratory relief that the notice was effective to terminate the affiliations
on January 15, 1998. UPN sought a preliminary injunction to prevent the
termination of the affiliations on January 15, 1998. Also in August 1997,
certain subsidiaries of Sinclair filed an action (the "Baltimore Action") in the
Circuit Court for Baltimore City seeking declaratory relief that their notice
was effective to terminate the affiliations on January 15, 1998. UPN responded
to the Baltimore Action, and filed a counterclaim against Sinclair seeking the
same remedies sought by UPN in the California Action. Both Sinclair and UPN
filed motions for summary judgment in the Baltimore Action, and the court
granted Sinclair's motion for summary judgment and denied UPN's motion, holding
that Sinclair effectively terminated the affiliations as of January 15, 1998.
Based on the decision in the Baltimore Action, the court in the California
Action has stayed all proceedings in the California Action. Following an appeal
by UPN, the Court of Special Appeals of Maryland upheld the ruling in the
Baltimore Action and UPN is seeking further appellate review by the Maryland
Court of Appeals. If the court's decision is overturned on appeal and if
judgment is ultimately awarded in favor of UPN, certain of Sinclair's stationss
could be compelled to run UPN programming until January 15, 2001 without
compensation from UPN. If these affiliation agreements were extended, such
stations would be unable to negotiate affiliations and compensation agreements
with any other network for three years. In addition, Sinclair could lose all or
a portion of the cash consideration to be received by Sinclair under the WB
Agreement and WB may assert that Sinclair is in breach of the WB Agreement and
seek compensation for damages resulting from such breach. See "Business of
Sinclair -- Legal Proceedings." There can be no assurance that Sinclair and its
subsidiaries will prevail in these proceedings or that the outcome of these
proceedings, if adverse to Sinclair and its subsidiaries, will not have a
material adverse effect on Sinclair.
COMPETITION
The television and radio industries are highly competitive. Some of the
stations and other businesses with which Sinclair's stations compete are
subsidiaries of large, national or regional companies that may have greater
resources than Sinclair. Technological innovation and the resulting
proliferation
16
<PAGE>
of programming alternatives, such as cable television, wireless cable, in home
satellite-to-home distribution services, pay-per-view and home video and
entertainment systems have fractionalized television viewing audiences and have
subjected free over-the-air television broadcast stations to new types of
competition. The radio broadcasting industry is also subject to competition from
new media technologies that are being developed or introduced, such as the
delivery of audio programming by cable television systems and by digital audio
radio service ("DARS"). In October 1997, the FCC awarded two licenses for
satellite DARS. DARS may provide a medium for the delivery by satellite or
terrestrial means of multiple new audio programming formats to local and
national audiences.
Sinclair's stations face strong competition for market share and
advertising revenues in their respective markets from other local free
over-the-air radio and television broadcast stations, cable television and
over-the-air wireless cable television as well as newspapers, periodicals and
other entertainment media. In addition, the FCC has adopted rules which permit
telephone companies to provide video services to homes on a common-carrier basis
without owning or controlling the product being distributed, and proposed
legislation could relax or repeal the telephone-cable cross-ownership
prohibition for all systems. See "Business of Sinclair--Competition."
In February 1996, the Telecommunications Act of 1996 (the "1996 Act") was
adopted by the Congress of the United States and signed into law by President
Clinton. The 1996 Act contains a number of sweeping reforms that are having an
impact on broadcasters, including Sinclair. While creating substantial
opportunities for Sinclair, the increased regulatory flexibility afforded by the
1996 Act and the removal of previous station ownership limitations have sharply
increased the competition for and prices of stations. The 1996 Act also frees
telephone companies, cable companies and others from some of the restrictions
which have previously precluded them from involvement in the provision of video
services. The 1996 Act may also have other effects on the competition Sinclair
faces, either in individual markets or in making acquisitions.
IMPACT OF NEW TECHNOLOGIES
The FCC has taken a number of steps to implement digital television ("DTV")
broadcasting service in the United States. In December 1996, the FCC adopted a
DTV broadcast standard and, in April 1997, made decisions in several pending
rulemaking proceedings that establish service rules and a plan for implementing
DTV. The FCC adopted a DTV table of allotments that provides all authorized
television stations with a second channel on which to broadcast a DTV signal. In
February 1998, the FCC made slight revisions to the DTV rules and table of
allotments in acting upon a number of appeals in the DTV proceeding. The
modified rules and table of allotments are also the subject of various pending
appeals. The FCC has attempted to provide DTV coverage areas that are comparable
to stations' existing service areas. The FCC has ruled that television broadcast
licensees may use their digital channels for a wide variety of services such as
high-definition television ("HDTV"), multiple standard definition television
programming, audio, data, and other types of communications, subject to the
requirement that each broadcaster provide at least one free video channel equal
in quality to the current technical standard.
DTV channels will generally be located in the range of channels from
channel 2 through channel 51. The FCC is requiring that affiliates of ABC, CBS,
Fox and NBC in the top ten television markets begin digital broadcasting by May
1, 1999 (the stations affiliated with these networks in the top ten markets have
voluntarily committed to begin digital broadcasting within 18 months), and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999. The FCC's plan calls for the DTV transition period to end in
the year 2006, at which time the FCC expects that television broadcasters will
cease non-digital broadcasting and return one of their two channels to the
government, allowing that spectrum to be recovered by the government for other
uses. Under the Balanced Budget Act of 1997, however, the FCC is authorized to
extend the December 31, 2006 deadline for reclamation of a television station's
non-digital channel if, in any given case: (i) one or more television stations
affiliated with one of ABC, CBS, NBC or Fox in a market is not broadcasting
digitally, and the FCC determines that such stations have "exercised due
diligence" in attempting to convert to digital broadcasting; or (ii) less than
85% of the television households in the market subscribe to a multichannel video
service (cable, wireless cable or direct-to-home broadcast satellite television)
that carries at least
17
<PAGE>
one digital channel from each of the local stations in that market, and less
than 85% of the television households in the market can receive digital signals
off the air using either a set-top converter box for an analog television set or
a new digital television set. The Balanced Budget Act also directs the FCC to
auction the non-digital channels by September 30, 2002 even though they are not
to be reclaimed by the government until at least December 31, 2006. The Balanced
Budget Act also permits broadcasters to bid on the non-digital channels in
cities with populations greater than 400,000, provided the channels are used for
DTV. Thus, it is possible a broadcaster could own two channels in a market. The
FCC has concluded a separate proceeding in which it reallocated television
channels 60 through 69 to other services while protecting existing television
stations on those channels from interference during the DTV transition period.
Additionally, the FCC will open a separate proceeding to consider to what extent
the cable must-carry requirements will apply to DTV signals.
Implementation of digital television will improve the technical quality of
television signals received by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in increased interference. The FCC's DTV allotment plan allows present
UHF stations that move to DTV channels considerably less signal power than
present VHF stations that move to UHF DTV channels. Additionally, the DTV
transmission standard adopted by the FCC may not allow certain stations to
provide a DTV signal of adequate strength to be reliably received by certain
viewers using inside television set antennas. Implementation of digital
television will also impose substantial additional costs on television stations
because of the need to replace equipment and because some stations will need to
operate at higher utility costs and there can be no assurance that Sinclair's
television stations will be able to increase revenue to offset such costs. The
FCC is also considering imposing new public interest requirements on television
licensees in exchange for their receipt of DTV channels. Sinclair is currently
considering plans to provide HDTV, to provide multiple channels of television,
including the provision of additional broadcast programming and transmitted data
on a subscription basis, and to continue its current TV program channels on its
allocated DTV channels. The 1996 Act allows the FCC to charge a spectrum fee to
broadcasters who use the digital spectrum to offer subscription-based services.
The FCC has opened a rulemaking to consider the spectrum fees to be charged to
broadcasters for such use. In addition, Congress has held hearings on
broadcasters' plans for the use of their digital spectrum. Sinclair cannot
predict what future actions the FCC or Congress might take with respect to DTV,
nor can it predict the effect of the FCC's present DTV implementation plan or
such future actions on Sinclair's business.
Further advances in technology may also increase competition for household
audiences and advertisers. The video compression techniques now under
development for use with current cable television channels or direct broadcast
satellites which do not carry local television signals (some of which commenced
operation in 1994) are expected to reduce the bandwidth which is required for
television signal transmission. These compression techniques, as well as other
technological developments, are applicable to all video delivery systems,
including over-the-air broadcasting, and have the potential to provide vastly
expanded programming to highly targeted audiences. Reduction in the cost of
creating additional channel capacity could lower entry barriers for new channels
and encourage the development of increasingly specialized "niche" programming.
This ability to reach a very defined audience may alter the competitive dynamics
for advertising expenditures. Sinclair is unable to predict the effect that
technological changes will have on the broadcast television industry or the
future results of Sinclair's operations. The radio broadcasting industry is also
subject to competition from new media technologies that are being developed or
introduced, such as the delivery of audio programming by cable television
systems and by DARS. DARS may provide a medium for the delivery by satellite or
terrestrial means of multiple new audio programming formats to local and
national audiences. The FCC has issued licenses for two satellite DARS systems.
See "Business of Sinclair--Competition."
GOVERNMENTAL REGULATIONS; NECESSITY OF MAINTAINING FCC LICENSES
The broadcasting industry is subject to regulation by the FCC pursuant to
the Communications Act. Approval by the FCC is required for the issuance,
renewal and assignment of station operating licenses and the transfer of control
of station licensees. In particular, Sinclair's business will be dependent upon
its continuing to hold broadcast licenses from the FCC. While in the vast
majority of cases such licenses
18
<PAGE>
are renewed by the FCC, there can be no assurance that Sinclair's licenses or
the licenses held by the owner-operators of the stations with which Sinclair has
LMAs will be renewed at their expiration dates. A number of federal rules
governing broadcasting have changed significantly in recent years and additional
changes may occur, particularly with respect to the rules governing digital
television, multiple ownership and attribution. Sinclair cannot predict the
effect that these regulatory changes may ultimately have on Sinclair's
operations. Additional information regarding governmental regulation is set
forth under "Business of Sinclair--Federal Regulation of Television and Radio
Broadcasting."
MULTIPLE OWNERSHIP RULES AND EFFECT ON LMAS
On a national level, FCC rules and regulations generally prevent an entity
or individual from having attributable interests in television stations that
reach in excess of 35% of all U.S. television households (for purposes of this
calculation, UHF stations are credited with only 50% of the television
households in their markets). Upon completion of all pending acquisitions and
dispositions, Sinclair will reach approximately 14% of U.S. television
households using the FCC's method of calculation. On a local level, the
"duopoly" rule generally prohibits attributable interests in two or more
television stations with overlapping service areas. There are no national limits
on ownership of radio stations, but on a local level no entity or individual can
have attributable interests in more than five to eight stations (depending on
the total number of stations in the market), with no more than three to five
stations (depending on the total allowed) broadcasting in the same band (AM or
FM). There are limitations on the extent to which radio programming can be
simulcast through LMA arrangements, and LMA arrangements in radio are counted in
determining the number of stations that a single entity may control if the
provider of programming under an LMA owns one or more radio stations in the same
market. FCC rules also impose limitations on the ownership of a television and
one or more radio stations in the same market, though such cross-ownership is
presumptively permitted on a limited basis in larger markets.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other entity. In the case of
corporations holding broadcast licenses, the interests of officers, directors
and those who, directly or indirectly, have the right to vote 5% or more of the
corporation's voting stock (or 10% or more of such stock in the case of
insurance companies, certain regulated investment companies and bank trust
departments that are passive investors) are generally deemed to be attributable,
as are positions as an officer or director of a corporate parent of a broadcast
licensee. The FCC has proposed changes to these attribution rules. See "Business
of Sinclair--Federal Regulation of Television and Radio Broadcasting."
The FCC has initiated rulemaking proceedings to consider proposals to
modify its television ownership restrictions, including proposals that may
permit the ownership, in some circumstances, of two television stations with
overlapping service areas. The FCC is also considering in these proceedings
whether to adopt restrictions on television LMAs. The "duopoly" rule currently
prevents Sinclair from acquiring the FCC licenses of television stations with
which it has LMAs in those markets where Sinclair owns a television station. In
addition, if the FCC were to decide that the provider of programming services
under a television LMA should be treated as the owner of the television station
and if it did not relax the duopoly rule, or if the FCC were to adopt
restrictions on LMAs without grandfathering existing arrangements, Sinclair
could be required to modify or terminate certain of its LMAs. In such an event,
Sinclair could be required to pay termination penalties under certain of its
LMAs. The 1996 Act provides that nothing therein "shall be construed to prohibit
the origination, continuation, or renewal of any television local marketing
agreement that is in compliance with the regulations of the [FCC]." The
legislative history of the 1996 Act reflects that this provision was intended to
grandfather television LMAs that were in existence upon enactment of the 1996
Act, and to allow television LMAs consistent with the FCC's rules subsequent to
enactment of the 1996 Act. In its pending rulemaking proceeding regarding the
television duopoly rule, the FCC has proposed to adopt a grandfathering policy
providing that, in the event that television LMAs become attributable interests,
LMAs that are in compliance with existing FCC rules and policies and were
entered into before November 5, 1996, would be permitted to continue in force
until the original term of the LMA expires. Under the FCC's proposal, television
LMAs that are entered into, renewed or assigned after November 5, 1996 would
have to be terminated if LMAs are made attributable interests and the LMA in
question resulted in a violation of the television multiple ownership rules. All
but three of Sinclair's television LMAs were entered
19
<PAGE>
into prior to the 1996 Act: one was entered into after enactment of the 1996 Act
but prior to November 5, 1996 (which LMA has a term expiring on May 31, 2006),
and two (one of which has a term expiring in 2008 and the other of which has a
term expiring no later than April 16, 2002) were entered into subsequent to
November 5, 1996. Moreover, rights under certain of Sinclair's television LMAs
were acquired by other parties either subsequent to enactment of the 1996 Act
but prior to November 5, 1996, or subsequent to November 5, 1996. Sinclair
cannot predict whether any or all of its television LMAs will be grandfathered.
See "Business of Sinclair--Federal Regulation of Television and Radio
Broadcasting." In connection with the Max Media Acquisition, the Company expects
to enter into one or more LMAs with Max Media Properties II LLC, the owner of
the License Assets of WKEF-TV, Dayton, Ohio and WEMT-TV, Greenville, Tennessee.
In connection with the Merger, Sinclair intends to take an assignment of
existing LMAs in the Nashville and Greensboro markets and to enter into new LMAs
with Sullivan II, Sullivan III, and/or Glencairn. These LMAs would not be
grandfathered under the FCC's pending proposal. Further, if the FCC were to find
that the owners/licensees of the stations with which Sinclair has LMAs failed to
maintain control over their operations as required by FCC rules and policies,
the licensee of the LMA station and/or Sinclair could be fined or could be set
for hearing, the outcome of which could be a fine or, under certain
circumstances, loss of the applicable FCC license.
A petition has been filed to deny the application to assign WTTV and WTTK
in the Indianapolis DMA from River City to Sinclair. Although the petition to
deny does not challenge the assignments of WTTV and WTTK to Sinclair, it alleges
that station WIIB in the Indianapolis DMA should be deemed an attributable
interest of the Controlling Stockholders (resulting in a violation of the FCC's
local television ownership restrictions when coupled with Sinclair's acquisition
of WTTV and WTTK) even though the Controlling Stockholders have agreed to
transfer their voting stock in WIIB to a third party. The FCC, at Sinclair's
request, has withheld action on the applications for Sinclair to acquire WTTV
and WTTK, and for the Controlling Stockholders to transfer their voting stock in
WIIB, pending the outcome of the FCC's rulemaking proceeding concerning the
cross-interest policy. The petitioner has appealed the withholding of action on
these applications. In addition, comments have been filed with the FCC by a
competitor of Sinclair with respect to the transfer of the license for WEMT-TV
in Tri-Cities, Tennessee/Virginia claiming that Sinclair's acquisition of
WEMT-TV will create undue regional media concentration.
In addition, the FCC granted the assignment applications for Sinclair to
acquire the License Assets of WLOS-TV and KABB-TV in the Asheville, North
Carolina/Greenville/Spartanburg, South Carolina and San Antonio, Texas markets,
respectively, and for Glencairn to acquire the License Assets of WFBC-TV and
KRRT-TV in these two markets, respectively, subject to the outcome of the FCC's
cross-interest policy rulemaking proceeding and certain other conditions
relating to certain trusts that have non-voting ownership interests in
Glencairn. Sinclair has acquired the License Assets of KABB-TV and WLOS-TV.
Glencairn has acquired the License Assets of KRRT-TV and WFBC-TV and Sinclair
provides programming services to KRRT-TV and WFBC-TV pursuant to LMAs.
Applications for review have been filed by third parties which appeal the FCC's
grants of: (i) Sinclair's application to acquire WLOS-TV in the Asheville, North
Carolina and Greenville/Spartanburg/Anderson, South Carolina market and
Glencairn's application to acquire WFBC-TV in that market; and (ii) Sinclair's
application to acquire KABB-TV in the San Antonio market. Sinclair has filed
oppositions to both applications for review. Sinclair also has pending several
requests for waivers of the FCC's radio-television cross-ownership, or "one to a
market," rule, in connection with its applications to acquire radio stations in
the Max Media Acquisition and other acquisitions in markets where Sinclair owns
or proposes to own a television station. Certain waivers of the one to a market
rule acquired by Sinclair in connection with the Heritage Acquisition are
temporary and conditioned on the FCC's pending rulemaking proceeding to
reexamine the one to a market rule. In addition, certain of the television
stations to be acquired in the Max Media Acquisition, the WSYX acquisition and
the Merger have overlapping service areas with Sinclair's television stations
and, therefore, Sinclair has requested or intends to request waivers from the
FCC to complete the Max Media Acquisition, the WSYX acquisition and the Merger.
There can be no assurance that any or all of such waiver requests will be
granted. Additionally, Sinclair's acquisition of the Heritage radio stations in
the New Orleans market and Sinclair's acquisition of the Max Media radio
stations in the Norfolk, Virginia market would violate FCC and DOJ restrictions
on ownership of radio
20
<PAGE>
stations in those markets. Accordingly, Sinclair has agreed to divest one or
more stations in these markets either to a third party or to a trustee.
Sinclair is unable to predict (i) the ultimate outcome of possible changes
to the FCC's LMA and multiple ownership rules or the resolution of the
above-described matters or (ii) the impact such factors may have upon Sinclair's
broadcast operations. As a result of regulatory changes, Sinclair could be
required to modify or terminate some or all of its LMAs, resulting in
termination penalties and/or divestitures of broadcast properties. In addition,
Sinclair's competitive position in certain markets could be materially adversely
affected. Thus, no assurance can be given that changes to the FCC rules or the
resolution of the above-described matters will not have a material adverse
effect upon Sinclair.
LMAS--RIGHTS OF PREEMPTION AND TERMINATION
All of Sinclair's LMAs allow, in accordance with FCC rules, regulations and
policies, preemptions of Sinclair's programming by the owner-operator and FCC
licensee of each station with which Sinclair has an LMA. In addition, each LMA
provides that under certain limited circumstances the arrangement may be
terminated by the FCC licensee. Accordingly, Sinclair cannot be assured that it
will be able to air all of the programming expected to be aired on those
stations with which it has an LMA or that Sinclair will receive the anticipated
advertising revenue from the sale of advertising spots in such programming.
Although Sinclair believes that the terms and conditions of each of its LMAs
should enable Sinclair to air its programming and utilize the programming and
other non-broadcast license assets acquired for use on the LMA stations, there
can be no assurance that early terminations of the arrangements or unanticipated
preemptions of all or a significant portion of the programming by the
owner-operator and FCC licensee of such stations will not occur. An early
termination of one of Sinclair's LMAs, or repeated and material preemptions of
programming thereunder, could adversely affect Sinclair's operations. In
addition, Sinclair's LMAs expire on various dates from the years 1999 to 2010,
unless extended or earlier terminated. There can be no assurance that Sinclair
will be able to negotiate extensions of its arrangements on terms satisfactory
to Sinclair.
In certain of its LMAs, Sinclair has agreed to indemnify the FCC licensee
against certain claims (including trademark and copyright infringement, libel or
slander and claims relating to certain FCC proceedings or investigations) that
may arise against the FCC licensee as a result of the arrangement.
POTENTIAL EFFECT ON THE MARKET PRICE RESULTING FROM SHARES ELIGIBLE FOR FUTURE
SALE
Any shares of Sinclair Class A Common Stock offered pursuant to this
Information Statement/ Prospectus will be freely tradeable in the United States
without restriction or further registration. Shares of Class B Common Stock are
convertible into Class A Common Stock on a share-for-share basis at any time at
the option of the holder and are automatically converted into Class A Common
Stock upon transfer, except for transfers to certain permitted transferees. The
25,166,432 shares of Class B Common Stock outstanding as of March 31, 1998 (and
shares of Class A Common Stock into which they are convertible), all of which
are beneficially owned by the Controlling Stockholders, are held by persons who
may be deemed to be affiliates of Sinclair and are eligible for resale under
Rule 144 under the Securities Act, subject to the volume limitations thereunder.
As of the date of this Information Statement/Prospectus, options to acquire
5,171,536 shares of Class A Common Stock have been granted and reserved for
issuance to certain officers or employees of Sinclair under Sinclair's various
stock option plans. Of the options granted, 1,261,743 have vested as of the date
of this Information Statement/ Prospectus. In addition, Sinclair issued
1,150,000 shares of Series B Preferred Stock to River City in connection with
the River City Acquisition, of which 45,703 shares (which are convertible at any
time at the option of the holders, into an aggregate of approximately 166,210
shares of Class A Common Stock subject to certain adjustments) were issued and
outstanding as of April 30, 1998. All such shares are registered under the
Securities Act pursuant to a shelf registration statement and may be sold into
the public market at any time. Sinclair has also registered under the Securities
Act 1,382,435 shares of Class A Common Stock issuable upon exercise of stock
options held by Barry Baker, and has registered an additional 2,155,238 shares
issuable upon exercise of options issued or issuable pursuant to Sinclair's
employee plans. Sale of substantial amounts of shares of Class A Common Stock,
or the perception that such sales could occur, may materially adversely affect
the market price of the Class A Common Stock.
21
<PAGE>
NET LOSSES
Sinclair has experienced a net loss in two of the last four years,
including a net loss of $10.6 million in 1997. The losses include significant
interest expense as well as substantial non-cash expenses such as depreciation,
amortization and deferred compensation. Notwithstanding slight net income in
1995 and 1996, Sinclair expects to experience net losses in the future,
principally as a result of interest expense, amortization of programming and
intangibles and depreciation.
DIVIDEND RESTRICTIONS
The terms of Sinclair's Bank Credit Agreement, the Existing Indentures and
the other indebtedness of Sinclair restrict Sinclair from paying dividends on
its Common Stock. Sinclair does not expect to pay dividends on its Common Stock
in the foreseeable future.
FORWARD-LOOKING STATEMENTS
This Information Statement/Prospectus contains forward-looking statements.
In addition, when used in this Information Statement/Prospectus, the words
"intends to," "believes," "anticipates," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
a number of risks and uncertainties. Actual results in the future could differ
materially and adversely from those described in the forward-looking statements
as a result of various important factors, including the impact of changes in
national and regional economies, successful integration of acquired television
and radio stations (including achievement of synergies and cost reductions),
pricing fluctuations in local and national advertising, volatility in
programming costs, the availability of suitable acquisitions on acceptable terms
and the other risk factors set forth above and the matters set forth in this
Information Statement/Prospectus generally. Sinclair undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
22
<PAGE>
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA
COMBINED PER SHARE DATA
The following table sets forth (1) historical net income (loss) per share
and historical book value per share data of Sinclair; (2) historical net income
(loss) per share and historical book value per share data of Sullivan; and (3)
unaudited pro forma combined net income (loss) per share and unaudited pro forma
combined book value per share data of Sinclair after giving effect to the Recent
Financings, the Significant Acquisitions and the Merger on a purchase basis. The
information in the table should be read in conjunction with the audited
consolidated financial statements of Sinclair and Sullivan and the notes thereto
included elsewhere in this Information Statement/Prospectus. The unaudited pro
forma combined per share data is not necessarily indicative of the net income
(loss) per share or book value per share that would have been achieved had the
Merger been consummated as of the beginning of the periods presented and should
not be construed as representative of such amounts for any future dates or
periods.
<TABLE>
<CAPTION>
HISTORICAL AND PRO FORMA
PER SHARE DATA(1)
---------------------------------------------
YEAR ENDED
DECEMBER 31, 1997
------------------
<S> <C>
Sinclair Common Stock
Net income (loss) per common share:
Historical ............................. $ (0.27)
Pro forma .............................. (0.26)
Book value per common share at period end:
Historical ............................. 13.87
Pro forma .............................. 23.85
Sullivan Common Stock
Net income (loss) per common share:
Historical (unaudited) ................. (2.10)
Book value per common share at period end: 2.15
Historical (unaudited) .................
</TABLE>
- ----------
(1) Historical book value per share is computed by dividing stockholders'
equity, after reduction for preferred liquidation preferences, if any, by
the number of shares of common stock outstanding at the end of the period.
Sinclair pro forma book value per share is computed by dividing pro forma
shareholders' equity, including the effect of pro forma adjustments, by the
pro forma number of shares of Sinclair Common Stock which would have been
outstanding had the Merger been consummated as of December 31, 1997.
23
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1997, (a) the actual
capitalization of Sinclair, (b) the pro forma capitalization of Sinclair as
adjusted to reflect the April 1998 Common Stock Issuance, Significant
Acquisitions and the Merger as if such transactions had occurred on December 31,
1997. The information set forth below should be read in conjunction with "Pro
Forma Consolidated Financial Information of Sinclair" located elsewhere in this
Information Statement/Prospectus and Sinclair's Consolidated Financial
Statements as of and for the year ended December 31, 1997 and related notes
thereto, the historical financial data of Heritage Media Services, Inc. --
Broadcasting Segment, the historical financial data of Max Media Properties LLC,
and the historical financial data of Sullivan Broadcast Holdings, Inc. and
Subsidiaries, all of which are included herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
APRIL 1998
APRIL 1998 COMMON STOCK ISSUANCE,
COMMON STOCK ISSUANCE, SIGNIFICANT ACQUISITIONS
ACTUAL AND SIGNIFICANT ACQUISITIONS AND THE MERGER
------------- ------------------------------ -------------------------
<S> <C> <C> <C>
Cash and cash equivalents ................................. $ 139,327 $ -- $ --
========== ========== ===========
Current portion of long-term debt ......................... $ 38,288 $ 38,288 38,288
========== ========== ===========
Long-term debt:
Commercial bank financing ................................ 272,011 375,238 1,275,238
Notes and capital leases payable to affiliates ........... 19,500 19,500 19,500
Senior subordinated notes ................................ 750,923 750,923 750,923
---------- ---------- -----------
Total long-term debt ..................................... 1,042,434 1,145,661 2,045,661
---------- ---------- -----------
Company Obligated Mandatorily Redeemable Security
of Subsidiary Trust Holding Solely KDSM Senior
Debentures ............................................... 200,000 200,000 200,000
---------- ---------- -----------
Stockholders' equity (deficit):
Series B Preferred Stock, $.01 par value, 10,000,000
shares authorized and 1,071,381 and 513,079 shares
issued and outstanding, respectively ................... 10 5 5
Series D Convertible Exchangeable Preferred Stock,
$.01 par value, 3,450,000 shares authorized and
outstanding ............................................ 35 35 35
Class A Common Stock, $.01 par value, 100,000,000
shares authorized and 13,733,430, 21,763,617 and
23,691,328 shares issued and outstanding respec-
tively ................................................. 137 217 236
Class B Common Stock, $.01 par value, 35,000,000
shares authorized and 25,436,432 issued and out-
standing ............................................... 255 255 255
Additional paid-in capital ............................... 552,949 888,503 988,484
Additional paid-in capital -- equity put options ......... 23,117 23,117 23,117
Additional paid-in capital -- deferred compensation (954) (954) (954)
Accumulated deficit ...................................... (32,261) (32,261) (32,261)
---------- ---------- -----------
Total stockholders' equity ............................. 543,288 878,917 978,917
---------- ---------- -----------
Total capitalization .................................. $1,785,722 $2,224,578 3,224,578
========== ========== ===========
</TABLE>
24
<PAGE>
THE MERGER
GENERAL
Pursuant to the Merger Agreement, Sinclair will form a wholly-owned
subsidiary ("Merger Sub") which will merge with and into Sullivan, and Sullivan
will be the surviving corporation (the "Surviving Corporation"). All Sullivan
Share Equivalents outstanding immediately prior to the Effective Time will be
automatically converted into the right to receive the Merger Consideration, as
defined below. As part of the Merger, Sullivan will adopt the Certificate of
Incorporation and Bylaws of Merger Sub, and the name of the Surviving
Corporation shall be designated by Sinclair.
In addition, prior to the closing of the Merger, Sullivan will spin off two
wholly-owned subsidiaries, Sullivan II and Sullivan III. Sinclair has also
entered into an agreement and plan of merger with Sullivan II.
MERGER CONSIDERATION
The aggregate consideration for all Sullivan Share Equivalents (the "Merger
Consideration") shall be derived by adding (i) the sum of (x) the product of the
Cash Flow Multiplier and the Annualized Trailing Cash Flow (as each are defined
below) and (y) $2,620,000, if the Cash Flow Mulitiplier is 12.00 and the
Annualized Trailing Cash Flow is not less than $78,115,000 plus discretionary
401(k) Plan contributions made by Sullivan after December 31, 1997, (ii) the
KOKH Amount, as defined below, (iii) the Adjustment Amount, as defined below,
and (iv) an amount equal to Sullivan receivable proceeds collected during the
120 days following the Merger, as described in the Merger Agreement. However, if
the Merger closes prior to September 21, 1998, the amount in clause (i) above
shall not exceed $970,000,000.
"Cash Flow Multiplier" means (x) 12.00 if the Merger closes on or prior to
June 23, 1998, (y) 12.25 if the Merger closes after June 23, 1998 and on or
prior to September 21, 1998, and (z) 12.5 if the Merger closes after September
21, 1998.
"Annualized Trailing Cash Flow" means the consolidated net income of
Sullivan from January 1, 1998 to the earlier of (i) the last day of the last
full calendar month ended prior to the closing of the Merger and (ii) August 31,
1998, increased by all non-recurring items incurred other than in the ordinary
course of business, corporate overhead, income taxes, interest expense,
depreciation and amortization deducted in computing such operating net income,
and reduced by certain amounts paid or due by Sullivan under its Program
Contracts, as defined in the Merger Agreement.
"KOKH Amount" means the result of $30,620,000 and a yield of 7.125% applied
to such amount from January 30, 1998, plus the net effect of certain payments,
capital contributions, loans, or advances described in the Merger Agreement.
"Adjustment Amount" means, as of the Closing Date, the aggregate amount of
all cash, cash equivalents, marketable securities, prepaid expenses, deposits
held by others, and any current assets, reduced by: (i) certain indebtedness;
(ii) trade accounts payable, accrued expenses, and other liabilities; (iii) the
aggregate amount of the proceeds from the sale certain assets with replacement
value under $130,000; and (iv) the excess, if any, of (a) the product of
$1,985,422 and the number of calendar days in 1998 before closing, divided by
365, over (b) the aggregate amount of capital expenditures of Sullivan and its
subsidiaries during calendar year 1998 prior to closing. The Adjustment Amount
will be increased by $10,000,000 if the closing has not occurred before October
21, 1998, and will be increased by an additional $10,000,000 (up to a maximum
increase of $70,000,000) at the end of each 30-day period thereafter.
PER SHARE MERGER CONSIDERATION
The Merger Consideration for each Sullivan Share Equivalent (the "Per Share
Merger Consideration") shall be the amount such Sullivan Share Equivalent holder
would receive if: (i) all rights to acquire Sullivan capital stock were
exercised and all securities convertible into Sullivan capital stock
25
<PAGE>
were converted to the fullest extent permitted, (ii) thereafter, Sullivan
received an amount equal to the aggregate Merger Consideration and applied a
portion of that amount to the redemption in full of any outstanding Sullivan
preferred stock, and (iii) Sullivan then distributed the remaining sum to the
holders of Sullivan capital stock in accordance with its certificate of
incorporation reduced, in the case of any right to acquire Sullivan capital
stock or right to convert into Sullivan capital stock, by the exercise price.
FORM OF MERGER CONSIDERATION
At the option of the Merger Sub, up to $100,000,000 of the aggregate Common
Merger Consideration will be paid in validly-issued, fully-paid and
nonassessable shares of Sinclair Class A Common Stock. The remainder of the
Merger Consideration will be paid in cash by wire transfer of immediately
available funds for the account of holders of Sullivan Share Equivalents. The
Sinclair Class A Common Stock will be issuable only to holders of Sullivan
Common Equivalents, and the proportion of the Per Share Common Merger
Consideration that is represented by Sinclair Class A Common Stock will be equal
to the proportion of the aggregate Common Merger Consideration payable to
holders of Sullivan Common Equivalents that is represented by Sinclair Class A
Common Stock. The Sinclair Class A Common Stock will be valued at the average of
the closing trading prices for the Sinclair Class A Common Stock for the third
business day prior to the closing date and the nine preceding business days.
TIME OF PAYMENT
The Merger Consideration will be paid in three components: the initial
estimated payment; the final non-receivables payment; and the receivables
payment.
The Initial Estimated Payment. Sinclair will make the initial estimated
payment at the time of the closing of the Merger. Prior to the Merger, Sullivan
will estimate Annualized Trailing Cash Flow, the KOKH Amount and the Adjustment
Amount. Sinclair will pay the initial estimated payment based on these
estimates. Sullivan will also determine receivables for the period beginning 120
days before closing of the Merger. If this estimate of receivables is less than
$24 million, then Sinclair will pay a portion of the initial estimated payment
equal to the difference between $24 million and this estimate of receivables
into an escrow account. All remaining amounts will be paid to or at the
direction of the stockholders of Sullivan.
The Final Non-Receivables Payment. Sinclair will calculate the final
Annualized Trailing Cash Flow Amount, KOKH Amount and Adjustment Amount no later
than 110 days after closing of the Merger. If ABRY Partners, as the
representative of the stockholders of Sullivan, disputes this determination, the
determination will be submitted to a dispute resolution procedure which may
include arbitration. After these amounts have been finally determined by
agreement or pursuant to the dispute resolution procedure, payments will be made
as follows. If additional amounts are payable to the stockholders of Sullivan,
Sinclair will pay the amount first from whatever amounts were set aside in the
escrow account described in the preceding paragraph, and then from other
sources. If the final calculation results in amounts owing to Sinclair, then
such amounts shall be paid first from any amounts set aside in the escrow
described in the preceding paragraph, and then as an offset to any amounts
payable with respect to the receivables payment described below. If these
amounts are not sufficient, no-one will be obligated to pay any remaining
amounts owing to Sinclair.
The Receivables Payment. On or before the 150th day after the closing of
the Merger, Sinclair will pay to the Sullivan stockholders an amount equal to
the proceeds of receivables of Sullivan arising from the sale of advertising
time and other paid programming time that existed at the time of the closing of
the Merger and that were collected in the 120 days following the closing of the
Merger. In addition, Sinclair will pay interest on these amounts at the rate of
7.125% per year accruing from the 74th day after closing of the Merger. The
amount paid to the stockholders of Sullivan will be reduced by (i) any amount
owed Sinclair (or which Sinclair in good faith asserts will be owed) pursuant to
the preceding paragraph and (ii) an amount equal to the aggregate amount of all
loss and expense for which Sinclair claims indemnification under the Indemnity
Agreement described under "Terms of the Merger Agreement -- Indemnification,"
below. Sinclair will pay into an escrow account any amounts that are estimates
of amounts that will be owed Sinclair under the preceding paragraph and the
amount of any
26
<PAGE>
claims for indemnification. The escrow agent will pay amounts held in escrow to
Sinclair or the Sullivan stockholders as appropriate after amounts owing under
the preceding paragraph are finally determined and after all claims for
indemnity are resolved.
BACKGROUND OF THE MERGER; APPROVAL OF THE MERGER BY SULLIVAN'S BOARD OF
DIRECTORS AND REASONS FOR THE MERGER
From time to time since Sullivan's commencement of broadcast operations in
1996, Sullivan has variously received and made unsolicited inquiries of other
television broadcasting companies and other persons concerning possible business
combinations involving Sullivan and/or all or portions of its television
properties.
In such efforts (including in connection with the Merger), Sullivan has
been assisted and advised by ABRY Partners, Inc. ("ABRY Partners"), an affiliate
of Sullivan's majority stockholder, ABRY Broadcast Partners II, L.P., whom
Sullivan engaged at the time of Sullivan's formation to advise Sullivan
concerning financial, strategic and other matters generally. In turn, ABRY
Partners has been assisted and advised in such efforts by Paradigm Consulting
Ltd. (together with ABRY Partners, the "Advisors"), whom ABRY Partners has
engaged to assist and advise ABRY Partners. Neither Advisor was specifically or
separately engaged or is being compensated by Sullivan in connection with the
Merger.
In late 1997, with a view to identifying opportunities for Sullivan's
stockholders to maximize and realize the value of Sullivan and its television
properties, but without determining whether to approve any merger or other
transaction involving Sullivan or any portion of its assets, the board of
directors of Sullivan (the "Sullivan Board") authorized the management of
Sullivan, with the assistance of the Advisors, to determine the terms and
conditions upon which Sullivan and/or its television properties could be the
subject of a business combination and the persons likely to be interested
consummating any such business combination. The Sullivan Board took such action
in light of a number of factors, including (i) their knowledge of the business,
operations, earnings, assets and properties of Sullivan, (ii) their assessment
of Sullivan's long-term and short-term business prospects and the risks to
Sullivan's stockholders in connection therewith, (iii) the recent and historical
trading prices of common stocks of public companies primarily engaged in
television broadcasting, (iv) the valuations reflected in recent and historical
business combination transactions involving publicly-traded and privately-owned
companies primarily engaged in television broadcasting, and (v) the relative
valuations and degrees of stockholder liquidity achieved in recent and
historical business combination transactions involving companies primarily
engaged in television broadcasting as compared with those achieved in recent and
historical public offerings of equity securities of companies of such a type.
Intermittently during the period from November 1997 through February 1998,
on Sullivan's behalf and in consultation with the members of the Sullivan Board,
the executive officers of Sullivan and the Advisors had discussions with
Sinclair and a number of other parties. Such discussions ranged from
communications that were merely exploratory in nature to the negotiation of the
terms and conditions to be set forth in definitive merger agreements to be
submitted to the Sullivan Board for its consideration and approval.
As a result of such discussions, by the third week of February 1998,
Sullivan's management and the Advisors believed that they had identified the
most favorable terms available from each of the parties with whom they had
discussed a transaction involving Sullivan and/or its television properties, and
that it was not likely that terms more favorable to the stockholders of Sullivan
could be obtained at such time. Those proposed terms of possible alternative
transactions were presented to the members of the Sullivan Board for their
consideration. The members of the Sullivan Board determined that the proposal
from Sinclair was the most favorable and therefore approved the terms of the
Merger and Sullivan's execution of the Merger Agreement.
The principal reason for the Merger is to enable the stockholders of
Sullivan to receive the Per Share Merger Consideration. In approving the Merger
and the Merger Agreement, the Sullivan Board considered a variety of factors,
including (i) the factors described above which the Sullivan Board considered in
connection with authorizing the executive officers of Sullivan and the Advisors
to explore
27
<PAGE>
possible business combinations, (ii) the respective terms and conditions of the
possible alternative transactions and the likelihood that any such transaction
could be consummated, (iii) the fact that no director or executive officer of
Sullivan has any interest in Sinclair (other than any interest which he or she
might acquire by virtue of receiving shares of Sinclair Class A Common Stock as
part of the Merger Consideration on the same terms as other stockholders of
Sullivan) or will become or continue to be an executive officer or director of
Sullivan or Sinclair after the Merger, (iv) selected prices paid or agreed to be
paid in recent and historical business combination transactions involving
privately- and publicly-held companies primarily engaged in television
broadcasting, and (v) the Sullivan Board's belief that the Merger Consideration
reflected at least the fair market value of Sullivan's stock.
In analyzing the terms and conditions of the Merger prior to approving
them, the Sullivan Board recognized that the stockholders of Sullivan would no
longer have an opportunity to participate in the future growth of Sullivan,
other than indirectly as stockholders of Sinclair in the event that Sinclair
exercised its option to pay a portion of the Merger Consideration in the form of
Sinclair Common Stock. The Sullivan Board also recognized that, if Sinclair
exercised such option, the stockholders of Sullivan would, in effect, be making
an investment in Sinclair Class A Common Stock. Accordingly, the Sullivan Board
gave consideration to Sullivan's and Sinclair's results of operation, Sullivan's
anticipated future earnings and financial position, and the recent and
historical values at which Sinclair Class A Common Stock has been traded in the
public markets.
Based upon its consideration of the factors described above and others they
deemed relevant, the members of the Sullivan Board unanimously approved the
terms and conditions of the Merger and Sullivan's entry into the Merger
Agreement. In view of the circumstances and wide variety of factors considered
in taking such actions, the Sullivan Board did not find it practicable to assign
relative weights to the factors considered in taking such actions.
APPRAISAL AND DISSENTERS' RIGHTS
Holders of shares of Sullivan Common Stock are entitled to appraisal rights
under Section 262 of the DGCL ("Section 262"), provided that they comply with
the conditions established by Section 262. Section 262 is reprinted in its
entirety as Annex A to this Information Statement/Prospectus. The following
discussion does not purport to be a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Annex A. This
discussion and Annex A should be reviewed carefully by any holder of Sullivan
Common Stock who wishes to exercise statutory appraisal rights or who wishes to
preserve the right to do so, as failure to comply with the procedures set forth
herein or therein may result in the loss of appraisal rights. A holder of record
of shares of Sullivan Common Stock who desires to exercise appraisal rights
must: (i) hold shares of Sullivan Common Stock on the date of the making of a
demand for appraisal; (ii) continuously hold such shares through the Effective
Time; (iii) deliver a properly executed written demand for appraisal to Sinclair
prior to the 20th day after the date of this Information Statement/Prospectus;
(iv) file any necessary petition in the Delaware Court of Chancery (the
"Delaware Court"), as more fully described below, within 120 days after the
Effective Time; and (v) otherwise satisfy all of the conditions described more
fully below and in Annex A. HOLDERS WHO WISH TO EXERCISE APPRAISAL RIGHTS MUST
NOTIFY SULLIVAN OF THEIR INTENT TO DO SO NO LATER THAN _______, 1998 IN ORDER TO
PRESERVE THOSE RIGHTS.
A record holder of shares of Sullivan Common Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the Effective Time and who otherwise complies with
the statutory requirements of Section 262 will be entitled, if the Merger is
consummated, to receive payment of the fair value of his shares of Sullivan
Common Stock as appraised by the Delaware Court. All references in Section 262
and in this summary of appraisal rights to a "stockholder" or "holders of shares
of Sullivan Common Stock" are to the record holder or holders of shares of
Sullivan Common Stock.
Under Section 262, not less than 10 days after the Effective Time, Sullivan
is required to notify its stockholders eligible for appraisal rights of the
availability of such appraisal rights. This Information Statement/Prospectus
constitutes notice to holders of Sullivan Common Stock that appraisal rights are
available to them. Stockholders of record who desire to exercise their appraisal
rights must satisfy all of
28
<PAGE>
the conditions set forth herein. Each Sullivan stockholder electing to demand
the appraisal of his or her shares must file with Sinclair a written demand for
appraisal of any shares of Sullivan Common Stock before the twentieth day after
the date of this Information Statement/Prospectus. Such written demand must
reasonably inform Sinclair of the identity of the stockholder of record and of
such stockholder's intention to demand appraisal of the Sullivan Common Stock
held by such stockholder.
STOCKHOLDERS WHO DESIRE TO EXERCISE APPRAISAL RIGHTS MUST TIMELY SUBMIT A
WRITTEN DEMAND FOR APPRAISAL AND OTHERWISE COMPLY WITH SECTION 262. FAILURE TO
DO SO MAY CONSTITUTE A WAIVER OF THE STOCKHOLDER'S RIGHT OF APPRAISAL.
A demand for appraisal must be executed by or on behalf of the stockholder
of record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing the shares of Sullivan Common Stock. A
person having a beneficial interest in shares of Sullivan Common Stock that are
held of record in the name of another person, such as a broker, fiduciary or
other nominee, must act promptly to cause the record holder to follow the steps
summarized herein properly and in a timely manner to perfect any appraisal
rights. If the shares of Sullivan Common Stock are owned of record by a person
other than the beneficial owner, including a broker, fiduciary (such as a
trustee, guardian or custodian) or other nominee, such demand must be executed
by or for the record owner. If the shares of Sullivan Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common, such
demand must be executed by or for all such joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for
appraisal for a stockholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the demand,
such person is acting as agent for the record owner. A record owner, such as a
broker, fiduciary or other nominee, who holds shares of Sullivan Common Stock as
a nominee for others, may exercise appraisal rights with respect to the shares
held for all or less than all beneficial owners of shares as to which such
person is the record owner. In such case, the written demand must set forth the
number of shares covered by such demand. Where the number of shares is not
expressly stated, the demand will be presumed to cover all shares of Sullivan
Common Stock outstanding in the name of such record owner. A stockholder who
elects to exercise appraisal rights should mail or deliver his or her written
demand to: Sinclair Broadcast Group, Inc., 2000 West 41st Street, Baltimore,
Maryland, 21211, Attention: David B. Amy. The written demand for appraisal
should specify the stockholder's name and mailing address, the number of shares
of Sullivan Common Stock owned, and that the stockholder is thereby demanding
appraisal of his or her shares.
Within ten days after the Effective Time, Sullivan, as the surviving
corporation in the Merger, (the "Surviving Corporation") must provide notice of
the Effective Time to each of its stockholders who have complied with Section
262. Within 120 days after the Effective Time, the Surviving Corporation or any
stockholder who has complied with the required conditions of Section 262 may
file a petition in the Delaware Court, with a copy served on the Surviving
Corporation in the case of a petition filed by a stockholder, demanding a
determination of the fair value of the shares of the dissenting stockholders of
the Surviving Corporation. The Surviving Corporation does not currently intend
to file an appraisal petition and stockholders seeking to exercise appraisal
rights should not assume that the Surviving Corporation will file such a
petition or that the Surviving Corporation will initiate any negotiations with
respect to the fair value of such shares. Accordingly, stockholders who desire
to have their shares appraised should initiate any petitions necessary for the
perfection of their appraisal rights within the time periods and in the manner
prescribed in Section 262. Within 120 days after the Effective Time, any
stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from the
Surviving Corporation a statement setting forth the aggregate number of shares
of Sullivan Common Stock not voted in favor of the Merger and the aggregate
number of shares of Sullivan Common Stock with respect to which demands for
appraisal were received by Sullivan and the number of holders of such shares.
Such written statement must be mailed within 10 days after the written request
therefor has been received by the Surviving Corporation or within 10 days after
expiration of the time for delivery of demands for appraisal under Section 262,
whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights and will appraise the shares of Sullivan
29
<PAGE>
Common Stock owned by such stockholders, determining the fair value of such
shares exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining fair value,
the Delaware Court is to take into account all relevant factors. In Weinberger
v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered, and that "fair price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
stated that in making this determination of fair value the court must consider
market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which are known or which can be ascertained as of
the date of the merger and which throw any light on future prospects of the
merged corporation. In Weinberger, the Delaware Supreme Court stated that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Section 262, however, provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Stockholders considering seeking appraisal should recognize that the fair
value of their shares as determined under Section 262 could be more than, the
same as or less than the shares of Class A Common Stock and cash to be issued
pursuant to the Merger to holders of Sullivan Common Stock if they do not seek
appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. Upon application of a dissenting
stockholder of Sullivan, the Delaware Court may order that all or a portion of
the expenses incurred by any dissenting stockholder in connection with the
appraisal proceeding, including without limitation, reasonable attorney's fees
and the fees and expenses of experts, be charged pro rata against the value of
all shares of stock entitled to appraisal.
Any holder of shares of Sullivan Common Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any holder of Sullivan
Common Stock will have the right to withdraw such demand for appraisal and to
accept the terms offered in the Merger; after this period, such holder may
withdraw such demand for appraisal only with the written consent of the
Surviving Corporation. If no petition for appraisal is filed with the Delaware
Court within 120 days after the Effective Time, stockholders' rights to
appraisal will cease, and all holders of shares of Sullivan Common Stock will be
entitled to receive the Merger Consideration. Inasmuch as the Surviving
Corporation has no obligation to file such a petition, and has no present
intention to do so, any holder of shares of Sullivan Common Stock who desires
such a petition to be filed is advised to file it on a timely basis.
FAILURE TO TAKE ANY REQUIRED STEP IN CONNECTION WITH THE EXERCISE OF
APPRAISAL RIGHTS MAY RESULT IN TERMINATION OF SUCH RIGHTS. IN VIEW OF THE
COMPLEXITY OF THESE PROVISIONS OF THE DGCL, STOCKHOLDERS WHO ARE CONSIDERING
EXERCISING THEIR RIGHTS UNDER SECTION 262 OF THE DGCL SHOULD CONSULT WITH THEIR
LEGAL ADVISORS.
RESALES BY AFFILIATES
All shares of Sinclair Class A Common Stock received by Sullivan
stockholders in the Merger will be freely transferable, except that shares of
Sinclair Class A Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of Sullivan
prior to the Merger may be resold by them only in transactions permitted by the
resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144
in the case of such person who become affiliates of Sinclair) or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Sinclair or Sullivan generally include individuals or entities that control,
are controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as principal stockholders
of such party.
30
<PAGE>
Sinclair will file with the Commission a registration statement under the
Securities Act to provide for the sale by Sullivan affiliates from time to time
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act.
Pursuant to the Merger Agreement, Sinclair will also file an application
with the Nasdaq Stock Market seeking approval for quotation on the Nasdaq
National Market of the shares of Sinclair Class A Common Stock to be issued in
connection with the Merger.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase in accordance with generally
accepted accounting principles, with Sinclair considered the acquiror. The
results of operations of Sinclair will consist of the results of operations of
Sinclair combined with the results of operations of Sullivan from and after the
Effective Time of the Merger. The cost of Sullivan to Sinclair shall be based
upon (i) the value of the Sinclair Class A Common Stock issued for Sullivan
Common Stock, (ii) the value of the cash portion of the Merger Consideration and
(iii) direct costs of the Merger. The aggregate cost of Sullivan, as determined,
shall be allocated to the assets acquired and liabilities assumed by Sinclair
based upon their respective fair values.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes all the material anticipated federal
income tax consequences of the Merger to holders of Sullivan Common Stock. The
discussion does not address any tax consequences of the Merger to persons who
exercise appraisal rights, if any, in connection with the Merger. This
discussion does not apply to certain classes of taxpayers, including without
limitation, foreign persons, insurance companies, tax-exempt organizations,
financial institutions, dealers in securities, persons who will acquire Sinclair
Class A Common Stock pursuant to the exercise or termination of employee stock
options or rights or otherwise as compensation or persons who will hold their
Sinclair Class A Common Stock in a hedging transaction or as part of a straddle
or conversion transaction. Also, the discussion does not address the effect of
any applicable foreign, state, local or other tax laws. This discussion is based
upon laws, regulations, ruling and decisions, all of which are subject to change
(possibly with retroactive effect), and no ruling has been or will be requested
from the Internal Revenue Service (the "IRS") on the tax consequences of the
Merger. ACCORDINGLY, SULLIVAN STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES, OF THE MERGER IN THEIR INDIVIDUAL
CIRCUMSTANCES.
The exchange of Sullivan Common Stock for Sinclair Class A Common Stock and
cash pursuant to the Merger will be a taxable transaction for U.S. federal
income tax purposes and may also be taxable under applicable state, local and
foreign tax laws. In general, for U.S. federal income purposes, each Sullivan
Stockholder will recognize gain or loss equal to the difference between (x) the
sum of the amount of cash and the fair market value of the Sinclair Class A
Common Stock received pursuant to the Merger and (y) the Sullivan Stockholder's
adjusted tax basis in the Sullivan Common Stock exchanged therefor. Assuming
that such shares of Sullivan Common Stock constitute capital assets in the
stockholder's hands, such gain (or loss) will be long-term gain (or loss) if, at
the Effective Time, the shares of Sullivan Stock were held for more than one
year. The recently enacted Taxpayer Relief Act of 1997 reduces the rate of
federal income tax imposed on capital gains with respect to capital assets held
more than 18 months by noncorporate taxpayers. The basis of the Sinclair Class A
Common Stock received pursuant to the Merger will be its fair market value at
the time of the Merger, and the holding period thereof will begin on the day
following the day on which the Effective Time occurs.
Any later acquisition of Sullivan II by Sinclair should have no effect for
federal income tax purposes on a shareholder of Sullivan II. The Sullivan II
shares are not expected to have any material value either at the time of their
distribution or at the time of any later merger. In addition, no additional
consideration will be paid by Sinclair to Sinclair II stockholders for the
acquisition of Sullivan II.
31
<PAGE>
Further, the Glencairn Merger should have no effect for federal income tax
purposes on a shareholder of Sullivan III. The Sullivan III shares are not
expected to have any material value either at the time of their distribution or
at the time of the Glencairn Merger. In addition, no consideration will be paid
by Glencairn to Sullivan III stockholders for the acquisition of Sullivan III.
Payments in connection with the Merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
stockholder (a) fails to furnish his social security number or other taxpayer
identification number ("TIN"), (b) furnishes an incorrect TIN, (c) fails
properly to report interest or dividends, or (d) under certain circumstances,
fails to provide a certified statement, signed under penalties of perjury, that
the TIN provided is his correct number and that he is not subject to backup
withholding. Backup withholding is not an additional tax but merely an advance
payment, which may be refunded to the extent it results in an overpayment of
tax. Any amounts withheld from a payment to a stockholder under the backup
withholding rules will be allowed as a credit against such stockholder's federal
income tax liability, provided that the required information is provided to the
IRS. Certain persons generally are exempt from backup withholding, including
corporations and financial institutions. Certain penalties apply for failure to
furnish correct information and for failure to include the reportable payments
in income. Each Sullivan Stockholder should consult with his own tax advisor as
to his qualification for exemption from withholding and the procedure for
obtaining such exemption. A Sullivan Stockholder may request a Substitute Form
W-9 from Sinclair in order to provide his or her taxpayer identification number
(employer identification number or social security number), certify that such
number is correct, and that he or she is not subject to backup withholding.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO. THUS,
SULLIVAN STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER IN THEIR INDIVIDUAL CIRCUMSTANCES,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, AND OTHER APPLICABLE TAX LAWS, AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
TERMS OF THE MERGER AGREEMENT
Sinclair has entered into an Agreement and Plan of Merger with Sullivan and
a related Agreement and Plan of Merger with Sullivan Broadcasting Company II,
Inc. ("Sullivan II"), effective as of February 23, 1998 (together, the "Merger
Agreement"). Sullivan II is a corporation which Sullivan will spin off as part
of this transaction.
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is available upon request from Sinclair or Sullivan
and is incorporated herein by reference. This summary does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement.
All stockholders are urged to read the Merger Agreement in its entirety.
Capitalized terms used herein and not otherwise defined have the same meaning as
in the Merger Agreement.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, on the terms and subject to the
conditions set forth therein, and in accordance with the DGCL, Merger Sub will
be merged with and into Sullivan, the separate existence of Merger Sub will
cease, and Sullivan will continue its existence as the Surviving Corporation.
Pursuant to the Merger Agreement, the Surviving Corporation's name will be
designated by Sinclair. The effective time of the Merger will be the date and
time of the filing of the Certificate of Merger, and any other documents
necessary to effect the Merger, with the Secretary of State of the State of
Delaware or such subsequent date or time as shall be agreed by Sinclair and
Sullivan and specified in the Certificate of Merger (the "Effective Time").
32
<PAGE>
MANNER AND BASIS OF CONVERTING SHARES
In the Merger, each outstanding share of Sullivan capital stock, each right
to acquire Sullivan capital stock, and each security convertible into Sullivan
capital stock (each a "Sullivan Share Equivalent") outstanding at the Effective
Time will be automatically converted into the right to receive the Per Share
Merger Consideration. Each share of common stock of the Merger Sub will be
automatically converted into one share of common stock of Sullivan after the
merger ("Post-Merger Sullivan"), so that immediately after the Merger Sinclair
will will be the sole owner of the equity securities of Post-Merger Sullivan.
At or after the Closing, each holder of record of Sullivan Share
Equivalents will deliver to Post-Merger Sullivan for cancellation the
certificates representing each Sullivan Share Equivalent. Upon surrender of the
certificate, the holder thereof will receive the Merger Consideration therefor
and such Sullivan certificate will be canceled.
The Merger Agreement provides that the certificate of incorporation and
bylaws of Merger Sub will become the certificate of incorporation and bylaws of
the Surviving Corporation. In addition, under the Merger Agreement, the
directors and officers of Merger Sub immediately prior to the Effective Time
will become the directors and officers, respectively, of the Surviving
Corporation following the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain customary representations and
warranties of the parties. Sinclair and Merger Sub, on one hand, and Sullivan,
on the other, have made certain representations and warranties to the other(s)
regarding, among other things: (i) their respective organization, subsidiaries
and capitalization; (ii) their respective authority to enter into and perform
their respective obligations under the Merger Agreement; (iii) the compliance of
the transactions contemplated by the Merger Agreement with their respective
articles or certificates of incorporation and bylaws, certain agreements and
applicable laws; (iv) litigation; (v) the accuracy of their respective
disclosures; and (vi) brokers' fees.
Additionally, Sullivan has made representations and warranties to Sinclair
and the Merger Sub regarding (i) its financial statements; (ii) the conduct of
its business since September 30, 1997; (iii) FCC authorizations; (iv) the
condition of its assets; (v) Sullivan's title to its realty and non-realty, and
its compliance with zoning laws; (vi) its rights, licenses and other authority
to use the call letters used by its stations and all trademarks and trade names
relating to its stations; (viii) insurance of assets; (viii) significant
contracts; (ix) its employees and employee benefit plans; (x) certain tax
matters; (xi) its corporate books and records; and (xii) the absence of
significant undisclosed liabilities. Sinclair and the Merger Sub have
represented and warranted to Sullivan that any Sinclair common stock issued as
part of the Merger Consolidation will be duly issued, validly authorized, fully
paid and nonassessable, and listed on Nasdaq National Market.
Sullivan, Sullivan II, Sullivan III, Sinclair, Glencairn, Ltd., and ABRY
Partners, Inc. have entered into an indemnity agreement effective February 23,
1998 (the "Indemnity Agreement"). Pursuant to the Indemnity Agreement, the
representations, warranties, and certifications set forth in the Merger
Agreement will survive the execution of the Merger Agreement and the Merger for
150 days after the closing of the Merger with Sullivan.
CONDUCT OF BUSINESS PENDING THE MERGER
Conduct of Business by Sullivan. The Merger Agreement provides that, prior
to the Effective Time, except as expressly permitted or contemplated by the
Merger Agreement, unless Sinclair shall otherwise agree in writing, Sullivan
will, and will cause its subsidiaries to (i) carry on its business and
operations only in the ordinary and usual course of business and consistent with
past practice and preserve the goodwill of the Stations' suppliers, customers,
and other business relations; (ii) not use its or its subsidiaries' rights under
any Program Contract in a manner which will render exhibitions of programming
thereunder unavailable to post-merger Sullivan, except in accordance with past
practices; (iii) promptly execute and timely file any applications for renewal
of FCC authorizations; (iv) timely file all tax returns; (v) fully pay all
taxes; (vi) sell advertising on its stations only in the usual course of
business; (vii) perform obligations under station contracts, preserve station
assets, and maintain FCC authorizations;
33
<PAGE>
(viii) maintain insurance on station assets; (ix) not enter into, or amend any,
Program Contract without Sinclair's consent, except as permitted in the Merger
Agreement; (x) use reasonable efforts to assert and prosecute any claims
pursuant to the Act III Merger Agreement; and (xi) except as contemplated by the
Merger Agreement, neither Sullivan nor its subsidiaries shall (a) sell, lease
(as lessor), transfer, or agree to sell, lease (as lessor), or transfer any
station assets which are required for the operation of the Station, unless in
the ordinary course of business, or unless replacement thereof is provided with
a functionally equivalent or superior asset, (b) enter into any employment
contract or increase the pay of employees more than 4% in the aggregate, (c)
enter into any new trade agreement, (d) apply to the FCC for any construction
permit that would inherently restrict any station's present operations, or enter
any material adverse change in the buildings or leasehold improvements which
constitute Station Assets, (e) merge or consolidate, or agree to merge or
consolidate, (f) enter into any contract with any of its affiliates, other than
Sullivan or any of its subsidiaries, which will not be performed in its entirety
at or prior to the Closing, (g) cause any of its assets or properties to become
subject to any lien, except as described in the Merger Agreement, (h) commit any
breach of any material contract, or (i) change any material tax election.
CONDITIONS OF THE MERGER
Under the Merger Agreement, the respective obligations of Sinclair and
Sullivan to effect the Merger are subject to the satisfaction of the following
conditions: (i) each of the representations and warranties of the respective
parties will be true and accurate in all material respects, except as permitted
or contemplated by the Merger Agreement; (ii) each party will have performed or
complied with the covenants and agreements required by the Merger Agreement;
(iii) no action or proceeding will have been instituted and be pending before
any court or governmental body which restrains, enjoins or prohibits the
consummation of the transactions contemplated by the Merger Agreement; (iv) no
party to the merger will have received written notice from any governmental body
of such governmental body's intention to initiate any action or proceeding to
restrain or enjoin the Merger, or to initiate an investigation into the Merger;
and (v) the expiration or early termination of any waiting period under the HSR
Act shall have occurred; (vi) the required FCC consent for the spin-off of
certain Sullivan subsidiaries shall have been granted and be in full force and
effect. In addition, the obligation of Sullivan to effect the Merger is subject
to the satisfaction or waiver of the following additional conditions: (i)
Sullivan shall have received satisfactory evidence to the effect that the Merger
Sub, the Surviving Corporation, and/or its subsidiaries shall have sufficient
funds to satisfy its obligations under the Merger Agreement; (ii) if the Merger
Sub has elected to pay part of the Merger Consolidation in Sinclair Common
Stock, then Sinclair will have taken such actions as required to register the
stock and have such stock tradeable on the relevant securities exchange; and
(iii) the Merger Sub will deliver such instruments, documents, and certificates
as contemplated under the Merger Agreement.
As well, the obligations of the Merger Sub to effect the Merger are subject
to the satisfaction or waiver of the following additional conditions: (i)
Sullivan shall have attained minimum gross revenues as described in the Merger
Agreement; (ii) Sullivan shareholders who properly exercise dissenter's rights
will not, in the aggregate, be entitled to receive more than 6% of the total
Merger Consideration; and (iii) Sullivan will deliver such instruments,
documents, and certificates as contemplated under the Merger Agreement.
PROHIBITION ON SOLICITATION OF OTHER OFFERS
Pursuant to the Merger Agreement, Sullivan may not, directly or indirectly,
solicit, initiate, entertain or enter into any discussions or transactions with,
or encourage or provide any information to, any person (other than Sinclair and
its subsidiaries) concerning the sale of assets of Sullivan or its subsidiaries,
or any merger, stock acquisition, or similar transaction involving Sullivan or
its subsidiaries. However, the Merger Agreement does not prohibit Sullivan from
providing information to any court, governmental authority, or other person as
may be required by law.
CONTINUED EMPLOYMENT OF SULLIVAN EMPLOYEES
Pursuant to the terms of the Merger Agreement, Post-Merger Sullivan will
continue to employ all of the common law employees of Sullivan on the same terms
of employment applicable at the time of
34
<PAGE>
closing of the Merger. However, the employment of certain executives and
management of Sullivan and certain employees of Sullivan with non-standard
employment contracts may be terminated at the closing of the Merger.
TERMINATION
The Merger Agreement may be terminated and abandoned prior to the Closing
by either Sullivan or Sinclair (i) if the other party shall have materially
breached the Merger Agreement, and after 30 days written notice, has not cured
the breach; or (ii) at any time after May 16, 1999 (except that if the closing
conditions were not satisfied due to a breach by Sullivan, Sullivan cannot
terminate the Merger Agreement).
The Merger Agreement may also be terminated by Sullivan prior to the
Closing at any time that the Merger Sub has failed to make a payment as mandated
by the Merger Agreement.
TERMINATION FEES
Sinclair has agreed to fund an escrow account with a $75,000,000 line of
credit (the "Earnest Money Fund"). Sullivan will have the right to receive the
Earnest Money Fund if the Merger is terminated by Sullivan because: (i) Sinclair
and/or the Merger Sub failed to cure a material breach of its obligations under
the Merger Agreement after 30 days written notice by Sullivan; (ii) the Merger
Sub failed to make the mandatory payment of $75,000,000 to Sullivan (the
"Mandatory Payment") when due under the Merger Agreement; or (iii) the Merger
has not been consummated by May 16, 1999, subject to certain conditions relating
to the actions of Sullivan and Sinclair. Sullivan will also have the right to
receive the Earnest Money Fund if Sinclair terminates the Merger after the
Mandatory Payment is due and payable and has not been paid, or at any time after
May 16, 1999, subject to certain conditions relating to the actions of Sullivan
and Sinclair. However, if the Mandatory Payment has been made, Sullivan shall
not have the right to receive the Earnest Money Fund in addition to the
Mandatory Payment, and Sullivan's right, if any, to receive the Mandatory
Payment or the Earnest Money Fund shall be its exclusive remedy upon termination
of the transaction.
After regulatory approval of the transaction, Merger Sub will have the
right to the return of (or the release from its obligation to pay) the Mandatory
Payment should Sullivan fail to perform or comply with any covenant or agreement
in the Merger Agreement, if: (i) Sinclair terminates the Merger because of (x)
Sullivan's failure to cure its noncompliance with the Merger Agreement, or (y)
Sullivan's gross revenues, as determined pursuant to the Merger Agreement, are
less than $71,630,000 for the six months ending June 30, 1998; and (ii) in the
case that Sinclair terminates pursuant to the Merger Agreement, then each
condition to Sullivan's obligation to close was satisfied or waived, or the
absence of satisfaction of each such condition which was not satisfied or waived
was caused solely by a breach by Sullivan of its obligations under the Merger
Agreement. In addition, if Sinclair has terminated the Merger Agreement pursuant
to clause (ii) of this paragraph based on a willful breach of the Merger
Agreement by Sullivan, and Sinclair has disclaimed in writing its right to seek
specific performance, or is barred from obtaining specific performance by a
final, nonappeallable judgment on the grounds that specific performance is not
an available remedy, then Sullivan will pay to Sinclair $75,000,000 in cash as
liquidated damages.
INDEMNIFICATION
Pursuant to the Indemnity Agreement, Sullivan stockholders will indemnify
Sinclair and Merger Sub in respect to any and all damages, claims, losses,
expenses, costs, obligations, and liabilities, including attorney's fees,
arising out of: (i) any breach of representation or warranty of Sullivan or any
certification made at closing; (ii) any litigation, proceeding or claim by any
third party arising from the business or operations of any station prior to the
Closing Date; or (iii) the failure of any Sullivan consent (of the Board of
Directors or stockholders, as appropriate) to be obtained or in effect at the
Closing Date for which such Sullivan consent is required to be obtained.
Indemnification by Sullivan stockholders is limited to the funds of an escrow
account and a conditional escrow account funded from a portion of the Merger
Consideration, as described in the Merger Agreement. See "The Merger -- Time of
35
<PAGE>
Payment." In addition, Sinclair and Merger Sub shall be entitled to no remedy:
(i) unless the aggregate amount of loss and expense of the parties taken
together exceeds $1,000,000, (ii) unless notice is provided on or prior to the
last day of the 150 day survival period of the representations, warranties, and
certifications; or (iii) with respect to any tax liability (other than the
Sullivan III Spin-Off Tax Liability, as defined in the Merger Agreement).
After the Closing Date, each of Sinclair, Post-Merger Sullivan and
Post-Merger Sullivan Two will indemnify and hold harmless the Sullivan
stockholders and the Stockholder Representative from any against any and all
loss or expense suffered directly or indirectly by reason of: (i) any breach of
representation or warranty or Sinclair or either Sinclair Merger Sub, or in any
certification delivered by Sinclair or either Sinclair Merger Sub at closing;
(ii) any failure by Sinclair or either Merger Sub to perform or fulfill any of
its covenants or agreements set forth in the Merger Agreement; (iii) any failure
by either Post-Merger Sullivan or any of their respective subsidiaries to pay,
perform, or discharge any of their liabilities or obligations after the
respective closing; (iv) any litigation, proceeding, or claim by any third party
arising from the business or operations of any Station after the Adjustment Time
(as defined in the Merger Agreement); or (v) the failure of any Sinclair or
Merger Sub consent (of the Board of Directors or stockholders, as appropriate)
to be obtained or in effect at the Closing Date for which such consent is
required to be obtained. However, Sullivan stockholders and the Stockholder
Representative shall be entitled to no remedy: (i) unless the aggregate amount
of loss and expense of the parties taken together exceeds $1,000,000, and (ii)
unless notice is provided on or prior to the last day of the survival of the
representations, warranties, and certifications.
36
<PAGE>
STOCK PRICE AND DIVIDEND INFORMATION
Effective June 13, 1995, the Class A Common Stock of Sinclair was listed
for trading on the Nasdaq Stock Market under the symbol SBGI. Following the
Merger, the Sinclair Class A Common Stock will continue to be traded on the
Nasdaq Stock Market. The following table sets forth for the periods indicated
the high and low sales prices on the Nasdaq Stock Market.
<TABLE>
<S> <C> <C>
1996 HIGH LOW
---- ---- ---
First Quarter ........... $ 26.5000 $ 16.7500
Second Quarter .......... 43.5000 25.5000
Third Quarter ........... 48.2500 36.0000
Fourth Quarter .......... 44.0000 22.2500
1997 HIGH LOW
---- ---- ---
First Quarter ........... $ 32.0000 $ 22.7500
Second Quarter .......... 31.7500 22.7500
Third Quarter ........... 41.5000 27.5000
Fourth Quarter .......... 47.0000 32.6875
1998 HIGH LOW
---- ---- ---
First Quarter ........... $ 58.1250 $ 42.8750
</TABLE>
On April 30, 1998, there were approximately 83 holders of record.
Sinclair has not paid any dividends on the Common Stock and does not
anticipate paying dividends in the foreseeable future.
No established trading market exists for Sullivan Common Stock. As of April
30, 1998, there were 56 holders of record of Sullivan Common Stock.
37
<PAGE>
INDUSTRY OVERVIEW
TELEVISION BROADCASTING
Commercial television stations in the United States are typically
affiliated with one of six television networks, which are at different stages of
development. The networks are differentiated in part by the amount of
programming they provide their affiliates each week and by the length of time
they have been in operation. These networks are ABC, CBS, NBC, FOX, WB, and UPN.
The ABC, CBS, and NBC networks (the "Traditional Networks") have a substantial
number of affiliated stations, have been in operation for the longest time and
provide the majority of their affiliates' programming each day. Fox established
an affiliate network in the mid-1980s and provides fewer hours of prime-time and
daytime programming than the Traditional Networks. WB and UPN, the newest
television networks, provide four nights of prime-time programming each week and
also provide a number of hours of children's programming each week. Television
stations affiliated with Fox, WB, or UPN have more hours of the day to program
and consequently have more commercial inventory to sell to advertisers.
Each Traditional Network provides the majority of its affiliates'
programming each day without charge in exchange for a substantial majority of
the available advertising time in the programs supplied. Each Traditional
Network sells this advertising time and retains the revenue. The affiliate
receives compensation from the Traditional Network and retains the revenue from
time sold during breaks in and between network programs and in programming the
affiliate produces or purchases from non-network sources.
In contrast, a station that is not affiliated with a Traditional Network
supplies over-the-air programming for a majority of the broadcast day by
acquiring rights to broadcast programs through syndication. This syndicated
programming is generally acquired by such stations for cash and barter. Those
stations that acquire a program through syndication are usually given exclusive
rights to show the program in the station's market for either a period of years
or a number of episodes agreed upon between the station and the syndicator of
the programming. Types of syndicated programs aired on these stations include
feature films, popular series previously shown on network television and series
produced for direct distribution to television stations.
Fox has established a network of television stations that operates on a
basis similar to the Traditional Networks. However, the 15 hours per week of
prime-time programming supplied by Fox to its affiliates are significantly less
than that of the Traditional Networks and, as a result, Fox affiliates retain a
significantly higher portion of the available inventory of broadcast time for
their own use than Traditional Network affiliates. As of February 28, 1998, Fox
had 175 affiliated stations broadcasting to 96% of U.S. television households.
During 1994, WB established an affiliation of independent stations which
began broadcasting in January 1995 and operates on a basis similar to Fox.
However, WB currently supplies only eight hours of prime-time programming per
week to its affiliates, which is significantly less than that of Fox or the
traditional networks and, as a result, WB affiliates retain a significantly
higher portion of the available inventory of broadcast time for their own use
than affiliates of Fox or the Traditional Networks. As of February 28, 1998, WB
had 86 affiliated stations broadcasting to 88% of U.S. television households,
including cable coverage provided by WGN-TV.
During 1994, UPN established an affiliation of independent television
stations that began broadcasting in January 1995. UPN supplies its affiliates
with 8 hours per week of prime-time programming. As of February 28, 1998, UPN
had 147 affiliated stations broadcasting to 81% of U.S. television households,
excluding secondary affiliations.
Television stations derive their revenues primarily from the sale of
national, regional and local advertising. All network-affiliated stations,
including those affiliated with Fox and others, are required to carry spot
advertising sold by their networks. This reduces the amount of advertising
available for sale directly by the network-affiliated stations. Network
affiliates generally are compensated for the broadcast of network advertising.
The compensation paid is negotiated, station-by-station, based on a fixed
formula, subject to certain adjustments. Stations directly sell all of the
remaining advertising to be
38
<PAGE>
inserted in network programming and all of the advertising in non-network
programming, retaining all of the revenues received from these sales of
advertising, less any commissions paid. Through barter and cash-plus-barter
arrangements, however, a national syndicated program distributor typically
retains a portion of the available advertising time for programming it supplies,
in exchange for no or reduced fees to the station for such programming.
Advertisers wishing to reach a national audience usually purchase time
directly from the Traditional Networks, the Fox network, UPN or WB, or advertise
nationwide on an ad hoc basis. National advertisers who wish to reach a
particular regional or local audience buy advertising time directly from local
stations through national advertising sales representative firms. Additionally,
local businesses purchase advertising time directly from stations' local sales
staffs. Advertising rates are based upon factors which include the size of the
DMA in which the station operates, a program's popularity among the viewers that
an advertiser wishes to attract, the number of advertisers competing for the
available time, demographic characteristics of the DMA served by the station,
the availability of alternative advertising media in the DMA, aggressive and
knowledgeable sales forces and the development of projects, features and
marketing programs that tie advertiser messages to programming. Because
broadcast television stations rely on advertising revenues, declines in
advertising budgets, particularly in recessionary periods, will adversely affect
the broadcast business. Conversely, increases in advertising budgets may
contribute to an increase in the revenue and operating cash flow of a particular
broadcast television station.
Information regarding competition in the television broadcast industry is
set forth under "Business of Sinclair -- Competition."
RADIO BROADCASTING
The primary source of revenues for radio stations is the sale of
advertising time to local and national spot advertisers and national network
advertisers. During the past decade, local advertising revenue as a percentage
of total radio advertising revenue in a given market has ranged from
approximately 74% to 80%. The growth in total radio advertising revenue tends to
be fairly stable and has generally grown at a rate faster than the Gross
Domestic Product ("GDP"). Total domestic radio advertising revenue reached an
all-time record of $12.8 billion in 1997, as estimated by the Veronis, Suhler &
Associates Communications Industry Forecast.
According to the Radio Advertising Bureau's Radio Marketing Guide and Fact
Book for Advertisers, 1997, radio reaches approximately 95% of all Americans
over the age of 12 every week. More than one half of all radio listening is done
outside the home, in contrast to other advertising media. The average adult
listener spends approximately three hours and 45 minutes per weekday listening
to radio. Most radio listening occurs during the morning, particularly between
the time a listener wakes up and the time the listener reaches work. This
"morning drive time" period reaches more than 80% of commuters each week and, as
a result, radio advertising sold during this period achieves premium advertising
rates. Radio listeners have gradually shifted over the years from AM to FM
stations. FM reception, as compared to AM, is generally clearer and provides
greater total range and higher fidelity, except for so-called "clear channel" AM
radio stations, which have the maximum range of any type of station and can be
very successful in the news/talk/ sports formats. In comparison to AM, FM's
listener share is now in excess of 75%, despite the fact that the number of AM
and FM commercial stations in the United States is approximately equal.
Radio is considered an efficient, cost-effective means of reaching
specifically identified demographic groups. Stations are typically classified by
their on-air format, such as country, adult contemporary, oldies and news/talk.
A station's format and style of presentation enable it to target certain
demographics. By capturing a specific share of a market's radio listening
audience, with particular concentration in a targeted demographic, a station is
able to market its broadcasting time to advertisers seeking to reach a specific
audience. Advertisers and stations utilize data published by audience measuring
services, such as Arbitron, to estimate how many people within particular
geographical markets and demographics listen to specific stations.
The number of advertisements that can be broadcast without jeopardizing
listening levels (and the resulting ratings) is limited in part by the format of
a particular station and the local competitive envi-
39
<PAGE>
ronment. Although the number of advertisements broadcast during a given time
period may vary, the total number of advertisements broadcast on a particular
station generally does not vary significantly from year to year.
A station's local sales staff generates the majority of its local and
regional advertising sales through direct solicitations of local advertising
agencies and businesses. To generate national advertising sales, a station
usually will engage a firm that specializes in soliciting radio advertising
sales on a national level. National sales representatives obtain advertising
principally from advertising agencies located outside the station's market and
receive commissions based on the revenue from the advertising obtained.
Information regarding competition in the radio broadcast industry is set
forth under "Business of Sinclair -- Competition."
40
<PAGE>
BUSINESS OF SINCLAIR
Sinclair is a diversified broadcasting company that currently owns or
programs pursuant to LMAs 36 television stations and, upon consummation of all
pending acquisitions and dispositions, will own or program pursuant to LMAs 57
television stations. Sinclair owns or programs pursuant to LMAs 52 radio
stations and upon consummation of all pending acquisitions and dispositions,
Sinclair will own or program pursuant to LMAs 51 radio stations. Sinclair also
has options to acquire two additional radio stations. Sinclair believes that
upon completion of all pending acquisitions and dispositions it will be one of
the top 10 radio groups in the United States, when measured by the total number
of radio stations owned or programmed pursuant to LMAs.
The 36 television stations Sinclair owns or programs pursuant to LMAs are
located in 24 geographically diverse markets, with 24 of the stations in the top
51 television DMAs in the United States. Upon consummation of all pending
acquisitions and dispositions, Sinclair will own or program television stations
in 38 geographically diverse markets (with 31 of such stations in the top 51
DMAs) and will reach approximately 22.5% of the television households in the
United States. Sinclair currently owns or programs 10 stations affiliated with
Fox, 13 with WB, five with ABC, two with NBC, one with UPN, and one with CBS.
Four stations operate as independents. Upon consummation of all pending
acquisitions and dispositions and the transfer of affiliations pursuant to
existing agreements, 21 of Sinclair's owned or programmed television stations
will be Fox affiliates, 16 will be WB affiliates, six will be UPN affiliates,
six will be ABC affiliates, three will be NBC affiliates, one will be a CBS
affiliate and four will be operated as independents. Upon consummation of all
pending acquisitions and dispositions and transfers of affiliations pursuant to
existing agreements, Sinclair will own or program more stations affiliated with
Fox than any other broadcaster.
Sinclair's radio station group is geographically diverse with a variety of
programming formats including country, urban, news/talk/sports, rock and adult
contemporary. Of the 52 stations owned or provided programming services by
Sinclair, 19 broadcast on the AM band and 33 on the FM band. Sinclair owns
between three and ten stations in all but one of the 12 radio markets it serves.
Sinclair has undergone rapid and significant growth over the course of the
last seven years. Since 1991, Sinclair has increased the number of stations it
owns or provides programming services to from three television stations to 36
television stations and 52 radio stations. From 1991 to 1997, net broadcast
revenues and Adjusted EBITDA (as defined herein) increased from $39.7 million to
$471.2 million, and from $15.5 million to $229.0 million, respectively. Pro
forma for pending acquisitions and dispositions described below (except the
Montecito Acquisition, the Lakeland Acquisition, and the execution of an LMA
with respect to WSYX-TV), net broadcast revenue and Adjusted EBITDA would have
been $715.1 million and $344.7 million, respectively.
Sinclair is a Maryland corporation formed in 1986. Sinclair's principal
offices are located at 2000 West 41st Street, Baltimore, Maryland 21211, and its
telephone number is (410) 467-5005.
41
<PAGE>
TELEVISION BROADCASTING
Sinclair owns and operates, provides programming services to, or has agreed
to acquire the following television stations:
<TABLE>
<CAPTION>
MARKET
MARKET RANK(a) STATIONS STATUS(b) CHANNEL
------ ------- -------- --------- -------
<S> <C> <C> <C> <C>
Minneapolis/St. Paul,
Minnesota .................... 14 KLGT Pending 23
Pittsburgh, Pennsylvania ...... 19 WPGH O&O 53
WCWB (s) LMA 22
Sacramento, California ........ 20 KOVR O&O 13
St. Louis, Missouri ........... 21 KDNL O&O 30
Baltimore, Maryland ........... 23 WBFF O&O 45
WNUV LMA 54
Indianapolis, Indiana ......... 25 WTTV LMA (e) 4
WTTK LMA (e)(g) 29
Raleigh/Durham,
North Carolina ............... 29 WLFL O&O 22
WRDC LMA 28
Cincinnati, Ohio .............. 30 WSTR O&O 64
Milwaukee, Wisconsin .......... 31 WCGV O&O 24
WVTV LMA 18
Kansas City, Missouri ......... 32 KSMO O&O 62
Nashville, Tennessee .......... 33 WZTV Pending (o) 17
WUXP Pending (p) 30
Columbus, Ohio ................ 34 WTTE O&O 28
WSYX LMA(e) 6
Asheville, North Carolina
and Greenville/
Spartanburg/ Anderson,
South Carolina ............... 35 WFBC LMA 40
WLOS O&O 13
San Antonio, Texas ............ 38 KABB O&O 29
KRRT LMA 35
Norfolk, Virginia ............. 39 WTVZ O&O 33
Buffalo, New York ............. 40 WUTV Pending (o) 29
Oklahoma City, Oklahoma 44 KOCB O&O 34
KOKH Pending (p) 25
Greensboro/Winston-
Salem/High Point,
North Carolina ............... 46 WXLV Pending (o) 45
WUPN Pending (p) 48
Birmingham, Alabama ........... 51 WTTO O&O 21
WABM LMA 68
Dayton, Ohio .................. 53 WKEF Pending (l) 22
WRGT Pending (p) 45
Charleston/Huntington,
West Virginia ................ 57 WCHS O&O 8
WVAH Pending (p) 11
Richmond, Virginia ............ 59 WRLH Pending (o) 35
Las Vegas, Nevada ............. 61 KUPN O&O 21
KFBT LMA (q) 33
Mobile, Alabama and
Pensacola, Florida ........... 62 WEAR O&O 3
WFGX LMA 35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
COMMERCIAL EXPIRATION
STATIONS IN STATION DATE OF
MARKET AFFILIATION THE MARKET (c) RANK(d) FCC LICENSE
------ ----------- -------------- ------- -----------
<S> <C> <C> <C> <C>
Minneapolis/St. Paul,
Minnesota .................... WB 6 6 4/1/98 (f)
Pittsburgh, Pennsylvania ...... FOX 6 4 8/1/99
WB 5 8/1/99
Sacramento, California ........ CBS 7 3 12/1/98
St. Louis, Missouri ........... ABC 6 5 2/1/06
Baltimore, Maryland ........... FOX 5 4 10/1/04
WB 5 10/1/04
Indianapolis, Indiana ......... WB 8 5 8/1/05
WB 5 8/1/05
Raleigh/Durham,
North Carolina ............... FOX 7 4 12/1/04
UPN 5 12/1/04
Cincinnati, Ohio .............. WB 5 5 10/1/05
Milwaukee, Wisconsin .......... IND 6 5 12/1/05
WB 6 12/1/05
Kansas City, Missouri ......... WB 8 5 2/1/06
Nashville, Tennessee .......... FOX 6 4 8/1/05
UPN 5 8/1/05
Columbus, Ohio ................ FOX 5 4 10/1/05
ABC 3 10/1/05
Asheville, North Carolina
and Greenville/
Spartanburg/ Anderson,
South Carolina ............... IND (h) 6 5 12/1/04
ABC 3 12/1/04
San Antonio, Texas ............ FOX 7 4 8/1/98 (f)
WB 6 8/1/98 (f)
Norfolk, Virginia ............. FOX 6 4 10/1/04
Buffalo, New York ............. FOX 5 4 6/1/99
Oklahoma City, Oklahoma WB 5 5 6/1/98 (f)
FOX 4 6/1/98 (f)
Greensboro/Winston-
Salem/High Point,
North Carolina ............... ABC 7 4 12/1/04
UPN 5 12/1/04
Birmingham, Alabama ........... WB 6 5 4/1/05
IND (h) 6 4/1/05
Dayton, Ohio .................. NBC 4 3 10/1/05
FOX 4 10/1/05
Charleston/Huntington,
West Virginia ................ ABC 4 3 10/1/04
FOX 4 10/1/04
Richmond, Virginia ............ FOX 5 4 10/1/04
Las Vegas, Nevada ............. WB 8 5 10/1/98
IND (h) 8 10/1/98
Mobile, Alabama and
Pensacola, Florida ........... ABC 6 2 2/01/05
WB 6 2/01/05
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
MARKET
MARKET RANK(a) STATIONS STATUS(b) CHANNEL
------ ------- -------- --------- -------
<S> <C> <C> <C> <C>
Flint/Saginaw/Bay City,
Michigan ................... 63 WSMH O&O 66
Lexington, Kentucky ......... 67 WDKY O&O 56
Des Moines, Iowa ............ 69 KDSM O&O 17
Syracuse, New York .......... 72 WSYT Pending (l) 68
WNYS Pending (m) 43
Rochester, New York ......... 75 WUHF Pending (o) 31
Paducah, Kentucky and Cape
Girardeau, Missouri ........ 79 KBSI Pending (l) 23
WDKA Pending (m) 49
Madison, Wisconsin .......... 84 WMSN Pending (o) 47
Burlington, Vermont and
Plattsburgh, New York ...... 91 WPTZ O&O (i) 5
WNNE O&O (i)(j) 31
Tri-Cities, Tennessee/
Virginia ................... 93 WEMT Pending (l) 39
Tyler/Longview, Texas ....... 107 KETK Pending (l) 56
KLSB Pending (m) 19
Peoria/Bloomington,
Illinois ................... 110 WYZZ O&O 43
Charleston, South Carolina... 117 WMMP Pending (l) 36
WTAT Pending (p) 24
Utica, New York ............. 169 WFXV Pending (p) 33
WPNY Pending (p)(t) 11
Tuscaloosa, Alabama ......... 187 WDBB LMA (k) 17
<CAPTION>
NUMBER OF
COMMERCIAL EXPIRATION
STATIONS IN STATION DATE OF
MARKET AFFILIATION THE MARKET (c) RANK(d) FCC LICENSE
------ ----------- -------------- ------- -----------
<S> <C> <C> <C> <C>
Flint/Saginaw/Bay City,
Michigan ................... FOX 4 4 10/1/05
Lexington, Kentucky ......... FOX 5 4 8/1/05
Des Moines, Iowa ............ FOX 4 4 2/1/06
Syracuse, New York .......... FOX 5 4 6/1/99
UPN 5 6/1/99
Rochester, New York ......... FOX 4 4 6/1/99
Paducah, Kentucky and Cape
Girardeau, Missouri ........ FOX 5 4 2/1/06
UPN 5 (r)
Madison, Wisconsin .......... FOX 4 4 12/1/05
Burlington, Vermont and
Plattsburgh, New York ...... NBC 5 2 6/1/99
NBC 4 4/1/99
Tri-Cities, Tennessee/
Virginia ................... FOX 5 4 8/1/05
Tyler/Longview, Texas ....... NBC 3 2 8/1/98 (f)
NBC (n) 8/1/98 (f)
Peoria/Bloomington,
Illinois ................... FOX 4 4 12/1/05
Charleston, South Carolina... UPN 5 5 12/1/04
FOX 4 12/1/04
Utica, New York ............. FOX 4 3 6/1/99
UPN 4 6/1/98 (f)
Tuscaloosa, Alabama ......... WB 2 2 4/1/05
</TABLE>
- ----------
(a) Rankings are based on the relative size of a station's DMA among the 211
generally recognized DMAs in the United States as estimated by Nielsen.
(b) "O&O" refers to stations owned and operated by Sinclair, "LMA" refers to
stations to which Sinclair provides programming services pursuant to an LMA
and "Pending" refers to stations Sinclair has agreed to acquire. See "--
1997 Acquisitions."
(c) Represents the number of television stations designated by Nielsen as
"local" to the DMA, excluding public television stations and stations which
do not meet the minimum Nielsen reporting standards (weekly cumulative
audience of at least 2.5%) for the Sunday-Saturday, 6:00 a.m. to 2:00 a.m.
time period.
(d) The rank of each station in its market is based upon the November 1997
Nielsen estimates of the percentage of persons tuned to each station in the
market from 6:00 a.m. to 2:00 a.m., Sunday-Saturday.
(e) Non-License Assets acquired from River City Broadcasting, L.P. ("River
City") and option exercised to acquire License Assets. Will become owned
and operated upon FCC approval of transfer of License Assets and closing of
acquisition of License Assets.
(f) License renewal application pending.
(g) WTTK currently simulcasts all of the programming aired on WTTV and the
station rank applies to the combined viewership of these stations.
(h) "IND" or "Independent" refers to a station that is not affiliated with any
of ABC, CBS, NBC, Fox, WB or UPN.
(i) Sinclair has sold the non-license assets to a third party, which programs
these stations under an LMA.
(j) WNNE currently simulcasts the programming broadcast on WPTZ.
(k) WDBB simulcasts the programming broadcast on WTTO.
(l) This station will be owned upon the completion of the Max Media
Acquisition.
(m) Sinclair will provide programming services to this station upon the
completion of the Max Media Acquisition.
(n) KLSB simulcasts the programming broadcast of KETK.
(o) This station will be owned upon the completion of the Sullivan Acquisition.
(p) Sinclair anticipates that it will provide programming services to this
station upon the completion of the Merger.
(q) Sinclair has also entered into an agreement to acquire all of the capital
stock of the entity which owns this station.
(r) This station has begun broadcast operations pursuant to program test
authority and does not yet have a license.
43
<PAGE>
(s) WCWB was formerly known as WPTT.
(t) This station is a low power television station.
Operating Strategy
Sinclair's television operating strategy includes the following key
elements:
Attracting Viewership
- ---------------------
Sinclair seeks to attract viewership and expand its audience share through
selective, high-quality programming.
Popular Programming. Sinclair believes that an important factor in
attracting viewership to its stations is their network affiliations with Fox,
WB, ABC, NBC, CBS and UPN. These affiliations enable Sinclair to attract viewers
by virtue of the quality first-run original programming provided by these
networks and the networks' promotion of such programming. Sinclair also seeks to
obtain, at attractive prices, popular syndicated programming that is
complementary to the station's network affiliation. Examples of popular
syndicated programming obtained by Sinclair for broadcast on its Fox, WB and UPN
affiliates and independent stations are "Mad About You," "Frasier," "The
Simpsons," "Home Improvement" and "Seinfeld." In addition to network
programming, Sinclair's ABC, CBS and NBC affiliates broadcast news magazine,
talk show, and game show programming such as "Hard Copy," "Entertainment
Tonight," "Regis and Kathie Lee," "Wheel of Fortune" and "Jeopardy."
Children's Programming. Sinclair seeks to be a leader in children's
programming in each of its respective DMAs. Sinclair's nationally recognized
"Kids Club" was the forerunner and model for the Fox network-wide marketing
efforts promoting children's programming. Sinclair carries the Fox Children's
Network ("FCN") and WB and UPN children's programming, all of which include
significant amounts of animated programming throughout the week. In those
markets where Sinclair owns or programs ABC, NBC or CBS affiliates, Sinclair
broadcasts those networks' animated programming during weekends. In addition to
this animated programming, Sinclair broadcasts other forms of children's
programming, which may be produced by Sinclair or by an affiliated network or
supplied by a syndicated programmer.
Counter-Programming. Sinclair's programming strategy on its Fox, WB, UPN
and independent stations also includes "counter-programming," which consists of
broadcasting programs that are alternatives to the types of programs being shown
concurrently on competing stations. This strategy is designed to attract
additional audience share in demographic groups not served by concurrent
programming on competing stations. Sinclair believes that implementation of this
strategy enables its stations to achieve competitive rankings in households in
the 18-34, 18-49 and 25-54 demographics and to offer greater diversity of
programming in each of its DMAs.
Local News. Sinclair believes that the production and broadcasting of local
news can be an important link to the community and an aid to the station's
efforts to expand its viewership. In addition, local news programming can
provide access to advertising sources targeted specifically to local news.
Sinclair carefully assesses the anticipated benefits and costs of producing
local news prior to introduction at a Company station because a significant
investment in capital equipment is required and substantial operating expenses
are incurred in introducing, developing and producing local news programming.
Sinclair currently provides local news programming at WBFF and WNUV in
Baltimore, WLFL in Raleigh/ Durham, KDNL in St. Louis, KABB in San Antonio, KOVR
in Sacramento, WPGH in Pittsburgh and WLOS in
Asheville/Greenville/Spartanburg/Anderson. Sinclair also broadcasts news
programs on WDKY in Lexington, which are produced in part by Sinclair and in
part through the purchase of production services from an independent third
party, and on WTTV in Indianapolis, which are produced by a third party in
exchange for a limited number of advertising spots. The possible introduction of
local news at the other Company stations is reviewed periodically. Sinclair's
policy is to institute local news programming at a specific station only if the
expected benefits of local news programming at the station are believed to
exceed the associated costs after an appropriate start-up period.
44
<PAGE>
Popular Sporting Events. Sinclair attempts to capture a portion of
advertising dollars designated to sports programming in selected DMAs.
Sinclair's WB, UPN and independent stations generally face fewer restrictions on
broadcasting live local sporting events than do their competitors that are
affiliates of the major networks and Fox since affiliates of the major networks
and Fox are subject to prohibitions against preemptions of network programming.
Sinclair has been able to acquire the local television broadcast rights for
certain sporting events, including NBA basketball, Major League Baseball, NFL
football, NHL hockey, ACC basketball, Big Ten football and basketball, and SEC
football. Sinclair seeks to expand its sports broadcasting in DMAs as profitable
opportunities arise. In addition, Sinclair's stations that are affiliated with
Fox, NBC, ABC and CBS broadcast certain Major League Baseball games, NFL
football games and NHL hockey games as well as the Olympics and other popular
sporting events.
Innovative Local Sales and Marketing
- ------------------------------------
Sinclair believes that it is able to attract new advertisers to its
stations and increase its share of existing customers' advertising budgets by
creating a sense of partnership with those advertisers. Sinclair develops such
relationships by training its sales forces to offer new marketing ideas and
campaigns to advertisers. These campaigns often involve the sponsorship by
advertisers of local promotional events that capitalize on the station's local
identity and programming franchises. For example, several of Sinclair's stations
stage local "Kids Fairs" which allow station advertisers to reinforce their
on-air advertising with their target audience. Through its strong local sales
and marketing focus, Sinclair seeks to capture an increasing share of its
revenues from local sources, which are generally more stable than national
advertising.
Control of Operating and Programming Costs
- ------------------------------------------
By employing a disciplined approach to managing programming acquisition and
other costs, Sinclair has been able to achieve operating margins that Sinclair
believes are among the highest in the television broadcast industry. Sinclair
has sought and will continue to seek to acquire quality programming for prices
at or below prices paid in the past. As an owner or provider of programming
services to a substantial number of television stations throughout the country,
Sinclair believes that it is able to negotiate favorable terms for the
acquisition of programming. Moreover, Sinclair emphasizes control of each of its
stations' programming and operating costs through program-specific profit
analysis, detailed budgeting, tight control over staffing levels and detailed
long-term planning models.
Attract and Retain High Quality Management
- ------------------------------------------
Sinclair believes that much of its success is due to its ability to attract
and retain highly skilled and motivated managers, both at the corporate and
local station levels. A portion of the compensation provided to regional
managers, general managers, sales managers and other station managers is based
on their achieving certain operating results. Sinclair also provides its
corporate and station managers with deferred compensation plans offering options
to acquire Sinclair Class A Common Stock.
Community Involvement
- ---------------------
Each of Sinclair's stations actively participates in various community
activities and offers many community services. Sinclair's activities include
broadcasting programming of local interest and sponsorship of community and
charitable events. Sinclair also encourages its station employees to become
active members of their communities and to promote involvement in community and
charitable affairs. Sinclair believes that active community involvement by its
stations provides its stations with increased exposure in their respective DMAs
and ultimately increases viewership and advertising support.
45
<PAGE>
Establish LMAs
- --------------
Sinclair believes that it can attain significant growth in operating cash
flow through the utilization of LMAs. By expanding its presence in a market in
which it owns a station, Sinclair can improve its competitive position with
respect to a demographic sector. In addition, by providing programming services
to an additional station in a market, Sinclair is able to realize significant
economies of scale in marketing, programming, overhead and capital expenditures.
After giving effect to all pending acquisitions and dispositions, Sinclair will
provide programming services pursuant to an LMA to an additional station in 19
of the 37 television markets in which Sinclair will own or program a station.
Programming and Affiliations
Sinclair continually reviews its existing programming inventory and seeks
to purchase the most profitable and cost-effective syndicated programs available
for each time period. In developing its selection of syndicated programming,
Sinclair balances the cost of available syndicated programs with their potential
to increase advertising revenue and the risk of their reduced popularity during
the term of the program contract. Sinclair seeks to purchase only those programs
with contractual periods that permit programming flexibility and which
complement a station's overall programming strategy. Programs that can perform
successfully in more than one time period are more attractive due to the long
lead time and multi-year commitments inherent in program purchasing.
Of the 36 stations owned or provided programming services by Sinclair, 10
stations are Fox affiliates, 13 stations are WB affiliates, five stations are
ABC affiliates, two stations are NBC affiliates, one station is a UPN affiliate,
and one station is a CBS affiliate. The networks produce and distribute
programming in exchange for each station's commitment to air the programming at
specified times and for commercial announcement time during the programming. In
addition, networks other than Fox and UPN pay each affiliated station a fee for
each network-sponsored program broadcast by the stations.
On August 21, 1996, Sinclair entered into an agreement with Fox (the "Fox
Agreement") which, among other things, provides that the affiliation agreements
between Fox and eight stations owned or provided programming services by
Sinclair (except as noted below) would be amended to have new five-year terms
commencing on the date of the Fox Agreement. Fox has the option to extend the
affiliation agreements for additional five-year terms and must extend all of the
affiliation agreements if it extends any (except that Fox may selectively renew
affiliation agreements if any station has breached its affiliation agreement).
The Fox Agreement also provides that Sinclair will have the right to purchase,
for fair market value, any station Fox acquires in a market currently served by
a Company-owned Fox affiliate (other than the Norfolk, Virginia and
Raleigh/Durham, North Carolina markets) if Fox determines to terminate the
affiliation agreement with Sinclair's station in that market and operate the
station acquired by Fox as a Fox affiliate. The Fox Agreement confirmed that the
affiliation agreements for WTVZ-TV (Norfolk) and WLFL-TV (Raleigh/Durham) will
terminate on August 31, 1998. The Fox Agreement also includes provisions
limiting the ability of Sinclair to preempt Fox programming except where it has
existing programming conflicts or where Sinclair preempts to serve a public
purpose.
On July 4, 1997, Sinclair entered into the WB Agreement, pursuant to which
Sinclair agreed that certain stations affiliated with UPN would enter into
affiliation agreements with WB effective as of January 1998, the termination
date of their affiliation agreements with UPN. With respect to the following
stations, Sinclair did not renew their affiliation agreements with UPN when
their agreements expired on January 15, 1998: WCWB-TV, Pittsburgh, Pennsylvania,
WNUV-TV, Baltimore, Maryland, WSTR-TV, Cincinnati, Ohio, KRRT-TV, San Antonio,
Texas, KOCB-TV, Oklahoma City, Oklahoma, KSMO-TV, Kansas City, Missouri,
KUPN-TV, Las Vegas, Nevada, WCGV-TV, Milwaukee, Wisconsin, and WABM-TV,
Birmingham, Alabama. Additionally, Sinclair cancelled its UPN affiliation
agreement with WTTV-TV/WTTK-TV, Indianapolis, Indiana. These stations (other
than WCGV-TV and WABM-TV, which will either operate as independents or enter
into new affiliation agreements with WB or another network) entered into
ten-year affiliation agreements with WB which became effective on January 16,
1998 (other than WTTV-TV/WTTK-TV, which became effective on April 6, 1998, and
KSMO-TV, which became effective on March 30, 1998). Pursuant to the WB
Agreement, the WB affiliation agreements of WVTV-TV, Milwaukee, Wisconsin, and
WTTO-TV, Birmingham, Alabama (whose program-
46
<PAGE>
ming is simulcast on WDBB-TV, Tuscaloosa, Alabama), have been extended to
January 16, 2008. In addition, WFBC-TV in the Asheville, North Carolina and
Greenville/Spartanburg/Anderson, South Carolina market will become affiliated
with WB on November 1, 1999 when WB's current affiliation with another station
in that market expires. WTVZ-TV, Norfolk, Virginia and WLFL-TV, Raleigh/ Durham
North Carolina, will become affiliated with WB when their affiliations with Fox
expire. These Fox affiliations are scheduled to expire on August 31, 1998.
Under the terms of the WB Agreement, WB has agreed to pay Sinclair $64
million in aggregate amount in monthly installments during the first eight years
commencing on January 16, 1998 in consideration for Sinclair's entering into
affiliation agreements with WB. In addition, WB will be obligated to pay an
additional $10 million aggregate amount in monthly installments in each of the
following two years provided that WB is in the business of supplying programming
as a television network during each of those years.
The affiliation agreements relating to stations that have been acquired by
Sinclair are terminable by the network upon transfer to Sinclair of the License
Assets of the station. Sinclair does not seek consents of the affected network
to the transfer of License Assets in connection with its acquisitions. As of the
date of this Prospectus Supplement, no network has terminated an affiliation
agreement following transfer of License Assets to Sinclair.
RADIO BROADCASTING
The following table sets forth certain information regarding the radio
stations (i) owned and operated by Sinclair; (ii) provided programming by
Sinclair under an LMA; or (iii) which Sinclair has an option or has agreed to
acquire:
<TABLE>
<CAPTION>
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S PRIMARY IN PRIMARY DATE
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED/STATION (a) REVENUE (b) FORMAT TARGET (c) TARGET (d) LICENSE
------------------ ----------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Los Angeles, California ..... 1
KBLA-AM (e) Korean N/A N/A 12/1/05
St. Louis, Missouri ......... 18
KPNT-FM Alternative Rock Adults 18-34 2 2/1/05
WVRV-FM Modern Adult Contemporary Adults 18-34 7 12/1/04
WRTH-AM Adult Standards Adults 25-54 23 2/1/05
WIL-FM Country Adults 25-54 1 2/1/05
KIHT-FM 70s Rock Adults 25-54 9 2/1/05
Portland, Oregon ............ 22
KFXX-AM (h) Adult Standards Adults 25-54 22 2/1/06
KKSN-FM (h) 60s Oldies Adults 25-54 1 2/1/06
KKRH-FM (h) 70s Rock Adults 25-54 9 2/1/06
Kansas City, Missouri ....... 29
KCAZ-AM (e)(r) Childrens N/A N/A 6/1/05
KCFX-FM 70s Rock Adults 25-54 2 2/1/05
KQRC-FM Active Rock Adults 18-34 2 6/1/05
KCIY-FM Smooth Jazz Adults 25-54 9 2/1/05
KXTR-FM Classical Adults 25-54 13 2/1/05
Milwaukee, Wisconsin ........ 32
WEMP-AM 60s Oldies Adults 25-54 24 12/1/04
WMYX-FM Adult Contemporary Adults 25-54 6 12/1/04
WAMG-FM Rhythmic Adults 25-54 11 12/1/04
Nashville, Tennessee ........ 34
WLAC-FM (h) Adult Contemporary Women 25-54 8 8/1/04
WJZC-FM (h) Smooth Jazz Women 25-54 8 8/1/04
WLAC-AM (h) News/Talk/Sports Adults 35-64 8 8/1/04
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S PRIMARY IN PRIMARY DATE
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED/STATION (a) REVENUE (b) FORMAT TARGET (c) TARGET (d) LICENSE
------------------ ----------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
New Orleans, Louisiana (q) ..... 38
WLMG-FM Adult Contemporary Women 25-54 3 6/1/04
KMEZ-FM (s) Urban Oldies Women 25-54 12 6/1/04
WWL-AM News/Talk/Sports Adults 35-64 2 6/1/04
WSMB-AM Talk/Sports Adults 35-64 17 6/1/04
WBYU-AM (g)(s) Adult Standards Adults 25-54 16 6/1/04
WEZB-FM (g)(i) Adult Contemporary Adults 25-54 9 6/1/04
WRNO-FM (g)(s) 70s Rock Adults 25-54 7 6/1/04
WLTS-FM (p) Adult Contemporary Women 25-54 5 6/1/04
WTKL-FM (p) Oldies Adults 25-54 5 6/1/04
Memphis, Tennessee ............. 40
WRVR-FM Soft Adult Contemporary Women 25-54 1 8/1/04
WJCE-AM Urban Oldies Women 25-54 19 8/1/04
WOGY-FM Country Adults 25-54 9 8/1/04
Norfolk, Virginia (q) .......... 41
WGH-AM (t) Sports Talk Country Adults 25-54 18 10/1/03
WGH-FM (t) Country Adults 25-54 3 10/1/03
WVKL-FM (j)(t) 60s Oldies Adults 25-54 9 10/1/03
WFOG-FM (o) Soft Adult Contemporary Women 25-54 4 10/1/03
WPTE-FM (o) Adult Contemporary Adults 18-34 3 10/1/03
WWDE-FM (o) Adult Contemporary Women 25-54 4 10/1/03
WNVZ-FM (o) Contemporary Hit Radio Women 18-49 2 10/1/03
Buffalo, New York .............. 42
WMJQ-FM Adult Contemporary Women 25-54 3 6/1/98
WKSE-FM Contemporary Hit Radio Women 18-49 2 6/1/98
WBEN-AM News/Talk/Sports Adults 35-64 3 6/1/98
WWKB-AM Country Adults 35-64 18 6/1/98
WGR-AM Sports Adults 25-54 10 6/1/98
WWWS-AM Urban Oldies Adults 25-54 14 6/1/98
Greensboro/Winston
Salem/High Point,
North Carolina .............. 52
WMQX-FM (o) Oldies Adults 25-54 5 12/1/03
WQMG-FM (o) Urban Adult Contemporary Adults 25-54 4 12/1/03
WJMH-FM (o) Urban Adults 18-34 1 12/1/03
WQMG-AM (o) Gospel Adults 35-64 9 12/1/03
Rochester, New York ............ 53
WBBF-AM (h) Adult Standards Adults 25-54 13 6/1/98
WBEE-FM (h) Country Adults 25-54 1 6/1/98
WKLX-FM (h) 60s Oldies Adults 25-54 6 6/1/98
WQRV-FM (h) Classic Hits Adults 25-54 12 6/1/98
Asheville, North Carolina
Greenville/Spartanburg,
South Carolina ............... 60
WFBC-FM (k) Contemporary Hit Radio Women 18-49 2 12/1/03
WORD-AM (k) News/Talk Adults 35-64 8 12/1/03
WYRD-AM (k) News/Talk Adults 35-64 14 12/1/03
WSPA-AM (k) Full Service/Talk Adults 35-64 21 12/1/03
WSPA-FM (k) Soft Adult Contemporary Women 25-54 1 12/1/03
WOLI-FM (k) Oldies Adults 25-54 12 12/1/03
WOLT-FM (k) Oldies Adults 25-54 16 12/1/03
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S PRIMARY IN PRIMARY DATE
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED/STATION (a) REVENUE (b) FORMAT TARGET (c) TARGET (d) LICENSE
------------------ ----------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Wilkes-Barre/Scranton,
Pennsylvania .......... 68
WKRZ-FM (l) Contemporary Hit Radio Adults 18-49 1 8/1/98 (f)
WGGY-FM Country Adults 25-54 3 8/1/98 (f)
WGGI-FM Country Adults 25-54 21 8/1/98 (f)
WILK-AM (m) News/Talk/Sports Adults 35-64 5 8/1/98 (f)
WGBI-AM (m) News/Talk/Sports Adults 35-64 35 8/1/98 (f)
WWSH-FM (n) Soft Hits Women 25-54 23 8/1/98 (f)
WILP-AM (m) News/Talk/Sports Adults 35-64 40 8/1/98 (f)
WWFH-FM (n) Soft Hits Women 25-54 12 8/1/98 (f)
WKRF-FM (l) Contemporary Hit Radio Adults 18-49 30 8/1/98 (f)
WILT-AM (m) News/Talk/Sports Adults 35-64 40 8/1/98 (f)
</TABLE>
- ----------
(a) Actual city of license may differ from the geographic market served.
(b) Ranking of the principal radio market served by the station among all U.S.
radio markets by 1996 aggregate gross radio broadcast revenue according to
Duncan's Radio Market Guide -- 1997 Edition.
(c) Due to variations that may exist within programming formats, the primary
demographic target of stations with the same programming format may be
different.
(d) All information concerning ratings and audience listening information is
derived from the Fall 1997 Arbitron Metro Area Ratings Survey (the "Fall
1997 Arbitron"). Arbitron is the generally accepted industry source for
statistical information concerning audience ratings. Due to the nature of
listener surveys, other radio ratings services may report different
rankings; however, Sinclair does not believe that any radio ratings service
other than Arbitron is accorded significant weight in the radio broadcast
industry. "Station Rank in Primary Demographic Target" is the ranking of
the station among all radio stations in its market that are ranked in its
target demographic group and is based on the station's average persons
share in the primary demographic target in the applicable Metro Survey
Area. Source: Average Quarter Hour Estimates, Monday through Sunday, 6:00
a.m. to midnight, Fall 1997 Arbitron.
(e) Programming is provided to this station by a third party pursuant to an
LMA.
(f) License renewal application pending.
(g) Sinclair has the right to acquire the assets of this station in the
Heritage Acquisition, subject to FCC approval.
(h) Sinclair has agreed to sell this station to a third party, which currently
programs the station pursuant to an LMA.
(i) An application for review of the grant of this station's license renewal is
pending.
(j) EEO reporting conditions for 1997, 1998 and 1999 were placed on this
station's most recent license renewal.
(k) Sinclair has exercised its option to acquire Keymarket of South Carolina,
Inc. ("Keymarket" or "KSC"), which owns and operates WYRD-AM, WORD-AM and
WFBC-FM, and provides sales services pursuant to a JSA and has an option to
acquire WOLI-FM and WOLT-FM. Sinclair has also agreed to acquire WSPA-AM
and WSPA-FM, which KSC programs pursuant to an LMA. FCC approval of
Sinclair's acquisition of WYRD-AM, WORD-AM, WFBC-FM, WSPA-AM, and WSPA-FM
is pending.
(l) WKRZ-FM and WKRF-FM simulcast their programming.
(m) WILK-AM, WGBI-AM, WILP-AM and WILT-AM simulcast their programming.
(n) WWSH-FM and WWFH-FM simulcast their programming.
(o) Sinclair has the right to acquire this radio station in conjunction with
the Max Media Acquisition.
(p) Sinclair provides sales and programming services to this station pursuant
to an LMA and has an option to acquire substantially all the assets of this
station.
(q) Sinclair has agreed to sell two FM stations and one AM station in the New
Orleans market in order to comply with current FCC or DOJ guidelines.
Additionally, Sinclair has applied for FCC consent to transfer the assets
of two FM stations and one AM station in the Norfolk market to a trustee in
order to comply with current FCC or DOJ guidelines.
(r) A third party has exercised its option to purchase this station, the
closing of which is subject to FCC approval.
(s) Sinclair has entered into an agreement to sell this radio station to a
third party, the closing of which is subject to FCC approval.
(t) Sinclair has applied for FCC consent to transfer the assets of this station
to a trustee.
49
<PAGE>
Radio Operating Strategy
Sinclair's radio strategy is to operate a cluster of radio stations in
selected geographic markets throughout the country. In each geographic market,
Sinclair employs broadly diversified programming formats to appeal to a variety
of demographic groups within the market. Sinclair seeks to strengthen the
identity of each of its stations through its programming and promotional
efforts, and emphasizes that identity to a far greater degree than the identity
of any local radio personality.
Sinclair believes that its strategy of appealing to diverse demographic
groups in selected geographic markets allows it to reach a larger share of the
overall advertising market while realizing economies of scale and avoiding
dependence on one demographic or geographic market. Sinclair realizes economies
of scale by combining sales and marketing forces, back office operations and
general management in each geographic market. At the same time, the geographic
diversity of its portfolio of radio stations helps lessen the potential impact
of economic downturns in specific markets and the diversity of target audiences
served helps lessen the impact of changes in listening preferences. In addition,
the geographic and demographic diversity allows Sinclair to avoid dependence on
any one or any small group of advertisers.
Sinclair's group of radio stations includes the top billing station group
in four markets and one of the top three billing station groups in each of its
markets other than Los Angeles, Milwaukee, Portland, Rochester and Nashville.
Through ownership or LMAs, the group also includes duopolies in 12 of its 13
markets.
Depending on the programming format of a particular station, there are a
predetermined number of advertisements broadcast each hour. Sinclair determines
the optimum number of advertisements available for sale during each hour without
jeopardizing listening levels (and the resulting ratings). Although there may be
shifts from time to time in the number of advertisements available for sale
during a particular time of day, the total number of advertisements available
for sale on a particular station normally does not vary significantly. Any
change in net radio broadcasting revenue, with the exception of those instances
where stations are acquired or sold, is generally the result of pricing
adjustments made to ensure that the station effectively uses advertising time
available for sale, an increase in the number of commercials sold or a
combination of these two factors.
Large, well-trained local sales forces are maintained by Sinclair in each
of its radio markets. Sinclair's principal goal is to utilize its sales efforts
to develop long-standing customer relationships through frequent direct
contacts, which Sinclair believes provide it with a competitive advantage.
Additionally, in some radio markets, duopolies permit Sinclair to offer creative
advertising packages to local, regional and national advertisers. Each radio
station owned by Sinclair also engages a national independent sales
representative to assist it in obtaining national advertising revenues. These
representatives obtain advertising through national advertising agencies and
receive a commission from the radio station based on its gross revenue from the
advertising obtained.
BROADCASTING ACQUISITION STRATEGY
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
was signed into law. The 1996 Act represents the most sweeping overhaul of the
country's telecommunications laws since the Communications Act of 1934, as
amended (the "Communications Act"). The 1996 Act relaxes the broadcast ownership
rules and simplifies the process for renewal of broadcast station licenses.
Sinclair believes that the enactment of the 1996 Act has presented a unique
opportunity to build a larger and more diversified broadcasting company.
Additionally, Sinclair expects that the opportunity to act as one of the
consolidators of the industry will enable Sinclair to gain additional influence
with program suppliers, television networks, other vendors, and alternative
delivery media. The additions to Sinclair's management team as a result of the
River City Acquisition have given it additional resources to take advantage of
these developments.
In implementing its acquisition strategy, Sinclair seeks to identify and
pursue favorable station or group acquisition opportunities primarily in the
15th to 75th largest DMAs and Metro Service Areas ("MSAs"). In assessing
potential acquisitions, Sinclair examines opportunities to improve revenue
share, audience share and/or cost control. Additional factors considered by
Sinclair in a potential acquisition include geographic location, demographic
characteristics and competitive dynamics of the market.
50
<PAGE>
Sinclair also considers the opportunity for cross-ownership of television and
radio stations and the opportunity it may provide for cross-promotion and
cross-selling.
In conjunction with its acquisitions, Sinclair may determine that certain
of the acquired stations may not be consistent with Sinclair's strategic plan.
In such an event, Sinclair reviews opportunities for swapping such stations with
third parties for other stations or selling such stations outright. The Heritage
Acquisition has provided such opportunities, and the Max Media Acquisition and
the Merger may provide such opportunities.
Certain terms of Sinclair's acquisitions in 1998 and 1997, and other
pending acquisitions, are described below.
1998 ACQUISITIONS AND DISPOSITIONS
In addition to the Sullivan acquisition, Sinclair has completed the
following acquisitions and dispositions:
Heritage Acquisition. In July 1997, the Company entered into a purchase
agreement to acquire certain assets of the radio and television stations of
Heritage for approximately $570 million (the "Heritage Acquisition"), net of the
$60 million divestiture of KOKH-TV in the Oklahoma City market. Pursuant to the
Heritage Acquisition, and after giving effect to the dispositions described
below and a third party's exercise of its option to acquire radio station KCAZ
in Kansas City, Missouri, the Company has acquired or is providing programming
services to three television stations in two separate markets and 13 radio
stations in four separate markets. The Company also has the right to acquire
three radio stations in the New Orleans, Louisiana market. Acquisition of the
Heritage radio stations in the New Orleans market is subject to approval by the
FCC and termination of the applicable waiting period under the HSR Act.
In January 1998, Sinclair entered into an agreement with Entertainment
Communications, Inc. ("Entercom") pursuant to which Sinclair will sell to
Entercom the Portland, Oregon and Rochester, New York radio stations which
Sinclair acquired from Heritage for an aggregate sales price of approximately
$126.5 million. Sinclair anticipates it will close on the sale of the Portland
and Rochester radio stations to Entercom during the second quarter of 1998.
Entercom is operating these stations pursuant to an LMA pending closing of the
sale.
In February 1998, the Company entered into agreements to sell to STC
Broadcasting of Vermont, Inc. ("STC") two television stations in the Burlington,
Vermont/Plattsburgh, New York market and rights to program a third television
station in that market, all of which were acquired in the Heritage Acquisition.
In April 1998, the Company closed on the sale of the non-license assets of two
of these three stations and assigned its right to program the third for
aggregate consideration of approximately $70 million. During the second quarter
of 1998, the Company expects to sell the license assets upon FCC approval for a
sales price of $2 million.
Montecito Acquisition. In February 1998, Sinclair entered into an agreement
to acquire all of the capital stock of Montecito for approximately $33 million.
Montecito owns all of the issued and outstanding stock of Channel 33, Inc.,
which owns and operates KFBT-TV in Las Vegas, Nevada. Currently, Sinclair is a
guarantor of Montecito indebtedness of approximately $33 million. Sinclair
cannot acquire Montecito unless and until FCC rules permit Sinclair to own the
broadcast licenses of more than one station in the Las Vegas market, or unless
Sinclair no longer owns the broadcast license for KUPN-TV in Las Vegas. Sinclair
currently provides programming to KFBT-TV under an LMA.
WSYX Acquisition. In connection with Sinclair's 1996 acquisition of the
radio and television broadcasting assets of River City Broadcasting, L.P.
("River City"), Sinclair acquired a three-year option to purchase the assets of
WSYX-TV in Columbus, Ohio (the "Columbus Option"). In April 1998, the Company
acquired the non-license assets of WSYX-TV in Columbus, Ohio from River City
Broadcasting, LP ("River City"), making cash payments of approximately $228
million. In addition, the Company exercised its option to acquire the License
Assets of WSYX and expects to close on this transaction during 1998 for an
option exercise price of $2 million. The Company also entered into an LMA with
51
<PAGE>
River City whereby the Company has obtained the right to program and sell
advertising on substantially all of the station's inventory of broadcast time.
Sinclair has agreed to sell the License Assets of WTTE-TV in Columbus, Ohio
to Glencairn and to enter into an LMA with Glencairn to provide programming
services to WTTE-TV. The FCC has approved this transaction, but Sinclair does
not believe that this transaction will be completed unless Sinclair acquires the
License Assets of WSYX-TV.
Max Media Acquisition. On December 2, 1997, Sinclair entered into
agreements to acquire, directly or indirectly, all of the equity interests of
Max Media. As a result of this transaction, Sinclair will acquire, or acquire
the right to program pursuant to LMAs, nine television stations and eight radio
stations in eight markets. The television stations serve the following markets:
Dayton, Ohio; Syracuse, New York; Paducah, Kentucky and Cape Girardeau,
Missouri; Tri-Cities, Tennessee/Virginia; Tyler/ Longview, Texas; and
Charleston, South Carolina. The radio stations serve the Norfolk, Virginia and
Greensboro/Winston Salem/High Point, North Carolina markets. The aggregate
purchase price is approximately $255 million payable in cash at closing (less a
deposit of $12.8 million paid at the time of signing the acquisition agreement),
a portion of which will be used to retire existing debt of Max Media at closing.
Max Media's television station WKEF-TV in Dayton, Ohio has an overlapping
service area with Sinclair's television stations WTTE-TV in Columbus, Ohio and
WSTR-TV in Cincinnati, Ohio as well as with Company LMA station WTTV-TV in
Indianapolis, Indiana and Company LMA station WSYX-TV in Columbus, Ohio (the
License Assets of which Sinclair has exercised an option to acquire). In
addition, Max Media's television station WEMT-TV in Tri-Cities,
Tennessee/Virginia has an overlapping service area with Sinclair's television
station WLOS-TV in Asheville, North Carolina and
Greenville/Spartanburg/Anderson, South Carolina and Max Media's television
station KBSI-TV in Paducah, Kentucky and Cape Girardeau, Missouri has an
overlapping service area with Sinclair's television station KDNL-TV in St.
Louis, Missouri. Furthermore, Sinclair owns a television station and three radio
stations in the Norfolk, Virginia market, where four of Max Media's radio
stations are located. Consequently, Sinclair has requested various waivers from
the FCC to allow Sinclair to complete the Max Media Acquisition. There can be no
assurance that such waivers will be granted. Comments have been filed with the
FCC by a competitor of Sinclair with respect to the transfer of the license for
WEMT-TV in Tri-Cities, Tennessee/Virginia claiming that Sinclair's acquisition
of WEMT-TV will create undue regional media concentration. As a result of the
Max Media Acquisition and the Heritage Acquisition, Sinclair intends to dispose
of two of the FM radio stations in the Norfolk, Virginia radio market that it
has acquired from Heritage and agreed to acquire from Max Media in order to be
in compliance with the FCC regulations that limit the number of radio stations
that can be owned in that market. Additionally, Sinclair has sought FCC approval
to assign the licenses of the two FM radio stations and one AM radio station it
presently owns in the Norfolk, Virginia market to an independent trustee. The
Max Media Acquisition is subject to approval by the FCC and termination of the
applicable waiting period under the HSR Act, and is expected to close in the
second quarter of 1998. The transaction is expected to be financed through
borrowings under Sinclair's Bank Credit Agreement.
Lakeland Acquisition. On November 14, 1997, Sinclair entered into a
definitive agreement to acquire 100% of the stock of Lakeland Group Television,
Inc. (the "Lakeland Acquisition"). In the Lakeland Acquisition, Sinclair will
acquire television station KLGT in Minneapolis/St. Paul, Minnesota. The purchase
price is approximately $50 million in cash plus the assumption of certain
indebtedness of Lakeland not to exceed $2.5 million. KLGT-TV, Channel 23, is the
WB affiliate in Minneapolis, the nation's 14th largest market. Sinclair intends
to finance the purchase price from borrowings under the Bank Credit Agreement.
The Lakeland Acquisition has been approved by the FCC (subject to the condition
that it not be consummated until KLGT-TV's license renewal is granted) and is
expected to close in the second quarter of 1998.
Other Dispositions. Sinclair has entered into an agreement to sell three
radio stations in the Nashville, Tennessee market for approximately $35 million.
Sinclair expects the closing to occur during the second quarter of 1998.
Sinclair has entered into an agreement to divest certain radio stations it owns
or has the right to acquire in the New Orleans market for a sale price of $16
million and expects to receive FCC approval and clearance under the HSR Act in
connection with such disposition. In addition, Sinclair intends to dispose of
one of the FM radio stations in the Norfolk, Virginia radio market that it has
52
<PAGE>
acquired from Heritage and one of the FM radio stations in Norfolk, Virginia
that it has agreed to acquire from Max Media in order to be in compliance with
FCC regulations that limit the number of radio stations that can be owned in a
market. See "-- Max Media Acquisition." A third party has also exercised its
option to acquire from Sinclair radio station KCAZ in Kansas City, Missouri.
1997 ACQUISITION
Las Vegas Acquisition. On January 30, 1997, Sinclair entered into an
agreement to acquire the assets of KUPN-TV, Las Vegas, Nevada, for approximately
$87.0 million. Sinclair completed this acquisition on May 30, 1997.
ONGOING DISCUSSIONS
In furtherance of its acquisition strategy, Sinclair routinely reviews and
conducts investigations of potential television, radio station and related
business acquisitions. When Sinclair believes a favorable opportunity exists,
Sinclair seeks to enter into discussions with the owners of such businesses
regarding the possibility of an acquisition, disposition or station swap. At any
given time, Sinclair may be in discussions with one or more such business
owners. Sinclair is in serious negotiations with various parties relating to the
disposition of television, radio and related properties which would be disposed
of for aggregate consideration of approximately $20 million. There can be no
assurance that any of these or other negotiations will lead to definitive
agreement or, if agreements are reached, that any transactions would be
consummated.
LOCAL MARKETING AGREEMENTS
Sinclair currently has LMA arrangements with television stations in ten
markets in which it owns a television station: Pittsburgh, Pennsylvania (WCWB),
Baltimore, Maryland (WNUV), Raleigh/Durham, North Carolina (WRDC), Milwaukee,
Wisconsin (WVTV), Birmingham, Alabama (WABM), San Antonio, Texas (KRRT),
Asheville, North Carolina and Greenville/Spartanburg/Anderson, South Carolina
(WFBC), Mobile, Alabama and Pensacola, Florida (WFGX), Las Vegas, Nevada (KFBT)
and Columbus, Ohio (WSYX). In addition, Sinclair has an LMA arrangement with a
station in the Tuscaloosa, Alabama market (WDBB), which is adjacent to
Birmingham. In each of these markets other than Pittsburgh, Tuscaloosa, Mobile
and Pensacola, Las Vegas, and Columbus, the LMA arrangement is with Glencairn
and Sinclair owns the Non-License Assets of the stations. Sinclair also has LMA
arrangements with radio stations in the New Orleans, Louisiana market. In
addition, Sinclair has entered into an LMA with respect to WTTV and WTTK in
Indianapolis, Indiana. At Sinclair's request, the FCC has withheld action on an
application for Sinclair's acquisition of WTTV and WTTK in Indianapolis (and a
pending application for the Controlling Stockholders to divest their
attributable interests in WIIB) until the FCC completes its pending rulemaking
proceeding considering the cross-interest policy. In addition, in connection
with certain pending acquisitions, Sinclair will enter into LMAs. See "-- 1998
Acquisitions and "-- 1997 Acquisitions."
Sinclair believes that it is able to increase its revenues and improve its
margins by providing programming services to stations in selected DMAs and MSAs
where Sinclair already owns a station. In certain instances, single station
operators and stations operated by smaller ownership groups do not have the
management expertise or the operating efficiencies available to Sinclair as a
multi-station broadcaster. Sinclair seeks to identify such stations in selected
markets and to provide such stations with programming services pursuant to LMAs.
In addition to providing Sinclair with additional revenue opportunities,
Sinclair believes that these LMA arrangements have assisted certain stations
whose operations may have been marginally profitable to continue to air popular
programming and contribute to diversity of programming in their respective DMAs
and MSAs.
In many cases where Sinclair enters into LMA arrangements in connection
with a station whose acquisition by Sinclair is pending FCC approval, Sinclair
(i) obtains an option to acquire the station assets essential for broadcasting a
television or radio signal in compliance with regulatory guidelines, generally
consisting of the FCC license, transmitter, transmission lines, technical
equipment, call letters and trademarks, and certain furniture, fixtures and
equipment (the "License Assets") and (ii) acquires the remaining assets (the
"Non-License Assets") at the time it enters into the option. Following
acquisition of the
53
<PAGE>
Non-License Assets, the License Assets continue to be owned by the
owner-operator and holder of the FCC license, which enters into an LMA with
Sinclair. After FCC approval for transfer of the License Assets is obtained,
Sinclair exercises its option to acquire the License Assets and become the
owner-operator of the station, and the LMA arrangement is terminated.
USE OF DIGITAL TELEVISION TECHNOLOGY
Sinclair believes that television broadcasting may be enhanced
significantly by the development and increased availability of digital
broadcasting service technology. This technology has the potential to permit
Sinclair to provide viewers multiple channels of digital television over each of
its existing standard channels, to provide certain programming in a high
definition television format and to deliver various forms of data, including
data on the Internet, to home and business computers. These additional
capabilities may provide Sinclair with additional sources of revenue, although
Sinclair may be required to incur significant additional costs in connection
therewith. Sinclair is currently considering plans to provide high definition
television ("HDTV"), to provide multiple channels of television including the
provision of additional broadcast programming and transmitted data on a
subscription basis, and to continue its current TV program channels on its
allocated digital television ("DTV") channels. The FCC has granted authority for
Sinclair to conduct experimental DTV multicasting operations in Baltimore,
Maryland. The 1996 Act allows the FCC to charge a spectrum fee to broadcasters
who use the digital spectrum to offer subscription-based services, and the FCC
has opened a rulemaking to consider the spectrum fees to be charged to
broadcasters for such use. In addition, Congress has held hearings on
broadcasters' plans for the use of their digital spectrum. Sinclair cannot
predict what future actions the FCC or Congress might take with respect to DTV,
nor can it predict the effect of the FCC's present DTV implementation plan or
such future actions on Sinclair's business. DTV technology is not currently
available to the viewing public and a successful transition from the current
analog broadcast format to a digital format may take many years. There can be no
assurance that Sinclair's efforts to take advantage of the new technology will
be commercially successful.
FEDERAL REGULATION OF TELEVISION AND RADIO BROADCASTING
The ownership, operation and sale of television and radio stations are
subject to the jurisdiction of the FCC, which acts under authority granted by
the Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and operating
power of stations; issues, renews, revokes and modifies station licenses;
regulates equipment used by stations; adopts and implements regulations and
policies that directly or indirectly affect the ownership, operation and
employment practices of stations; and has the power to impose penalties for
violations of its rules or the Communications Act.
The following is a brief summary of certain provisions of the
Communications Act, the 1996 Act and specific FCC regulations and policies.
Reference should be made to the Communications Act, the 1996 Act, FCC rules and
the public notices and rulings of the FCC for further information concerning the
nature and extent of federal regulation of broadcast stations.
License Grant and Renewal. Television and radio stations operate pursuant
to broadcasting licenses that are granted by the FCC for maximum terms of eight
years.
Television and radio station licenses are subject to renewal upon
application to the FCC. During certain periods when renewal applications are
pending, competing applicants may file for the radio or television frequency
being used by the renewal applicant. During the same periods, petitions to deny
license renewal applications may be filed by interested parties, including
members of the public. The FCC is required to hold hearings on renewal
applications if it is unable to determine that renewal of a license would serve
the public interest, convenience and necessity, or if a petition to deny raises
a "substantial and material question of fact" as to whether the grant of the
renewal application would be prima facie inconsistent with the public interest,
convenience and necessity. However, the FCC is prohibited from considering
competing applications for a renewal applicant's frequency, and is required to
grant the renewal application, if the FCC finds: (i) that the station has served
the public interest, convenience and necessity; (ii) that there have been no
serious violations by the licensee of the Communications Act or the rules and
regulations of the FCC; and
54
<PAGE>
(iii) that there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when taken
together, would constitute a pattern of abuse.
All of the stations that Sinclair currently owns and operates or to which
it provides programming services pursuant to LMAs, or intends to acquire or to
which it intends to provide programming services pursuant to LMAs in connection
with pending acquisitions, are presently operating under regular licenses, which
expire as to each station on the dates set forth under "-- Television
Broadcasting" and "-- Radio Broadcasting," above. Although renewal of license is
granted in the vast majority of cases even when petitions to deny are filed,
there can be no assurance that the licenses of such stations will be renewed.
Ownership Matters
General
- -------
The Communications Act prohibits the assignment of a broadcast license or
the transfer of control of a broadcast licensee without the prior approval of
the FCC. In determining whether to permit the assignment or transfer of control
of, or the grant or renewal of, a broadcast license, the FCC considers a number
of factors pertaining to the licensee, including compliance with various rules
limiting common ownership of media properties, the "character" of the licensee
and those persons holding "attributable" interests therein, and compliance with
the Communications Act's limitations on alien ownership.
To obtain the FCC's prior consent to assign a broadcast license or transfer
control of a broadcast licensee, an appropriate application must be filed with
the FCC. If the application involves a "substantial change" in ownership or
control, the application must be placed on public notice for a period of
approximately 30 days during which petitions to deny the application may be
filed by interested parties, including members of the public. If the application
does not involve a "substantial change" in ownership or control, it is a "pro
forma" application. The "pro forma" application is not subject to petitions to
deny or a mandatory waiting period, but is nevertheless subject to having
informal objections filed against it. If the FCC grants an assignment or
transfer application, interested parties have approximately 30 days from public
notice of the grant to seek reconsideration or review of that grant. Generally,
parties that do not file initial petitions to deny or informal objections
against the application face difficulty in seeking reconsideration or review of
the grant. The FCC normally has approximately an additional 10 days to set aside
such grant on its own motion. When passing on an assignment or transfer
application, the FCC is prohibited from considering whether the public interest
might be served by an assignment or transfer to any party other than the
assignee or transferee specified in the application.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding, or through subsidiaries controlling, broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or 10%
or more of such stock in the case of insurance companies, investment companies
and bank trust departments that are passive investors) are generally
attributable, except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. The FCC has pending a rulemaking proceeding
that, among other things, seeks comment on whether the FCC should modify its
attribution rules by (i) raising the attribution stock benchmark from 5% to 10%;
(ii) raising the attribution stock benchmark for passive investors from 10% to
20%; (iii) restricting the availability of the single majority shareholder
exemption; and (iv) attributing certain interests such as non-voting stock, debt
and certain holdings by limited liability corporations in certain circumstances.
More recently, the FCC has solicited comment on proposed rules that would (i)
treat an otherwise nonattributable equity or debt interest in a licensee as an
attributable interest where the interest holder is a program supplier or the
owner of a broadcast station in the same market and the equity and/or debt
holding is greater than a specified benchmark; (ii) treat a licensee of a
television station which, under an LMA, brokers more than 15% of the time on
another television station serving the same market, as having an attributable
interest in the brokered station; and (iii) in certain circumstances, treat the
licensee of a broadcast station that sells advertising time on another station
in the same market pursuant to a JSA as having an attributable interest in the
station whose advertising is being sold.
55
<PAGE>
The Controlling Stockholders hold attributable interests in two entities
owning media properties, namely: Channel 63, Inc., licensee of WIIB-TV, a UHF
television station in Bloomington, Indiana, and Bay Television, Inc., licensee
of WTTA-TV, a UHF television station in St. Petersburg, Florida. All of the
issued and outstanding shares of Channel 63, Inc. are owned by the Controlling
Stockholders. A majority of the issued and outstanding shares of Bay Television,
Inc. is owned by the Controlling Stockholders and Robert L. Simmons, a former
stockholder of Sinclair. The Controlling Stockholders have agreed to divest
their attributable interests in Channel 63, Inc. and Sinclair believes that,
after doing so, such holdings will not materially restrict its ability to
acquire or program additional broadcast stations.
Under its "cross-interest" policy, the FCC considers certain "meaningful"
relationships among competing media outlets in the same market, even if the
ownership rules do not specifically prohibit the relationship. Under this
policy, the FCC may consider significant nonattributable equity or debt
interests in a media outlet combined with an attributable interest in another
media outlet in the same market, joint ventures, and common key employees among
competitors. The cross-interest policy does not necessarily prohibit all of
these interests, but requires that the FCC consider whether, in a particular
market, the "meaningful" relationships between competitors could have a
significant adverse effect upon economic competition and program diversity.
Heretofore, the FCC has not applied its cross-interest policy to LMAs and JSAs
between broadcast stations. In its ongoing rulemaking proceeding concerning the
attribution rules, the FCC has sought comment on, among other things, (i)
whether the cross-interest policy should be applied only in smaller markets, and
(ii) whether non-equity financial relationships such as debt, when combined with
multiple business interrelationships such as LMAs and JSAs, raise concerns under
the cross-interest policy. Moreover, in its most recent proposals in its ongoing
attribution rulemaking proceeding, the FCC has proposed treating television
LMAs, television and radio JSAs, and presently nonattributable debt or equity
interests as attributable interests in certain circumstances without regard to
the cross-interest policy.
The Communications Act prohibits the issuance of broadcast licenses to, or
the holding of a broadcast license by, any corporation of which more than 20% of
the capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country (collectively,
"Aliens"). The Communications Act also authorizes the FCC, if the FCC determines
that it would be in the public interest, to prohibit the issuance of a broadcast
license to, or the holding of a broadcast license by, any corporation directly
or indirectly controlled by any other corporation of which more than 25% of the
capital stock is owned of record or voted by Aliens. Sinclair has been advised
that the FCC staff has interpreted this provision to require a finding that such
grant or holding would be in the public interest before a broadcast license may
be granted to or held by any such corporation and that the FCC staff has made
such a finding only in limited circumstances. The FCC has issued interpretations
of existing law under which these restrictions in modified form apply to other
forms of business organizations, including partnerships. As a result of these
provisions, the licenses granted to Subsidiaries of Sinclair by the FCC could be
revoked if, among other restrictions imposed by the FCC, more than 25% of
Sinclair's stock were directly or indirectly owned or voted by Aliens. Sinclair
and the Subsidiaries are domestic corporations, and the Controlling Stockholders
are all United States citizens. The Amended and Restated Articles of
Incorporation of Sinclair (the "Amended Certificate") contain limitations on
Alien ownership and control that are substantially similar to those contained in
the Communications Act. Pursuant to the Amended Certificate, Sinclair has the
right to repurchase Alien-owned shares at their fair market value to the extent
necessary, in the judgment of the Board of Directors, to comply with the Alien
ownership restrictions.
Television
- ----------
National Ownership Rule. Prior to the 1996 Act, FCC rules generally
prohibited an individual or entity from having an attributable interest in more
than 12 television stations nationwide, or in television stations reaching more
than 25% of the national television viewing audience. Pursuant to the 1996 Act,
the FCC has modified its rules to eliminate any limitation on the number of
television stations an individual or entity may own nationwide, subject to the
restriction that no individual or entity may have an attributable interest in
television stations reaching more than 35% of the national television viewing
audience. Historically, VHF stations have shared a larger portion of the market
than UHF stations. Therefore, only half of the households in the market area of
any UHF station are included when calculating whether an entity or individual
owns television stations reaching more than 35% of the
56
<PAGE>
national television viewing audience. All but seven of the stations owned and
operated by Sinclair, or towhich Sinclair provides programming services, are
UHF. Upon completion of all pending acquisitions and dispositions, Sinclair will
reach approximately 14% of U.S. television households using the FCC's method of
calculation.
Duopoly Rule. On a local level, the television "duopoly" rule generally
prohibits a single individual or entity from having an attributable interest in
two or more television stations with overlapping Grade B service areas. While
the 1996 Act did not eliminate the television duopoly rule, it did direct the
FCC to initiate a rulemaking proceeding to determine whether to retain, modify,
or eliminate the rule. The FCC has pending a rulemaking proceeding in which it
has proposed, among other options, to modify the television duopoly rule to
permit the common ownership of television stations in different DMAs, so long as
the Grade A signal contours of the stations do not overlap. Pending resolution
of its rulemaking proceeding, the FCC has adopted an interim waiver policy that
permits the common ownership of television stations in different DMAs with no
overlapping Grade A signal contours, conditioned on the final outcome of the
rulemaking proceeding. The FCC has also sought comment on whether common
ownership of two television stations in a market should be permitted (i) where
one or more of the commonly owned stations is UHF, (ii) where one of the
stations is in bankruptcy or has been off the air for a substantial period of
time and (iii) where the commonly owned stations have very small audience or
advertising shares, are located in a very large market, and/or a specified
number of independently owned media voices would remain after the acquisition.
Local Marketing Agreements. A number of television stations, including
certain of Sinclair's stations, have entered into what have commonly been
referred to as local marketing agreements, or LMAs. While these agreements may
take varying forms, pursuant to a typical LMA, separately owned and licensed
television stations agree to enter into cooperative arrangements of varying
sorts, subject to compliance with the requirements of antitrust laws and with
the FCC's rules and policies. Under these types of arrangements, separately
owned stations agree to function cooperatively in terms of programming,
advertising sales, etc., subject to the requirement that the licensee of each
station maintain independent control over the programming and operations of its
own station. One typical type of LMA is a programming agreement between two
separately owned television stations serving a common service area, whereby the
licensee of one station programs substantial portions of the broadcast day on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during such
program segments. Such arrangements are an extension of the concept of "time
brokerage" agreements, under which a licensee of a station sells blocks of time
on its station to an entity or entities which program the blocks of time and
which sell their own commercial advertising announcements during the time
periods in question. The staff of the FCC's Mass Media Bureau has held that LMAs
are not contrary to the Communications Act, provided that the licensee of the
station which is being substantially programmed by another entity maintains
complete responsibility for and control over the programming and operations of
its broadcast station and assures compliance with applicable FCC rules and
policies.
At present, FCC rules permit television station LMAs, and the licensee of a
television station brokering time on another television station is not
considered to have an attributable interest in the brokered station. However, in
connection with its ongoing rulemaking proceeding regarding the television
duopoly rule, the FCC has proposed to adopt rules providing that the licensee of
a television station which brokers more than 15% of the time on another
television station serving the same market would be deemed to have an
attributable interest in the brokered station for purposes of the national and
local multiple ownership rules. In connection with this proceeding, the FCC has
solicited detailed information from parties to television LMAs as to the terms
and characteristics of such LMAs.
The 1996 Act provides that nothing therein "shall be construed to prohibit
the origination, continuation, or renewal of any television local marketing
agreement that is in compliance with the regulations of the [FCC]." The
legislative history of the 1996 Act reflects that this provision was intended to
grandfather television LMAs that were in existence upon enactment of the 1996
Act, and to allow television LMAs consistent with the FCC's rules subsequent to
enactment of the 1996 Act. In its pending rulemaking proceeding regarding the
television duopoly rule, the FCC has proposed to adopt a grandfathering policy
providing that, in the event that television LMAs become attributable interests,
57
<PAGE>
LMAs that are in compliance with existing FCC rules and policies and were
entered into before November 5, 1996, would be permitted to continue in force
until the original term of the LMA expires. Under the FCC's proposal, television
LMAs that are entered into, renewed, or assigned after November 5, 1996 would
have to be terminated if LMAs are made attributable interests and the LMA in
question resulted in a violation of the television multiple ownership rules.
Sinclair's LMAs with television stations WCWB in Pittsburgh, Pennsylvania, WNUV
in Baltimore, Maryland, WVTV in Milwaukee, Wisconsin, WRDC in Raleigh/Durham,
North Carolina, WABM in Birmingham, Alabama, and WDBB in Tuscaloosa, Alabama,
were in existence on both the date of enactment of the 1996 Act and November 5,
1996. Sinclair's LMAs with television stations WTTV and WTTK in Indianapolis,
Indiana were entered into subsequent to the date of enactment of the 1996 Act
but prior to November 5, 1996. Sinclair's LMA with television station KRRT in
San Antonio, Texas was in existence on the date of enactment of the 1996 Act,
but was assumed by Sinclair subsequent to that date but prior to November 5,
1996. The licensee's rights under Sinclair's LMA with KRRT-TV were assumed by
Glencairn subsequent to November 5, 1996. Sinclair's LMAs with television
stations WFGX-TV in Mobile, Alabama and Pensacola, Florida and WFFF-TV in
Burlington, Vermont and Plattsburgh, New York were in existence on both the date
of enactment of the 1996 Act and November 5, 1996, but were assumed by Sinclair
subsequent to November 5, 1996. Sinclair's LMA with WFBC-TV in Asheville, North
Carolina and Greenville/Spartanburg/ Anderson, South Carolina, was entered into
by Sinclair subsequent to the date of enactment of the 1996 Act but prior to
November 5, 1996, and the licensee's rights under that LMA were assumed by
Glencairn subsequent to November 5, 1996. Sinclair's LMAs with KFBT in Las
Vegas, Nevada and WSYX in Columbus, Ohio were entered into subsequent to
November 5, 1996. Sinclair cannot predict if any or all of its LMAs will be
grandfathered.
The Conference Agreement adopted as part of the Balanced Budget Act of 1997
(the "Balanced Budget Act") clarifies Congress' intent with respect to LMAs and
duopolies. The Conference Agreement states as follows: "The conferees do not
intend that the duopoly and television-newspaper cross-ownership relief provided
herein should have any bearing upon the [FCC's] current proceedings, which
concerns more immediate relief. The conferees expect that the [FCC] will proceed
with its own independent examination in these matters. Specifically, the
conferees expect that the [FCC] will provide additional relief (e.g., VHF/UHF
combinations) that it finds to be in the public interest, and will implement the
permanent grandfather requirement for local marketing agreements as provided in
the Telecommunications Act of 1996."
The TV duopoly rule currently prevents Sinclair from acquiring the licenses
of television stations with which it has LMAs in those markets where Sinclair
owns a television station. As a result, if the FCC were to decide that the
provider of programming services under a television LMA should be treated as
having an attributable interest in the brokered station, and if it did not relax
its television duopoly rule, Sinclair could be required to modify or terminate
those of its LMAs that were not in existence on the date of enactment of the
1996 Act or on November 5, 1996. Furthermore, if the FCC adopts its present
proposal with respect to the grandfathering of television LMAs, Sinclair could
be required to terminate even those LMAs that were in effect prior to the date
of enactment of the 1996 Act or prior to November 5, 1996, after the initial
term of the LMA or upon assignment of the LMA or sooner. In such an event,
Sinclair could be required to pay termination penalties under certain of such
LMAs. Further, if the FCC were to find, in connection with any of Sinclair's
LMAs, that the owners/licensees of the stations with which Sinclair has LMAs
failed to maintain control over their operations as required by FCC rules and
policies, the licensee of the LMA station and/or Sinclair could be fined or set
for hearing, the outcome of which could be a monetary forfeiture or, under
certain circumstances, loss of the applicable FCC license. Sinclair is unable to
predict the ultimate outcome of possible changes to these FCC rules and the
impact such changes may have on its broadcasting operations. See "Risk Factors
- -- Multiple Ownership Rules and Effect on LMAs" in the accompanying
Prospectuses.
On June 1, 1995, the Chief of the FCC's Mass Media Bureau released a Public
Notice concerning the processing of television assignment and transfer of
control applications proposing LMAs. Due to the pendency of the ongoing
rulemaking proceeding concerning attribution of ownership, the Mass Media Bureau
has placed certain restrictions on the types of television assignment and
transfer of control applications involving LMAs that it will approve during the
pendency of the rulemaking. Specifically,
58
<PAGE>
the Mass Media Bureau has stated that it will not approve arrangements where a
time broker seeks to finance a station acquisition and hold an option to
purchase the station in the future. Sinclair believes that none of Sinclair's
LMAs fall within the ambit of this Public Notice.
Radio
- -----
National Ownership Rule. Prior to the 1996 Act, the FCC's rules limited an
individual or entity from holding attributable interests in more than 20 AM and
20 FM radio stations nationwide. Pursuant to the 1996 Act, the FCC has modified
its rules to eliminate any limitation on the number of radio stations a single
individual or entity may own nationwide.
Local Ownership Rule. Prior to the 1996 Act, the FCC's rules generally
permitted an individual or entity to hold attributable interests in no more than
four radio stations in a local market (no more than two of which could be in the
same service (AM or FM)), and then only if the aggregate audience share of the
commonly owned stations did not exceed 25%. In markets with fewer than 15
commercial radio stations, an individual or entity could hold an attributable
interest in no more than three radio stations in the market (no more than two of
which could be in the same service), and then only if the number of the commonly
owned stations did not exceed 50% of the total number of commercial radio
stations in the market.
Pursuant to the 1996 Act, the limits on the number of radio stations one
entity may own locally have been increased as follows: (i) in a market with 45
or more commercial radio stations, an entity may own up to eight commercial
radio stations, not more than five of which are in the same service (AM or FM);
(ii) in a market with between 30 and 44 (inclusive) commercial radio stations,
an entity may own up to seven commercial radio stations, not more than four of
which are in the same service; (iii) in a market with between 15 and 29
(inclusive) commercial radio stations, an entity may own up to six commercial
radio stations, not more than four of which are in the same service; and (iv) in
a market with 14 or fewer commercial radio stations, an entity may own up to
five commercial radio stations, not more than three of which are in the same
service, except that an entity may not own more than 50% of the stations in such
market. These numerical limits apply regardless of the aggregate audience share
of the stations sought to be commonly owned. FCC ownership rules continue to
permit an entity to own one FM and one AM station in a local market regardless
of market size. Irrespective of FCC rules governing radio ownership, however,
the DOJ and the Federal Trade Commission have the authority to determine, and in
certain radio transactions have determined, that a particular transaction
presents antitrust concerns. Moreover, in certain recent cases the FCC has
signaled a willingness to independently examine issues of market concentration
notwithstanding a transaction's compliance with the numerical station limits.
The FCC has also indicated that it may propose further revisions to its radio
multiple ownership rules.
Local Marketing Agreements. As in television, a number of radio stations
have entered into LMAs. The FCC's multiple ownership rules specifically permit
radio station LMAs to be entered into and implemented, so long as the licensee
of the station which is being programmed under the LMA maintains complete
responsibility for and control over programming and operations of its broadcast
station and assures compliance with applicable FCC rules and policies. For the
purposes of the multiple ownership rules, in general, a radio station being
programmed pursuant to an LMA by an entity is not considered an attributable
ownership interest of that entity unless that entity already owns a radio
station in the same market. However, a licensee that owns a radio station in a
market, and brokers more than 15% of the time on another station serving the
same market (i.e., a station whose principal community contour overlaps that of
the owned station), is considered to have an attributable ownership interest in
the brokered station for purposes of the FCC's multiple ownership rules. As a
result, in a market in which Sinclair owns a radio station, Sinclair would not
be permitted to enter into an LMA with another local radio station which it
could not own under the local ownership rules, unless Sinclair's programming
constituted 15% or less of the other local station's programming time on a
weekly basis. The FCC's rules also prohibit a broadcast licensee from
simulcasting more than 25% of its programming on another station in the same
broadcast service (i.e., AM-AM or FM-FM) through a time brokerage or LMA
arrangement where the brokered and brokering stations serve substantially the
same area.
Joint Sales Agreements. A number of radio (and television) stations have
entered into cooperative arrangements commonly known as joint sales agreements,
or JSAs. While these agreements may take
59
<PAGE>
varying forms, under the typical JSA, a station licensee obtains, for a fee, the
right to sell substantially all of the commercial advertising on a
separately-owned and licensed station in the same market. The typical JSA also
customarily involves the provision by the selling licensee of certain sales,
accounting, and "back office" services to the station whose advertising is being
sold. The typical JSA is distinct from an LMA in that a JSA (unlike an LMA)
normally does not involve programming.
The FCC has determined that issues of joint advertising sales should be
left to enforcement by antitrust authorities, and therefore does not generally
regulate joint sales practices between stations. Currently, stations for which a
licensee sells time under a JSA are not deemed by the FCC to be attributable
interests of that licensee. However, in connection with its ongoing rulemaking
proceeding concerning the attribution rules, the FCC is considering whether JSAs
should be considered attributable interests or within the scope of the FCC's
cross-interest policy, particularly when JSAs contain provisions for the supply
of programming services and/or other elements typically associated with LMAs. If
JSAs become attributable interests as a result of changes in the FCC rules,
Sinclair may be required to terminate any JSA it might have with a radio station
which Sinclair could not own under the FCC's multiple ownership rules.
Other Ownership Matters
- -----------------------
There remain in place after the 1996 Act a number of additional
cross-ownership rules and prohibitions pertaining to licensees of television and
radio stations. FCC rules, the Communications Act, or both generally prohibit an
individual or entity from having an attributable interest in both a television
station and a radio station, a daily newspaper, or a cable television system
that is located in or serves the same market area.
Antitrust Regulation. The DOJ and the Federal Trade Commission have
increased their scrutiny of the television and radio industry since the adoption
of the 1996 Act, and have indicated their intention to review matters related to
the concentration of ownership within markets (including LMAs and JSAs) even
when the ownership or LMA or JSA in question is permitted under the laws
administered by the FCC or by FCC rules and regulations. For instance, the DOJ
has for some time taken the position that an LMA entered into in anticipation of
a station's acquisition with the proposed buyer of the station constitutes a
change in beneficial ownership of the station which, if otherwise subject to
filing under the HSR Act, cannot be implemented until the waiting period
required by that statute has ended or been terminated.
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally prohibits a single
individual or entity from having an attributable interest in a television
station and a radio station serving the same market. However, in each of the 25
largest local markets in the United States, provided that there remain at least
30 separately owned television and radio stations in the particular market after
the acquisition in question, the FCC has traditionally employed a policy that
presumptively allows waivers of the one to a market rule to permit the common
ownership of one AM, one FM and one TV station in the market. The 1996 Act
directs the FCC to extend this policy to each of the top 50 markets. Moreover,
the FCC has pending a rulemaking proceeding in which it has solicited comment on
whether the one to a market rule should be eliminated altogether. Sinclair has
pending several requests for waivers of the one to a market rule in connection
with its applications to acquire radio stations in the Max Media Acquisition and
from Keymarket of South Carolina, Inc., in markets where Sinclair owns or
proposes to own a television station. Furthermore, Sinclair expects to request
waivers of the one to a market rule in connection with its applications to
acquire certain television stations in the Sullivan Acquisition in markets where
Sinclair owns or proposes to own radio stations.
However, the FCC does not apply its presumptive waiver policy in cases
involving the common ownership of one television station, and two or more radio
stations in the same service (AM or FM), in the same market. Pending its ongoing
rulemaking proceeding to reexamine the one to a market rule, the FCC has stated
that it will consider waivers of the rule in such instances on a case-by-case
basis, considering (i) the public service benefits that will arise from the
joint operation of the facilities such as economies of scale, cost savings and
programming and service benefits; (ii) the types of facilities involved; (iii)
the number of media outlets owned by the applicant in the relevant market; (iv)
the finan-
60
<PAGE>
cial difficulties of the stations involved; and (v) the nature of the relevant
market in light of the level of competition and diversity after joint operation
is implemented. Generally, any such waivers that are granted, and which allow
common ownership of a television station and more than two same-service radio
stations in the same market, are temporary and conditioned on the outcome of the
rulemaking proceeding. Sinclair obtained such temporary, conditional waivers of
the one to a market rule in connection with its acquisition of the Heritage
radio stations in the Kansas City and St. Louis markets.
In its ongoing rulemaking proceeding to reexamine the one to a market rule,
the FCC has proposed the following options for modifying the rule in the event
it is not eliminated: (i) extending the presumptive waiver policy to any
television market in which a specified number of independently owned media
"voices" would remain after common ownership of a television station and one or
more radio stations is effectuated; (ii) extending the presumptive waiver policy
to entities that seek to own more than one FM and/or one AM radio station; (iii)
reducing the minimum number of independently owned voices that must remain after
a transaction is effectuated; and (iv) modifying the five-factor case-by-case
test for waivers.
Local Television/Cable Cross-Ownership Rule. While the 1996 Act eliminates
a previous statutory prohibition against the common ownership of a television
broadcast station and a cable system that serve the same local market, the 1996
Act leaves the current FCC rule in place. The legislative history of the Act
indicates that the repeal of the statutory ban should not prejudge the outcome
of any FCC review of the rule.
Broadcast Network/Cable Cross-Ownership Rule. The 1996 Act directs the FCC
to eliminate its rules which formerly prohibited the common ownership of a
broadcast network and a cable system, subject to the provision that the FCC
revise its rules as necessary to ensure carriage, channel positioning, and
non-discriminatory treatment of non-affiliated broadcast stations by cable
systems affiliated with a broadcast network. In March 1996, the FCC issued an
order implementing this legislative change.
Broadcast/Daily Newspaper Cross-Ownership Rule. The FCC's rules prohibit
the common ownership of a radio or television broadcast station and a daily
newspaper in the same market. The 1996 Act does not eliminate or modify this
prohibition. In October 1996, however, the FCC initiated a rulemaking proceeding
to determine whether it should liberalize its waiver policy with respect to
cross-ownership of a daily newspaper and one or more radio stations in the same
market.
Dual Network Rule. The 1996 Act directs the FCC to repeal its rule which
formerly prohibited an entity from operating more than one television network.
In March 1996, the FCC issued an order implementing this legislative change.
Under the modified rule, a network entity is permitted to operate more than one
television network, provided, however, that ABC, CBS, NBC, and/or Fox are
prohibited from merging with each other or with another network television
entity such as WB or UPN.
The 1996 Act requires the FCC to review its broadcast ownership rules every
two years to "determine whether any of such rules are necessary in the public
interest as the result of competition," and to repeal or modify any rules that
are determined to be no longer in the public interest. In March 1998, the FCC
initiated a rulemaking proceeding to review certain of its broadcast ownership
rules pursuant to the statutory mandate, including: (i) the rule limiting
ownership of television stations nationally to stations reaching 35% of the
national television audience; (ii) the rule attributing only 50% of television
households in a market to the audience reach of a UHF television station for
purposes of the 35% national audience reach limit; (iii) the rule prohibiting
common ownership of a broadcast station and a daily newspaper in the same
market; (iv) the rule prohibiting common ownership of a broadcast television
station and a cable system in the same market; (v) the local radio multiple
ownership rules; and (vi) the dual network rule. Additionally, the FCC stated
that its already-pending proceedings to review the television duopoly and "one
to a market" rules satisfy the 1996 Act's biennial review requirements.
Expansion of Sinclair's broadcast operations on both a local and national
level will continue to be subject to the FCC's ownership rules and any changes
the FCC or Congress may adopt. Concomitantly, any further relaxation of the
FCC's ownership rules may increase the level of competition in one or more of
the markets in which Sinclair's stations are located, more specifically to the
extent that any of Sinclair's competitors may have greater resources and thereby
be in a superior position to take advantage of such changes.
61
<PAGE>
Must-Carry/Retransmission Consent
Pursuant to the Cable Act of 1992, television broadcasters are required to
make triennial elections to exercise either certain "must-carry" or
"retransmission consent" rights in connection with their carriage by cable
systems in each broadcaster's local market. By electing the must-carry rights, a
broadcaster demands carriage on a specified channel on cable systems within its
Area of Dominant Influence, in general as defined by the Arbitron 1991-92
Television Market Guide. These must-carry rights are not absolute, and their
exercise is dependent on variables such as (i) the number of activated channels
on a cable system; (ii) the location and size of a cable system; and (iii) the
amount of programming on a broadcast station that duplicates the programming of
another broadcast station carried by the cable system. Therefore, under certain
circumstances, a cable system may decline to carry a given station.
Alternatively, if a broadcaster chooses to exercise retransmission consent
rights, it can prohibit cable systems from carrying its signal or grant the
appropriate cable system the authority to retransmit the broadcast signal for a
fee or other consideration. In October 1996, Sinclair elected must-carry or
retransmission consent with respect to each of its markets based on its
evaluation of the respective markets and the position of Sinclair's owned or
programmed station(s) within the market. Sinclair's stations continue to be
carried on all pertinent cable systems, and Sinclair does not believe that its
elections have resulted in the shifting of its stations to less desirable cable
channel locations. Certain of Sinclair's stations affiliated with Fox are
required to elect retransmission consent because Fox's retransmission consent
negotiations on behalf of Sinclair resulted in agreements which extend into
1998. Therefore, Sinclair will need to negotiate retransmission consent
agreements for these Fox-affiliated stations to attain carriage on the relevant
cable systems for the balance of this triennial period (i.e., through December
31, 1999). For subsequent elections beginning with the election to be made by
October 1, 1999, the must-carry market will be the station's DMA, in general as
defined by the Nielsen DMA Market and Demographic Rank Report of the prior year.
Syndicated Exclusivity/Territorial Exclusivity
The FCC has imposed syndicated exclusivity rules and expanded existing
network nonduplication rules. The syndicated exclusivity rules allow local
broadcast television stations to demand that cable operators black out
syndicated non-network programming carried on "distant signals" (i.e., signals
of broadcast stations, including so-called "superstations," which serve areas
substantially removed from the cable system's local community). The network
non-duplication rules allow local broadcast network television affiliates to
require that cable operators black out duplicative network programming carried
on distant signals. However, in a number of markets in which Sinclair owns or
programs stations affiliated with a network, a station that is affiliated with
the same network in a nearby market is carried on cable systems in Sinclair's
market. This is not in violation of the FCC's network nonduplication rules.
However, the carriage of two network stations on the same cable system could
result in a decline of viewership adversely affecting the revenues of Sinclair
owned or programmed station.
Restrictions on Broadcast Advertising
Advertising of cigarettes and certain other tobacco products on broadcast
stations has been banned for many years. Various states restrict the advertising
of alcoholic beverages. Congressional committees have examined legislation
proposals which would eliminate or severely restrict the advertising of beer and
wine. Although no prediction can be made as to whether any or all of such
proposals will be enacted into law, the elimination of all beer and wine
advertising would have an adverse effect upon the revenues of Sinclair's
stations, as well as the revenues of other stations which carry beer and wine
advertising.
The FCC has imposed commercial time limitations in children's television
programming pursuant to legislation. In television programs designed for viewing
by children of 12 years of age and under, commercial matter is limited to 12
minutes per hour on weekdays and 10.5 minutes per hour on weekends. In granting
renewal of the license for WBFF-TV, the FCC imposed a fine of $10,000 on
Sinclair alleging that the station had exceeded these limitations. Sinclair has
appealed this fine and the appeal is pending. In addition, the FCC imposed a
fine of $10,000 on WCGV-TV alleging that the station had exceeded these
limitations. Sinclair is considering an appeal in this matter. In granting
renewal of the license for WTTV-TV and WTTK-TV, stations that Sinclair programs
pursuant to an LMA, the FCC imposed a fine of $15,000 on WTTV-TV and WTTK-TV's
licensee alleging that the stations had exceeded these
62
<PAGE>
limitations. In granting renewal of the license for WTTE-TV, the FCC imposed a
fine of $10,000 on Sinclair alleging that the station had exceeded these
limitations. Sinclair has appealed this fine and the appeal is pending. In
granting renewal of the license for WCGV-TV, the FCC imposed a fine of $10,000
on Sinclair alleging that the station had exceeded these limitations. The
Company has not yet determined whether it will appeal this fine.
The Communications Act and FCC rules also impose regulations regarding the
broadcasting of advertisements by legally qualified candidates for elective
office. Among other things, (i) stations must provide "reasonable access" for
the purchase of time by legally qualified candidates for federal office; (ii)
stations must provide "equal opportunities" for the purchase of equivalent
amounts of comparable broadcast time by opposing candidates for the same
elective office; and (iii) during the 45 days preceding a primary or primary
run-off election and during the 60 days preceding a general or special election,
legally qualified candidates for elective office may be charged no more than the
station's "lowest unit charge" for the same class of advertisement, length of
advertisement, and daypart. Recently, both the President of the United States
and the Chairman of the FCC have called for rules that would require broadcast
stations to provide free airtime to political candidates. Sinclair cannot
predict the effect of such a requirement on its advertising revenues.
Programming and Operation
General. The Communications Act requires broadcasters to serve the "public
interest." The FCC has relaxed or eliminated many of the more formalized
procedures it had developed in the past to promote the broadcast of certain
types of programming responsive to the needs of a station's community of
license. FCC licensees continue to be required, however, to present programming
that is responsive to their communities' issues, and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming may be considered by the FCC when it evaluates renewal
applications of a licensee, although such complaints may be filed at any time
and generally may be considered by the FCC at any time. Stations also must pay
regulatory and application fees, and follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identification, the advertisement of contests and lotteries, obscene
and indecent broadcasts, and technical operations, including limits on radio
frequency radiation. In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities
(although a federal appeals court has recently declared this requirement
unconstitutional), and must submit reports to the FCC with respect to these
matters on an annual basis and in connection with a renewal application. Failure
to observe these or other rules and policies can result in the imposition of
various sanctions, including monetary forfeitures, the grant of a renewal for a
"short" (i.e., less than the full) license term, or, for particularly egregious
violations, the denial of a license renewal application or the revocation of a
license.
Children's Television Programming. Pursuant to rules adopted in 1996,
television stations are required to broadcast a minimum of three hours per week
of "core" children's educational programming, which the FCC defines as
programming that (i) has serving the educational and informational needs of
children 16 years of age and under as a significant purpose; (ii) is regularly
scheduled, weekly and at least 30 minutes in duration; and (iii) is aired
between the hours of 7:00 a.m. and 10:00 p.m. Furthermore, "core" children's
educational programs, in order to qualify as such, are required to be identified
as educational and informational programs over the air at the time they are
broadcast, and are required to be identified in the children's programming
reports required to be placed in stations' public inspection files.
Additionally, television stations are required to identify and provide
information concerning "core" children's programming to publishers of program
guides and listings.
Television Violence. The 1996 Act contains a number of provisions relating
to television violence. First, pursuant to the 1996 Act, the television industry
has developed a ratings system which the FCC has approved. Furthermore, also
pursuant to the 1996 Act the FCC has adopted rules requiring certain television
sets to include the so-called "V-chip," a computer chip that allows blocking of
rated programming. Under these rules, half of television receiver models with
picture screens 13 inches or greater will be required to have the "V-chip" by
July 1, 1999, and all such models will be required to have the "V-chip" by
January 1, 2000. In addition, the 1996 Act requires that all television license
renewal applications filed
63
<PAGE>
after May 1, 1995 contain summaries of written comments and suggestions received
by the station from the public regarding violent programming.
Closed Captioning. Pursuant to the 1996 Act, the FCC has adopted rules
requiring closed captioning of all broadcast television programming, except
where captioning would be "economically burdensome." The rules require generally
that (i) 95% of all new programming first published or exhibited on or after
January 1, 1998 must be closed captioned within eight years, and (ii) 75% of
"old" programming which first aired prior to January 1, 1998 must be closed
captioned within 10 years, subject to certain exemptions.
Digital Television
The FCC has taken a number of steps to implement digital television ("DTV")
broadcasting service in the United States. In December 1996, the FCC adopted a
DTV broadcast standard and, in April 1997, adopted decisions in several pending
rulemaking proceedings that establish service rules and a plan for implementing
DTV. The modified rules and table of allotments are also the subject of various
pending appeals. The FCC adopted a DTV table of allotments that provides all
authorized television stations with a second channel on which to broadcast a DTV
signal. In February 1998, the FCC made slight revisions to the DTV rules and
table of allotments in acting upon a number of appeals in the DTV proceeding.
The FCC has attempted to provide DTV coverage areas that are comparable to
stations' existing service areas. The FCC has ruled that television broadcast
licensees may use their digital channels for a wide variety of services such as
high-definition television, multiple standard definition television programming,
audio, data, and other types of communications, subject to the requirement that
each broadcaster provide at least one free video channel equal in quality to the
current technical standard.
DTV channels will generally be located in the range of channels from
channel 2 through channel 51. The FCC is requiring that affiliates of ABC, CBS,
Fox and NBC in the top 10 television markets begin digital broadcasting by May
1, 1999 (many stations affiliated with these networks in the top 10 markets have
voluntarily committed to begin digital broadcasting by November 1998), and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999. The FCC's plan calls for the DTV transition period to end in
the year 2006, at which time the FCC expects that television broadcasters will
cease non-digital broadcasting and return one of their two channels to the
government, allowing that spectrum to be recovered for other uses. Under the
Balanced Budget Act, however, the FCC is authorized to extend the December 31,
2006 deadline for reclamation of a television station's non-digital channel if,
in any given case: (i) one or more television stations affiliated with ABC, CBS,
NBC or Fox in a market is not broadcasting digitally, and the FCC determines
that such stations have "exercised due diligence" in attempting to convert to
digital broadcasting; or (ii) less than 85% of the television households in the
station's market subscribe to a multichannel video service (cable, wireless
cable or DBS) that carries at least one digital channel from each of the local
stations in that market, and less than 85% of the television households in the
market can receive digital signals off the air using either a set-top converter
box for an analog television set or a new DTV television set. The Balanced
Budget Act also directs the FCC to auction the non-digital channels by September
30, 2002 even though they are not to be reclaimed by the government until at
least December 31, 2006. The Balanced Budget Act also permits broadcasters to
bid on the non-digital channels in cities with populations greater than 400,000,
provided the channels are used for DTV. Thus, it is possible a broadcaster could
own two channels in a market. The FCC has concluded a separate proceeding in
which it reallocated television channels 60 through 69 to other services while
protecting existing television stations on those channels from interference
during the DTV transition period. Additionally, the FCC will open a separate
proceeding to consider to what extent the cable must-carry requirements will
apply to DTV signals.
Implementation of digital television will improve the technical quality of
television signals received by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference. The FCC's DTV allotment plan allows
present UHF stations that move to DTV channels considerably less signal power
than present VHF stations that move to UHF DTV channels. Additionally, the DTV
transmission standard adopted by the FCC may not allow certain stations to
provide a DTV signal of adequate strength to be reliably received by certain
viewers using inside television set antennas. Implementation of digital
television will also impose substantial additional costs on television stations
because of the need to replace equipment
64
<PAGE>
and because some stations will need to operate at higher utility costs and there
can be no assurance that Sinclair's television stations will be able to increase
revenue to offset such costs. The FCC is also considering imposing new public
interest requirements on television licensees in exchange for their receipt of
DTV channels. Sinclair is currently considering plans to provide HDTV, to
provide multiple channels of television, including the provision of additional
broadcast programming and transmitted data on a subscription basis, and to
continue its current TV program channels on its allocated DTV channels. The 1996
Act allows the FCC to charge a spectrum fee to broadcasters who use the digital
spectrum to offer subscription-based services. The FCC has opened a rulemaking
to consider the spectrum fees to be charged to broadcasters for such use. In
addition, Congress has held hearings on broadcasters' plans for the use of their
digital spectrum. Sinclair cannot predict what future actions the FCC or
Congress might take with respect to DTV, nor can it predict the effect of the
FCC's present DTV implementation plan or such future actions on Sinclair's
business.
Proposed Changes
The Congress and the FCC have under consideration, and in the future may
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation, ownership
and profitability of Sinclair's broadcast stations, result in the loss of
audience share and advertising revenues for Sinclair's broadcast stations, and
affect the ability of Sinclair to acquire additional broadcast stations or
finance such acquisitions. In addition to the changes and proposed changes noted
above, such matters may include, for example, the license renewal process,
spectrum use fees, political advertising rates, potential restrictions on the
advertising of certain products (beer, wine and hard liquor, for example), and
the rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations. Other matters that could affect Sinclair's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry, such as direct radio
and television broadcast satellite service, the continued establishment of
wireless cable systems and low power television stations, digital television and
radio technologies, and the advent of telephone company participation in the
provision of video programming service.
Other Considerations
The foregoing summary does not purport to be a complete discussion of all
provisions of the Communications Act or other congressional acts or of the
regulations and policies of the FCC. For further information, reference should
be made to the Communications Act, other congressional acts, and regulations and
public notices promulgated from time to time by the FCC. There are additional
regulations and policies of the FCC and other federal agencies that govern
political broadcasts, public affairs programming, equal employment opportunity,
and other matters affecting Sinclair's business and operations.
ENVIRONMENTAL REGULATION
Prior to Sinclair's ownership or operation of its facilities, substances or
waste 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 at or under Sinclair'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 Sinclair could become subject to
environmental liabilities in the future in connection with these facilities
under applicable environmental laws and regulations. Although Sinclair 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 Sinclair's costs to comply with such
requirements will not increase in the future. Sinclair presently believes that
none of its properties have any condition that is likely to have a material
adverse effect on Sinclair's financial condition or results of operations.
COMPETITION
Sinclair's television and radio stations compete for audience share and
advertising revenue with other television and radio stations in their respective
DMAs or MSA's, as well as with other advertising media, such as newspapers,
magazines, outdoor advertising, transit advertising, yellow page directories,
65
<PAGE>
direct mail and local cable and wireless cable systems. Some competitors are
part of larger organizations with substantially greater financial, technical and
other resources than Sinclair.
Television Competition. Competition in the television broadcasting industry
occurs primarily in individual DMAs. Generally, a television broadcasting
station in one DMA does not compete with stations in other DMAs. Sinclair's
television stations are located in highly competitive DMAs. In addition, certain
of Sinclair's DMAs are overlapped by both over-the-air and cable carriage of
stations in adjacent DMAs, which tends to spread viewership and advertising
expenditures over a larger number of television stations.
Broadcast television stations compete for advertising revenues primarily
with other broadcast television stations, radio stations and cable system
operators serving the same market. ABC, CBS and NBC programming generally
achieves higher household audience levels than Fox, WB and UPN programming and
syndicated programming aired by independent stations. This can be attributed to
a combination of factors, including the efforts of ABC, CBS and NBC to reach a
broader audience, generally better signal carriage available when broadcasting
over VHF channels 2 through 13 versus broadcasting over UHF channels 14 through
69 and the higher number of hours of ABC, CBS and NBC programming being
broadcast weekly. However, greater amounts of advertising time are available for
sale during Fox, UPN and WB programming and non-network syndicated programming,
and as a result Sinclair believes that Sinclair's programming typically achieves
a share of television market advertising revenues greater than its share of a
market's audience.
Television stations compete for audience share primarily on the basis of
program popularity, which has a direct effect on advertising rates. A large
amount of Sinclair's prime time programming is supplied by Fox and WB, and to a
lesser extent UPN, ABC, CBS and NBC. In those periods, Sinclair's affiliated
stations are totally dependent upon the performance of the networks' programs in
attracting viewers. Non-network time periods are programmed by the station
primarily with syndicated programs purchased for cash, cash and barter, or
barter-only, and also through self-produced news, public affairs and other
entertainment programming.
Television advertising rates are based upon factors which include the size
of the DMA in which the station operates, a program's popularity among the
viewers that an advertiser wishes to attract, the number of advertisers
competing for the available time, the demographic makeup of the DMA served by
the station, the availability of alternative advertising media in the DMA
(including radio and cable), the aggressiveness and knowledge of sales forces in
the DMA and development of projects, features and programs that tie advertiser
messages to programming. Sinclair believes that its sales and programming
strategies allow it to compete effectively for advertising within its DMAs.
Other factors that are material to a television station's competitive
position include signal coverage, local program acceptance, network affiliation,
audience characteristics and assigned broadcast frequency. Historically,
Sinclair's UHF broadcast stations have suffered a competitive disadvantage in
comparison to stations with VHF broadcast frequencies. This historic
disadvantage has gradually declined through (i) carriage on cable systems, (ii)
improvement in television receivers, (iii) improvement in television
transmitters, (iv) wider use of all channel antennae, (v) increased availability
of programming, and (vi) the development of new networks such as Fox, WB and
UPN.
The broadcasting industry is continuously faced with technical changes and
innovations, the popularity of competing entertainment and communications media,
changes in labor conditions, and governmental restrictions or actions of federal
regulatory bodies, including the FCC, any of which could possibly have a
material effect on a television station's operations and profits. There are
sources of video service other than conventional television stations, the most
common being cable television, which can increase competition for a broadcast
television station by bringing into its market distant broadcasting signals not
otherwise available to the station's audience, serving as a distribution system
for national satellite-delivered programming and other non-broadcast programming
originated on a cable system and selling advertising time to local advertisers.
Other principal sources of competition include home video exhibition,
direct-to-home broadcast satellite television ("DBS") entertainment services and
multichannel multipoint distribution services ("MMDS"). Moreover, technology
advances and regulatory changes affecting programming delivery through fiber
optic telephone lines and video compression could lower entry barriers for new
video channels and encourage the development of increasingly specialized "niche"
programming. The 1996 Act permits tele-
66
<PAGE>
phone companies to provide video distribution services via radio communication,
on a common carrier basis, as "cable systems" or as "open video systems," each
pursuant to different regulatory schemes. Sinclair is unable to predict the
effect that technological and regulatory changes will have on the broadcast
television industry and on the future profitability and value of a particular
broadcast television station.
The FCC authorizes DBS services throughout the United States. Currently,
two FCC permitees, DirecTV and United States Satellite Broadcasting, provide
subscription DBS services via high-power communications satellites and small
dish receivers, and other companies provide direct-to-home video service using
lower powered satellites and larger receivers. Additional companies are expected
to commence direct-to-home operations in the near future. DBS and MMDS, as well
as other new technologies, will further increase competition in the delivery of
video programming.
Sinclair cannot predict what other video technologies might be considered
or implemented in the future, nor can it judge in advance what impact, if any,
the implementation of any of these proposals or changes might have on its
business.
Sinclair believes that television broadcasting may be enhanced
significantly by the development and increased availability of DTV technology.
This technology has the potential to permit Sinclair to provide viewers multiple
channels of digital television over each of its existing standard channels, to
provide certain programming in a high definition television format and to
deliver various forms of data, including data on the Internet, to home and
business computers. These additional capabilities may provide Sinclair with
additional sources of revenue. Sinclair is currently considering plans to
provide HDTV, to provide multiple channels of television including the provision
of additional broadcast programming and transmitted data on a subscription
basis, and to continue its current TV program channels on its allocated DTV
channels. Sinclair has obtained FCC authority to conduct experimental DTV
multicasting operations in Baltimore, Maryland. The 1996 Act allows the FCC to
charge a spectrum fee to broadcasters who use the digital spectrum to offer
subscription-based services. The FCC has opened a rulemaking to consider the
spectrum fees to be charged to broadcasters for such use. In addition, Congress
has held hearings on broadcasters' plans for the use of their digital spectrum.
Sinclair cannot predict what future actions the FCC or Congress might take with
respect to DTV, nor can it predict the effect of the FCC's present DTV
implementation plan or such future actions on Sinclair's business. DTV
technology is not currently available to the viewing public and a successful
transition from the current analog television format to a digital format may
take many years. There can be no assurance that Sinclair's efforts to take
advantage of the new technology will be commercially successful.
Sinclair also competes for programming, which involves negotiating with
national program distributors or syndicators that sell first-run and rerun
packages of programming. Sinclair's stations compete for exclusive access to
those programs against in-market broadcast station competitors for syndicated
products. Cable systems generally do not compete with local stations for
programming, although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local television
stations. Public broadcasting stations generally compete with commercial
broadcasters for viewers but not for advertising dollars.
Historically, the cost of programming has increased because of an increase
in the number of new independent stations and a shortage of quality programming.
However, Sinclair believes that over the past five years program prices
generally have stabilized.
Sinclair believes it competes favorably against other television stations
because of its management skill and experience, the ability of Sinclair
historically to generate revenue share greater than its audience share, its
network affiliations and its local program acceptance. In addition, Sinclair
believes that it benefits from the operation of multiple broadcast properties,
affording it certain nonquantifiable economies of scale and competitive
advantages in the purchase of programming.
Radio Competition. Radio broadcasting is a highly competitive business, and
each of the radio stations operated by Sinclair competes for audience share and
advertising revenue directly with other radio stations in its geographic market,
as well as with other media, including television, cable television, newspapers,
magazines, direct mail and billboard advertising. The audience ratings and
advertising revenue of each of such stations are subject to change, and any
adverse change in a particular market could
67
<PAGE>
have a material adverse effect on the revenue of such radio stations located in
that market. There can be no assurance that any one of Sinclair's radio stations
will be able to maintain or increase its current audience ratings and radio
advertising revenue market share.
Sinclair attempts to improve each radio station's competitive position with
promotional campaigns designed to enhance and reinforce its identity with the
listening public. Extensive market research is conducted in order to identify
specific demographic groups and design a programming format for those groups.
Sinclair seeks to build a strong listener base composed of specific demographic
groups in each market, and thereby attract advertisers seeking to reach these
listeners. Aside from building its stations' identities and targeting its
programming to specific demographic groups, management believes that Sinclair
also obtains a competitive advantage by operating duopolies or multiple stations
in the nation's larger mid-size markets.
The radio broadcasting industry is also subject to competition from new
media technologies that are being developed or introduced, such as the delivery
of audio programming by cable television systems and by digital audio
broadcasting ("DAB"). DAB may provide a medium for the delivery by satellite or
terrestrial means of multiple new audio programming formats to local and
national audiences. The FCC has issued licenses for two satellite DAB systems.
Historically, the radio broadcasting industry has grown in terms of total
revenues despite the introduction of new technologies for the delivery of
entertainment and information, such as television broadcasting, cable
television, audio tapes and compact disks. There can be no assurance, however,
that the development or introduction in the future of any new media technology
will not have an adverse effect on the radio broadcast industry.
EMPLOYEES
As of March 31, 1998, Sinclair had approximately 2,657 employees. With the
exception of certain of the employees of KOVR-TV, KDNL-TV, WBEN-AM, WWL-AM and
WLMG-FM, none of the employees is represented by labor unions under any
collective bargaining agreement. No significant labor problems have been
experienced by Sinclair, and Sinclair considers its overall labor relations to
be good.
68
<PAGE>
LEGAL PROCEEDINGS
On July 14, 1997, Sinclair publicly announced that it had reached an
agreement for certain of its owned and/or programmed television stations which
were affiliated with UPN to become affiliated with WB beginning January 16,
1998. On August 1, 1997, UPN informed Sinclair that it did not believe Sinclair
or its affiliates had provided proper notice of their intention not to extend
the UPN affiliation agreements beyond January 15, 1998, and, accordingly, that
these agreements had been automatically renewed through January 15, 2001.
In August 1997, UPN filed an action (the "California Action") in Los
Angeles Superior Court against Sinclair, seeking declaratory relief and specific
performance or, in the alternative, unspecified damages and alleging that
neither Sinclair nor its affiliates provided proper notice of their intention
not to extend the current UPN affiliations beyond January 15, 1998. Certain
subsidiaries of Sinclair filed an action (the "Baltimore Action") in the Circuit
Court for Baltimore City seeking declaratory relief that their notice was
effective to terminate the affiliations on January 15, 1998. On December 9,
1997, the court in the Baltimore Action ruled that Sinclair gave timely and
proper notice to effectively terminate the affiliations as of January 15, 1998
and granted Sinclair's motion for summary judgment. Based on the decision in the
Baltimore Action, the court in the Los Angeles Superior Court has stayed all
proceedings in the California Action. Following an appeal by UPN, the court of
Special Appeals of Maryland upheld the ruling in the Baltimore Action and UPN is
seeking further appellate review by the Maryland Court of Appeals. See "Risk
Factors -- Certain Network Affiliation Agreements". Although Sinclair believes
that proper notice of intention not to extend was provided to UPN, there can be
no assurance that Sinclair and its subsidiaries will prevail in these
proceedings or that the outcome of these proceedings, if adverse to Sinclair and
its subsidiaries, will not have a material adverse effect on Sinclair.
Sinclair currently and from time to time is involved in litigation
incidental to the conduct of its business. Except as described above, Sinclair
is not a party to any lawsuit or proceeding that in the opinion of Sinclair will
have a material adverse effect.
MANAGEMENT OF SINCLAIR
Set forth below is certain information relating to Sinclair's executive
officers, directors, certain key employees and persons expected to become
executive officers, directors or key employees.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
David D. Smith ................ 47 President, Chief Executive Officer, Director and
Chairman of the Board
Frederick G. Smith ............ 48 Vice President and Director
J. Duncan Smith ............... 43 Vice President, Secretary and Director
Robert E. Smith ............... 34 Vice President, Treasurer and Director
David B. Amy .................. 45 Chief Financial Officer
Barry Drake ................... 46 Chief Operating Officer, SCI Radio
Robert Gluck .................. 39 Regional Director, SCI
Michael Granados .............. 43 Regional Director, SCI
Steven M. Marks ............... 41 Regional Director, SCI
Stuart Powell ................. 56 Regional Director, SCI
John T. Quigley ............... 54 Regional Director, SCI
Frank Quitoni ................. 53 Regional Director, SCI
Frank W. Bell ................. 42 Vice President, Programming, SCI Radio
M. William Butler ............. 45 Vice President/Group Program Director, SCI
Lynn A. Deppen ................ 40 Vice President, Engineering, SCI Radio
Michael Draman ................ 48 Vice President/TV Sales and Marketing, SCI
Stephen A. Eisenberg .......... 55 Vice President/Director of National Sales, SCI
Nat Ostroff ................... 57 Vice President/New Technology
Delbert R. Parks, III ......... 45 Vice President/Operations and Engineering, SCI
Robert E. Quicksilver ......... 43 Vice President/General Counsel, SCI
Thomas E. Severson ............ 34 Corporate Controller
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------------- ----- ------------------------------------------------
<S> <C> <C>
Michael E. Sileck ............. 37 Vice President/Finance, SCI
Robin A. Smith ................ 41 Chief Financial Officer, SCI Radio
Patrick J. Talamantes ......... 33 Director of Corporate Finance, Treasurer of SCI
Lawrence E. McCanna ........... 54 Director
Basil A. Thomas ............... 82 Director
</TABLE>
In addition to the foregoing, the following persons have agreed to serve as
executive officers and/or directors of Sinclair as soon as permissible under the
rules of the FCC and applicable laws. See "Risk Factors -- Dependence Upon Key
Personnel; Employment Agreements with Key Personnel."
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---------------------- ----- --------------------------------------------
<S> <C> <C>
Barry Baker .......... 45 Executive Vice President of Sinclair, Chief
Executive Officer of SCI and Director
Kerby Confer ......... 56 Chief Executive Officer, SCI Radio
</TABLE>
In connection with the River City Acquisition, Sinclair agreed to increase
the size of the Board of Directors from seven members to eight to accommodate
the prospective appointment of Barry Baker. Mr. Baker and Mr. Confer currently
serve as consultants to Sinclair.
Members of the Board of Directors are elected for one-year terms and until
their successors are duly elected and qualified. Executive officers are
appointed by the Board of Directors annually to serve for one-year terms and
until their successors are duly appointed and qualified.
David D. Smith has served as President, Chief Executive Officer and
Chairman of the Board since September 1990. Prior to that, he served as General
Manager of WPTT, Pittsburgh, Pennsylvania, from 1984, and assumed the financial
and engineering responsibility for Sinclair, including the construction of WTTE,
Columbus, Ohio, in 1984. In 1980, Mr. Smith founded Comark Television, Inc.,
which applied for and was granted the permit for WPXT-TV in Portland, Maine and
which purchased WDSI-TV in Chattanooga, Tennessee. WPXT-TV was sold one year
after construction and WDSI-TV was sold two years after its acquisition. From
1978 to 1986, Mr. Smith co-founded and served as an officer and director of
Comark Communications, Inc., a company engaged in the manufacture of high power
transmitters for UHF television stations. His television career began with WBFF
in Baltimore, where he helped in the construction of the station and was in
charge of technical maintenance until 1978. David D. Smith, Frederick G. Smith,
J. Duncan Smith and Robert E. Smith are brothers.
Frederick G. Smith has served as Vice President of Sinclair since 1990 and
as a Director since 1986. Prior to joining Sinclair in 1990, Mr. Smith was an
oral and maxillofacial surgeon engaged in private practice and was employed by
Frederick G. Smith, M.S., D.D.S., P.A., a professional corporation of which Mr.
Smith was the sole officer, director and stockholder.
J. Duncan Smith has served as Vice President, Secretary and a Director of
Sinclair since 1988. Prior to that, he worked for Comark Communications, Inc.
installing UHF transmitters. In addition, he also worked extensively on the
construction of WPTT in Pittsburgh, WTTE in Columbus, WIIB in Bloomington and
WTTA in St. Petersburg, as well as on the renovation of the new studio, offices
and news facility for WBFF in Baltimore.
Robert E. Smith has served as Vice President, Treasurer and a Director of
Sinclair since 1988. Prior to that, he served as Program Director at WBFF from
1986 to 1988. Prior to that, he assisted in the construction of WTTE and also
worked for Comark Communications, Inc. installing UHF transmitters.
David B. Amy has served as Chief Financial Officer ("CFO") since October of
1994. In addition, he serves as Secretary of Sinclair Communications, Inc.,
Sinclair subsidiary which owns and operates the broadcasting operations. Prior
to his appointment as CFO, Mr. Amy served as the Corporate Controller of
Sinclair beginning in 1986 and has been Sinclair's Chief Accounting Officer
since that time. Mr. Amy has over thirteen years of broadcast experience, having
joined Sinclair as a business manager for WCWB in Pittsburgh. Mr. Amy received
an MBA degree from the University of Pittsburgh in 1981.
70
<PAGE>
Barry Drake has served as Chief Operating Officer of SCI Radio since
completion of the River City Acquisition. Prior to that time, he was Chief
Operating Officer -- Keymarket Radio Division of River City since July 1995.
Prior to that time, he was President and Chief Operating Officer of Keymarket
since 1988. From 1985 through 1988, Mr. Drake performed the duties of the
President of each of the Keymarket broadcasting entities, with responsibility
for three stations located in Houston, St. Louis and Detroit.
Robert Gluck has served as Regional Director of Sinclair since August 1997.
As Regional Director, Mr. Gluck is responsible for the Milwaukee and
Raleigh/Durham markets. Prior to joining Sinclair, Mr. Gluck served as General
Manager at WTIC-TV in the Hartford-New Haven market. Prior to joining WTIC-TV in
1988, Mr. Gluck served as National Sales Manager and Local Sales Manager of
WLVI-TV in Boston. Before joining WLVI-TV, Mr. Gluck served in various sales and
management capacities with New York national sales representative firms.
Michael Granados has served as a Regional Director of Sinclair since July
1996. As a Regional Director, Mr. Granados is responsible for the San Antonio,
Des Moines, Peoria and Las Vegas markets. Prior to July 1996, Mr. Granados has
served in various positions with Sinclair and, before the River City
Acquisition, with River City. He served as the General Sales Manager of KABB
from 1989 to 1993, the Station Manager and Director of Sales of WTTV from 1993
to 1994 and the General Manager of WTTV prior to his appointment as Regional
Director in 1996.
Steven M. Marks has served as Regional Director for Sinclair since October
1994. As Regional Director, Mr. Marks is responsible for the Baltimore, Norfolk,
Flint and Birmingham markets. Prior to his appointment as Regional Director, Mr.
Marks served as General Manager for WBFF since July 1991. From 1986 until
joining WBFF in 1991, Mr. Marks served as General Sales Manager at WTTE. Prior
to that time, he was national sales manager for WFLX-TV in West Palm Beach,
Florida.
Stuart Powell has served as a Regional Director since December 15, 1997. As
a Regional Director, Mr. Powell is responsible for the Pittsburgh, Kansas City
and Lexington markets. Prior to joining Sinclair, Mr. Powell served as Vice
President and General Manager at WXIX-TV in the Cincinnati market. Prior to
joining WXIX-TV in 1992, Mr. Powell served as General Manager of WFLD in
Chicago. Before joining WFLD, Mr. Powell served in various sales and management
capacities with Scripps Howard in Phoenix and Kansas City.
John T. Quigley has served as a Regional Director of Sinclair since June
1996. As Regional Director, Mr. Quigley is responsible for the Columbus,
Cincinnati, and Oklahoma City markets. Prior to that time, Mr. Quigley served as
general manager of WTTE since July 1985. Prior to joining WTTE, Mr. Quigley
served in broadcast management positions at WCPO-TV in Cincinnati, Ohio and
WPTV-TV in West Palm Beach, Florida.
Frank Quitoni has served as a Regional Director since completion of the
River City Acquisition. As Regional Director, Mr. Quitoni is responsible for the
St. Louis, Sacramento, Indianapolis and Asheville/ Greenville/Spartanburg
markets. Prior to joining Sinclair, he was Vice President of Operations for
River City since 1995. Mr. Quitoni had served as the Director of Operations and
Engineering for River City since 1994. Prior thereto Mr. Quitoni served as a
consultant to CBS beginning in 1989. Mr. Quitoni was the Director of Olympic
Operations for CBS Sports for the 1992 Winter Olympic Games and consulted with
CBS for the 1994 Winter Olympic Games. Mr. Quitoni was awarded the Technical
Achievement Emmy for the 1992 and 1994 CBS Olympic broadcasts.
Frank W. Bell has served as Vice President/Radio Programming of SCI Radio
since Sinclair's acquisition of the assets of River City in 1996. Prior to that
time, he served in the same capacity in the Keymarket Radio Division of River
City Broadcasting since 1995, and for Keymarket Communications since 1987. From
1981 through 1987, Mr. Bell owned and operated several radio stations in
Pennsylvania and Kansas. Before that, he served two years as a Regional Manager
for the National Association of Broadcasters.
M. William Butler has served as Vice President/Group Program Director, SCI
since 1997. From 1995 to 1997, Mr. Butler served as Director of Programming at
KCAL, the Walt Disney Company station in Los Angeles, California. From 1991 to
1995, he was Director of Marketing and Programming
71
<PAGE>
at WTXF in Philadelphia, Pennsylvania and prior to that he held the same
position at WLVI in Boston, Massachusetts. Mr. Butler attended the Graduate
Business School of the University of Cincinnati from 1975 to 1976.
Lynn A. Deppen has served as Director of Engineering/Radio Division of SCI
Radio since Sinclair's acquisition of the assets of River City in 1996. Prior to
that time, he served in the same position for the Keymarket Radio Division of
River City Broadcasting since 1995, and for Keymarket Communications since 1985.
Mr. Deppen has owned and operated his own technical consulting firm as well as
radio stations in Pennsylvania, New York and Ohio.
Michael Draman has served as Vice President/TV Sales and Marketing, SCI
since 1997. From 1995 until joining Sinclair, Mr. Draman served as Vice
President of Revenue Development for New World Television. From 1983 to 1995, he
was Director of Sales and Marketing for WSVN in Miami, Florida. Mr. Draman
attended The American University and The Harvard Business School and served with
the U.S. Marine Corps in Vietnam.
Stephen A. Eisenberg has served as Director of National Sales, SCI since
November 1996. Prior to joining Sinclair, he worked since 1975 in various
capacities at Petry Television, including most recently as Vice
President/Director of Sales with total national sales responsibility for KTTV in
Los Angeles, California, KCPQ-TV in Seattle, Washington, WTNH-TV in New Haven,
Connecticut, WKYC-TV in Cleveland, Ohio, WBIR-TV in Knoxville, Tennessee,
WKEF-TV in Dayton, Ohio and WTMJ-TV in Milwaukee, Wisconsin. Mr. Eisenberg
received an MS degree in Journalism from Northwestern's Medill School and a BA
degree from Brooklyn College.
Nat Ostroff has served as Vice President for New Technology since joining
Sinclair in January of 1996. From 1984 until joining Sinclair, he was the
President and CEO of Comark Communication Inc., a leading manufacturer of UHF
transmission equipment. While at Comark, Mr. Ostroff was nominated and awarded a
Prime Time Emmy Award for outstanding engineering achievement for the
development of new UHF transmitter technologies in 1993. In 1968, Mr. Ostroff
founded Acrodyne Industries Inc., a manufacturer of TV transmitters and a public
company and served as its first President and CEO. Mr. Ostroff holds a BSEE
degree from Drexel University and an MEEE degree from New York University. He is
a member of several industry organizations, including, AFCCE, IEEE and SBE.
Delbert R. Parks III has served as Vice President of Operations and
Engineering since the completion of the River City Acquisition. Prior to that
time, he was Director of Operations and Engineering for WBFF and Sinclair since
1985, and has been with Sinclair for 25 years. He is responsible for planning,
organizing and implementing operational and engineering policies and strategies
as they relate to television and computer systems. Currently, he is
consolidating facilities for Sinclair's television stations and has just
completed a digital facility for Sinclair's news and technical operation in
Pittsburgh. Mr. Parks was also a Lieutenant Colonel in the Maryland Army
National Guard and commanded the 1st Battalion, 175th Infantry (Light).
Robert E. Quicksilver has served as Vice President/General Counsel, SCI
since completion of the River City Acquisition. Prior to that time he served as
General Counsel of River City since September 1994. From 1988 to 1994, Mr.
Quicksilver was a partner of the law firm of Rosenblum, Goldenhersh, Silverstein
and Zafft, P.C. in St. Louis. Mr. Quicksilver holds a B.A. from Dartmouth
College and a J.D. from The University of Michigan.
Thomas E. Severson has served as Corporate Controller since January 1997.
Prior to that time, Mr. Severson served as Assistant Controller of Sinclair
since 1995. Prior to joining Sinclair, Mr. Severson held positions in the audit
departments of KPMG Peat Marwick LLP and Deloitte & Touche LLP from 1991 to
1995. Mr. Severson is a graduate of The University of Baltimore and is a member
of the American Institute of Certified Public Accountants and the Maryland
Association of Certified Public Accountants.
Michael E. Sileck has served as Vice President/Finance of SCI since
completion of the River City Acquisition. Prior to that time he served as the
Director of Finance for River City since 1993. Mr. Sileck joined River City in
July 1990 as Director of Finance and Business Affairs for KDNL-TV. Mr. Sileck is
72
<PAGE>
an active member of the Broadcast Cable Financial Management Association
("BCFM") and was a Director of BCFM from 1993 to 1996. Mr. Sileck, a Certified
Public Accountant, received a B.S. degree in Accounting from Wayne State
University and an M.B.A. in Finance from Oklahoma City University.
Robin A. Smith has served as Chief Financial Officer, SCI Radio since June
1996. From 1993 until joining Sinclair, Ms. Smith served as Vice President and
Chief Financial Officer of the Park Lane Group of Menlo Park, California, which
owned and operated small market radio stations. From 1982 to 1993, she served as
Vice President and Treasurer of Edens Broadcasting, Inc. in Phoenix, Arizona,
which owns and operates radio stations in major markets. Ms. Smith is a graduate
of the Arizona State University and is a Certified Public Accountant.
Patrick J. Talamantes has served as Director of Corporate Finance and
Treasurer of SCI since completion of the River City Acquisition. Prior to that
time, he served as Treasurer for River City since April 1995. From 1991 to 1995,
he was a Vice President with Chemical Bank, where he completed financings for
clients in the cable, broadcasting, publishing and entertainment industries. Mr.
Talamantes holds a B.A. degree from Stanford University and an M.B.A. from the
Wharton School at the University of Pennsylvania.
Lawrence E. McCanna has served as a Director of Sinclair since July 1995.
Mr. McCanna has been a partner of the accounting firm of Gross, Mendelsohn &
Associates, P.A., since 1972 and has served as its managing partner since 1982.
Mr. McCanna has served on various committees of the Maryland Association of
Certified Public Accountants and was chairman of the Management of the
Accounting Practice Committee. He is also a former member of the Management of
an Accounting Practice Committee of the American Institute of Certified Public
Accountants. Mr. McCanna is a member of the board of directors of Maryland
Special Olympics.
Basil A. Thomas has served as a Director of Sinclair since November 1993.
He is of counsel to the Baltimore law firm of Thomas & Libowitz, P.A. and has
been in the private practice of law since 1983. From 1961 to 1968, Judge Thomas
served as an Associate Judge on the Municipal Court of Baltimore City and, from
1968 to 1983, he served as an Associate Judge of the Supreme Bench of Baltimore
City. Judge Thomas is a trustee of the University of Baltimore and a member of
the American Bar Association and the Maryland State Bar Association. Judge
Thomas attended the College of William & Mary and received his L.L.B. from the
University of Baltimore. Judge Thomas is the father of Steven A. Thomas, a
senior attorney and founder of Thomas & Libowitz, counsel to Sinclair.
Barry Baker has been the Chief Executive Officer of River City since 1989,
and is the President of the corporate general partner of River City and Better
Communications, Inc. ("BCI"). The principal business of both River City and BCI
is television and radio broadcasting. In connection with the River City
Acquisition, Sinclair agreed to appoint Mr. Baker Executive Vice President of
Sinclair and to elect him as a Director at such time as he is eligible to hold
those positions under applicable FCC regulations. He currently serves as a
consultant to Sinclair.
Kerby Confer served as a member of the Board of Representatives and Chief
Executive Officer -- Keymarket Radio Division of River City since July 1995.
Prior thereto, Mr. Confer served as Chairman of the Board and Chief Executive
Officer of Keymarket since its founding in December 1981. Prior to engaging in
the acquisition of various radio stations in 1975, Mr. Confer held a number of
jobs in the broadcast business, including serving as Managing Partner of a radio
station in Annapolis, Maryland from 1969 to 1975. From 1966 to 1969, he hosted a
pop music television show on WBAL-TV (Baltimore) and WDCA-TV (Washington, D.C.).
Prior thereto, Mr. Confer served as program director or producer/director for
radio and television stations owned by Susquehanna Broadcasting and Plough
Broadcasting Company, Inc. Mr. Confer currently provides services to Sinclair
and is expected to become Chief Executive Officer of SCI Radio at such time as
he is eligible to hold this position under applicable FCC regulations.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with David D. Smith,
President and Chief Executive Officer of the Company. David Smith's employment
agreement has an initial term of three years commencing in June 1995 and is
renewable for additional one-year terms, unless either party
73
<PAGE>
gives notice of termination not less than 60 days prior to the expiration of the
then current term. As of January 1, 1998, Mr. Smith receives a base salary of
approximately $1,386,750, subject to annual increases of 7 1/2% on January 1 of
each year. Mr. Smith is also entitled to participate in the Company's Executive
Bonus Plan based upon the performance of the Company during the year. The
employment agreement provides that the Company may terminate Mr. Smith's
employment prior to expiration of the agreement's term as a result of (i) a
breach by Mr. Smith of any material covenant, promise or agreement contained in
the employment agreement; (ii) a dissolution or winding up of the Company; (iii)
the disability of Mr. Smith for more than 210 days in any twelve month period
(as determined under the employment agreement or (iv) for cause, which includes
conviction of certain crimes, breach of a fiduciary duty to the Company or the
stockholders, or repeated failure to exercise or undertake his duties as an
officer of the Company (each, a "Termination Event").
In June 1995, the Company entered into an employment agreement with
Frederick G. Smith, Vice President of the Company. Frederick Smith's employment
agreement has an initial term of three years and is renewable for additional
one-year terms, unless either party gives notice of termination not less than 60
days prior to the expiration of the then current term. Under the agreement, Mr.
Smith receives a base salary and is also entitled to participate in the
Company's Executive Bonus Plan based upon the performance of the Company and Mr.
Smith during the year. The employment agreement provides that the Company may
terminate Mr. Smith's employment prior to expiration of the agreement's term as
a result of a Termination Event.
In June 1995, the Company entered into an employment agreement with J.
Duncan Smith, Vice President and Secretary of the Company. J. Duncan Smith's
employment agreement has an initial term of three years and is renewable for
additional one-year terms, unless either party gives notice of termination not
less than 60 days prior to the expiration of the then current term. Under the
agreement, Mr. Smith receives a base salary and is also entitled to participate
in the Company's Executive Bonus Plan based upon the performance of the Company
and Mr. Smith during the year. The employment agreement provides that the
Company may terminate Mr. Smith's employment prior to expiration of the
agreement's term as a result of a Termination Event.
In June 1995, the Company entered into an employment agreement with Robert
E. Smith, Vice President and Treasurer of the Company. Robert E. Smith's
employment agreement has an initial term of three years and is renewable for
additional one-year terms, unless either party gives notice of termination not
less than 60 days prior to the expiration of the then current term. Under the
agreement, Mr. Smith receives a base salary 0 and is also entitled to
participate in the Company's Executive Bonus Plan based upon the performance of
the Company and Mr. Smith during the year. The employment agreement provides
that the Company may terminate Mr. Smith's employment prior to expiration of the
agreement's term as a result of a Termination Event.
The employment contracts for Frederick G. Smith, J. Duncan Smith, and
Robert E. Smith, described above will, pursuant to their terms, expire on June
12, 1998. The Company believes that modifications to the terms of the agreements
are appropriate in light of the growth of the Company since 1995. The Company
expects that each of these individuals will continue to devote his time and
attention to the business of the Company and participate in the establishment of
goals and policies for the Company. The Company expects to enter into new
agreements prior to the expiration of the current agreements.
In connection with the River City Acquisition, the Company entered into an
employment agreement (the "Baker Employment Agreement") with Barry Baker
pursuant to which Mr. Baker will become President and Chief Executive Officer of
SCI and Executive Vice President of the Company at such time as Mr. Baker is
able to hold those positions consistent with applicable FCC regulations. Until
such time as Mr. Baker is able to become an officer of the Company, he serves as
a consultant to the Company pursuant to a consulting agreement and receives
compensation that he would be entitled to as an officer under the Baker
Employment Agreement. While Mr. Baker acts as consultant to the Company he will
not direct employees of Sinclair in the operation of its television stations and
will not perform services relating to any shareholder, bank financing or
regulatory compliance matters with respect to the Company. In addition, Mr.
Baker will
74
<PAGE>
remain the Chief Executive Officer of River City and will devote a substantial
amount of his business time and energies to those services. As of January 1,
1998, Mr. Baker receives base compensation of approximately $1,155,625 per year,
subject to annual increases of 7 1/2% on January 1 each year. Mr. Baker is also
entitled to receive a bonus equal to 2% of the amount by which the Broadcast
Cash Flow (as defined in the Baker Employment Agreement) of SCI for a year
exceeds the Broadcast Cash Flow for the immediately preceding year. Mr. Baker
has received options to acquire 1,382,435 shares of the Class A Common Stock (or
3.33% of the common equity of Sinclair determined on a fully diluted basis as of
the date of the River City Acquisition). The option became exercisable with
respect to 50% of the shares upon closing of the River City Acquisition, and
became exercisable with respect to an additional 25% of the shares on the first
anniversary of the closing of the River City Acquisition, and will become
exercisable with respect to the remaining 25% on the second anniversary of the
closing of the River City Acquisition. The exercise price of the option is
approximately $30.11 per share. The term of the Baker Employment Agreement
extends until May 31, 2001, and is automatically extended to the third
anniversary of any Change of Control (as defined in the Baker Employment
Agreement). If the Baker Employment Agreement is terminated as a result of a
Series B Trigger Event (as defined below), then Mr. Baker shall be entitled to a
termination payment equal to the amount that would have been paid in base salary
for the remainder of the term of the agreement plus bonuses that would be paid
for such period based on the average bonus paid to Mr. Baker for the previous
three years, and all options shall vest immediately upon such termination. In
addition, upon such a termination, Mr. Baker shall have the option to purchase
from the Company for the fair market value thereof either (i) all broadcast
operations of Sinclair in the St. Louis, Missouri DMA or (at the option of Mr.
Baker) the Asheville, North Carolina/Greenville/Spartanburg, South Carolina DMA
or (ii) all of the Company's radio broadcast operations. Mr. Baker shall also
have the right following such a termination to receive quarterly payments (which
may be paid either in cash or, at the Company's option, in additional shares of
Class A Common Stock) equal to 5.00% of the fair market value (on the date of
each payment) of all stock options and common stock issued pursuant to the
exercise of such stock options or pursuant to payments of this obligation in
shares of Class A Common Stock and held by him at the time of such payment
(except that the first such payment shall be 3.75% of such value). The fair
market value of unexercised options for such purpose shall be equal to the
market price of underlying shares less the exercise price of the options.
Following termination of Mr. Baker's employment agreement, the Company shall
have the option to purchase the options and shares from Mr. Baker at their
market value. A "Series B Trigger Event" means the termination of Barry Baker's
employment with the Company prior to the expiration of the initial five-year
term of the Baker Employment Agreement (i) by the Company for any reason other
than "for cause" (as defined in the Baker Employment Agreement) or (ii) by Barry
Baker under certain circumstances, including (a) on 60 days' prior written
notice given at any time within 180 days following a Change of Control; (b) if
Mr. Baker is not elected (and continued) as a director of Sinclair or SCI, as
President and Chief Executive Officer of SCI or as Executive Vice President of
Sinclair, or Mr. Baker shall be removed from any such board or office; (c) upon
a material breach by Sinclair or SCI of the Baker Employment Agreement which is
not cured; (d) if there shall be a material diminution in Mr. Baker's authority
or responsibility, or certain of his economic benefits are materially reduced,
or Mr. Baker shall be required to work outside Baltimore; or (e) the effective
date of his employment as contemplated by clause (b) shall not have occurred by
August 31, 1997. Mr. Baker cannot be appointed to such positions with the
Company or SCI until certain events occur with respect to WTTV and WTTK or WIIB
in Indianapolis and WTTE or WSYX in Columbus. These events have not occurred as
of the date of this Information Statement/Prospectus and, accordingly, Mr. Baker
is able to terminate the Baker Employment Agreement at any time.
75
<PAGE>
EXECUTIVE COMPENSATION OF SINCLAIR OFFICERS
The following table sets forth certain information regarding the annual and
long-term compensation by Sinclair for services rendered in all capacities
during the year ended December 31, 1997 by the Chief Executive Officer and the
four other executive officers of Sinclair as to whom the total annual salary and
bonus exceeded $100,000 in 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (a) OPTIONS GRANTED (#) COMPENSATION (b)
------------------ ---- ------ --------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
David D. Smith
President and Chief Executive Officer ... 1997 $1,354,490 $ 98,224 -- $ 6,306
1996 767,308 317,913 -- 6,748
1995 450,000 343,213 -- 4,592
Frederick G. Smith
Vice President .......................... 1997 273,000 -- -- 5,912
1996 260,000 233,054 -- 6,704
1995 260,000 258,354 -- 20,361
J. Duncan Smith
Secretary ............................... 1997 283,500 -- -- 15,569
1996 270,000 243,485 -- 18,494
1995 270,000 268,354 -- 21,467
Robert E. Smith
Secretary ............................... 1997 259,615 -- -- 5,539
1996 250,000 233,054 -- 6,300
1995 250,000 258,354 -- 4,592
David B. Amy
Chief Financial Officer ................. 1997 189,000 50,000 25,000 10,140
1996 173,582 31,000 -- 7,766
1995 132,310 20,000 7,500 7,868
</TABLE>
- ----------
(a) The bonuses reported in this column represent amounts awarded and paid
during the fiscal years noted but relate to the fiscal year immediately
prior to the year noted.
(b) All other compensation consists of income deemed received for personal use
of Company-leased automobiles, the Company's 401 (k) contribution, life
insurance and long-term disability coverage.
In addition to the foregoing, Mr. Barry Baker has agreed to serve as an
executive officer and director, and Mr. Kerby Confer has agreed to serve as an
executive officer, of the Company as soon as permissible under the rules of the
FCC and applicable laws and have received consulting fees during the year ended
December 31, 1997 of $1,179,856 and $328,568 respectively.
STOCK OPTIONS
No grants of stock options were made during 1997 to the Named Executive
Officers other than the options with respect to 25,000 shares of Class A Common
Stock which were granted to David Amy. The following table shows the number of
stock options exercised during 1997 and the 1997 year-end value of the stock
options held by the Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(a)
SHARES ACQUIRED VALUE -------------------- -----------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David D. Smith ............. -- $-- -- -- $ -- $ --
Frederick G. Smith ......... -- -- -- -- -- --
J. Duncan Smith ............ -- -- -- -- -- --
Robert E. Smith ............ -- -- -- -- -- --
David B. Amy ............... -- -- 11,500 21,000 226,363 212,613
</TABLE>
- ----------
(a) An "In-the-Money" option is an option for which the option price of the
underlying stock is less than the market price at December 31, 1997, and
all of the value shown reflects stock price appreciation since the granting
of the option.
76
<PAGE>
DIRECTOR COMPENSATION
Directors of the Company who also are employees of the Company serve
without additional compensation. Independent directors receive $15,000 annually.
These independent directors also receive $1,000 for each meeting of the Board of
Directors attended and $500 for each committee meeting attended. In addition,
the independent directors are reimbursed for any expenses incurred in connection
with their attendance at such meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Other than as follows, no Named Executive Officer is a director of a
corporation that has a director or executive officer who is also a director of
the Company. Each of David D. Smith, Frederick G. Smith, J. Duncan Smith and
Robert E. Smith (the "Controlling Stockholders") (all of whom are directors of
the Company and Named Executive Officers) is a director and/or executive officer
of each of various other corporations controlled by the Controlling
Stockholders.
During 1997, none of the Named Executive Officers participated in any
deliberations of the Company's Board of Directors or the Compensation Committee
relating to compensation of the Named Executive Officers.
The members of the Compensation Committee are Messrs. Thomas and McCanna.
Mr. Thomas is of counsel to the law firm of Thomas & Libowitz, and is the father
of Steven A. Thomas, a senior attorney and founder of Thomas & Libowitz, P.A.
During 1997, the Company paid Thomas & Libowitz, P.A., approximately $919,058 in
fees and expenses for legal services.
77
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SINCLAIR
The following table sets forth as of March 5, 1998 the number and
percentage of outstanding shares of the Company's Common Stock beneficially
owned by (i) all persons known by the Company to beneficially own more than 5%
of the Company's Common Stock, (ii) each director and each Named Executive
Officer who is a stockholder, and (iii) all director and executive officers as a
group. Unless noted otherwise, the business address of each of the following is
2000 West 41st Street, Baltimore, MD 21211:
<TABLE>
<CAPTION>
SHARES OF CLASS B SHARES OF CLASS A
COMMON STOCK COMMON STOCK PERCENT OF
BENEFICIALLY OWNED BENEFICIALLY OWNED TOTAL
------------------------ ------------------------ VOTING
NAME NUMBER PERCENT NUMBER PERCENT POWER (A)
---- ------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
David D. Smith (b) ............................ 6,924,999 27.6% 6,935,057 22.5% 25.7%
Frederick G. Smith (b)(c) ..................... 5,840,795 23.3% 5,844,853 19.7% 22.0%
J. Duncan Smith (b)(d) ........................ 6,569,994 26.2% 6,570,020 21.6% 24.4%
Robert E. Smith (b)(e) ........................ 5,748,644 22.9% 5,748,702 19.4% 21.3%
David B. Amy (f) .............................. 102,382 * *
Basil A. Thomas ............................... 2,000 * *
Lawrence E. McCanna ........................... 300 * *
Barry Baker (g) ............................... 1,382,435 5.8% *
Putnam Investments, Inc. (h) .................. 4,393,534 18.4% 1.6%
One Post Office Square
Boston, Massachusetts 02109
T. Rowe Price Associates, Inc. (h)(i) ......... 933,500 3.9% *
100 East Pratt Street
Baltimore, Maryland 21202
Lynn & Mayer, Inc. (h) ........................ 819,000 3.4% *
520 Madison Avenue
New York, New York 10022
The Equitable Companies Incorporated (h) 1,162,725 4.9% *
787 Seventh Avenue
New York, New York 10019
All directors and executive
officers as a group (7 persons) .............. 25,084,432 100.0% 25,203,313 51.4% 93.4%
</TABLE>
- ----------
* Less than 1%
(a) Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share except
for votes relating to "going private" and certain other transactions. The
Class A Common Stock, the Class B Common Stock and the Series B Preferred
Stock vote altogether as a single class except as otherwise may be required
by Maryland law on all matters presented for a vote, with each share of
Series B Preferred Stock entitled to approximately 3.64 votes on all such
matters. Holders of Class B Common Stock may at any time convert their
shares into the same number of shares of Class A Common Stock and holders
of Series B Preferred Stock may at any time convert each share of Series B
Preferred Stock into approximately 3.64 shares of Class A Common Stock.
(b) Shares of Class A Common Stock beneficially owned includes shares of Class
B Common Stock beneficially owned, each of which is convertible into one
share of Class A Common Stock.
(c) Includes 430,145 shares held in irrevocable trusts established by Frederick
G. Smith for the benefit of his children and as to which Mr. Smith has the
power to acquire by substitution of trust property. Absent such
substitution, Mr. Smith would have no power to vote or dispose of the
shares.
(d) Includes 456,695 shares held in irrevocable trusts established by J. Duncan
Smith for the benefit of his children and as to which Mr. Smith has the
power to acquire by substitution of trust property. Absent such
substitution, Mr. Smith would have no power to vote or dispose of the
shares.
(e) Includes 782,855 shares held in irrevocable trusts established by Robert E.
Smith for the benefit of his children and as to which Mr. Smith has the
power to acquire by substitution of trust property. Absent such
substitution, Mr. Smith would have no power to vote or dispose of the
shares.
78
<PAGE>
(f) Includes 100,000 shares of Class A Common Stock that may be acquired upon
exercise of options granted in 1995, 1996 and 1998 pursuant to the
Incentive Stock Option Plan and Long Term Incentive Plan.
(g) Consists of 1,382,435 shares of Class A Common Stock that may be acquired
upon exercise of options granted in 1996 pursuant to the Long Term
Incentive Plan.
(h) The shares reflected herein reflect the most recent information available
to the Company as filed with the Commission.
(i) These securities are owned by various individual and institutional
investors to which T. Rowe Price Associates, Inc. ("Price Associates")
serves as investment advisor with power to direct investments and/or sole
voting power to vote the securities. For purposes of the reporting
requirements of the Securities Exchange Act of 1934, Price Associates is
deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, beneficial owner of
such securities.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF SINCLAIR
Since December 31, 1996, Sinclair has engaged in the following transactions
with persons who are, or are members of the immediate family of, directors,
persons expected to become a director, officers or beneficial owners of 5% or
more of the issued and outstanding Common Stock, or with entities in which such
persons or certain of their relatives have interests.
WPTT NOTE
In connection with the sale of WPTT in Pittsburgh by Sinclair to WPTT,
Inc., WPTT, Inc., issued to Sinclair a 15-year senior secured term note of $6.0
million (the "WPTT Note"). Sinclair subsequently sold the WPTT Note to the late
Julian S. Smith and Carolyn C. Smith, the parents of the Controlling
Stockholders and both former stockholders of Sinclair, in exchange for the
payment of $50,000 and the issuance of a $6.6 million note, which bears interest
at 7.21% per annum and requires payments of interest only through September
2001. Monthly principal payments of $109,317 plus interest are payable with
respect to this note commencing in November 2001 and ending in September 2006,
at which time the remaining principal balance plus accrued interest, if any, is
due. During the year ended December 31, 1997, Sinclair received $439,000 in
interest payments on this note. At December 31, 1997, the balance on this note
was $6.6 million.
WIIB NOTE
In September 1990, Sinclair sold all the stock of Channel 63, Inc., the
owner of WIIB in Bloomington, Indiana, to the Controlling Stockholders for $1.5
million. The purchase price was delivered in the form of a note issued to
Sinclair which was refinanced in June 1992 (the "WIIB Note"). The WIIB Note
bears interest at 6.88% per annum, is payable in monthly principal and interest
payments of $16,000 until September 30, 2000, at which time a final payment of
approximately $431,000 is due. Principal and interest paid in 1997 on the WIIB
Note was $211,000. As of December 31, 1997, $842,000 in principal amount of the
WIIB Note remained outstanding.
BAY CREDIT FACILITY
In connection with the capitalization of Bay Television, Inc., Sinclair
agreed on May 17, 1990 to loan the Controlling Stockholders up to $3.0 million
(the "Bay Credit Facility"). Each of the loans to the Controlling Stockholders
pursuant to the Bay Credit Facility is evidenced by an amended and restated
secured note totaling $2.6 million due December 31, 1999 accruing interest at a
fixed rate equal to 6.88%. Principal and interest are payable over six years
commencing on March 31, 1994, and are required to be repaid quarterly and
$530,000 was paid in 1997. $660,000 is payable in 1998 and $718,000 is payable
in 1999. As of December 31, 1997, approximately $1.3 million in principal amount
was outstanding under this note.
AFFILIATED LEASES
From 1987 to 1992, Sinclair entered into five lease transactions with CCI,
a corporation wholly owned by the Controlling Stockholders, to lease certain
facilities from CCI. Four of these leases are 10-year leases for rental space on
broadcast towers, two of which are capital leases having renewable
79
<PAGE>
terms of 10 years. The other lease is a month-to-month lease for a portion of
studio and office space at which certain satellite dishes are located. Aggregate
annual rental payments related to these leases were $641,000 in 1997. The
aggregate annual rental payments related to these leases are scheduled to be
$679,000 in 1998 and $700,000 in 1999.
In January 1991, CTI entered into a 10-year capital lease with KIG, a
corporation wholly owned by the Controlling Stockholders, pursuant to which CTI
leases both an administrative facility and studios for station WBFF and
Sinclair's present corporate offices. Additionally, in June 1991, CTI entered
into a one-year renewable lease with KIG pursuant to which CTI leases parking
facilities at the administrative facility. Payments under these leases with KIG
were $481,000 in 1997. The aggregate annual rental payments related to the
administrative facility are scheduled to be $519,000 in 1998 and $540,000 in
1999. During 1997, Sinclair chartered airplanes owned by certain companies
controlled by the Controlling Stockholders and incurred expenses of
approximately $736,000 related to these charters.
TRANSACTIONS WITH GERSTELL
Gerstell LP, an entity wholly owned by the Controlling Stockholders, was
formed in April 1993 to acquire certain personal and real property interests of
Sinclair in Pennsylvania. In a transaction that was completed in September 1993,
Gerstell LP acquired the WPGH office/studio, transmitter and tower site for an
aggregate purchase price of $2.2 million. The purchase price was financed in
part by a $2.1 million note from Gerstell LP bearing interest at 6.18% with
principal payments beginning on November 1, 1994 and a final maturity date of
October 1, 2013. Principal and interest paid in 1997 on the note was $183,000.
At December 31, 1997, $1.9 million in principal amount of the note remained
outstanding. Following the acquisition, Gerstell LP leased the office/studio,
transmitter and tower site to WPGH, Inc. (a subsidiary of Sinclair) for $14,875
per month and $25,000 per month, respectively. The leases have terms of seven
years, with four seven-year renewal periods. Aggregate annual rental payment
related to these leases was $561,000 in 1997. Sinclair believes that the leases
with Gerstell LP are on terms and conditions customary in similar leases with
independent third parties.
STOCK REDEMPTIONS
On September 30, 1990, Sinclair issued certain notes (the "Founders'
Notes") maturing on May 31, 2005, payable to the late Julian S. Smith and
Carolyn C. Smith, former majority owners of Sinclair and the parents of the
Controlling Stockholders. The Founders' Notes, which were issued in
consideration for stock redemptions equal to 72.65% of the then outstanding
stock of Sinclair, have principal amounts of $7.5 million and $6.7 million,
respectively. The Founders' Notes include stated interest rates of 8.75%, which
were payable annually from October 1990 until October 1992, then payable monthly
commencing April 1993 to December 1996, and then semiannually thereafter until
maturity. The effective interest rate approximates 9.4%. The Founders' Notes are
secured by security interests in substantially all of the assets of Sinclair and
its Subsidiaries, and are personally guaranteed by the Controlling Stockholders.
Principal and interest payments on the Founders' Note issued to the estate
of Julian S. Smith are payable, in various amounts, each April and October,
beginning October 1991 until October 2004, with a balloon payment due at
maturity in the amount of $5.0 million. Additionally, monthly interest payments
commenced on April 1993 and continued until December 1996. Principal and
interest paid in 1997 on this Founders' Note was $653,000 and at December 31,
1997, $5.8 million in principal amount of this Founders' Note remained
outstanding.
Principal payments on the Founders' Note issued to Carolyn C. Smith are
payable, in various amounts, each April and October, beginning October 1991
until October 2002. Principal and interest paid in 1997 on this Founders' Note
was $1.1 million. At December 31, 1997, $3.7 million in principal amount of this
Founders' Note remained outstanding.
RELATIONSHIP WITH GLENCAIRN
Glencairn is a corporation owned by (i) Edwin L. Edwards, Sr. (3%), (ii)
Carolyn C. Smith, the mother of the Controlling Stockholders (7%), and (iii)
certain trusts established by Carolyn C. Smith for the benefit of her
grandchildren (the "Glencairn Trusts") (90%). The 90% equity interest in
Glencairn
80
<PAGE>
owned by the Glencairn Trusts is held through the ownership of non-voting common
stock. The 7% equity interest in Glencairn owned by Carolyn C. Smith is held
through the ownership of common stock that is generally non-voting, except with
respect to certain specified extraordinary corporate matters as to which this 7%
equity interest has the controlling vote. Edwin L. Edwards, Sr. owns a 3% equity
interest in Glencairn through ownership of all of the issued and outstanding
voting stock of Glencairn and is Chairman of the Board, President and Chief
Executive Officer of Glencairn.
There have been, and Sinclair expects that in the future there will be,
transactions between Sinclair and Glencairn. Glencairn is the owner-operator and
FCC licensee of WNUV in Baltimore, WVTV in Milwaukee, WRDC in Raleigh/Durham,
WABM in Birmingham, KRRT in San Antonio and WFBC in
Asheville/Greenville/Spartanburg. Sinclair has entered into LMAs with Glencairn
pursuant to which Sinclair provides programming to Glencairn for broadcast on
WNUV, WVTV, WRDC, WABM, KRRT and WFBC during the hours of 6:00 a.m. to 2:00 a.m.
each day and has the right to sell advertising during this period, all in
exchange for the payment by Sinclair to Glencairn of a monthly fee totaling
$789,000.
In June 1995, Sinclair acquired options from certain stockholders of
Glencairn (the "Glencairn Options") which grant to Sinclair the right to
acquire, subject to applicable FCC rules and regulations, stock comprising up to
a 97% equity interest in Glencairn. Of the stock subject to the Glencairn
Options, a 90% equity interest is non-voting and the remaining 7% equity
interest is non-voting, except with respect to certain extraordinary matters as
to which this 7% equity interest has the controlling vote. Each Glencairn Option
was purchased by Sinclair for $1,000 ($5,000 in the aggregate) and is
exercisable only upon Sinclair's payment of an option exercise price generally
equal to the optionor's proportionate share of the aggregate acquisition cost of
all stations owned by Glencairn on the date of exercise (plus interest at a rate
of 10% from the respective acquisition date). Sinclair estimates that the
aggregate option exercise price for the Glencairn Options, if currently
exercised, would be approximately $14.8 million.
In addition, Sinclair has agreed to sell to Glencairn for $2,000,000 the
License Assets of WTTE in Columbus, Ohio, which Sinclair currently owns. In
addition, Sinclair has acquired from River City the Non-License Assets of WSYX,
which is in the same market as WTTE and has exercised an option to acquire
WSYX's License Assets. See "Business--Broadcasting Acquisition Strategy." Upon
Sinclair's assignment of the License Assets of WTTE to Glencairn (which Sinclair
does not expect to occur unless Sinclair acquires the License Assets of WSYX),
Sinclair intends to enter into an LMA with Glencairn relating to WTTE pursuant
to which Sinclair will supply programming to Glencairn, obtain the right to sell
advertising during the periods covered by the supplied programming and make
payments to Glencairn in amounts to be negotiated.
In addition, Glencairn has entered into a plan of merger with Sullivan III
which, if completed, would result in Glencairn's ownership of all the issued and
outstanding capital stock of Sullivan III. After the merger, Sinclair intends to
enter into an LMA with Glencairn and continue to provide programming services to
the five stations the License Assets of which are acquired by Glencairn in the
merger.
RIVER CITY TRANSACTIONS
Barry Baker, who will become a director and executive officer of Sinclair
as soon as permissible under the rules of the FCC and applicable laws, has an
equity interest in River City Broadcasting L.P. ("River City"). During 1997,
Sinclair made LMA payments of $896,000 to River City. In September 1996,
Sinclair entered into a five-year agreement with River City pursuant to which
River City will provide to Sinclair certain production services. Pursuant to
this agreement, River City will provide certain services to Sinclair in return
for an annual fee of $416,000, subject to certain adjustments on each
anniversary date.
KEYMARKET OF SOUTH CAROLINA
Kerby Confer, who is expected to become an executive officer of Sinclair as
soon as permissible under the rules of the FCC and applicable laws, is the owner
of 100% of the common stock of Keymarket of South Carolina, Inc. ("KSC").
Sinclair has exercised its option to acquire all of the assets of KSC for
81
<PAGE>
forgiveness of debt in an aggregate principal amount of approximately $7.4
million, plus payment of approximately $1.0 million, less certain adjustments.
Sinclair also purchased two properties from Mr. Confer for an aggregate purchase
price of approximately $1.75 million.
BEAVER DAM LIMITED LIABILITY COMPANY
In May 1996, Sinclair, along with the Controlling Stockholders, formed
Beaver Dam Limited Liability Company ("BDLLC"), of which Sinclair owns a 45%
interest. BDLLC was formed for the purpose of constructing and owning a building
which may be the site for Sinclair's corporate headquarters. Sinclair made
capital contributions to BDLLC in 1996 of approximately $380,000. During 1997,
BDLLC made a liquidating distribution to Sinclair of approximately $380,000 and
Sinclair no longer owns an interest in BDLLC.
HERITAGE AUTOMOTIVE GROUP
In January 1997, David D. Smith, Sinclair's President and Chief Executive
Officer and one of the Controlling Shareholders, made a substantial investment
in, and became a member of the board of directors of, Summa Holdings, Ltd.
which, through wholly owned subsidiaries, owns the Heritage Automotive Group
("Heritage") and Allstate Leasing ("Allstate"). Mr. Smith is not an officer, nor
does he actively participate in the management, of Summa Holdings, Ltd.,
Heritage, or Allstate. Heritage owns and operates new and used car dealerships
in the Baltimore metropolitan area. Allstate owns and operates an automobile and
equipment leasing business with offices in the Baltimore, Richmond, Houston, and
Atlanta metropolitan areas. Sinclair sells Heritage and Allstate advertising
time on WBFF and WNUV, the television stations operated by Sinclair serving the
Baltimore DMA. Sinclair believes that the terms of the transactions between
Sinclair and Heritage and Sinclair and Allstate are and will be comparable to
those prevailing in similar transactions with or involving unaffiliated parties.
Payments from Heritage and Allstate to Sinclair for the year 1997 were
approximately $263,200.
AIRCRAFT LEASES
During the years ended December 31, 1995, 1996 and 1997, the Company from
time to time entered into charter arrangements to lease airplanes owned by
certain Class B Stockholders. During the years ended December 31, 1995, 1996 and
1997, the Company incurred expenses of approximately $489,000, $336,000 and
$736,000 related to these arrangements, respectively.
82
<PAGE>
SELECTED FINANCIAL DATA FOR SINCLAIR
The selected consolidated financial data for the years ended December 31,
1993, 1994, 1995, 1996, and 1997 have been derived from Sinclair's audited
Consolidated Financial Statements. The Consolidated Financial Statements for the
years ended December 31, 1995, 1996 and 1997 are included elsewhere herein.
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere herein.
STATEMENT OF OPERATIONS DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcast revenue(a) ...................... $ 69,532 $ 118,611 $ 187,934 $ 346,459 $ 471,228
Barter revenue ................................ 6,892 10,743 18,200 32,029 45,207
--------- ---------- ---------- ------------ ----------
Total revenue ................................ 76,424 129,354 206,134 378,488 516,435
--------- ---------- ---------- ------------ ----------
Operating costs(b) ............................ 26,665 41,338 64,326 142,576 198,262
Expenses from barter arrangements ............. 5,630 9,207 16,120 25,189 38,114
Depreciation and amortization(c) .............. 22,486 55,587 80,410 121,081 152,170
Stock-based compensation ...................... -- -- -- 739 1,636
Special bonuses paid to executive
officers ..................................... 10,000 3,638 -- -- --
--------- ---------- ---------- ------------ ----------
Broadcast operating income .................... 11,643 19,584 45,278 88,903 126,253
Interest expense .............................. (12,852) (25,418) (39,253) (84,314) (98,393)
Subsidiary trust minority interest
expense(d) ................................... -- -- -- -- (18,600)
Interest and other income ..................... 2,131 2,447 4,163 3,478 2,228
--------- ---------- ---------- ------------ ----------
Income (loss) before (provision) benefit for
income taxes and extraordinary items ......... $ 922 $ (3,387) $ 10,188 $ 8,067 $ 11,488
========= ========== ========== ============ ==========
Net income (loss) ............................. $ (7,945) $ (2,740) $ 76 $ 1,131 $ (10,566)
========= ========== ========== ============ ==========
Net income (loss) available to common share-
holders ...................................... $ (7,945) $ (2,740) $ 76 $ 1,131 $ (13,329)
========= ========== ========== ============ ==========
OTHER DATA:
Broadcast cash flow(e) ........................ $ 37,498 $ 67,519 $ 111,124 $ 189,216 $ 243,406
Broadcast cash flow margin(f) ................. 53.9% 56.9% 59.1% 54.6% 51.7%
Adjusted EBITDA(g) ............................ $ 35,406 $ 64,547 $ 105,750 $ 180,272 $ 229,000
Adjusted EBITDA margin(f) ..................... 50.9% 54.4% 56.3% 52.0% 48.6%
After tax cash flow(h) ........................ $ 20,850 $ 24,948 $ 54,645 $ 77,484 $ 104,884
Program contract payments ..................... 8,723 14,262 19,938 30,451 51,059
Corporate overhead expense .................... 2,092 2,972 5,374 8,944 14,406
Capital expenditures .......................... 528 2,352 1,702 12,609 19,425
Cash flows from operating activities .......... 11,230 20,781 55,986 69,298 96,625
Cash flows from investing activities .......... 1,521 (249,781) (119,320) (1,012,225) (218,990)
Cash flows from financing activities .......... 3,462 213,410 173,338 832,818 259,351
PER SHARE DATA:
Basic net income (loss) per share before ex-
traordinary items ............................ $ -- $ (.09) $ .15 $ .03 $ (.20)
Basic net income (loss) per share after ex-
traordinary items ............................ $ (.27) $ (.09) $ -- $ .03 $ (.37)
Diluted net income (loss) per share
before extraordinary items ................... $ -- $ (.09) $ .15 $ .03 $ (.20)
Diluted net income (loss) per share
after extraordinary items .................... $ (.27) $ (.09) $ -- $ .03 $ (.37)
BALANCE SHEET DATA:
Cash and cash equivalents ..................... $ 18,036 $ 2,446 $ 112,450 $ 2,341 $ 139,327
Total assets .................................. 242,917 399,328 605,272 1,707,297 2,034,234
Total debt(i) ................................. 224,646 346,270 418,171 1,288,103 1,080,722
HYTOPS(j) ..................................... -- -- -- -- 200,000
Total stockholders' equity (deficit) .......... (11,024) (13,723) 96,374 237,253 543,288
</TABLE>
83
<PAGE>
- ----------
(a) "Net broadcast revenue" is defined as broadcast revenue net of agency
commissions.
(b) Operating costs include program and production expenses and selling,
general and administrative expenses.
(c) Depreciation and amortization includes amortization of program contract
costs and net realizable value adjustments, depreciation and amortization
of property and equipment, and amortization of acquired intangible
broadcasting assets and other assets including amortization of deferred
financing costs and costs related to excess syndicated programming.
(d) Subsidiary trust minority interest expense represents the distributions on
the HYTOPS.
(e) "Broadcast cash flow" is defined as broadcast operating income plus
corporate overhead expense, special bonuses paid to executive officers,
stock-based compensation, depreciation and amortization (including film
amortization and excess syndicated programming), less cash payments for
program rights. Cash program payments represent cash payments made for
current programs payable and do not necessarily correspond to program
usage. Special bonuses paid to executive officers are considered unusual
and non-recurring. Sinclair has presented broadcast cash flow data, which
Sinclair believes are comparable to the data provided by other companies in
the industry, because such data are commonly used as a measure of
performance for broadcast companies. However, broadcast cash flow does not
purport to represent cash provided by operating activities as reflected in
Sinclair's consolidated statements of cash flows, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
(f) "Broadcast cash flow margin" is defined as broadcast cash flow divided by
net broadcast revenues. "Adjusted EBITDA margin" is defined as Adjusted
EBITDA divided by net broadcast revenues.
(g) "Adjusted EBITDA" is defined as broadcast cash flow less corporate expenses
and is a commonly used measure of performance for broadcast companies.
Adjusted EBITDA does not purport to represent cash provided by operating
activities as reflected in Sinclair's consolidated statements of cash
flows, is not a measure of financial performance under generally accepted
accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(h) "After tax cash flow" is defined as net income (loss) available to common
shareholders plus extraordinary items (before the effect of related tax
benefits), special bonuses paid to executive officers, stock-based
compensation, depreciation and amortization (excluding film amortization),
and the deferred tax provision (or minus the deferred tax benefit). After
tax cash flow is presented here not as a measure of operating results and
does not purport to represent cash provided by operating activities. After
tax cash flow should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
(i) "Total debt" is defined as long-term debt, net of unamortized discount, and
capital lease obligations, including current portion thereof. Total debt
does not include the HYTOPS or Sinclair's preferred stock.
(j) HYTOPS represents Company Obligated Mandatorily Redeemable Security of
Subsidiary Trust Holding Solely KDSM Senior Debentures representing
$200,000 aggregate liquidation value.
84
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SINCLAIR
INTRODUCTION
The operating revenues of Sinclair are derived from local and national
advertisers and, to a much lesser extent, from television network compensation.
Sinclair's primary operating expenses involved in owning, operating or
programming the television and radio stations are syndicated program rights
fees, commissions on revenues, employee salaries, news-gathering and promotion.
Amortization and depreciation of costs associated with the acquisition of the
stations and interest carrying charges are significant factors in determining
Sinclair's overall profitability.
Set forth below are the principal types of broadcast revenue received by
Sinclair's stations for the periods indicated and the percentage contribution of
each type to Sinclair's total gross broadcast revenue:
BROADCAST REVENUE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Local/regional advertising..... $104,299 47.5% $199,029 49.4% $287,860 52.7%
National advertising .......... 113,678 51.7 191,449 47.6 250,445 45.9
Network compensation .......... 442 0.2 3,907 1.0 5,479 1.0
Political advertising ......... 197 0.1 6,972 1.7 1,189 0.2
Production .................... 1,115 0.5 1,142 0.3 1,239 0.2
-------- ----- -------- ----- -------- -----
Broadcast revenue ............. 219,731 100.0% 402,499 100.0% 546,212 100.0%
===== ===== =====
Less: agency commissions....... (31,797) (56,040) (74,984)
-------- -------- --------
Broadcast revenue, net ........ 187,934 346,459 471,228
Barter revenue ................ 18,200 32,029 45,207
-------- -------- --------
Total revenue ................. $206,134 $378,488 $516,435
======== ======== ========
</TABLE>
Sinclair's primary types of programming and their approximate percentages
of 1997 net broadcast revenue were network programming (14.9%), children's
programming (5.3%) and other syndicated programming (79.8%). Sinclair's four
largest categories of advertising and their approximate percentages of 1997 net
broadcast revenue were automotive (20.0%), movies (6.7%), fast food advertising
(6.4%) and retail/department stores (6.2%). No other advertising category
accounted for more than 6% of Sinclair's net broadcast revenue in 1997. No
individual advertiser accounted for more than 5% of any individual Company
station's net broadcast revenue in 1997.
85
<PAGE>
The following table sets forth certain operating data of Sinclair for the
years ended December 31, 1995, 1996 and 1997. Capitalized terms used in this
section and not defined elsewhere in this Information Statement/Prospectus are
defined in Notes to the Consolidated Financial Statements of Sinclair included
elsewhere herein.
OPERATING DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net broadcast revenue ..................... $187,934 $346,459 $471,228
Barter revenue ............................ 18,200 32,029 45,207
-------- -------- --------
Total revenue ............................. 206,134 378,488 516,435
-------- -------- --------
Operating costs ........................... 64,326 142,576 198,262
Expenses from barter arrangements ......... 16,120 25,189 38,114
Depreciation and amortization ............. 80,410 121,081 152,170
Stock-based compensation .................. -- 739 1,636
-------- -------- --------
Broadcast operating income ................ $ 45,278 $ 88,903 $126,253
======== ======== ========
BROADCAST CASH FLOW (BCF) DATA:
Television BCF ............................ $111,124 $175,212 $221,631
Radio BCF ................................. -- 14,004 21,775
-------- -------- --------
Consolidated BCF .......................... $111,124 $189,216 $243,406
======== ======== ========
Television BCF margin ..................... 59.1% 56.7% 54.4%
Radio BCF margin .......................... -- 37.3% 34.1%
Consolidated BCF margin ................... 59.1% 54.6% 51.7%
OTHER DATA:
Adjusted EBITDA ........................... $105,750 $180,272 $229,000
Adjusted EBITDA margin .................... 56.3% 52.0% 48.6%
After tax cash flow ....................... $ 54,645 $ 77,484 $104,884
Program contract payments ................. 19,938 30,451 51,059
Corporate expense ......................... 5,374 8,944 14,406
Capital expenditures ...................... 1,702 12,609 19,425
</TABLE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
Net broadcast revenue increased $124.7 million, or 36.0%, to $471.2 million
for the year ended December 31, 1997 from $346.5 million for the year ended
December 31, 1996. The increase in net broadcast revenue for the year ended
December 31, 1997 as compared to the year ended December 31, 1996 was comprised
of $114.5 million related to television and radio station acquisitions and LMA
transactions consummated during 1996 and 1997 (the "Acquisitions") and $10.2
million that resulted from an increase in net broadcast revenue on a same
station basis. Also on a same station basis, revenue from local and national
advertisers grew 7.7% and 4.9%, respectively, for a combined growth rate of
6.1%.
Total operating costs increased $55.7 million, or 39.1%, to $198.3 million
for the year ended December 31, 1997 from $142.6 million for the year ended
December 31, 1996. The increase in operating costs for the year ended December
31, 1997 as compared to the year ended December 31, 1996 com-
86
<PAGE>
prised $49.0 million related to the Acquisitions, $5.4 million from an increase
in corporate overhead expenses, and $1.3 million from an increase in operating
costs on a same station basis. On a same station basis, operating costs
increased 1.8%.
Broadcast operating income increased to $126.3 million for the year ended
December 31, 1997, from $88.9 million for the year ended December 31, 1996, or
42.1%. The increase in broadcast operating income for the year ended December
31, 1997 as compared to the year ended December 31, 1996 was primarily
attributable to the Acquisitions.
Interest expense increased to $98.4 million for the year ended December 31,
1997 from $84.3 million for the year ended December 31, 1996, or 16.7%. The
increase in interest expense for the year ended December 31, 1997 primarily
related to indebtedness incurred by Sinclair to finance the Acquisitions.
Subsidiary trust minority interest expense of $18.6 million for the year ended
December 31, 1997 is related to the issuance of the HYTOPS which was completed
March 12, 1997. Subsidiary trust minority interest expense was partially offset
by reductions in interest expense because a portion of the proceeds of the sale
of the HYTOPS was used to reduce indebtedness under Sinclair's Bank Credit
Agreement.
Interest and other income decreased to $2.2 million for the year ended
December 31, 1997 from $3.5 million for the year ended December 31, 1996. This
decrease was primarily due to lower average cash balances during these periods.
For the reasons described above, net loss for the year ended December 31,
1997 was $10.6 million or $.37 per share compared to net income of $1.1 million
or $.03 per share for the year ended December 31, 1996.
Broadcast Cash Flow increased $54.2 million to $243.4 million for the year
ended December 31, 1997 from $189.2 million for the year ended December 31,
1996, or 28.6%. The increase in Broadcast Cash Flow was comprised of $45.0
million relating to the Acquisitions and $9.2 million that resulted from
Broadcast Cash Flow growth on a same station basis, which had Broadcast Cash
Flow growth of 8.2%. Sinclair's Broadcast Cash Flow Margin decreased to 51.7%
for the year ended December 31, 1997 from 54.6% for the year ended December 31,
1996. The decrease in Broadcast Cash Flow Margin for the year ended December 31,
1997 as compared to the year ended December 31, 1996 primarily resulted from the
lower margins related to the 1996 Acquisitions. In addition, 1996 Broadcast Cash
Flow Margin benefited from a non-recurring $4.7 million timing lag of program
contract payments relating to the River City Acquisition and certain other
acquisitions. On a same station basis, Broadcast Cash Flow Margin improved from
57.3% for the year ended December 31, 1996 to 58.9% for the year ended December
31, 1997.
Adjusted EBITDA represents broadcast cash flow less corporate expenses.
Adjusted EBITDA increased to $229.0 million for the year ended December 31, 1997
from $180.3 million for the year ended December 31, 1996, or 27.0%. The increase
in Adjusted EBITDA for the year ended December 31, 1997 as compared to the year
ended December 31, 1996 resulted from the Acquisitions and to a lesser extent,
increases in net broadcast revenues on a same station basis. Sinclair's Adjusted
EBITDA margin decreased to 48.6% for the year ended December 31, 1997 from 52.0%
for the year ended December 31, 1996. This decrease in Adjusted EBITDA margin
resulted primarily from the circumstances affecting broadcast cash flow margins
as noted above combined with an increase in corporate expenses. Corporate
overhead expenses increased to $14.4 million for the year ended December 31,
1997 from $8.9 million for the year ended December 31, 1996, or 61.8%. The
increase in corporate expenses primarily resulted from costs associated with
managing a larger base of operations. During 1996, Sinclair increased the size
of its corporate staff as a result of the addition of a radio business segment
and a significant increase in the number of television stations owned, operated
or programmed. The costs associated with this increase in staff were only
incurred during a partial period of the year ended December 31, 1996.
After Tax Cash Flow increased to $104.9 million for the year ended December
31, 1997 from $77.5 million for the year ended December 31, 1996, or 35.4%. The
increase in After Tax Cash Flow for the year ended December 31, 1997 as compared
to the year ended December 31, 1996 primarily resulted
87
<PAGE>
from the Acquisitions, an increase in revenue on a same station basis, a Federal
income tax receivable of $10.6 million resulting from 1997 NOL carry-backs,
offset by interest expense on the debt incurred to consummate the Acquisitions
and subsidiary trust minority interest expense related to the private placement
of the HYTOPS issued during March 1997.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Total revenue increased to $378.5 million, or 83.6%, for the year ended
December 31, 1996 from $206.1 million for the year ended December 31, 1995.
Excluding the effects of non-cash barter transactions, net broadcast revenue for
the year ended December 31, 1996 increased by 84.4% over the year ended December
31, 1995. The increase in broadcast revenue was primarily the result of
acquisitions and LMA transactions consummated by Sinclair in 1995 (the "1995
Acquisitions") and 1996. For stations owned, operated or programmed throughout
1995 and 1996, television broadcast revenue grew 2.1% for the year ended
December 31, 1996 when compared to the year ended December 31, 1995. For
stations owned, operated or programmed throughout 1994 and 1995, television
broadcast revenue grew 12.8% for the year ended December 31, 1995 when compared
to the year ended December 31, 1994. The decrease in 1996 revenue growth as
compared to 1995 revenue growth primarily resulted from the loss in 1996 of the
Fox affiliation at WTTO in the Birmingham market, the loss of the NBC
affiliation at WRDC in the Raleigh/Durham market and decreases in ratings at
WCGV and WNUV in the Milwaukee and Baltimore markets, respectively.
Operating expenses excluding depreciation, amortization of intangible
assets, stock-based compensation and excess syndicated programming costs
increased to $167.8 million, or 108.7%, for the year ended December 31, 1996
from $80.4 million for the year ended December 31, 1995. The increase in
expenses for the year ended December 31, 1996 as compared to the year ended
December 31, 1995 was largely attributable to operating costs associated with
the 1995 and 1996 Acquisitions, an increase in LMA fees resulting from LMA
transactions and an increase in corporate overhead expenses.
Broadcast operating income increased to $88.9 million for the year ended
December 31, 1996, from $45.3 million for the year ended December 31, 1995, or
96.2%. The increase in broadcast operating income for the year ended December
31, 1996 as compared to the year ended December 31, 1995 was primarily
attributable to the 1995 and 1996 Acquisitions.
Interest expense increased to $84.3 million for the year ended December 31,
1996 from $39.3 million for the year ended December 31, 1995, or 114.5%. The
increase in interest expense for the year ended December 31, 1996 was primarily
related to senior bank indebtedness incurred by Sinclair to finance the River
City Acquisition and other acquisitions.
Interest and other income decreased to $3.5 million for the year ended
December 31, 1996 from $4.2 million for the year ended December 31, 1995, or
16.7%. The decrease for the year ended December 31, 1996 was primarily due to
lower cash balances and related interest income resulting from cash payments
made in February 1996 when Sinclair made a $34.4 million payment relating to the
WSMH acquisition and April 1996 when Sinclair made a $60 million down payment
relating to the River City Acquisition. The decrease in interest income was
offset by an increase in other income resulting from the 1995 and 1996
Acquisitions.
For the reasons described above, net income for the year ended December 31,
1996 was $1.1 million or $0.03 per share compared to net income of $5.0 million
or $0.15 per share for the year ended December 31, 1995 before the extraordinary
loss on early extinguishment of debt.
Broadcast Cash Flow increased to $189.2 million for the year ended December
31, 1996 from $111.1 million for the year ended December 31, 1995, or 70.3%. The
increase in Broadcast Cash Flow for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 primarily resulted from the 1995 and 1996
Acquisitions. For stations owned, operated or programmed throughout 1995 and
1996, Broadcast Cash Flow grew 1.3% for the year ended December 31, 1996 when
compared to the year ended December 31, 1995. For stations owned, operated or
programmed throughout 1994 and 1995, Broadcast Cash Flow grew 23.7% for the year
ended December 31, 1995 when compared to the year ended December 31, 1994. The
decrease in 1996 Broadcast Cash Flow growth as compared to 1995
88
<PAGE>
Broadcast Cash Flow growth primarily resulted from the loss in 1996 of the Fox
affiliation at WTTO in the Birmingham market, the loss of the NBC affiliation at
WRDC in the Raleigh/Durham market and decreases in ratings at WCGV and WNUV in
the Milwaukee and Baltimore markets, respectively. Sinclair's Broadcast Cash
Flow margin decreased to 54.6% for the year ended December 31, 1996 from 59.1%
for the year ended December 31, 1995. Excluding the effect of radio station
Broadcast Cash Flow, television station Broadcast Cash Flow margin decreased to
56.7% for the year ended December 31, 1996 as compared to 59.1% for the year
ended December 31, 1995. The decrease in Broadcast Cash Flow margins for the
year ended December 31, 1996 as compared to the year ended December 31, 1995
primarily resulted from the lower margins of the acquired radio broadcasting
assets and lower margins of certain of the acquired television stations. For
stations owned, operated or programmed throughout 1996 and 1995, Broadcast Cash
Flow margins were unchanged when comparing the years ended December 31, 1996 and
1995. Sinclair believes that margins of certain of the acquired stations will
improve as operating and programming synergies are implemented.
Adjusted EBITDA increased to $180.3 million for the year ended December 31,
1996 from $105.8 million for the year ended December 31, 1995, or 70.4%. The
increase in Adjusted EBITDA for the year ended December 31, 1996 as compared to
the year ended December 31, 1995 resulted from the 1995 and 1996 Acquisitions.
Sinclair's Adjusted EBITDA margin decreased to 52.0% for the year ended December
31, 1996 from 56.3% for the year ended December 31, 1995. The decrease in
Adjusted EBITDA margins for the year ended December 31, 1996 as compared to the
year ended December 31, 1995 primarily resulted from higher operating costs at
certain of the acquired stations.
After Tax Cash Flow increased to $77.5 million for the year ended December
31, 1996 from $54.6 million for the year ended December 31, 1995, or 41.9%. The
increase in After Tax Cash Flow for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 primarily resulted from the 1995 and 1996
Acquisitions offset by interest expense on the debt incurred to consummate these
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, Sinclair had $6.9 million in cash balances and,
excluding the effect of assets held for sale, working capital of approximately
$7.1 million. Sinclair's decrease in cash to $6.9 million at March 31, 1998 from
$139.3 million at December 31, 1997 primarily resulted from closings related to
the Heritage Acquisition during the first quarter of 1998. As of April 24, 1998
approximately $362.9 million was available for borrowing under the Bank Credit
Agreement. Sinclair anticipates that funds from operations, existing cash
balances and availability of the revolving credit facility under the 1997 Bank
Credit Agreement will be sufficient to meet its working capital, capital
expenditure commitments (other than commitments for pending acquisitions
described below) and debt service requirements for the foreseeable future.
Net cash flows from operating activities increased to $96.6 million for the
year ended December 31, 1997 from $69.3 million for the year ended December 31,
1996. Sinclair made income tax payments of $6.5 million for the year ended
December 31, 1997 as compared to $6.8 million for the year ended December 31,
1996. Sinclair made interest payments on outstanding indebtedness of $98.5
million during the year ended December 31, 1997 as compared to $82.8 million for
the year ended December 31, 1996. Additional interest payments for the year
ended December 31, 1997 as compared to the year ended December 31, 1996
primarily related to additional interest costs on indebtedness incurred to
finance the 1996 Acquisitions. Sinclair made subsidiary trust minority interest
expense payments of $17.6 million for the year ended December 31, 1997 related
to the issuance of HYTOPS completed in March 1997. Program rights payments
increased to $51.1 million for the year ended December 31, 1997 from $30.5
million for the year ended December 31, 1996, primarily as a result of the 1996
Acquisitions.
Net cash flows used in investing activities decreased to $219.0 million for
the year ended December 31, 1997 from $1.0 billion for the year ended December
31, 1996. During the year ended December 31, 1997, Sinclair made cash payments
of $87.5 million to acquire the license and non-license assets of KUPN-TV in Las
Vegas, Nevada, utilizing indebtedness under the 1997 Bank Credit Agreement and
existing cash balances. During the year ended December 31, 1997, Sinclair
incurred option extension
89
<PAGE>
payments and other costs of $16.0 million relating to WSYX-TV in Columbus, Ohio.
Sinclair made purchase option exercise payments of $11.1 million during the year
ended December 31, 1997 exercising options to acquire certain FCC licenses
related to the River City Acquisition. Sinclair made payments for property and
equipment of $19.4 million for the year ended December 31, 1997. During the year
ended December 31, 1997, Sinclair made deposits and incurred other costs
relating to the Heritage Acquisition, the Max Media Acquisition and other
acquisitions of $66.1 million, $12.8 million and $3.4 million, respectively.
Sinclair anticipates that future requirements for capital expenditures will
include capital expenditures incurred during the ordinary course of business
(which will include costs associated with the implementation of digital
television technology) and the cost of additional acquisitions of television and
radio stations if suitable acquisitions can be identified on acceptable terms.
Net cash flows provided by financing activities decreased to $259.4 million
for the year ended December 31, 1997 from $832.8 million for the year ended
December 31, 1996. In March 1997, Sinclair completed issuance of the HYTOPS.
Sinclair utilized $135 million of the approximately $192.8 million net proceeds
of the issuance of the HYTOPS to repay outstanding debt and retained the
remainder for general corporate purposes, which included the acquisition of
KUPN-TV in Las Vegas, Nevada. Sinclair made payments totaling $4.6 million to
repurchase 186,000 shares of Class A Common Stock during the year ended December
31, 1997. In May 1997, Sinclair made payments of $4.7 million related to the
amendment of its 1996 Bank Credit Agreement. In the fourth quarter of 1996,
Sinclair negotiated the prepayment of syndicated program contract liabilities
for excess syndicated programming assets. In the first quarter of 1997, Sinclair
made final cash payments of $1.4 million related to these negotiations. In July
1997, Sinclair issued $200.0 million aggregate principal amount of 9% Senior
Subordinated Notes due 2007 and utilized $162.5 million of the approximately
$195.6 million net proceeds to repay outstanding indebtedness, retaining the
remainder to pay a portion of the $63 million cash down payment relating to the
Heritage Acquisition. In December 1997, Sinclair completed an issuance of $250
million aggregate principal amount of 8 3/4% Senior Subordinated Notes due 2007.
Sinclair received net proceeds from the issuance of $242.8 million of which
$106.2 million was used to repurchase $98.1 million aggregate principal amount
of the 10% Senior Subordinated Notes due 2003. Sinclair retained the remainder
of the net proceeds for general corporate purposes which included closing the
acquisition of the Heritage television stations serving the Mobile/Pensacola and
Charleston/Huntington markets in January 1998.
Sinclair received net proceeds from the 1997 Preferred Stock Issuance and
the 1997 Common Stock Issuance of approximately $166.9 million and $151.0
million, respectively. Sinclair used the majority of these funds to repay
existing borrowings under the 1997 Bank Credit Agreement. Contemporaneously with
the 1997 Preferred Stock Issuance and the 1997 Common Stock Issuance, Sinclair
and the lenders under the 1997 Bank Credit Agreement entered into an amendment
to the 1997 Bank Credit Agreement, the effect of which was to recharacterize
$275 million of indebtedness from the Tranche A Term Loan under the 1997 Bank
Credit Agreement to amounts owing under the revolving credit facility under the
1997 Bank Credit Agreement. Sinclair used $285.7 million of the net proceeds
from the 1997 Preferred Stock Issuance and the 1997 Common Stock Issuance to
repay outstanding borrowings under the revolving credit facility, $8.9 million
to repay outstanding amounts under the Tranche A Term Loan and the remaining net
proceeds of approximately $23.3 million for general corporate purposes.
Sinclair has entered into agreements to acquire additional stations in the
Heritage Acquisition, the Max Media Acquisition and the Sullivan Acquisition.
The aggregate cash consideration needed to complete the purchase of the
remaining stations under the Heritage Acquisition and to complete the Max Media
Acquisition and the Sullivan Acquisition is expected to be approximately $1.2
billion (net of anticipated proceeds from sales of stations involved in these
acquisitions). Sinclair intends to finance pending acquisitions through a
combination of available cash and available borrowings under the 1997 Bank
Credit Agreement. The current terms of the 1997 Bank Credit Agreement do not
allow Sinclair to borrow an amount sufficient to finance all of the pending
acquisitions. Sinclair is negotiating with a group of lenders for a new $1.75
billion senior secured credit facility (the "New Credit Facility") which is
expected to contain the following terms. The New Credit Facility is expected to
include (i) a $750.0 million term loan facility repayable in consecutive
quarterly installments commencing on March 31, 1999 and ending on September 15,
2005; and (ii) a $1.0 billion reducing revolving credit facility. Availability
90
<PAGE>
under the revolving credit facility reduces quarterly, commencing March 31, 2001
and terminating on September 15, 2005. A portion of the revolving credit
facility not in excess of $350.0 million will be available for issuances of
letters of credit. The New Credit Facility also includes a standby uncommitted
multiple draw term loan facility of $400.0 million. Sinclair will be required to
prepay the term loan facility and reduce the revolving credit facility with (i)
100% of the net proceeds of any casualty loss or condemnation; (ii) 100% of the
net proceeds of any sale or other disposition by Sinclair of any assets in
excess of $100.0 million in the aggregate for any fiscal year; and (iii) 50% of
excess cash flow (as defined) if Sinclair's ratio of debt to EBITDA (as defined)
exceeds a certain threshold. The New Credit Facility is expected to contain
representations and warranties, and affirmative and negative covenants,
including limitations on additional indebtedness, customary for credit
facilities of this type. Sinclair will also be required to satisfy certain
financial covenants.
The 1997 Bank Credit Agreement and the indentures relating to Sinclair's 8
3/4% Senior Subordinated Notes due 2007, 9% Senior Subordinated Notes due 2007
and 10% Senior Subordinated Notes due 2005 restrict, and the New Credit
Commitment will restrict, the incurrence of additional indebtedness and the use
of proceeds of an equity issuance, but these restrictions are not expected to
restrict the incurrence of indebtedness or use of proceeds of an equity issuance
to finance the pending acquisitions.
INCOME TAXES
Income tax provision increased to $16.0 million for the year ended December
31, 1997 from a provision of $6.9 million for the year ended December 31, 1996.
Sinclair's effective tax rate increased to 139.1% for the year ended December
31, 1997 from 86.0% for the year ended December 31, 1996. The increase in
Sinclair's effective tax rate for the year ended December 31, 1997 as compared
to the year ended December 31, 1996 primarily resulted from non-deductible
goodwill amortization resulting from certain 1995 and 1996 stock acquisitions, a
tax liability related to the dividends paid on Sinclair's Series C Preferred
Stock (see Note 9, sub-note (a) to Sinclair's Consolidated Financial
Statements), and state franchise taxes which are not based upon pre-tax income.
Management believes that pre-tax income and "earnings and profits" will increase
in future years which will result in a lower effective tax rate and utilization
of certain tax deductions related to dividends paid on Sinclair's Series C
Preferred Stock.
As of December 31, 1997, Sinclair has a net deferred tax liability of $21.5
million as compared to a net deferred tax asset of $782,000 as of December 31,
1996. This change in deferred taxes primarily relates to deferred tax
liabilities associated with book and tax differences relating to the
depreciation and amortization of fixed assets and intangible assets, a deferred
tax liability generated as a result of a reduction in basis of Series C
Preferred Stock (see Note 9, sub-note (a) to Sinclair's Consolidated Financial
Statements), offset by deferred tax assets resulting from Federal and state net
operating tax losses (NOLs) incurred during 1997. During the year ended December
31, 1997, Sinclair carried back certain Federal NOLs to be applied against prior
years' Federal taxes paid. These Federal NOL carry-backs resulted in an income
tax receivable of $10.6 million as of December 31, 1997.
Sinclair's income tax provision increased to $6.9 million for the year
ended December 31, 1996 from $5.2 million for the year ended December 31, 1995.
Sinclair's effective tax rate increased to 86% for the year ended December 31,
1996 from 51% for the year ended December 31, 1995. The increase for the year
ended December 31, 1996 as compared to the year ended December 31, 1995
primarily related to certain financial reporting and income tax differences
attributable to certain 1995 and 1996 Acquisitions (primarily non-deductible
goodwill resulting from stock acquisitions), and state franchise taxes which are
independent of pre-tax income.
The net deferred tax asset decreased to $782,000 as of December 31, 1996
from $21.0 million at December 31, 1995. The decrease in Sinclair's net deferred
tax asset as of December 31, 1996 as compared to December 31, 1995 is primarily
due to Sinclair recording deferred tax liabilities of $18.1 million relating to
the acquisition of all of the outstanding stock of Superior in May 1996,
adjustments related to certain 1995 acquisitions, and resulting differences
between the book and tax basis of the underlying assets.
91
<PAGE>
SEASONALITY
Sinclair's results usually are subject to seasonal fluctuations, which
result in fourth quarter broadcast operating income typically being greater than
first, second and third quarter broadcast operating income. This seasonality is
primarily attributable to increased expenditures by advertisers in anticipation
of holiday season consumer spending and an increase in viewership during this
period.
YEAR 2000
Certain computer programs have been written using two digits rather than
four to define the applicable year, which could result in the computer
recognizing a date using "00" as the year 1900 rather than the year 2000. This,
in turn, could result in major system failures and in miscalculations, and is
generally referred to as the "Year 2000" problem. Sinclair and all of its
subsidiaries have implemented computer systems which run substantially all of
Sinclair's principal data processing and financial reporting software
applications. The applications software used in these systems are Year 2000
compliant. Presently, Sinclair does not believe that Year 2000 compliance will
result in any material investments, nor does Sinclair anticipate that the Year
2000 problem will have material adverse effects on the business operations or
financial performance of Sinclair. In addition, Sinclair is not aware of any
Year 2000 problems of its customers, suppliers or network affiliates that will
have a material adverse effect on the business, operations or financial
performance of Sinclair. There can be no assurance, however, that the Year 2000
problem will not adversely affect Sinclair and its business.
92
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF SINCLAIR
The following Pro Forma Consolidated Financial Data include the unaudited
pro forma consolidated balance sheet as of December 31, 1997 (the "Pro Forma
Consolidated Balance Sheet") and the unaudited pro forma consolidated statement
of operations for the year ended December 31, 1997 (the "Pro Forma Consolidated
Statement of Operations"). The unaudited Pro Forma Consolidated Balance Sheet is
adjusted to give effect to the Significant Acquisitions, the April 1998 Common
Stock Issuance and the Merger as if they occurred on December 31, 1997. The
unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997 is adjusted to give effect to the Recent Financings, the
Significant Acquisitions and the Merger as if each occurred at the beginning of
such period. The pro forma adjustments are based upon available information and
certain assumptions that Sinclair believes are reasonable. The Pro Forma
Consolidated Financial Data should be read in conjunction with Sinclair's
Consolidated Financial Statements as of and for the year ended December 31, 1997
and related notes thereto, the historical financial data of Heritage Media
Services, Inc. -- Broadcasting Segment, the historical financial data of Max
Media Properties LLC, and the historical financial data of Sullivan Broadcast
Holdings, Inc. and Subsidiaries all of which are included elsewhere in this
Information Statement/Prospectus. The unaudited Pro Forma Consolidated Financial
Data do not purport to represent what Sinclair's results of operations or
financial position would have been had any of the above events occurred on the
dates specified or to project Sinclair's results of operations or financial
position for or at any future period or date.
93
<PAGE>
SINCLAIR BROADCAST GROUP, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
HISTORICAL HERITAGE(a)
-------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including cash equivalents .................................... $ 139,327 $ (139,327)
Accounts receivable, net of allowance for doubtful accounts ......... 123,018
Current portion of program contract costs ........................... 46,876 1,462
Prepaid expenses and other current assets ........................... 4,673
Deferred barter costs ............................................... 3,727 578
Refundable income taxes ............................................. 10,581
Deferred tax asset .................................................. 2,550
----------
Total current assets .............................................. 330,752 (137,287)
PROGRAM CONTRACT COSTS, less current portion ......................... 40,609 1,179
LOANS TO OFFICERS AND AFFILIATES ..................................... 11,088
PROPERTY AND EQUIPMENT, net .......................................... 161,714 32,859
NON-COMPETE AND CONSULTING AGREEMENTS, net ........................... 200
DEFERRED TAX ASSET ................................................... --
OTHER ASSETS ......................................................... 167,895 (65,500)
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net ......................... 1,321,976 368,336
---------- -----------
Total Assets ...................................................... $2,034,234 $ 199,587
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 5,207
Income taxes payable ................................................ --
Accrued liabilities ................................................. 40,532
Current portion of long-term liabilities-- ..........................
Notes payable and commercial bank financing ........................ 35,215
Notes and capital leases payable to affiliates ..................... 3,073
Program contracts payable .......................................... 66,404 $ 1,788
Deferred barter revenues ............................................ 4,273 350
---------- -----------
Total current liabilities ......................................... 154,704 2,138
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ........................ 1,022,934 196,673 (e)
Notes and capital leases payable to affiliates ..................... 19,500
Program contracts payable .......................................... 62,408 776
Deferred tax liability ............................................. 24,092
Other long-term liabilities ........................................ 3,611
----------
Total liabilities ................................................. 1,287,249 199,587
---------- -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ....................... 3,697 --
---------- -----------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE
SECURITY OF SUBSIDIARY TRUST HOLDING SOLELY
KDSM SENIOR DEBENTURES .............................................. 200,000 --
---------- -----------
STOCKHOLDERS' EQUITY:
Series B Preferred Stock ........................................... 10
Series D Convertible Exchangeable
Preferred Stock ................................................... 35
Series E Convertible Exchangeable Preferred Stock .................. --
Class A Common Stock ............................................... 137
Class B Common Stock ............................................... 255
Additional paid-in capital ......................................... 552,949
Additional paid-in capital-equity put options ...................... 23,117
Additional paid-in capital-deferred compensation ................... (954)
Accumulated deficit ................................................ (32,261)
----------
Total stockholders' equity ........................................ 543,288 --
---------- -----------
Total Liabilities and Stockholders' Equity ........................ $2,034,234 $ 199,587
========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
HISTORICAL,
APRIL 1998
COMMON STOCK
APRIL 1998 ISSUANCE AND
COMMON STOCK SIGNIFICANT
ISSUANCE(b) MAX MEDIA(c) ACQUISITIONS
-------------- ------------------ -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including cash equivalents .................................... $ --
Accounts receivable, net of allowance for doubtful accounts ......... 123,018
Current portion of program contract costs ........................... $ 2,325 50,663
Prepaid expenses and other current assets ........................... 4,673
Deferred barter costs ............................................... 640 4,945
Refundable income taxes ............................................. 10,581
Deferred tax asset .................................................. 2,550
----------
Total current assets .............................................. -- 2,965 196,430
PROGRAM CONTRACT COSTS, less current portion ......................... 2,182 43,970
LOANS TO OFFICERS AND AFFILIATES ..................................... 11,088
PROPERTY AND EQUIPMENT, net .......................................... 25,556 220,129
NON-COMPETE AND CONSULTING AGREEMENTS, net ........................... 200
DEFERRED TAX ASSET ................................................... --
OTHER ASSETS ......................................................... (12,817) 89,578
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net ......................... 229,490 1,919,802
----------- ----------
Total Assets ...................................................... $ -- $ 247,376 $2,481,197
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 5,207
Income taxes payable ................................................ --
Accrued liabilities ................................................. 40,532
Current portion of long-term liabilities-- ..........................
Notes payable and commercial bank financing ........................ 35,215
Notes and capital leases payable to affiliates ..................... 3,073
Program contracts payable .......................................... 2,431 70,623
Deferred barter revenues ............................................ 1,026 5,649
----------- ----------
Total current liabilities ......................................... -- 3,457 160,299
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ........................ (335,629) 242,183 (f) 1,126,161
Notes and capital leases payable to affiliates ..................... 19,500
Program contracts payable .......................................... 1,736 64,920
Deferred tax liability ............................................. 24,092
Other long-term liabilities ........................................ 3,611
----------
Total liabilities ................................................. (335,629) 247,376 1,398,583
---------- ----------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ....................... -- -- 3,697
---------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE
SECURITY OF SUBSIDIARY TRUST HOLDING SOLELY
KDSM SENIOR DEBENTURES .............................................. -- -- 200,000
---------- ----------- ----------
STOCKHOLDERS' EQUITY:
Series B Preferred Stock ........................................... (5) 5
Series D Convertible Exchangeable
Preferred Stock ................................................... 35
Series E Convertible Exchangeable Preferred Stock .................. --
Class A Common Stock ............................................... 80 217
Class B Common Stock ............................................... 255
Additional paid-in capital ......................................... 335,554 888,503
Additional paid-in capital-equity put options ...................... 23,117
Additional paid-in capital-deferred compensation ................... (954)
Accumulated deficit ................................................ (32,261)
----------
Total stockholders' equity ........................................ 335,629 -- 878,917
------------ ----------- ----------
Total Liabilities and Stockholders' Equity ........................ $ -- $ 247,376 $2,481,197
============ =========== ==========
</TABLE>
94
<PAGE>
SINCLAIR BROADCAST GROUP, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
CONSOLIDATED HISTORICAL,
HISTORICAL, APRIL 1998
APRIL 1998 COMMON STOCK
COMMON STOCK ISSUANCE,
ISSUANCE AND SIGNIFICANT
SIGNIFICANT ACQUISITIONS
ACQUISITIONS MERGER(d) AND THE MERGER
-------------- ------------------ --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including cash equivalents .................................... $ -- $ --
Accounts receivable, net of allowance for doubtful accounts ......... 123,018 123,018
Current portion of program contract costs ........................... 50,663 $ 22,850 73,513
Prepaid expenses and other current assets ........................... 4,673 4,673
Deferred barter costs ............................................... 4,945 4,945
Refundable income taxes ............................................. 10,581 10,581
Deferred tax asset .................................................. 2,550 2,550
---------- ---------- ----------
Total current assets .............................................. 196,430 22,850 219,280
PROGRAM CONTRACT COSTS, less current portion ......................... 43,970 23,432 67,402
LOANS TO OFFICERS AND AFFILIATES ..................................... 11,088 11,088
PROPERTY AND EQUIPMENT, net .......................................... 220,129 39,723 259,852
NON-COMPETE AND CONSULTING AGREEMENTS, net ........................... 200 200
DEFERRED TAX ASSET ................................................... -- --
OTHER ASSETS ......................................................... 89,578 89,578
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net ......................... 1,919,802 1,135,309 3,055,111
---------- ---------- ----------
Total Assets ...................................................... $2,481,197 $1,221,314 $3,702,511
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 5,207 $ 5,207
Income taxes payable ................................................ -- --
Accrued liabilities ................................................. 40,532 40,532
Current portion of long-term liabilities-- ..........................
Notes payable and commercial bank financing ........................ 35,215 35,215
Notes and capital leases payable to affiliates ..................... 3,073 3,073
Program contracts payable .......................................... 70,623 24,944 95,567
Deferred barter revenues ............................................ 5,649 5,649
---------- ---------- ----------
Total current liabilities ......................................... 160,299 24,944 185,243
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ........................ 1,126,161 900,000 (g) 2,026,161
Notes and capital leases payable to affiliates ..................... 19,500 19,500
Program contracts payable .......................................... 64,920 22,710 87,630
Deferred tax liability ............................................. 24,092 173,660 197,752
Other long-term liabilities ........................................ 3,611 3,611
---------- ---------- ----------
Total liabilities ................................................. 1,398,583 1,121,314 2,519,897
---------- ---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ....................... 3,697 -- 3,697
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECU-
RITY OF SUBSIDIARY TRUST HOLDING SOLELY KDSM SENIOR
DEBENTURES .......................................................... 200,000 -- 200,000
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Series B Preferred Stock ........................................... 5 5
Series D Convertible Exchangeable Preferred Stock .................. 35 35
Series E Convertible Exchangeable Preferred Stock .................. -- --
Class A Common Stock ............................................... 217 19 236
Class B Common Stock ............................................... 255 255
Additional paid-in capital ......................................... 888,503 99,981 988,484
Additional paid-in capital-equity put options ...................... 23,117 23,117
Additional paid-in capital-deferred compensation ................... (954) (954)
Accumulated deficit ................................................ (32,261) (32,261)
---------- ---------- ----------
Total stockholders' equity ........................................ 878,917 100,000 978,917
---------- ---------- ----------
Total Liabilities and Stockholders' Equity ........................ $2,481,197 $1,221,314 $3,702,511
========== ========== ==========
</TABLE>
95
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(a) The Heritage Acquisition column reflects the assets and liabilities acquired
in connection with the $630,000 purchase of Heritage. The Heritage
Acquisition column gives effect to Sinclair's definitive agreements to sell
radio stations KFXX-AM, KKSN-FM, and KKRH-FM serving the Portland, Oregon
market, radio stations, WBBF-AM, WBEE-FM, WKLX-FM, and WQRV-FM serving the
Rochester, New York market and television stations WPTZ-TV, WNNE-TV and
WFFF-TV serving the Burlington, Vermont and Plattsburgh, New York markets
(the "Dispositions"). Total acquired intangibles are calculated as follows:
<TABLE>
<CAPTION>
HERITAGE
HERITAGE DISPOSITIONS ACQUISITION
------------ -------------- ------------
<S> <C> <C> <C>
Purchase Price ............................................ $ 630,000
Add:
Liabilities acquired--
Current portion of program contracts payable ........... $ 2,194 $ (406) 1,788
Deferred barter revenues ............................... 676 (326) 350
Long-term portion of program contracts payable ......... 857 (81) 776
Less:
Assets acquired--
Current portion of program contract costs .............. (1,704) 242 (1,462)
Deferred barter costs .................................. (880) 302 (578)
Program contract costs, less current portion ........... (1,323) 144 (1,179)
Property and equipment ................................. (45,840) 12,981 (32,859)
Proceeds from sale of stations ......................... (228,500)
----------
Acquired intangibles ................................... $ 368,336
==========
</TABLE>
(b) To reflect the net proceeds to Sinclair of the April 1998 Common Stock
Issuance, net of $13,871 underwriting discounts and commissions and
estimated expenses and the application of the proceeds therefrom.
(c) The Max Media Acquisition column reflects the assets and liabilities
acquired in connection with the $255,000 purchase of Max Media. The Max
Media Acquisition is subject to a number of conditions customary for
acquisitions of broadcasting properties. Total acquired intangibles are
calculated as follows:
<TABLE>
<CAPTION>
MAX MEDIA
------------
<S> <C>
Purchase Price ..................................................... $ 255,000
Add:
Liabilities acquired--
Current portion of program contracts payable .................... 2,431
Deferred barter revenues ........................................ 1,026
Long-term portion of program contracts payable .................. 1,736
Less:
Assets acquired--
Current portion of program contract costs ....................... (2,325)
Deferred barter costs ........................................... (640)
Program contract costs, less current portion .................... (2,182)
Property and equipment .......................................... (25,556)
---------
Acquired intangibles ............................................ $ 229,490
=========
</TABLE>
96
<PAGE>
(d) The Merger column reflects the assets and liabilities acquired in connection
with the $1,000,000 purchase of 100% of the outstanding capital stock of
Sullivan Broadcast Holdings, Inc. and its subsidiaries. Included in the
total purchase price is $100,000 of Sinclair Class A Common Stock (assuming
closing price of $51 7/8 per share), which may be issued at the option of
Sinclair pursuant to the Merger Agreement. The Merger is subject to a number
of conditions customary for acquisitions of broadcasting properties. Total
acquired intangibles are calculated as follows:
<TABLE>
<CAPTION>
MERGER
-------------
<S> <C>
Purchase Price ........................................... $1,000,000
Add:
Liabilities acquired--
Current portion of program contracts costs ............ 24,944
Long-term portion of program contract costs ........... 22,710
Deferred tax liability ................................ 173,660
Less:
Assets acquired--
Current portion of program contracts .................. (22,850)
Program contract costs, less current portion .......... (23,432)
Property and equipment ................................ (39,723)
----------
Acquired intangibles .................................. $1,135,309
==========
</TABLE>
(e) To reflect indebtedness of $196,673 incurred in connection with the Heritage
Acquisition as follows:
<TABLE>
<S> <C>
Purchase Price ........................................... $ 630,000
Less:
Proceeds from dispositions ............................ (228,500)
Deposits .............................................. (65,500)
Cash utilized ......................................... (139,327)
----------
Indebtedness incurred ................................. $ 196,673
==========
</TABLE>
(f) To reflect $242,183 incurred (net of a $12,817 deposit) under the Bank
Credit Agreement in connection with the Max Media Acquisition.
(g) To reflect $900,000 incurred (net of $100,000 of Sinclair Class A Common
Stock, which may be issued at the option of Sinclair pursuant to the Merger
Agreement) under the Bank Credit Agreement in connection with the Merger.
97
<PAGE>
SINCLAIR BROADCAST GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
RECENT FINANCINGS
------------------------------------------------------------------------
JULY COMMON AND
CONSOLIDATED HYTOPS NOTES PREFERRED
HISTORICAL ISSUANCE OFFERING STOCK OFFERINGS
---------- -------- -------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Station broadcast revenues, net of agency
commissions .................................. $471,228
Revenues realized from station barter
arrangements ................................. 45,207
--------
Total revenues ............................... 516,435 -- -- --
-------- -- -- --
OPERATING EXPENSES:
Program and production ........................ 92,178
Selling, general and administrative ........... 106,084
Expenses realized from barter arrangements 38,114
Amortization of program contract costs and
net realized value adjustments ............... 66,290
Amortization of deferred compensation ......... 1,636
Depreciation and amortization of property
and equipment ................................ 18,040
Amortization of acquired intangible assets,
non-compete, consult, and other .............. 67,840 $ 133 (f) $ 249 (g)
-------- --------- --------
Total operating expenses ..................... 390,182 133 249 --
-------- --------- -------- --
Broadcast operating income (loss) ............ 126,253 (133) (249) --
-------- --------- -------- --
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount
expense ...................................... (98,393) 1,852 (i) (1,734) (j) 16,857 (k)
Subsidiary trust minority interest expense..... (18,600) (4,650)(o)
Interest income ............................... 2,174
Other income .................................. 54
--------
Income (loss) before provision (bene-
fit) for income taxes ....................... 11,488 (2,931) (1,983) 16,857
PROVISION (BENEFIT) FOR INCOME
TAXES ......................................... 15,984 (1,172) (q) (793) (q) 6,743 (q)
-------- --------- -------- ------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................ (4,496) (1,759) (1,190) 10,114
EXTRAORDINARY ITEM ............................. (6,070) -- -- --
-------- --------- -------- ------
NET INCOME (LOSS) .............................. $(10,566) $ (1,759) $ (1,190) $ 10,114
======== ========= ======== ==========
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS ........................... $(13,329)
========
BASIC EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders ............. $ (0.20)
========
Net income (loss) per share ................... $ (0.37)
========
Average shares outstanding .................... 35,951
========
DILUTED EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders ............. $ (0.20)
========
Net income (loss) per share ................... $ (0.37)
========
Average shares outstanding .................... 40,078
========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RECENT FINANCINGS
----------------------------------
TENDER OFFER APRIL 1998
AND DECEMBER COMMON STOCK
NOTES OFFERING ISSUANCE HERITAGE(a) MAX MEDIA(b)
---------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Station broadcast revenues, net of agency
commissions .................................. $72,383 $51,351
Revenues realized from station barter
arrangements ................................. 3,996 5,362
------- -------
Total revenues ............................... -- 76,379 56,713
-- ------- -------
OPERATING EXPENSES:
Program and production ........................ 27,645 10,662
Selling, general and administrative ........... 17,010 24,148
Expenses realized from barter arrangements 3,474 2,334
Amortization of program contract costs and
net realized value adjustments ............... 1,974 5,546
Amortization of deferred compensation ......... --
Depreciation and amortization of property
and equipment ................................ 4,246 4,713
Amortization of acquired intangible assets,
non-compete, consult, and other .............. 15,083 8,028
------- -------
Total operating expenses ..................... -- 69,432 55,431
-- ------- -------
Broadcast operating income (loss) ............ -- 6,947 1,282
-- ------- -------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount
expense ...................................... (2,010)(l) 23,259 (m) (5,940) (6,078)
Subsidiary trust minority interest expense..... --
Interest income ............................... -- --
Other income .................................. 8,636 8,795
------- -------
Income (loss) before provision (bene-
fit) for income taxes ....................... (2,010) 23,259 9,643 3,999
PROVISION (BENEFIT) FOR INCOME
TAXES ......................................... (804)(q) 9,304 (q) 7,583 --
------ ------ ------- -------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................ (1,206) 13,955 2,060 3,999
EXTRAORDINARY ITEM ............................. (69)(r) -- --
------ ------ -------
NET INCOME (LOSS) .............................. $ (1,275) $ 13,955 $ 2,060 $ 3,999
========== ========= ======= =======
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS ...........................
BASIC EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders .............
Net income (loss) per share ...................
Average shares outstanding ....................
DILUTED EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders .............
Net income (loss) per share ...................
Average shares outstanding ....................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
HISTORICAL,
RECENT FINANCINGS,
ACQUISITION SIGNIFICANT ACQUISITION
ADJUSTMENTS ACQUISITIONS SULLIVAN(c) ADJUSTMENTS
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Station broadcast revenues, net of agency
commissions .................................. $ 594,962 $ 120,124
Revenues realized from station barter
arrangements ................................. 54,565 17,650
---------- ---------
Total revenues ............................... -- 649,527 137,774
-- ---------- ---------
OPERATING EXPENSES:
Program and production ........................ 130,485 17,301
Selling, general and administrative ........... (5,870)(d) 141,372 28,319 (3,531)(d)
Expenses realized from barter arrangements 43,922 16,999
Amortization of program contract costs and
net realized value adjustments ............... 73,810 13,198
Amortization of deferred compensation ......... 1,636 --
Depreciation and amortization of property
and equipment ................................ (909) (e) 27,908 9,464 (2,382)(e)
Amortization of acquired intangible assets,
non-compete, consult, and other .............. 10,220 (h) 101,553 32,756 6,878 (h)
------ ---------- --------- ------
Total operating expenses ..................... 5,259 520,686 118,037 965
------ ---------- --------- ------
Broadcast operating income (loss) ............ (5,259) 128,841 19,737 (965)
------ ---------- --------- ------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount
expense ...................................... (34,226) (n) (106,413) (40,711) (25,251) (n)
Subsidiary trust minority interest expense..... (23,250) --
Interest income ............................... (280)(p) 1,894 --
Other income .................................. 17,485 12
---------- ---------
Income (loss) before provision (bene-
fit) for income taxes ....................... (39,765) 18,557 (20,962) (26,216)
PROVISION (BENEFIT) FOR INCOME
TAXES ......................................... (15,906) (q) 20,939 (5,488) (10,486) (q)
------- ---------- --------- -------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................ (23,859) (2,382) (15,474) (15,730)
EXTRAORDINARY ITEM ............................. -- (6,139) -- --
------- ---------- --------- -------
NET INCOME (LOSS) .............................. $ (23,859) $ (8,521) $ (15,474) $ (15,730)
============ ========== ========= ============
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS ........................... $ (18,871)
==========
BASIC EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders ............. $ (0.27)
==========
Net income (loss) per share ................... $ (0.40)
==========
Average shares outstanding .................... 47,142 (s)
==========
DILUTED EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders ............. $ (0.27)
==========
Net income (loss) per share ................... $ (0.40)
==========
Average shares outstanding .................... 48,583 (s)
==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
HISTORICAL,
RECENT
FINANCINGS,
SIGNIFICANT
ACQUISITIONS
AND SULLIVAN
------------
<S> <C>
REVENUES:
Station broadcast revenues, net of agency
commissions .................................. $ 715,086
Revenues realized from station barter
arrangements ................................. 72,215
---------
Total revenues ............................... 787,301
---------
OPERATING EXPENSES:
Program and production ........................ 147,786
Selling, general and administrative ........... 166,160
Expenses realized from barter arrangements 60,921
Amortization of program contract costs and
net realized value adjustments ............... 87,008
Amortization of deferred compensation ......... 1,636
Depreciation and amortization of property
and equipment ................................ 34,990
Amortization of acquired intangible assets,
non-compete, consult, and other .............. 141,187
---------
Total operating expenses ..................... 639,688
---------
Broadcast operating income (loss) ............ 147,613
---------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount
expense ...................................... (172,375)
Subsidiary trust minority interest expense..... (23,250)
Interest income ............................... 1,894
Other income .................................. 17,497
---------
Income (loss) before provision (bene-
fit) for income taxes ....................... (28,621)
PROVISION (BENEFIT) FOR INCOME
TAXES ......................................... 4,965
---------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................ $ (33,586)
EXTRAORDINARY ITEM ............................. (6,139)
---------
NET INCOME (LOSS) .............................. $ (39,725)
=========
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS ........................... $ (50,075)
=========
BASIC EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders ............. $ (0.90)
=========
Net income (loss) per share ................... $ (1.02)
=========
Average shares outstanding .................... 49,070 (t)
=========
DILUTED EARNINGS PER SHARE:
Loss per share before extraordinary item
available to common shareholders ............. $ (0.90)
=========
Net income (loss) per share ................... $ (1.02)
=========
Average shares outstanding .................... 50,511 (t)
=========
</TABLE>
98
<PAGE>
SINCLAIR BROADCAST GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) The Heritage column reflects the results of operations for for the period
from January 1, 1997 to December 31, 1997, less television and radio
stations Sinclair has definitive agreements to sell. These dispositions
include the Portland, Oregon and Rochester, New York radio stations and the
Burlington, Vermont and Plattsburgh, New York television stations.
(b) The Max Media column reflects the results of operations for Max Media for
the period from January 1, 1997 to December 31, 1997. Included within
"other income" is a one time gain on station sales of approximately $8,500.
(c) The Merger column reflects the results of operations for Sullivan for the
period from January 1, 1997 to December 31, 1997.
(d) To adjust operating expenses for corporate overhead (net of integration
costs Sinclair anticipates incurring as a result of the Significant
Acquisitions and the Merger) which Sinclair does not expect to incur upon
consummation of the Heritage Acquisition, Max Media Acquisition and the
Merger on a going-forward basis.
(e) To record depreciation expense related to acquired tangible assets and
eliminate depreciation expense recorded by Heritage, Max Media, and
Sullivan from January 1, 1997 to December 31, 1997. Tangible assets are to
be depreciated over lives ranging from three to 20 years, calculated as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
---------------------------------------------
SIGNIFICANT
ACQUISITIONS SULLIVAN TOTAL
-------------- ------------ -------------
<S> <C> <C> <C>
Depreciation expense on acquired tangible assets ....................... $ 9,868 $ 7,082 $ 16,950
Less: Depreciation expense recorded by Heritage, Max Media and Sullivan (8,959) (9,464) (18,423)
-------- -------- ---------
Pro forma adjustment ................................................... $ 909 $ (2,382) $ (1,473)
======== ======== =========
</TABLE>
(f) To record amortization expense on other assets that relate to the HYTOPS
Issuance for one year ($7,677 over 12 years).
<TABLE>
<S> <C>
Amortization expense on other assets ............... $ 640
Amortization expense recorded by Sinclair .......... (507)
------
Pro Forma adjustment ............................... $ 133
======
</TABLE>
(g) To record amortization expense on other assets that relate to the July 1997
Notes Issuance for one year ($4,766 over 10 years).
<TABLE>
<S> <C>
Amortization expense on other assets ............... $ 477
Amortization expense recorded by Sinclair .......... (228)
------
Pro Forma adjustment ............................... $ 249
======
</TABLE>
(h) To record amortization expense related to acquired intangible assets and
deferred financing costs and eliminate amortization expense recorded by
Heritage, Max Media and Sullivan from January 1, 1997 to December 31, 1997.
Intangible assets are to be amortized over lives ranging from one to 40
years, calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------------------------------
SIGNIFICANT
ACQUISITIONS SULLIVAN TOTAL
-------------- ------------ ------------
<S> <C> <C> <C>
Amortization expense on acquired intangible assets ..................... $ 33,331 $ 39,634 $ 72,965
Less: Amortization expense recorded by Heritage, Max Media and Sullivan (23,111) (32,756) (55,867)
--------- --------- ---------
Pro forma adjustment ................................................... $ 10,220 $ 6,878 $ 17,098
========= ========= =========
</TABLE>
(i) To record the net interest expense reduction for the year ended December
31, 1997 related to the application of the HYTOPS Issuance proceeds to the
outstanding balance under the revolving credit facility under the Bank
Credit Agreement offset by an increase in commitment fees for the available
but unused portion of the revolving credit facility.
<TABLE>
<S> <C>
Interest on adjusted borrowings on the revolving credit facility for the period from
January 1, 1997 to March 5, 1997 ................................................... $ 2,865
Commitment fee on available but unused borrowings of $250,000 for five months and
$675,000 for seven months of revolving credit facility at 1/2 of 1%................. (2,490)
Commitment fee on available borrowings recorded by Sinclair .......................... 1,477
--------
Pro forma adjustment ................................................................. $ 1,852
========
</TABLE>
(j) To record the net interest expense reduction related to the application of
the net proceeds of the July 1997 Debt Issuance to repay borrowings under
the Bank Credit Agreement for the period from January 1, 1997 to June 27,
1997 offset by an increase in interest expense for the July 1997 Notes
Issuance ($200,000 at 9%) net of interest recorded by Sinclair.
99
<PAGE>
(k) To record the interest expense reduction of $16,857 related to the
application of the net proceeds of the 1997 Common Stock Issuance and the
1997 Preferred Stock Issuance to repay borrowings under the Bank Credit
Agreement for the period from January 1, 1997 to September 17, 1997.
(l) To record adjustments related to the December 1997 Notes Issuance ($250,000
at 8.75%) and the Debt Repurchase as follows:
<TABLE>
<S> <C>
Interest Adjustments:
Interest on December Debt Issuance for one year .................................. $ 21,875
Interest recorded on the 1993 Notes .............................................. (9,646)
Interest recorded on the December Debt Issuance .................................. (911)
Interest expense reduction related to the application of the net proceeds from the
December Debt Issuance .......................................................... (9,688)
--------
1,630
--------
Amortization Adjustments:
Amortization of deferred financing costs and debt discount ....................... 678
Amortization recorded by Sinclair ................................................ (298)
--------
380
--------
Pro forma adjustment ............................................................. $ 2,010
========
</TABLE>
(m) To record the interest expense reduction of $24,937 related to the
application of the proceeds of the April 1998 Common Stock Issuance to
repay borrowings under the Bank Credit Agreement offset by the increase in
commitment fees of $1,678.
(n) To record interest expense for the year ended December 31, 1997 on
acquisition financing relating to Heritage, Max Media and Sullivan of
$401,500, $242,183 and $900,000 (under Sinclair's Bank Credit Agreement at
7.43%), and eliminate interest expense recorded.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-------------------------------------------------
SIGNIFICANT
ACQUISITIONS SULLIVAN TOTAL
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest expense adjustment as noted above .......................... $ (46,244) $ (65,962) $ (112,206)
Less: Interest expense recorded by Heritage, Max Media and Sullivan . 12,018 40,711 52,729
---------- ---------- -----------
Pro forma adjustment ................................................ $ (34,226) $ (25,251) $ (59,477)
========== ========== ===========
</TABLE>
(o) To record subsidiary trust minority interest expense for the year ended
December 31, 1997 ($200,000 aggregate liquidation value of HYTOPS at
11.625%).
<TABLE>
<S> <C>
Subsidiary trust minority interest expense ........................... $ 23,250
Subsidiary trust minority interest expense recorded by Sinclair ...... (18,600)
---------
Pro Forma adjustment ................................................. $ 4,650
=========
</TABLE>
(p) To eliminate interest income for the year ended December 31, 1997 on
proceeds from the December 1997 Notes Issuance due to assumed utilization
of excess cash for the Significant Acquisitions and the Merger.
(q) To record tax provision (benefit) at the applicable tax rates.
(r) To record an increase in the extraordinary loss, net of the tax effect
related to the Debt Repurchase and the write-off of the deferred financing
costs related to the 1993 Notes.
(s) Weighted average shares outstanding on a pro forma basis assumes that the
4,345,000 shares of Sinclair Class A Common Stock issued in the 1997 Common
Stock Issuance, 6,000,000 shares of Class A Common Stock issued in the
April 1998 Common Stock Issuance and 2,030,187 shares of Sinclair Class A
Common Stock issued upon conversion of approximately 558,302 shares of
Series B Preferred Stock that were sold by certain selling stockholders at
the time of the April 1998 Common Stock Issuance were outstanding as of the
beginning of the period.
(t) Weighted average shares outstanding on a pro forma basis assumes that
1,927,711 shares of Sinclair Class A Common Stock issuable at the option of
Sinclair pursuant to the Merger Agreement (assuming a closing price of $51
7/8 per share at time of issuance) were outstanding as of the beginning of
the period.
100
<PAGE>
BUSINESS OF SULLIVAN
OVERVIEW
All of the outstanding capital stock of Act III Broadcasting, Inc., a
Delaware corporation ("Act III"), was acquired by A-3 Acquisition, Inc., a
Delaware corporation ("A-3"), on January 4, 1996 (the "Acquisition"). As
described further below, Sullivan Broadcasting Company, Inc. is the successor by
merger to A-3 and Act III.
Sullivan Broadcast Holdings, Inc., a Delaware corporation, formerly known
as A-3 Holdings, Inc. ("Holdings"), and its wholly-owned subsidiary, A-3, were
formed by ABRY Broadcast Partners II, L.P. ("ABRY") to acquire all of the
outstanding stock of Act III pursuant to a stock purchase agreement dated as of
June 19, 1995 (as amended, the "Stock Purchase Agreement") by and among A-3, Act
III, Act III Communications, Inc. and certain other stockholders of Act III.
Upon the consummation of such Acquisition, A-3 merged (the "Act III Merger")
with Act III, with Act III surviving such Merger (the "Surviving Company"). In
the Act III Merger, the name of the Surviving Company was changed from Act III
Broadcasting, Inc. to Sullivan Broadcasting Company, Inc. ("SBC"). Holdings
currently owns 100% of the outstanding capital stock of SBC.
References to "Sullivan" refer to Sullivan Broadcast Holdings, Inc.
SULLIVAN
Sullivan owns, operates and/or programs 10 television stations affiliated
with the Fox Broadcasting Co. ("Fox") (collectively, the "Fox Stations"), one
television station affiliated with the American Broadcasting Companies, Inc.
("ABC") (the "ABC Station"), one low power television station affiliated with
the United Paramount Network ("UPN") (collectively, "the Owned Stations") and
two independent television stations that Sullivan programs under Local Marketing
Agreements ("LMA"), also referred to as the Time Brokerage Agreements,
(collectively, the "Stations"). With its 10 owned Fox affiliates, Sullivan is
one of the largest owners of Fox-affiliated stations in the United States.
During 1997, four of the 10 Fox affiliated stations also received programming
from UPN under secondary affiliation agreements, while the two stations
programmed pursuant to LMAs remained primary UPN affiliates. In addition,
Sullivan operates the only U.S. television station to broadcast Fox programming
into the Toronto, Ontario market (WUTV). The following are the Stations and
their respective markets:
PRIMARY/SECONDARY
<TABLE>
<CAPTION>
STATION MARKET AFFILIATION
------- ------ -----------
<S> <C> <C>
OWNED STATIONS
WUTV .............. Buffalo, NY/Toronto, Ontario Fox
WZTV .............. Nashville, TN Fox
KOKH .............. Oklahoma City, OK Fox
WXLV .............. Greensboro/Winston Salem/High Point, NC ABC
WRGT .............. Dayton, OH Fox/UPN
WVAH .............. Charleston/Huntington, WV Fox/UPN
WRLH .............. Richmond, VA Fox
WUHF .............. Rochester, NY Fox/UPN
WTAT .............. Charleston, SC Fox
WMSN .............. Madison, WI Fox
WPNY .............. Utica, NY UPN
WFXV .............. Utica, NY Fox
LMA STATIONS
WUPN .............. Greensboro/Winston Salem/High Point, NC UPN
WUXP .............. Nashville, TN UPN
</TABLE>
101
<PAGE>
Sullivan selected and acquired the Stations based on the size and growth of
their respective markets and their broadcast revenues, number of competitors,
retail sales and programming inventory, as well as availability of other
programming in the market. Specifically, Sullivan sought and acquired
independent stations in designated market area ("DMA") markets ranked generally
between 30 and 100. See "Ratings." Each of the Stations broadcast over-the-air
and transmit over the cable systems operating within its market. Approximately
68%, in the aggregate, of the television households within the Stations' U.S.
markets are served by cable.
STRATEGY
Sullivan's selective acquisition of strong, independent stations in
medium-sized markets, combined with its experienced management, has provided
Sullivan with a strong market niche in television broadcasting. Sullivan's
strategy is centered upon the following:
Operate in Markets with Limited Competition. In seven of Sullivan's eleven
markets, Sullivan competed against only three or fewer other commercial
television stations as set forth in the Nielsen Station Index dated November
1997. As a result, Sullivan believes it achieves higher advertising revenues and
lower programming costs due to less competition for programming, viewers and
advertising sales. In addition, since there are four major commercial networks
(ABC, CBS, NBC and Fox), Sullivan believes that should there be network
affiliation changes within any market, Sullivan would not be left without a
major network affiliation in such market even if its present affiliation was
terminated. In six of Sullivan's ten markets, Sullivan's Station is the only
viable commercial UHF station. Therefore, in the event of regulatory changes
allowing common ownership of VHF and UHF stations in the same market, Sullivan's
UHF station may be a part of any combination of UHF and VHF stations in such
market, either by virtue of Sullivan's acquiring a VHF station or selling its
UHF station.
Develop Programming Franchises and Station Identities. In order to maximize
its share of advertising revenues in each of its markets, Sullivan seeks to
create distinctive identities for each of the Stations by developing programming
franchises targeted to specific demographic groups which Sullivan believes are
attractive to its advertising clients. Both Fox and UPN provide programming
which is designed to attract young adults, teens and children. Sullivan also
seeks to improve its ratings among key demographic groups by broadcasting high
quality off-network and first-run syndicated programming. With respect to
non-network programming, Sullivan focuses on acquiring cost efficient programs
which provide good ratings and, therefore, high advertising revenues, relative
to the cost per show. Independent and Fox-affiliated stations are typically the
largest consumers of syndicated programming. Therefore, because Sullivan's
Fox-affiliated stations are predominantly in markets without a competing
commercial independent station, there is little or no competition for the
purchase of such programming in such markets, which Sullivan believes results in
lower costs for such programming.
Pursue In-Market LMAs and Acquisitions. In its existing markets, Sullivan
believes that it can attain significant growth in its share of market revenues
and in operating cash flow through the utilization of LMAs and, if current law
is changed to allow ownership of more than one television station in a market,
through acquisitions. There can be no assurance that there will be any such
change in law. By programming more than one station in a market, Sullivan
believes it will be able to increase its revenues by attracting new advertisers
and increasing its share of existing customers' advertising budgets by offering
attractive sales packages that combine the programming strengths and commercial
inventories of both stations. In addition, Sullivan believes it will be able to
realize economies of scale in marketing, programming, overhead and capital
expenditures. Sullivan currently programs television stations in the
Greensboro/Winston Salem/High Point, North Carolina market (WUPN) and in the
Nashville, Tennessee market (WUXP) under LMAs (the "WUPN LMA" and the "WUXP
LMA", respectively). Sullivan will consider acquisitions that would help to
further diversify revenues and operating cash flow. Sullivan will seek
television stations which operating performance management believes it can
improve through the application of its business strategies.
Emphasize Local Sales. Sullivan's advertising sales strategy centers upon
increasing its sales of local, and in the case of WUTV, Canadian, advertising.
As compared to revenues from national advertising, revenues from local
advertising generally are more stable and, due to a lower cost of sales, more
prof-
102
<PAGE>
itable. Sullivan seeks both to attract new advertisers to television and to
increase the amount of advertising by existing local advertisers by operating
experienced local sales forces with strong community ties, producing commercials
for local clients and targeting small businesses with potential for growth. From
1993 through 1997, the percentage of Sullivan's total gross advertising revenues
from local sales increased from 55.6% to 59.6%.
Maximize Group Efficiencies. With operations presently in ten markets,
Sullivan has been and will continue to achieve certain efficiencies with respect
to programming purchases, advertising sales and operating costs. In addition,
group marketing ad sales enable each Station to expand its base of advertisers
and to obtain attractive terms from national sales representatives. See
"Advertising Sales." Sullivan controls overall operating costs by maintaining a
centralized corporate management structure, which provides programming,
financial and marketing support to each Station.
Capitalize on Changes in Method of Audience Measurement. A.C. Nielsen Co.
uses one of two methods to measure a television station's actual viewership. In
larger DMAs, ratings are determined by a combination of meters connected
directly to selected television sets and periodic surveys ("Sweeps" or "Ratings
Periods") of television viewers through a manual diary system. In smaller DMAs,
only periodic surveys are completed. Typically, viewership of Fox affiliates and
independent stations is under-reported in "diary markets" because members of the
target audience of these stations (children, teens and young adults) do not, on
a regular basis, maintain an accurate diary of the programs they watch as well
as older viewers. A switch from diary measurement to metered measurement in a
market generally results in a significant increase in reported viewership for
Fox affiliates and independent stations. Nielsen has announced that it is in the
process of converting diary markets to metered markets, generally in order of
market size. Metering commenced in Nashville in July 1997 and in the
Greensboro/Winston- Salem/High Point markets in April 1998. As a result of this
switch, Sullivan has experienced a significant increase in reported viewership
for its Nashville stations.
PROGRAMMING
Fox provides each Fox Station with approximately 15 hours of prime-time
programming per week, including Melrose Place, King of the Hill, The Simpsons
and The X-Files. In addition, Fox provides each Fox Station with approximately
25 hours per week of non-prime time programming, including National Football
League games, National Hockey League games, Major League Baseball and children's
programming via the Fox Children's Network ("FCN"). ABC provides the ABC station
with approximately 22 hours of prime-time programming and approximately 35 hours
of non-prime-time programming per week. Prime-time programming provided by ABC
includes Monday Night Football, Home Improvement, The Drew Carey Show and NYPD
Blue, while non-prime-time programming includes Good Morning America, ABC World
News Tonight, ABC College Football and All My Children.
Sullivan, through its affiliation with FCN, acquires television programming
for children, including animated programs, for broadcast on the Fox Stations.
Each of the Fox Affiliation Agreements (as defined, see "Network Affiliation
Agreements") includes the right to broadcast FCN programs, generally for morning
and afternoon children's programming. Sullivan believes FCN programs have been
successful in these periods, thereby increasing the Fox Station's overall
ratings. Sullivan also broadcasts Disney animated programming for children on
some of its Stations.
Sullivan has secondary affiliation agreements with UPN for a five-year term
ending on January 15, 2000, pursuant to which UPN may provide up to 10 hours
(and is currently providing six hours) of prime-time quality programming per
week. Such secondary UPN Affiliates are WRGT (Dayton), WVAH
(Charleston/Huntington) and WUHF (Rochester). In Nashville (WUXP),
Greensboro/Winston-Salem/Highpoint (WUPN) and Utica (WPNY), Sullivan has primary
UPN affiliation agreements.
Non-network programming hours at the Stations are programmed with a mix
(customized for each market) of syndicated off-network reruns and first-run
shows, movies, sports, talk shows, and other entertainment programs. In 1997,
WTAT (Charleston), WRLH (Richmond), WZTV (Nashville) and WUHF (Rochester) were
the four Fox Stations broadcasting local newscasts. WTAT and WRLH's newscasts
are produced by the CBS and NBC affiliated stations, respectively, in those
markets, WZTV's
103
<PAGE>
newscast is produced by the Nashville ABC affiliate, and WUHF's newscast, which
launched in December 1997 is self produced. WXLV, being an ABC affiliate,
broadcasts daily local news programming in the morning, early evening and at 11
p.m.
Non-network programming is purchased by the Stations from various program
suppliers such as Paramount Communications, Inc., Time Warner Entertainment
Company, L.P., Twentieth Century Fox Film Corporation, Sony Pictures
Entertainment, Inc., and The Walt Disney Company. Sullivan believes it has been
able to improve its ratings among key demographic groups due to the availability
of high quality off-network and first-run syndicated programming. UPN and
Fox-affiliated stations are the largest consumers of syndicated programming
which, based on there not being additional competing commercial independent
stations in most of Sullivan's markets, results in there being less competition
for the purchase of syndicated programming.
Sullivan's agreements for programming, other than that received from Fox,
ABC and UPN, typically have a four to five-year license term with payments
generally made over the same term. Such agreements are either licensed for cash
only, barter only or a combination of cash and barter. Under a barter agreement,
in exchange for the right to air the program, the program supplier retains a
percentage of the advertising time as consideration for telecasting rights for
the program, which it then sells for its own account, and Sullivan retains the
remainder of the advertising units in the program.
NETWORK AFFILIATION AGREEMENTS
Fox. Each of the Fox Stations is affiliated with Fox pursuant to a
substantially identical affiliation agreement (the "Fox Affiliation
Agreements"). Each Fox Affiliation Agreement provides the specified Fox Station
with the right to broadcast all programs transmitted by Fox, including NFL
football, NHL hockey, Major League Baseball and FCN programming. The amount of
programming provided by Fox to its affiliates has increased from a total of five
hours on two nights per week in July 1987 to 40 hours on seven days and nights
per week (including 15 hours of prime-time programming) in 1997. Fox prime-time
programming is intended to appeal to a target audience of 18 to 49 year old
adults. In exchange for the right to broadcast its programs, Fox has the right
to sell nationally approximately 60% of the advertising inventory in such
network programs and to retain the advertising revenues from the sale of that
time. The Fox Stations are entitled to sell the remainder of the advertising
time and retain the associated advertising revenues.
Each Fox Affiliation Agreement is for a term ending on July 15, 1998,
except for WUTV's and WFXV's Fox Affiliation Agreements, which end on December
1, 1998 and October 3, 1998, respectively. Each Fox Affiliation Agreement is
renewable for five years at the discretion of Fox and upon acceptance by the
specified Fox Station. The Fox Affiliation Agreement for each Fox Station may be
terminated generally: (a) by Fox upon (i) a material change in such Fox
Station's transmitter location, power, frequency, programming format or hours of
operation, with 30 days written notice, (ii) acquisition by Fox of a television
station in the same market, with 60 days written notice, (iii) assignment or
attempted assignment by such Fox Station of the Fox Affiliation Agreement in a
manner contrary to the terms thereof, with 30 days written notice, (iv) three or
more unauthorized preemption's of Fox programming within a 12-month period, with
30 days written notice, or (v) failure by Fox and such Fox Station to agree upon
retransmission consent terms or "must carry" status with respect to cable
television companies, with 30 days written notice; or (b) by either Fox or such
Fox Station upon occurrence of a force majeure event which substantially
interrupts Fox's ability to provide programming or such Fox Station's ability to
broadcast the programming.
ABC. WXLV entered into a 10-year affiliation agreement with ABC (the "ABC
Affiliation Agreement") on March 23, 1995. Under the ABC Affiliation Agreement,
WXLV has the right to broadcast all programs transmitted by ABC. In exchange for
ABC network provided programming, ABC has the right to sell nationally (and
retain the revenues therefrom) approximately 50% of the advertising time for
non-primetime network provided programming, and 70% of the advertising time for
network provided primetime programming. The ABC Station sells the remainder of
the advertising time and retains the revenues therefrom. WXLV is compensated by
ABC depending on the quantity of network programming it airs "in pattern" (i.e.,
within ABC prescribed time-periods). The ABC Affiliation Agreement provides for
annual network compensation payments of $350,000.
104
<PAGE>
The ABC Affiliation Agreement may be terminated by ABC upon (i) a material
change in the ABC Station's transmitter location, power, frequency, programming
format or hours of operation, with 30 days written notice; (ii) an assignment or
attempted assignment by the ABC Station in a manner contrary to the terms
thereof, with 30 days written notice; or (iii) unauthorized preemptions of ABC
programming which exceed 50 half-hours per year, after receiving written notice
of such unacceptable preemptions from ABC and failing to comply within 90 days
after such notice.
UPN. WRGT, WVAH and WUHF maintain secondary affiliation agreements with
UPN, and WUXP, WUPN and WPNY have primary affiliation agreements (all
hereinafter collectively referred to as the "UPN Affiliation Agreements"). UPN
provides six hours of primetime quality programs (two hours per night for three
nights per week), including the newest Star Trek series - Star Trek: Voyager.
The secondary UPN Affiliation Agreements are for five years through January 15,
2000, and permit UPN to provide up to 10 hours of primetime quality programming
per week over its term.
ADVERTISING SALES
General. Television station revenues are primarily derived from local,
national and, in the case of WUTV, from Canadian advertising. Advertising rates
are based upon a program's popularity among the viewers time sold (see
"Ratings"), the number of advertisers competing for available time, the size and
demographic composition of the respective daypart desired and the availability
of alternative advertising media in the market area. Declines in advertising
budgets, particularly in recessionary periods, adversely affect the broadcast
industry, and as a result may contribute to a decrease in the revenues of
broadcast television stations. Sullivan seeks to manage its advertising spot
inventory efficiently and effectively in order to maximize advertising revenues
and the return on programming costs. Subject to availability, Stations can sell
advertising time up to 52 weeks in advance. Sullivan's advertising sales
strategy centers upon increasing its sales of local advertising. As compared to
revenues from national advertising, revenues from local advertising are
generally more stable and, due to a lower cost of sales, more profitable. From
1993 through 1997, the percentage of Sullivan's total gross advertising revenues
from local sales increased from 55.6% to 59.6%. National Sales. Approximately
40.4% of Sullivan's total gross advertising revenues in 1997 came from national
advertisers. Typical national advertisers include General Mills, Inc., Hasbro,
Inc. and General Motors Corporation. Sullivan can provide advertising time on
all of the Stations to national advertisers, offering bulk buying power and an
attractive geographic and demographic package to such sponsors. National
advertising time is sold through representation agencies retained by Sullivan.
All of the Stations except WUHF are currently represented by Seltel, Inc.
("Seltel") pursuant to substantially identical agreements. Sullivan believes
that the representation of its Stations by the same agency increases Sullivan's
ability to effectively sell national advertising. Blair Television currently
represents WUHF as its exclusive national sales representative under an
agreement that is scheduled to expire one year from notice of cancellation by
WUHF.
Local Sales. Approximately 59.6% of the Stations gross advertising revenues
in 1997 came from local advertisers. Typical local advertisers include car
dealerships, retail stores and restaurants. Sullivan seeks to both attract new
advertisers to television and to increase the amount of advertising by existing
local advertisers by operating experienced local sales forces with strong
community ties, producing commercials for local clients and targeting small
businesses with potential for growth. Local advertising time is sold by account
executives at each Station. Sullivan places a strong emphasis on the size and
experience of its local sales staff and maintains a comprehensive, on- going
training program for account executives and managers and utilizes
performance-based compensation plans and sales contests. In addition, Sullivan
strives to increase local advertising by increasing the Stations' presence in
their respective local communities through participation in various
co-promotions with community businesses, such as sponsorship of children's
expos, children's clubs and other high-profile promotional tie-ins.
SULLIVAN'S TELEVISION STATIONS
The following table sets forth general information for each of the Stations
as of November 30, 1997 unless otherwise noted:
105
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE MARKET
MARKET MARKET TELEVISION
STATION DMA(1) AREA POPULATION
------- ------ ---- ----------
<S> <C> <C> <C>
WUTV .............. 39(6) Buffalo, NY 1,577,000
Toronto, Ontario 5,912,000
WZTV/WUXP ......... 33 Nashville, TN 1,918,000
KOKH .............. 44 Oklahoma City, OK 1,477,000
WXLV/WUPN ......... 46 Greensboro/ 1,376,000
Winston Salem/
High Point, NC
WRGT .............. 53 Dayton, OH 1,277,000
WVAH .............. 56 Charleston/ 1,232,000
Huntington, WV
WRLH .............. 59 Richmond, VA 1,144,000
WUHF .............. 74 Rochester, NY 923,000
WMSN .............. 84 Madison, WI 785,000
WTAT .............. 109 Charleston, SC 601,000
WFXV/WPNY ......... 166 Utica, NY 242,000
<CAPTION>
TOTAL WEEKLY
COMMERCIAL COMMERCIAL EVENING DATE OF
BROADCASTERS BROADCASTERS RATINGS/ ACQUISITION/ CHANNEL
STATION HOUSEHOLDS(2) IN MARKET SHARE LMA NUMBER(5)
------- ------------- --------- ----- --- ---------
<S> <C> <C> <C> <C> <C>
WUTV .............. 633,000 5 2/5 6/90 29
2,174,000 12
WZTV/WUXP ......... 783,000 5 3/8 6/88 17
2/4 2/96 30
KOKH .............. 587,000 5 3/7 2/98 25
WXLV/WUPN ......... 568,000 6 2/8 12/86 45
1/3 7/96 48
WRGT .............. 503,000 4 2/6 2/88 45
WVAH .............. 483,000 4 2/6 2/88 11
WRLH .............. 461,000 4 3/8 9/88 35
WUHF .............. 367,000 4 3/9 3/89 31
WMSN .............. 313,000 4 3/12 7/96 47
WTAT .............. 224,000 5 2/7 11/87 24
WFXV/WPNY ......... 96,000 3 2/5 7/96 33
1/2 7/96 11
</TABLE>
- ----------
Source -- The November 1997 Nielsen Station Index (other than information with
respect to Toronto).
(1) DMA is defined by A.C. Nielsen Co. ("Nielsen") as a station's "designated
market area".
(2) Each of the Stations broadcasts over-the-air and is carried on cable
systems operating within its market. Approximately 68%, in the aggregate,
of the television households within the Stations' markets are served by
cable.
(3) Total number of commercial broadcast television stations, including the
Stations, designated by Nielsen as "local" to the DMA delivering at least
1% of the 7:00 a.m. to 1:00 a.m., Sunday through Saturday audiences. As
used throughout this Form 10-K report, references to the number of
independent stations in a DMA exclude public television stations and other
stations that are not reportable stations.
(4) Represents average share in the market from 7:00 a.m. to 1:00 a.m., daily,
Sunday through Saturday as estimated by Nielsen for the most recent rating
period ended November 1996. The ratings and shares shown are statistical
estimates.
(5) Each of the Stations, other than WVAH and WPNY, broadcast on the UHF band
and consequently have not been assigned channel numbers above 2 through 13,
which are reserved for VHF transmission. WVAH and WPNY broadcast on the VHF
band, and consequently their channel position (both 11) is within the 2
through 13 VHF band.
(6) If the combined markets of Buffalo and Toronto were considered a single
market, they would constitute approximately the sixth largest television
market in the U.S.
DESCRIPTION OF THE STATIONS
The following is a description of the history and characteristics of each
of the Stations.
WUTV (BUFFALO, NEW YORK/TORONTO, ONTARIO)
Sullivan acquired WUTV, a UHF station, in June 1990. WUTV is the dominant
independent television station in the Buffalo market and is the only U.S.
independent television Fox affiliate station to broadcast in the Toronto market.
WUTV is carried on Toronto area cable systems as part of the basic cable service
provided to the Toronto market. WUTV enjoys a "grandfathered" status in Canada
due to the fact that the Station's commencement of operations in 1970 pre-dated
formal cable regulation in Canada. WUTV capitalizes on its unique ability to
offer Fox and independent U.S. programming in Toronto by selling advertising
time to Canadian advertisers while obtaining syndicated programming based on
prices appropriate for the Buffalo market. WUTV competes effectively against the
Buffalo
106
<PAGE>
network affiliates, which also are carried in Toronto via cable, due to its
ability to offer a greater variety of syndicated U.S. programming other than
that provided by the three major networks. The major three network affiliates'
programming has limited appeal in Toronto since a large number of the networks'
programs are syndicated to Canadian broadcasters. Sullivan began replacing
WUTV's transmitter, tower and antenna in 1996 to increase its power and
broadcast area. This project is expected to be completed by mid-1998.
WZTV (NASHVILLE, TENNESSEE)
Sullivan acquired WZTV, a UHF station, in June 1988. Sullivan believes that
WZTV has obtained a strong position in the market which has further been
solidified with the metering of the Nashville market by Nielsen in July of 1997.
WZTV operates production facilities which it utilizes to produce commercials and
originate community oriented programming. WZTV also leases the production
facilities to third parties. In addition, WZTV launched a 9:00 p.m. newscast in
July of 1997 which is produced by the ABC affiliate in Nashville.
KOKH (OKLAHOMA CITY, OKLAHOMA)
Sullivan acquired KOKH-TV, a UHF station, in February 1998. KOKH-TV was
acquired in connection with Sinclair's acquisition of Heritage Media Group, Inc.
for a purchase price of $60 million. KOKH-TV is the Fox affiliate in the
Oklahoma City, Oklahoma market and will be operated by Sinclair after the Merger
pursuant to an LMA.
WUXP (NASHVILLE, TENNESSEE)
Sullivan began programming WUXP under the WUXP LMA in February 1996. With
Sullivan's emphasis on local sales and the continued reductions in operating
costs, including marketing, programming and overhead, resulting from economies
of scale and with the positive impact of metering, WUXP has strengthened
Sullivan's position within the market while providing improved operating
results.
WXLV (GREENSBORO/WINSTON-SALEM/HIGH POINT, NORTH CAROLINA)
Sullivan acquired WXLV, a UHF station, in December 1986. On March 23, 1995,
in anticipation of the termination by Fox of its affiliation with WXLV as a
result of the acquisition by a Fox-related company of a material ownership
interest in a television station in the Greensboro/Winston-Salem/High Point,
North Carolina market, Sullivan entered into the ABC Affiliation Agreement.
WXLV's affiliation change from Fox to ABC became effective as of September 3,
1995. Under the ABC Affiliation Agreement, WXLV has the right to broadcast all
ABC programming. As a result of the change in network affiliation, WXLV has
access to approximately seven additional hours of prime-time and twenty-five
additional hours of non-prime time network programming per week as compared to
its prior arrangement with Fox. The ABC Affiliation Agreement provides for a
term of ten years and Sullivan receives network compensation of approximately
$350,000 per year for each year of such term.
Historically, WXLV operated at a competitive disadvantage because of sub-
standard transmission facilities. In order to address this issue, in September
1991, Sullivan entered into a LMA with Guilford Telecasters, Inc. ("Guilford"),
owner of WGGT (the "Original WGGT LMA"), the only independent television station
in the market. Pursuant to the Original WGGT LMA, WXLV simulcast substantially
all of its programming over WGGT, thereby increasing WXLV's audience reach.
During 1994, WXLV replaced its old transmitter and antenna. These new
transmission facilities resulted in improved signal quality and audience reach.
As a result, the Original WGGT LMA became obsolete.
On June 30, 1995, Sullivan and Guilford entered into a revised LMA (the
"Second WGGT LMA"), which is an amendment to the Original WGGT LMA. Pursuant to
the Second WGGT LMA, Sullivan paid Guilford $6.0 million in exchange for certain
broadcast time on WGGT through September 30, 2001 and Sullivan's obligation to
pay Guilford 25% of WXLV's cash flow was terminated. Under the Second WGGT LMA,
Sullivan had the right to have WGGT rebroadcast the signal of WXLV or to
broadcast other programming designated by Sullivan, subject to certain rights of
Guilford.
107
<PAGE>
As part of the Second WGGT LMA, Sullivan also paid Guilford $1.0 million
and Guilford granted to a third party an option to purchase certain assets of
WGGT for an additional $1.0 million (the "WGGT Option"). Such third party
granted the right to Sullivan to require such third party to assign the WGGT
Option to Sullivan or another third party designated by Sullivan and such option
was assigned and exercised in March 1996. In conjunction with the exercise of
the WGGT Option by a third party, WGGT changed its call letters to WUPN, and the
Second WGGT LMA was assigned to such third party (hereafter, the "WUPN LMA").
Sullivan began providing a separate program feed to WUPN in September 1996 using
WXLV's excess programming as a result of its affiliation switch to ABC from Fox.
Such programming will satisfy WUPN's needs for up to three years at very little
incremental cost.
WXLV is active in community involvement through such events as the Dixie
Class Fair in Winston-Salem and the Fridays at Five in Greensboro. Additionally,
WXLV is the media sponsor of the Juvenile Diabetes Foundation, as well as the
flagship station for the United Cerebral Palsy Telethon.
WRGT (DAYTON, OHIO)
Sullivan acquired WRGT, a UHF station, in February 1988. WRGT is the only
independent television station in the Dayton, Ohio market. The Station's
promotion and production departments have earned 17 regional Emmy awards, as
well as a Gold and Silver Medal from The International Film and Television
Festival of New York.
WVAH (CHARLESTON/HUNTINGTON, WEST VIRGINIA)
Sullivan acquired WVAH, a VHF station, in February 1988. WVAH is the only
independent television station in the Charleston/Huntington market, and WVAH is
the only Fox affiliate located in West Virginia. WVAH has its own production
department doing business as an independent production company.
WRLH (RICHMOND, VIRGINIA)
Sullivan acquired WRLH, a UHF station, in September 1988. WRLH is the
dominant independent television station in the Richmond, Virginia market. WRLH
added local news to its programming in 1994, making it, WTAT, WZTV and WUHF the
four Fox Stations of Sullivan which provide news programming. Pursuant to a
multi-year agreement effective September 1994, WWBT-TV, the NBC affiliate in
Richmond, provides WRLH with a fully produced half hour seven day-a-week
newscast for broadcast from 10:00 p.m. to 10:30 p.m. In exchange, WRLH pays
WWBT-TV $8,333 per month plus a percentage of the net cash flow resulting from
the newscast.
WUHF (ROCHESTER, NEW YORK)
Sullivan acquired WUHF, a UHF station, in March 1989. WUHF is the only
independent television station in the Rochester, New York market. In serving its
clients, WUHF's production unit features a state-of-the-art facility that
specializes in long form corporate videos, plus documentaries that have aired
nationally on PBS. WUHF's locally produces a children's program, Doctor's Rock's
Dinosaur Adventure. In addition, WUHF launched a self-produced 10:00 p.m. seven
day-a-week newscast in December 1997.
WTAT (CHARLESTON, SOUTH CAROLINA)
Sullivan acquired WTAT, a UHF station, in November 1987. WTAT is the
dominant independent television station in the Charleston, South Carolina
market. WTAT provides news programming pursuant to an agreement (which has been
extended through December 1999) under which WCSC-TV, the CBS affiliate in
Charleston, provides WTAT with a fully-produced half-hour newscast for broadcast
weekdays from 10:00 p.m. to 10:30 p.m. In exchange, WTAT pays WCSC-TV $8,333 per
month plus a percentage of the net cash flow resulting from the newscast.
WMSN (MADISON, WISCONSIN)
Sullivan acquired WMSN, a UHF station, in July 1996. WMSN is the only
independent station in the Madison market, a market which is consistently rated
one of the best places in America in which to live. Madison maintains a very low
unemployment rate and an average per capita income significantly higher than the
U.S. average.
108
<PAGE>
WFXV AND WPNY (UTICA, NEW YORK)
Sullivan acquired WFXV, a Fox affiliate, and WPNY, a low power UPN
affiliate, in July 1996. Although a relatively small market, given the overall
size of Sullivan, the station benefits greatly from Sullivan's group buying
power in programming and other related costs.
EMPLOYEES
As of December 31, 1997, Sullivan employed approximately 541 people.
Sullivan is not a party to any collective bargaining agreements. Sullivan
considers its employee relationships to be very good.
DESCRIPTION OF PROPERTIES
Sullivan's headquarters are located at 18 Newbury Street, Boston,
Massachusetts 02116. Sullivan reimburses ABRY Partners, Inc., the management
company for all investments of ABRY, $1,789 per month, representing Sullivan's
allocable share of rent paid by ABRY under its lease, which expires March 31,
2001. The lease covers approximately 4,112 square feet of office space.
109
<PAGE>
The types of properties required to support each of the Owned Stations
include offices, studios, transmitter sites and antenna sites. A Station's
studios are generally housed with its offices in downtown or business districts.
The transmitter sites and antenna sites are generally located so as to provide
maximum market coverage. The following table contains certain information
describing the general character of Sullivan's properties:
<TABLE>
<CAPTION>
STATION, OWNED ACREAGE EXPIRATION
METROPOLITAN OR APPROXIMATE OF
AREA LEASED SIZE LEASE
- --------------------------------------- -------- ------------------ -----------
<S> <C> <C> <C>
WUTV -- Buffalo, NY/ Toronto, Ontario
Office -- Studio ..................... Owned 15,000 Sq. Ft N/A
Tower/Transmitter Site ............... Owned 44.5 Acres N/A
WZTV -- Nashville, TN
Office -- Studio ..................... Owned 22,500 Sq. Ft. N/A
Tower/Transmitter Site ............... Leased 1,750 Sq.Ft.(a) 01/11/03
KOKH -- Oklahoma City, OK
Office -- Studio ..................... Owned 25,000 Sq. Ft. N/A
Tower/Transmitter Site ............... Owned (b) N/A
WXLV -- Greensboro/ Winston Salem/ High
Point, NC
Office -- Studio ..................... Owned 10,000 Sq. Ft. N/A
Office -- Studio ..................... Leased 5,650 Sq. Ft. 10/31/03
Tower/Transmitter Site ............... Leased 9.4 Acres 10/31/05
WRGT -- Dayton, OH
Office -- Studio ..................... Owned 12,000 Sq. Ft. N/A
Tower/Transmitter Site ............... Owned 15 Acres N/A
WVAH -- Charleston/ Huntington, WV
Office -- Studio ..................... Owned 10,500 Sq. Ft. N/A
Tower/Transmitter Site ............... Owned 18.2 Acres N/A
WRLH -- Richmond, VA
Office -- Studio ..................... Leased 13,798 Sq. Ft. 03/01/00
Tower/Transmitter Site ............... Owned 25 Acres N/A
WUHF -- Rochester, NY
Office -- Studio ..................... Leased 11,300 Sq. Ft. 05/31/99
Tower/Transmitter Site ............... Leased 950 Sq. Ft. 12/31/29
WTAT -- Charleston, SC
Office -- Studio ..................... Leased 10,521 Sq. Ft. 06/30/00
Tower/Transmitter Site ............... Leased 1,200 Sq. Ft.(a) 05/31/00
WMSN -- Madison, WI
Office -- Studio ..................... Leased 12,000 Sq. Ft. 12/31/00
Tower/Transmitter Site ............... Leased 1,600 Sq. Ft.(a) 10/14/05
WFXV -- Rome, NY
Office -- Studio ..................... Owned 3,500 Sq. Ft. N/A
Tower/Transmitter Site ............... Leased 5 Acres 9/1/02
Tower/Transmitter Site ............... Leased 7 Acres 8/31/14
Repeater Site ........................ Leased 5 Acres 4/30/97
</TABLE>
- ----------
(a) Represents square feet for its transmitter building. Station also leases
space on a tower for its antenna.
(b) Tower and Office are located on the same parcel of land.
110
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF SULLIVAN
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR PREDECESSOR SULLIVAN SULLIVAN
------------- ------------- ------------- ------------ -----------
1993 1994 1995 1996 (6) 1997
---- ---- ---- -------- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue (1) ............................. $ 74,929 $ 83,828 $ 92,125 $ 107,714 $ 120,124
Trade and barter revenues ................... 9,035 7,942 7,876 14,808 17,650
---------- ---------- --------- --------- ---------
Total net revenue (1) ....................... 83,964 91,770 100,001 122,522 137,774
Operating expenses .......................... $ 9,211 $ 8,518 $ 11,136 $ 15,005 $ 17,301
Selling, general and administrative ......... 21,928 23,243 23,447 23,921 28,319
Depreciation and amortization (2) ........... 37,738 33,494 29,813 74,724 72,417
---------- ---------- --------- --------- ---------
Operating income ............................ 15,087 26,515 35,605 8,872 19,737
Interest expense ............................ 17,648 18,587 17,777 41,187 40,711
Net income (loss) (3) ....................... (15,883) 4,364 22,343 (22,272) (15,474)
OTHER FINANCIAL DATA:
Broadcast Cash Flow (4) ..................... $ 35,044 $ 45,318 $ 53,985 $ 64,049 $ 67,895
Amortization of programming
rights ..................................... 23,088 20,367 18,033 26,673 30,197
Payments for programming rights ............. 12,369 10,341 8,368 9,087 11,820
Trade expense ............................... 363 320 304 928 815
Corporate expense ........................... 3,260 3,272 4,507 3,420 4,396
Capital expenditures ........................ 1,525 4,518 5,560 3,105 4,439
OTHER DATA:
Number of stations (5) ...................... 8 8 8 13 13
BALANCE SHEET DATA:
Total assets ................................ $ 132,903 $ 121,848 $ 134,826 $ 737,544 $ 710,316
Total long-term debt ........................ 182,207 176,355 138,898 407,743 386,828
Other long-term liabilities ................. 11,209 10,535 12,992 109,458 115,236
Senior redeemable preferred stock ........... 21,532 23,868 26,386 111,483 113,185
Stockholders' equity (deficit) .............. (102,453) (108,491) (88,513) 53,073 15,855
</TABLE>
- ----------
(1) "Net revenues" and "Total net revenue" are shown net of agency
communications.
(2) This amount includes amortization of programming rights reflected below in
"Other Financial Data".
(3) Net loss for the year ended December 31, 1993 includes an extraordinary
item of $12,619,000 resulting from a prepayment premium and other losses
from early extinguishment of certain debt.
(4) "Broadcast Cash Flow" is defined as operating income plus (i) noncash
expenses, including depreciation and amortization expenses and program
amortization expense, plus (ii) corporate expenses, net less (iii) payments
for programming rights and net barter revenues (expenses). Sullivan has
included Broadcast Cash Flow data because it understands such data is used
by certain investors to measure a Company's ability to service debt.
Broadcast Cash Flow does not purport to represent cash provided by
operating activities as reflected in Sullivan's consolidated financial
statements, 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.
(5) "Number of stations" represents stations either owned or programmed under a
LMA arrangement.
(6) Data for 1996 includes the results of Sullivan after giving effect to the
Acquisition and other acquisitions made during 1996.
111
<PAGE>
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDINGS
1995
----
<S> <C>
INCOME STATEMENT DATA:
Net revenues ................................ $ --
Selling, general and administrative ......... 1,601
Operating income (loss) ..................... (1,601)
Interest expense ............................ 258
Net income (loss) ........................... (1,524)
BALANCE SHEET DATA:
Total assets ................................ $173,964
Total long-term debt ........................ 154,407
Stockholders equity ......................... 11,048
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following analyses of the financial condition and results of operations
of Sullivan should be read in conjunction with the Consolidated Financial
Statements and notes thereto included elsewhere in this Information
Statement/Prospectus.
SULLIVAN
Sullivan's revenues are derived principally from local and national
advertisers. Additional revenues are derived from network compensation from ABC,
commercial production and rental of broadcast towers. Substantially all of
Sullivan's revenue growth in the last three years has been due to increases in
advertising unit rates paid by its advertisers, which have been mostly
attributable to improvements in ratings among key demographics, strong
advertiser demand as well as the WUXP LMA and other acquisitions made in 1996.
Sullivan has been able to improve its ratings among key demographics due to the
availability of high quality programming, including programming provided by Fox,
programming provided by FCN, NFL football and first run programming. The
development of sales marketing programs, implemented to enhance the Stations'
image, has also contributed to the growth in revenues. The Stations conduct
local "Kids Expos" and live remote broadcasts, publish promotional advertising
print supplements and participate in joint marketing events with local
businesses and radio stations.
Sullivan's operating revenues are generally highest in the fourth quarter
of each year. This seasonality is primarily attributable to increased
expenditures by advertisers in anticipation of holiday retail spending and an
increase in viewership during the Fall/Winter season. Accordingly, accounts
receivable balances as of the end of each of the first three calendar quarterly
periods are generally substantially less than the balances as of the end of the
year. Each of the Stations generate positive Broadcast Cash Flow. Generally,
Stations in larger markets contribute higher Broadcast Cash Flow.
Sullivan's principal costs of operations are employee salaries and
commissions, programming, production, promotion and other expenses (such as
maintenance, supplies, insurance, rent and utilities).
On January 4, 1996, Holdings acquired substantially all of the outstanding
stock of Act III, through its wholly owned subsidiary SBC, for approximately
$517 million plus certain amounts defined in the underlying purchase and sale
agreement. See Note 3 of "Notes to Consolidated Financial Statements."
HOLDINGS
Holdings, and its 100% owned subsidiary A-3, were formed in 1995 to acquire
the outstanding capital stock of Act III. The operations of Holdings during 1995
were principally related to the raising of funds through the issuance in a
public offering of 35,000 units, each unit consisting of $1,000 principal
112
<PAGE>
amount of Holdings 13 1/4% senior accrual debentures due 2006 and 16 shares of
Holdings Class B-1 Common Stock and a public offering of $125 million of 10 1/4%
senior subordinated notes due 2006 of A-3 (which are now obligations of
Sullivan).
RESULTS OF OPERATIONS
SULLIVAN
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Set forth below are selected consolidated financial data for the years
ended December 31, 1997 and December 31, 1996 and the percentage changes between
the periods.
<TABLE>
<CAPTION>
SULLIVAN
YEAR ENDED DECEMBER 31,
---------------------------------------
PERCENTAGE
1996 1997 CHANGE
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues (excluding trade and barter) ............ $107,714 $120,124 11.5%
Trade and barter revenues ............................ 14,808 17,650 19.2
Total net revenues ................................... 122,522 137,774 12.4
Operating expenses ................................... 15,005 17,301 15.3
Selling, general and administrative expenses ......... 23,921 28,319 18.4
Depreciation and amortization ........................ 74,724 72,417 (3.1)
Operating income ..................................... 8,872 19,737 122.5
Interest expense ..................................... 41,187 40,711 (1.2)
Net loss ............................................. 22,272 15,474 (30.5)
Payments for programming rights ...................... 9,087 11,820 30.1
Broadcast Cash Flow .................................. 64,049 67,895 6.0
</TABLE>
Net revenues are net of commissions and exclude trade and barter revenues
and primarily include local and national spot advertising sales. Net revenues
increased to $120,124,000 in 1997 from $107,714,000 in 1996, an increase of $
12,410,000, or 11.5%. Approximately $4,044,000 of this increase was attributable
to the WMSN and WFXV station acquisitions made during mid-1996. Additionally,
net revenues increased due to higher advertising rates in 1997 when compared
with 1996. During 1997, advertising spot rates were positively impacted by the
improving economy, resulting in greater advertising spending, along with higher
key demographic ratings from additional Fox programming and other syndicated and
first run programming. Of the advertising revenues reported for 1997, 59.6% were
from local advertising sales and 40.4% were from national advertising sales.
Local revenues include gross revenues before commissions from local or
regional advertisers or their representative agencies. Local and regional areas
encompass the station's designated market area and its outlying areas. Local
revenues increased to $83,862,000 in 1997 from $72,073,000 in 1996, an increase
of $11,789,000, or 16.4%. The increase was due to station acquisitions made
during mid-1996, along with increased ratings and stronger advertising demand
resulting from Sullivan's emphasis on expanding local sales.
National revenues include gross revenues before commissions from national
advertisers or their representative agencies. National advertisers are
advertisers outside of the station's local market or region. National revenues
increased to $56,912,000 in 1997 from $55,795,000 in 1996, an increase of
$1,117,000, or 2.0%. As with local revenues, national revenues increased as a
result of stations acquisitions made during mid-1996, as well as increased
ratings and higher advertising rates in 1997 when compared with 1996, offset
somewhat by Sullivan successfully increasing local sales in 1997 over 1996.
Trade and barter revenues increased to $17,650,000 in 1997 from $14,808,000
in 1996, an increase of $2,842,000, or 19.2%. This change was primarily due to
higher advertising spot rates in 1997 compared to 1996 along with Station
acquisitions made in mid-1996 which resulted in an increase in the revenue
recognized therefrom.
113
<PAGE>
Operating expenses include engineering, promotion, production, programming
operations and trade expenses. Operating expenses increased to $17,301,000 in
1997 from $15,005,000 in 1996, an increase of $2,296,000, or 15.3%. The increase
was primarily the result of operating the WMSN and WFXV stations for a full
twelve months in 1997 compared to only six months in 1996.
Selling, general and administrative expenses include sales, salaries,
commissions, insurance, supplies and general management salaries. Selling,
general and administrative expenses increased to $28,319,000 in 1997 from
$23,921,000 in 1996, an increase of $4,398,000 and 18.4%. This increase was the
result of additional costs associated with the WMSN and WFXV station
acquisitions in mid-1996 along with higher compensation levels in 1997 over
1996.
Depreciation and amortization includes depreciation of property and
equipment, amortization of programming rights and amortization of intangibles.
Depreciation and amortization decreased to $72,417,000 in 1997 from $74,724,000
in 1996, a decrease of $2,307,000, or 3.1%, due to the retirement of certain
fixed and intangible assets, offset somewhat by increased amortization of
programming rights along with additional amortization of intangible assets and
depreciation of fixed assets associated with the acquisition of WMSN and WFXV in
mid-1996.
Operating income increased to $19,737,000 in 1997 from $8,872,00 in 1996,
an increase of $10,865,000 or 122.5% due to the reasons discussed above.
Interest expense includes interest charged on all outstanding debt and the
amortization of debt issuance costs and debt discount over the life of the
underlying debt. Interest expense decreased to $40,711,000 in 1997 from
$41,187,000 in 1996, a decrease of $476,000 or 1.2%. The decrease was
attributable to lower amortization of debt issue costs and debt discount offset
somewhat by the compounding of unpaid interest and those increases attributable
to additional borrowings used to fund the WMSN and WFXV acquisitions.
The income tax benefit decreased to $5,488,000 in 1997 from $10,174,000 in
1996, a decrease of $4,686,000 or 46.1%. This decrease is due to an increase in
current income tax expense coupled with a decrease in the deferred income tax
benefit. These fluctuations relate to improving operating results as well as
timing differences between book and tax for items such as depreciation and
amortization.
Net loss decreased to $15,474,000 in 1997 from $22,272,000 in 1996, a
decrease of $6,798,000 or 30.5% due to the reasons discussed above.
Payments for programming rights increased to $11,820,000 in 1997 from
$9,087,000 in 1996, an increase of $2,733,000, or 30.1%. This increase is a
result of increased programming demands relating to the WMSN and WFXV stations
acquired in mid-1996.
Broadcast Cash Flow increased to $67,895,000 in 1997 from $64,049,000 in
1996, an increase of $3,846,000, or 6.0%. This increase is a result of the
aforementioned increased in revenue with a smaller proportional increase in
operating, selling, and general and administrative expenses in the aggregate.
Sullivan believes that Broadcast Cash Flow, which is operating income exclusive
of amortization, depreciation, barter revenue and expense less the amount of any
cash film payments made during the period, is important in measuring Sullivan's
financial results and its ability to pay principal and interest on its debt
because broadcasting companies traditionally have large amounts of non-cash
expense attributable to amortization of programming rights and other
intangibles. Broadcast Cash Flow does not purport to represent cash provided by
operating activities as reflected in Sullivan's consolidated financial
statements, 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Set forth below are selected consolidated financial data for the years
ended December 31, 1996 and December 31, 1995 and the percentage changes between
the periods.
114
<PAGE>
<TABLE>
<CAPTION>
SULLIVAN
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 PERCENTAGE
(PREDECESSOR) 1996 CHANGE
--------------- ----------- -----------
<S> <C> <C> <C>
Net revenues (excluding trade and barter) ............ $ 92,125 $ 107,714 16.9%
Trade and barter revenues ............................ 7,876 14,808 88.0
Total net revenues ................................... 100,001 122,522 22.5
Operating expenses ................................... 11,136 15,005 34.7
Selling, general and administrative expenses ......... 23,447 23,921 2.0
Depreciation and amortization ........................ 29,813 74,724 150.6
Operating income ..................................... 35,605 8,872 ( 75.1)
Interest expense ..................................... 17,777 41,187 131.7
Net income (loss) .................................... 22,343 (22,272) (199.7)
Payments for programming rights ...................... 8,368 9,087 8.6
Broadcast Cash Flow .................................. 53,985 64,049 18.6
</TABLE>
Net revenues are net of commissions and exclude trade and barter revenues
and primarily include local and national spot advertising sales. Net revenues
increased to $107,714,000 in 1996 from $92,125,000 in 1995, an increase of
$15,589,000, or 16.9%. Furthermore, net revenues increased at all of the
Stations in 1996 from 1995. Approximately $10,800,000 of this increase was
attributable to the addition of the WUXP LMA and Station acquisitions made
during 1996. Additionally, net revenues increased due to reduced national sales
representative commission rates which commenced concurrent with the Acquisition
along with higher advertising rates in 1996 when compared with 1995. During
1996, advertising spot rates were positively impacted by the improving economy,
resulting in greater advertising spending, along with higher key demographic
ratings from additional Fox programming and other syndicated and first run
programming. Of the advertising revenues reported for 1996, 56.3% were from
local advertising sales and 43.7% were from national advertising sales.
Local revenues include gross revenues before commissions from local or
regional advertisers or their representative agencies. Local and regional areas
encompass the station's designated market area and its outlying areas. Local
revenues increased to $72,073,000 in 1996 from $59,036,000 in 1995, an increase
of $13,037,000, or 22.1%. Of this increase, approximately $6,700,000 was
attributable to the addition of the WUXP LMA and Stations acquired in 1996.
Furthermore, the increase is due to increased ratings as well as strong
advertising demand.
National revenues include gross revenues before commissions from national
advertisers or their representative agencies. National advertisers are
advertisers outside of the station's local market or region. National/Canadian
revenues increased to $55,795,000 in 1996 from $50,413,000 in 1995, an increase
of $5,382,000, or 10.7%. Approximately $4,630,000 of this increase was related
to the WUXP LMA along with Stations acquired during 1996. Additionally, as with
local revenues, national revenues increased as a result of higher ratings as
well as stronger advertising demand in 1996 when compared with 1995.
Trade and barter revenues increased to $14,808,000 in 1996 from $7,876,000
in 1995, an increase of $6,932,000, or 88.0%. This change was primarily due to
the increase in the value of barter programming rights recorded in the purchase
accounting for the Acquisition as well as other acquisitions made in 1996 which
resulted in an increase in the revenue recognized therefrom.
Operating expenses include engineering, promotion, production, programming
operations and trade expenses. Operating expenses increased to $15,005,000 in
1996 from $11,136,000 in 1995, an increase of $3,869,000, or 34.7%. The increase
was primarily due to the WXLV affiliation switch from Fox Broadcasting Company
to the American Broadcasting Company, Inc. in September 1995, as Sullivan is now
producing local news at WXLV, which increased operating expenses by $1,785,000
in 1996. Additionally, operating expenses were further increased by
approximately $1,323,000 due to the addition of the WUXP LMA as well as Station
acquisitions made during 1996.
Selling, general and administrative expenses include sales, salaries,
commissions, insurance, supplies and general management salaries. Selling,
general and administrative expenses increased to
115
<PAGE>
$23,921,000 in 1996 from $23,447,000 in 1995, an increase of $474,000, and 2.0%.
This increase is the result of higher salary costs due to an overall headcount
increase, offset somewhat by reduced corporate overhead.
Depreciation and amortization includes depreciation of property and
equipment, amortization of programming rights and amortization of intangibles.
Depreciation and amortization increased to $74,724,000 in 1996 from $29,813,000
in 1995, an increase of $44,911,000, or 150.6%, due to the increased value of
all fixed assets, programming rights and intangible assets recorded in the
purchase accounting for the Acquisition, and other acquisitions made in 1996.
Operating income decreased to $8,872,000 in 1996 from $35,605,000 in 1995,
a decrease of $26,733,000 or 75.1% due to the reasons discussed above.
Interest expense increased to $41,187,000 from $17,777,000, an increase of
$23,410,000 or 131.7%. This increase was the result of interest costs incurred
on the debt utilized to fund the Acquisition and additional borrowings to fund
other acquisitions made during the period.
Sullivan Broadcast Holdings, Inc. had net losses of $22,272,000, compared
to net income of $22,343,000 in 1995, a decrease of $44,615,000 due to the
reasons discussed above.
Payments for programming rights increased to $9,087,000 in 1996 from
$8,368,000 in 1995, an increase of $719,000, or 8.6%. This increase was a result
of increased programming demands relating to the WUXP LMA, an independent
station, and other Station acquisitions made during 1996.
Broadcast Cash Flow increased to $64,049,000 in 1996 from $53,985,000 in
1995, an increase of $10,064,000, or 18.6%. This increase was a result of the
aforementioned increased in revenue with a smaller proportional increase in
operating, selling, and general and administrative expenses in the aggregate.
Sullivan believes that Broadcast Cash Flow, which is operating income exclusive
of amortization, depreciation, barter revenue and expense less the amount of any
cash film payments made during the period, is important in measuring Sullivan's
financial results and its ability to pay principal and interest on its debt
because broadcasting companies traditionally have large amounts of non-cash
expense attributable to amortization of programming rights and other
intangibles. Broadcast Cash Flow does not purport to represent cash provided by
operating activities as reflected in Sullivan's consolidated financial
statements, 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.
116
<PAGE>
YEAR ENDED DECEMBER 31, 1995
Set forth below is selected consolidated financial data for the year ended
December 31, 1995.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDINGS
1995
<S> <C>
Total net revenues ................................... $ ---
Selling, general and administrative expenses ......... 1,601
Operating income (loss) .............................. (1,601)
Net income (loss) .................................... (1,524)
</TABLE>
Selling, general and administrative expenses include salaries and payments
required under an agreement executed with an executive's former employer related
to the executive's termination.
LIQUIDITY AND CAPITAL RESOURCES
SULLIVAN
Sullivan's primary source of liquidity is cash provided by operations. Cash
provided by operations was $21,361,000 during 1997 and $16,663,000 in 1996. Cash
provided by operations was $21,820,000 during 1995. The changes in cashflow from
operations for these periods was attributable primarily to improvements in
Sullivan's operating results, offset somewhat by the timing of interest
payments.
Such cash provided by operations is after payments for programming rights,
which amounted to $11,820,000, $9,087,000, and $8,368,000 respectively, for the
years ended 1997, 1996 and 1995. Sullivan prepaid certain obligations for
programming rights in connection with the Acquisition in 1996. After giving
effect to such prepayments, Sullivan has cash program payment commitments
(including contracts not yet recordable as assets) of $46,253,000 of which
$14,798,000 are payable in 1998, $11,437,000 in 1999, $9,351,000 in 2000,
$5,868,000 in 2001, $3,632,000 in 2002 and $1,167,000 thereafter.
Sullivan's primary capital requirements have been for capital expenditures.
Capital expenditures totaled $4,439,000, $3,105,000, and $5,560,000 for 1997,
1996 and 1995, respectively. Expenditures for 1997, 1996 and 1995 reflect work
associated with the replacement of WUTV's transmitter, tower and antenna.
Sullivan anticipates a lower level of capital expenditures in 1998 compared to
1997, which expenditures Sullivan anticipates will maintain Sullivan's
operations as well as allow for the completion of the replacement of the
transmitter system at WUTV.
Sullivan's primary financing activities have been related to borrowings
under the existing debt facility to fund the station acquisitions made during
1996. At December 31, 1997, Sullivan had $6,000,000 of revolver borrowings
outstanding under a $30,000,000 revolving credit facility.
HOLDINGS
Holdings' only source of liquidity as of December 31, 1995 was from the
proceeds of capital stock purchases and funds raised through the issuance in a
public offering of 35,000 units, each unit consisting of $1,000 principal amount
of Holdings 13 1/4% senior accrual debentures due 2006 and 16 shares of Holdings
Class B-1 Common Stock and $125,000,000 of senior subordinated notes due 2006.
RISK OF LOSS OF TAX BENEFITS
At December 31, 1997, there were net operating loss carryforwards for
federal income tax purposes, available to reduce future taxable income of
approximately $109,857,000. Additionally, there were charitable contributions
carryforwards of approximately $10,000,000 for federal income tax purposes,
available to reduce future taxable income. To the extent not used, federal net
operating loss carryforwards expire in varying amounts beginning in 2003. In
addition, there were net operating loss carryforwards of approximately
$38,604,000 regarding state and local income tax purposes in various
jurisdictions.
117
<PAGE>
A corporation that undergoes a "change of ownership" pursuant to Section
382 of the Internal Revenue Code is subject to limitations on the amount of its
net operating loss carryforwards which may be used in the future. An ownership
change occurred on January 4, 1996. The annual limitation on the use of the net
operating loss is $10,050,000. Sullivan estimates the limitation on the net
operating loss will not have a material adverse impact on Sullivan's
consolidated financial position or results of operations. No assurance can be
given that an ownership change will not occur as a result of other transactions
entered into by Sullivan, or by certain other parties over which Sullivan has no
control. If a "change in ownership" for income tax purposes occurs, Sullivan's
ability to use "pre-change losses" could be postponed or reduced, possibly
resulting in accelerated or additional tax payments which, with respect to tax
periods beyond 1997, could have a material adverse impact on Sullivan's
consolidated financial position or results of operations.
INFLATION
For the three years ended December 31, 1997, inflation and changing prices
have not had a significant impact on Sullivan's results of operations and
financial condition.
SEASONALITY
Sullivan's operating revenues are generally highest in the fourth quarter
of each year. This seasonality is primarily attributable to increased
expenditures by advertisers in anticipation of holiday retail spending and on
increases in viewership during the Fall/Winter season.
MANAGEMENT OF SULLIVAN
The following table sets forth certain information with respect to the
Directors and Executive Officers of Sullivan as of March 15, 1998. All directors
will hold office until the next annual meeting of the stockholders and until
their successors are duly elected and qualified or until their earlier death,
resignation or removal. All officers will hold office until their successors are
duly elected or until their death, resignation or removal.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peni Garber 35 Director
Peggy Koenig 41 Director
Tim R. Palmer 40 Director
J. Daniel Sullivan 46 Director, President and Chief Executive Officer
Royce Yudkoff 42 Director
Patrick Bratton 32 Vice President and Chief Financial Officer
David Pulido 43 Executive Vice President-Programming and
Legal Affairs and Secretary
</TABLE>
118
<PAGE>
The following sets forth certain biographical information with respect to
the individuals identified above.
Peni Garber joined ABRY I (the predecessor fund to ABRY) in 1990. She is a
principal and is responsible for investment analysis, working with the portfolio
companies of ABRY on an ongoing basis and arranging the disposition of ABRY's
investments. Prior to joining ABRY I, Ms. Garber served as Senior Accountant in
the Audit Division of Price Waterhouse LLP, an international accounting firm,
from 1985 to 1990.
Peggy Koenig joined ABRY in 1995. She is a partner and is responsible for
initiating investment opportunities and arranging debt and equity financing.
From 1992 until joining ABRY, Ms. Koenig was President of Koenig Management
Group, Inc., a financial management company which provided advisory services to
broadcast related companies, including ABRY I. From 1988 to 1992, Ms. Koenig was
Vice President, partner and member of the Board of Directors of Sillerman
Communications Management Corporation, a merchant bank, which makes investments
principally in the radio industry.
Tim R. Palmer is a Managing Director of Harvard Private Capital Group, Inc.
("Harvard Private Capital"), which manages the direct investment portfolio of
the Harvard University endowment fund and is a wholly owned subsidiary of the
President and Fellows of Harvard College. Prior to joining Harvard Private
Capital in 1990, Mr. Palmer was Manager, Business Development for The Field
Corporation, a Chicago-based investment management firm specializing in direct
investments in the communications industry, and an attorney with Sidley & Austin
in Chicago. Mr. Palmer serves on the board of directors of NHP Incorporated,
PriCellular Corporation and several private companies.
J. Daniel Sullivan is President and Chief Executive Officer of Holdings and
Sullivan. From 1988 to September 1995 (when he signed the Sullivan Employment
Agreement (as defined)), Mr. Sullivan was the President and Chief Executive
Officer of Clear Channel, a wholly owned subsidiary of Clear Channel
Communications, Inc., which owned and/or programmed fourteen television stations
as of June 30, 1995. Mr. Sullivan has been an executive in the television
broadcasting business for 22 years. Mr. Sullivan serves on the Holdings Board of
Directors pursuant to the Sullivan Employment Agreement.
Royce Yudkoff co-founded ABRY I in 1989 with Andrew Banks. Mr. Yudkoff has
managing partner responsibilities for ABRY and had similar responsibilities for
ABRY I. Prior to the formation of ABRY I, Mr. Yudkoff was affiliated with Bain &
Company ("Bain"), an international consulting firm. He was a partner at Bain
from 1985 until the time he co-founded ABRY I. While at Bain, Mr. Yudkoff had
significant responsibility for Bain's media practice.
Patrick Bratton is Vice President and Chief Financial Officer of Holdings
and Sullivan. From October 1993 until November 1995 (when he signed the Bratton
Employment Agreement (as defined)), Mr. Bratton was the controller of Honeywell
DMC Services, Inc., an energy conservation services company. Previously, Mr.
Bratton was a manager with Price Waterhouse LLP, an international accounting
firm, which he joined in August 1988.
David Pulido is Executive Vice President--Programming and Legal Affairs and
Secretary of Holdings and Sullivan. Mr. Pulido joined ABRY I in 1990 and was a
partner prior to joining SBC, with responsibility for evaluating investment
opportunities and overseeing on-going programming, legal and regulatory matters
related to ABRY's investments. Prior to joining ABRY I, Mr. Pulido spent eight
years in the television business at MCA, Paramount Pictures and Columbia
Pictures, most recently as Director of Legal and Business Affairs for MCA
Television from 1986 to 1990.
119
<PAGE>
EXECUTIVE COMPENSATION
ACT III AND SULLIVAN
Compensation of Directors. Those directors who are not also officers or
employees of Sullivan receive reimbursement for expenses in attending each
meeting of the Board of Directors and for each committee meeting attended.
Compensation of Executive Officers. The following table summarizes the
compensation paid to the Chief Executive Officer and Sullivan's most highly
compensated officers as to whom the total annual salary and bonus exceeded
$100,000 in 1995, for services rendered to Sullivan. These officers are no
longer employed by Sullivan effective as of the Acquisition.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------------------------------
NAME PRINCIPAL POSITION YEAR SALARY BONUS
---- ------------------ ---- ------ -----
<S> <C> <C> <C> <C>
Hal Gaba ..................... Chief Executive Officer 1995 $200,000 $ 50,000
Richard M. Ballinger ......... President, Chief Operating Officer 1995 $306,000 $300,000
John F. DeLorenzo ............ Executive Vice President, 1995 $201,000 $160,000
Chief Financial Officer
</TABLE>
Compensation for Executive Officers was determined by the Compensation
Committee of the Board of Directors of Sullivan. Executive Officer compensation
was principally in the form of annual salary and cash bonuses paid on a
quarterly basis. In making compensation determinations, the Compensation
Committee considered several criteria, including Sullivan's performance and
growth, industry standards for similarly situated companies and the experience
and qualitative performance of such Executive Officers.
Specifically, Sullivan's financial performance for the fiscal year and
quarters were analyzed and compared against budgeted performance goals for such
periods. However, commencing June 1, 1993, the annual salaries of Mr. Ballinger
and Mr. DeLorenzo were set by their respective employment agreements at a
minimum base of $250,000 and $175,000, respectively, plus bonuses.
Quarterly bonuses for Sullivan's Executive Officers were set exclusively on
comparison of Sullivan's quarterly financial performance to budgeted goals. The
extent to which such quarterly goals were surpassed or not achieved affected the
bonuses paid to the Executive Officers. In the past, Sullivan's performance had
approximated budgeted goals, resulting in regular quarterly bonuses for
Executive Officers. Typically, bonuses were established at the beginning of each
fiscal year by the Chief Executive Officer.
Long-term compensation of Executive Officers and certain other Company
employees were in the form of options to purchase Class B Common Stock (as
defined) under Sullivan's 1989 Management Stock Option Plan, as amended. Awards
of such stock options were determined by the Stock Option Plan Committee of the
Board of Directors. These option awards were generally not considered or
intended to be part of the Executive Officers' annual compensation, but rather
to provide long-term incentive and motivation through equity ownership in
Sullivan.
No options were granted by Sullivan in 1995 to the Executive Officers named
in the Summary Compensation Table fiscal year-end option values for the
Executive Officers named in the Summary Compensation Table. All outstanding
options were exercised by such individuals in 1996.
120
<PAGE>
FISCAL YEAR-END OPTION VALUES -- 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Hal Gaba ..................... 5.00 13.00 $ 14,250 $28,500
Richard M. Ballinger ......... 74.00 15.50 814,400 73,850
John F. DeLorenzo ............ 22.83 13.67 242,159 87,066
</TABLE>
- ----------
(1) Based upon the value of $11,850 per Class B Share.
SULLIVAN
Compensation of Directors. Those Directors who are not also officers or
employees of Sullivan receive reimbursement for expenses in attending each
meeting of the Board of Directors and for each committee meeting attended.
Compensation of Executive Officers. The following table summarizes the
compensation paid to the Chief Executive Officer and Sullivan's most highly
compensated officers as to whom the total annual salary and bonus exceeded
$100,000 in 1996 and 1997, for services rendered to Sullivan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------------------
NAME PRINCIPAL POSITION YEAR SALARY BONUS
---- ------------------ ---- ------ -----
<S> <C> <C> <C> <C>
J. Daniel Sullivan ......... Chief Executive Officer 1997 $375,000 $150,000
1996 $411,305 $150,000
1995 $ 94,231 --
David Pulido ............... Executive Vice President, 1997 $185,000 $ 55,000
Programming and Legal Affairs 1996 $173,343 $ 72,250
Patrick Bratton ............ Vice President and 1997 $ 90,000 $ 25,000
Chief Financial Officer 1996 $ 75,085 $ 37,300
</TABLE>
Compensation for Executive Officers is determined based upon the respective
officer's employment agreement. Increases to the contractual salaries and annual
non-contractual discretionary bonuses are determined by the Board of Directors
based upon Sullivan's overall performance against financial targets and the
individual's performance during the past year.
EMPLOYMENT AGREEMENTS OF SULLIVAN
Sullivan Employment Agreement. SBC, Holdings and Mr. Sullivan are parties
to an Executive Employment Agreement, dated as of September 13, 1995 ( the
"Sullivan Employment Agreement"), under which, Mr. Sullivan will serve as
President and Chief Executive Officer of Holdings and as a director and member
of the executive committee, if any, of the Board of Directors of Holdings and
SBC. Additionally, under the Sullivan Employment Agreement, Holdings will cause
Mr. Sullivan to be elected President and Chief Executive Officer of any of its
wholly-owned direct or indirect subsidiaries which is the holder of any FCC
license to operate television, radio or other broadcast properties (including
SBC). The Sullivan Employment Agreement is for an initial term through September
13, 2000 (with automatic successive one-year renewals thereafter unless either
party gives 180 days prior notice of its intent to terminate), subject to
earlier termination as described below. The Sullivan Employment Agreement
provides for an annual base salary of $350,000, an annual guaranteed bonus of
$150,000 (the "Guaran-
121
<PAGE>
teed Bonus") and an additional bonus each year as determined by the Holdings
Board of Directors in its sole discretion based upon Holdings' overall
performance and the satisfaction of the personal goals of Mr. Sullivan as
established by the Holdings Board of Directors. Mr. Sullivan has purchased at
the Closing, 200,000 shares of Class B-2 Common Stock for $10.00 per share and
347,512 shares of Class C Common Stock for $0.5720665 per share, for an
aggregate purchase price of $2,198,800.
The Sullivan Employment Agreement will terminate under the following
circumstances: (i) Mr. Sullivan's death, (ii) the illness, physical or mental
disability or other incapacity of Mr. Sullivan resulting in an inability to
perform his duties under the Sullivan Employment Agreement for six consecutive
months and (iii) a Sale of Holdings (as defined in the Sullivan Employment
Agreement). In addition, (i) Holdings may terminate the Sullivan Employment
Agreement for any reason on or after September 13, 1996 upon thirty days notice
and subject to the obligation to make termination payments described below and
(ii) Mr. Sullivan may terminate the Sullivan Employment Agreement at any time
for Good Reason (as defined in the Sullivan Employment Agreement), and for any
reason on or after September 13, 1996 upon thirty days notice, provided that in
the latter case Holdings will have the right, exercisable at any time within
ninety days after the date of termination, to repurchase 69,502 shares of the
Holdings Class C Common Stock at $0.5720665 per share (which is Mr. Sullivan's
original purchase price per share). Holdings may also require Mr. Sullivan to
retire upon attaining age 65.
Under the Sullivan Employment Agreement, in the event Mr. Sullivan's
employment with Holdings is terminated other than by reason of Mr. Sullivan's
death or following a Sale of Holdings, then Holdings will have the right,
exercisable at any time within 90 days after the date of termination of
employment, to repurchase for cash that number of Mr. Sullivan's shares of
Holdings Class C Common Stock for $0.5720665 (which is Mr. Sullivan's original
purchase price per share) as follows:
<TABLE>
<CAPTION>
SHARES WHICH MAY BE REPURCHASED
- ------------------------------------------------------------------------------
<S> <C>
Termination on or after 9/13/97 but before 9/13/98 ......... 208,507
Termination on or after 9/13/98 but before 9/13/99 ......... 139,005
Termination on or after 9/13/99 but before 9/13/00 ......... 69,502
Termination on or after 9/13/00 ............................ 0
</TABLE>
Under the Sullivan Employment Agreement, in the event Mr. Sullivan's
employment is terminated under certain limited circumstances, then Holdings will
be required to purchase all of the shares of Holdings Class C Common Stock held
by Mr. Sullivan for a purchase price stated within the agreement.
Under the Sullivan Employment Agreement, if Mr. Sullivan's employment is
terminated by reason of Mr. Sullivan's death, following a Sale of Holdings or by
Mr. Sullivan without Good Reason, Holdings will pay to Mr. Sullivan (or his
estate, as the case may be) any accrued and unpaid base salary as of the date of
termination and the Guaranteed Bonus, prorated through the date of termination.
Under the Sullivan Employment Agreement, if Mr. Sullivan's employment is
terminated by reason of Mr. Sullivan's disability, then Mr. Sullivan will
continue to receive his base salary and the Guaranteed Bonus, less any amounts
paid to Mr. Sullivan pursuant to disability insurance, for 12 months after the
date of termination, and if Mr. Sullivan's employment is voluntarily terminated
by Holdings for any reason or by Mr. Sullivan for Good Reason, Mr. Sullivan will
continue to receive his base salary and the Guaranteed Bonus for one year after
the date of termination. A "Sale of Holdings" will occur when Holdings
consolidates with or merges with and into any other entity, effects a share
exchange, sells all or substantially all of its assets or enters into a
comparable capital transaction pursuant to which Holdings is not the continuing
or surviving corporation or a sale of a majority of the outstanding voting power
of Holdings equity securities to a third party occurs such that the beneficial
owners of Holdings have substantially changed and, in such transaction, the
stockholders of Holdings receive at least 50% of the value of their Holdings
Common Stock held immediately prior to such consolidation, merger, share
exchange, asset sale, stock sale or comparable transaction of Holdings. For
purposes of the Sullivan Employment Agreement, termination of Mr. Sullivan's
employment following a transaction described in the definition of a "Sale of
Holdings" in which the stockholders of Holdings do not receive at least 50% of
such value will be considered to be a voluntary termination by Holdings.
122
<PAGE>
Bratton Employment Agreement. SBC, Holdings and Mr. Bratton are parties to
an Executive Employment Agreement, dated as of November 10, 1995 ( the "Bratton
Employment Agreement"), under which Mr. Bratton will serve as Chief Financial
Officer of each of Holdings and SBC. Under the Bratton Employment Agreement, Mr.
Bratton's employment was for an initial term through December 31, 1996 (the
"Initial Term") and, after the Initial Term, will continue on a month-by-month
basis. The Bratton Employment Agreement provides for an annual base salary of
$100,000 and a guaranteed bonus of $25,000. Mr. Bratton purchased, at the
Closing, 6,000 shares of Holdings Class C Common Stock and an additional 10,000
shares of Holdings Class C Common Stock in December 1996, each at $0.5720665 per
share (for an aggregate purchase price of $9,153).
SBC's employment of Mr. Bratton under the Bratton Employment Agreement will
terminate under the following circumstances: (i) Mr. Bratton's death, (ii) the
illness, physical or mental disability or other incapacity of Mr. Bratton
resulting in an inability to perform his duties under the Bratton Employment
Agreement for three consecutive months, subject to certain notice requirements,
and (iii) if, after the Initial Term, Holdings consolidates or merges with and
into any other entity, effects a share exchange, sells all or substantially all
of its assets or enters into a comparable capital transaction pursuant to which
Holdings is not the continuing or surviving corporation or a sale of a majority
of the outstanding voting power to a third party such that the beneficial owners
of Holdings have substantially changed. In addition, (i) SBC may terminate Mr.
Bratton's employment for any reason or for Company's Good Reason (as defined in
the Bratton Employment Agreement) and (ii) Mr. Bratton may terminate his
employment at any time with or without Executive Good Reason (as defined in the
Bratton Employment Agreement). SBC may also require Mr. Bratton to retire upon
attaining age 65.
Under the Bratton Employment Agreement, in the event Mr. Bratton's
employment with SBC is terminated other than following a Sale of Holdings, then
Holdings will have the right, exercisable at any time within 90 days after the
date of termination of employment, to repurchase for cash, from Mr. Bratton or
his estate, executors and/or personal representatives, as the case may be, that
number of Mr. Bratton's shares of Holdings Class C Common Stock for $0.5720665
(which is Mr. Bratton's original purchase price per share) as follows:
<TABLE>
<CAPTION>
SHARES WHICH MAY BE REPURCHASED
- ------------------------------------------------------------------------------
<S> <C>
Termination on or after 11/20/97 but before 11/20/98 ......... 9,600
Termination on or after 11/20/98 but before 11/20/99 ......... 6,400
Termination on or after 11/20/99 but before 11/20/00 ......... 3,200
Termination on or after 11/20/00 ............................. 0
</TABLE>
Under the Bratton Employment Agreement, if Mr. Bratton's employment is
terminated by reason of Mr. Bratton's death, following a Sale of Holdings, by
Holdings with Good Reason, or by Mr. Bratton without Good Reason, then SBC will
pay to Mr. Bratton (or his estate, as the case may be) any accrued and unpaid
base salary as of the date of termination. If Mr. Bratton's employment is
terminated by reason of Mr. Bratton's disability, then Mr. Bratton will continue
to receive his base salary, less any amounts paid to Mr. Bratton pursuant to
disability insurance, for three months after the date of termination, and if Mr.
Bratton's employment is voluntarily terminated by SBC without Good Reason or by
Mr. Bratton for Good Reason, Mr. Bratton will continue to receive his base
salary for the remainder of the initial term for such reason after the Initial
Term. For purposes of the Bratton Employment Agreement, termination of Mr.
Bratton's employment following a transaction described in the definition of a
"Sale of Holdings" in which the stockholders of Holdings do not receive at least
50% of such value will be considered to be voluntary termination by Sullivan.
Pulido Employment Agreement. SBC and Mr. Pulido have executed an Executive
Employment Agreement (the "Pulido Employment Agreement") under which Mr. Pulido
serves as Executive Vice President--Programming and Legal Affairs and Secretary
of each of Holdings and SBC.
Mr. Pulido purchased, at the Closing, 10,000 shares of Holdings Class B-1
Common Stock for $10.00 per share (for an aggregate purchase price of $100,000)
and 61,500 shares of Holdings Class C Common
123
<PAGE>
Stock for $0.5720665 per share (for an aggregate purchase price of $35,182) In
addition, Mr. Pulido acquired 20,000 shares of Holdings Class C Common Stock in
December 1996, each at $0.5720665 per share (for an aggregate purchase price of
$11,441).
The Pulido Employment Agreement has an initial term and will terminate
under comparable circumstances to those set forth in the Sullivan Employment
Agreement. The Pulido Employment Agreement provides for an annual base salary of
$185,000 and a guaranteed bonus of $55,000. The Pulido Agreement is also
expected to contain provisions comparable to the Sullivan Employment Agreement
giving Holdings the right to repurchase shares of Holdings Class B-1 Common
Stock and Holdings' Class C Common Stock held by Mr. Pulido and requiring
payments to Mr. Pulido under certain circumstances upon employment termination.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SULLIVAN
HOLDINGS
Ownership
The following table sets forth certain information regarding the beneficial
ownership of Holdings Common Stock as of March 15, 1998 by (i) holders having
beneficial ownership of more than five percent of Holdings Common Stock by vote,
(ii) each director of Holdings, (iii) the executive officers of Holdings, and
(iv) all such directors and executive officers as a group. The general managers
of the Stations own as a group 45,000 shares of Class B-1 Common Stock and
573,860 shares of Class C Common Stock.
<TABLE>
<CAPTION>
HOLDINGS COMMON STOCK
---------------------------------------
TYPE OF NUMBER OF PERCENT OF
NAME OF BENEFICIAL HOLDER SHARES SHARES CLASS(a)
------------------------- ------ ------ --------
<S> <C> <C> <C>
ABRY Broadcast Partners II, L.P. (b) ......... Class B-2 5,958,211 79.8%
18 Newbury Street
Boston, MA 02116
Patrick Bratton (c)(d) ....................... Class C 16,000 *
Peni Garber(c) ............................... Class B-1 500 *
Peggy Koenig (c) ............................. Class B-1 1,688 *
David Pulido (c)(e) .......................... Class B-1 10,000 1.1
Class C 81,500
Tim R. Palmer (f) ............................ Class B-1 941,598 1.3
Harvard Private Capital
600 Atlantic Avenue, 26th Floor
Boston, MA 02210
J. Daniel Sullivan (g) ....................... Class B-2 200,000 7.3
4431 Dyke Bennet Road Class C 347,512
Franklin, TN 37064
</TABLE>
124
<PAGE>
<TABLE>
<CAPTION>
HOLDINGS COMMON STOCK
---------------------------------------
TYPE OF NUMBER OF PERCENT OF
NAME OF BENEFICIAL HOLDER SHARES SHARES CLASS(a)
------------------------- ------ ------ --------
<S> <C> <C> <C>
Royce Yudkoff (c)(h) ................................ Class B-1 9,205 79.8
Class B-2 5,958,211
Directors and executive officers as a group ......... Class B-1 962,991 89.6
Class B-2 6,158,211
Class C 415,012
</TABLE>
- ----------
(a) For such purpose, all shares of Holdings Common Stock are treated as a
single class. Percentages are based on the percentage of total voting power
and are rounded to the nearest one-tenth of one percent. An asterisk
indicates less than 1.0%.
(b) ABRY Holdings, Inc., the general partner of ABRY Capital, which is the
general partner of ABRY, is wholly owned by Mr. Yudkoff.
(c) The business address of Mr. Bratton, Ms. Garber, Ms. Koenig, Mr. Pulido and
Mr. Yudkoff is 18 Newbury Street, Boston, MA 02116.
(d) Mr. Bratton's shares are subject to the Bratton Employment Agreement. See
"Management--Bratton Employment Agreement."
(e) Mr. Pulido's shares are subject to the Pulido Employment Agreement. See
"Management--Pulido Employment Agreement."
(f) Represents shares that Harvard Private Capital has the right to acquire
under Holdings Warrants and other shares purchased by Harvard Private
Capital. Mr. Palmer has neither sole investment power not sole voting power
over such shares, and disclaims beneficial ownership thereof.
(g) Mr. Sullivan's shares are subject to the Sullivan Employment Agreement. See
"Management--Sullivan Employment Agreement."
(h) Mr. Yudkoff may be deemed to be the beneficial owner of the Holdings Common
Stock held by ABRY. See Note (b) above.
125
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF SINCLAIR
GENERAL
Sinclair currently has two classes of Common Stock, each having a par value
of $.01 per share, and three classes of issued and outstanding Preferred Stock,
also with a par value of $.01 per share. Upon the issuance of all shares covered
by this Information Statement/Prospectus, the Controlling Stockholders, by
virtue of their beneficial ownership of 100% of the shares of the Class B Common
Stock, with its super voting rights as described below, will retain control over
Sinclair's business and operations.
The following summary of Sinclair's capital stock does not purport to be
complete and is subject to detailed provisions of, and is qualified in its
entirety by reference to, Sinclair's Amended and Restated Articles of
Incorporation (the "Amended Certificate"). The Amended Certificate is an exhibit
to the Registration Statement of which this Information Statement/Prospectus is
a part and is available as set forth under "Available Information."
The Amended Certificate authorizes Sinclair to issue up to 100,000,000
shares of Class A Common Stock, par value $.01 per share, 35,000,000 shares of
Class B Common Stock, par value $.01 per share, and 10,000,000 shares of
preferred stock, par value $.01 per share. As of April 30, 1998, 48,946,446
shares of Common Stock, consisting of 23,780,014 shares of Class A Common Stock
and 25,166,432 shares of Class B Common Stock, were issued and outstanding,
45,703 shares of Series B Preferred Stock were issued and outstanding, 2,062,000
shares of Series C Preferred Stock were issued and outstanding and 3,450,000
shares of Series D Convertible Exchangeable Preferred Stock were issued and
outstanding.
COMMON STOCK
The rights of the holders of the Class A Common Stock and Class B Common
Stock are substantially identical in all respects, except for voting rights and
the right of Class B Common Stock to convert into Class A Common Stock. The
holders of the Class A Common Stock are entitled to one vote per share. The
holders of the Class B Common Stock are entitled to ten votes per share except
as described below. The holders of all classes of Common Stock entitled to vote
will vote together as a single class on all matters presented to the
stockholders for their vote or approval except as otherwise required by the
general corporation laws of the State of Maryland ("Maryland General Corporation
Law"). Except for transfers to a "Permitted Transferee" (generally, related
parties of a Controlling Stockholder), any transfer of shares of Class B Common
Stock held by any of the Controlling Stockholders will cause such shares to be
automatically converted to Class A Common Stock. In addition, if the total
number of shares of Common Stock held by the Controlling Stockholders falls to
below 10% of the total number of shares of Common Stock outstanding, all of the
outstanding shares of Class B Common Stock automatically will be classified as
Class A Common Stock. In any merger, consolidation or business combination, the
consideration to be received per share by the holders of the Class A Common
Stock must be identical to that received by the holders of the Class B Common
Stock, except that in any such transaction in which shares of a third party's
common stock are distributed in exchange for Sinclair's Common Stock, such
shares may differ as to voting rights to the extent that such voting rights now
differ among the classes of Common Stock.
The holders of Class A Common Stock and Class B Common Stock will vote as a
single class, with each share of each class entitled to one vote per share, with
respect to any proposed (a) "Going Private" transaction; (b) sale or other
disposition of all or substantially all of Sinclair's assets; (c) sale or
transfer which would cause a fundamental change in the nature of Sinclair's
business; or (d) merger or consolidation of Sinclair in which the holders of
Sinclair's Common Stock will own less than 50% of the Common Stock following
such transaction. A "Going Private" transaction is defined as any "Rule 13e-3
transaction," as such term is defined in Rule 13e-3 promulgated under the
Exchange Act between Sinclair and (i) the Controlling Stockholders, (ii) any
affiliate of the Controlling Stockholders, or (iii) any group of which the
Controlling Stockholders are an affiliate or of which the Controlling
Stockholders are a member. An "affiliate" is defined as (i) any individual or
entity who or that, directly or indirectly, controls, is controlled by, or is
under the common control of the Controlling Stockholders; (ii)
126
<PAGE>
any corporation or organization (other than Sinclair or a majority-owned
subsidiary of Sinclair) of which any of the Controlling Stockholders is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of voting securities or in which any of the Controlling
Stockholders has a substantial beneficial interest; (iii) a voting trust or
similar arrangement pursuant to which the Controlling Stockholders generally
control the vote of the shares of Common Stock held by or subject to any such
trust or arrangement; (iv) any other trust or estate in which any of the
Controlling Stockholders has a substantial beneficial interest or as to which
any of the Controlling Stockholders serves as a trustee or in a similar
fiduciary capacity; or (v) any relative or spouse of the Controlling
Stockholders or any relative of such spouse who has the same residence as any of
the Controlling Stockholders.
Under Maryland General Corporation Law, the holders of Common Stock are
entitled to vote as a separate class with respect to any amendment of the
Amended Certificate that would increase or decrease the aggregate number of
authorized shares of such class, increase or decrease the par value of the
shares of such class, or modify or change the powers, preferences or special
rights of the shares of such class so as to affect such class adversely.
For a discussion of the effects of disproportionate voting rights upon the
holders of the Class A Common Stock, see "Risk Factors -- Voting Rights; Control
by Controlling Stockholders; Potential Anti-Takeover Effect of Disproportionate
Voting Rights."
Stockholders of Sinclair have no preemptive rights or other rights to
subscribe for additional shares, except that the Class B Common Stock is
convertible into Class A Common Stock by the holders thereof. Except as
described in the prior sentence, no shares of any class of Common Stock have
conversion rights or are subject to redemption. Subject to the rights of any
outstanding preferred stock which may be hereafter classified and issued,
holders of Common Stock are entitled to receive dividends, if any, as may be
declared by Sinclair's Board of Directors out of funds legally available
therefor and to share, regardless of class, equally on a share-for-share basis
in any assets available for distribution to stockholders on liquidation,
dissolution or winding up of Sinclair. Under the Bank Credit Agreement, the
Existing Indentures, the terms of the Series C Preferred Stock and certain other
debt of Sinclair, Sinclair's ability to declare Common Stock dividends is
restricted.
PREFERRED STOCK
Series B Preferred Stock. As partial consideration for the acquisition of
assets from River City, Sinclair issued 1,150,000 shares of Series A Preferred
Stock to River City which has since been converted into 1,150,000 shares of
Series B Preferred Stock. As of April 30, 1998, 45,703 shares of Series B
Preferred Stock were outstanding. Each share of Series B Preferred Stock has a
liquidation preference of $100 and, after payment of this preference, is
entitled to share in distributions made to holders of shares of (plus all
accrued and unpaid dividends through the determination date) Common Stock. Each
holder of a share of Series B Preferred Stock is entitled to receive the amount
of liquidating distributions received with respect to approximately 3.64 shares
of Common Stock (subject to adjustment) less the amount of the liquidation
preference. The liquidation preference of Series B Preferred Stock is payable in
preference to Common Stock of Sinclair, but may rank equal to or below other
classes of capital stock of Sinclair. After a "Trigger Event" (as defined
below), the Series B Preferred Stock ranks senior to all classes of capital
stock of Sinclair as to liquidation preference, except that Sinclair may issue
up to $400 million of capital stock ("Senior Securities"), as to which the
Series B Preferred Stock will have the same rank. The Series C Preferred Stock
are Senior Securities. A Trigger Event means the termination of Barry Baker's
employment with Sinclair prior to the expiration of the initial five-year term
of his employment agreement (1) by Sinclair for any reason other than for Cause
(as defined in the employment agreement) or (2) by Barry Baker upon the
occurrence of certain events described in the employment agreement.
The holders of Series B Preferred Stock do not initially receive dividends,
except to the extent that dividends are paid to the holders of Common Stock. A
holder of shares of Series B Preferred Stock is entitled to share in any
dividends paid to holders of Common Stock, with each share of Series B Preferred
Stock allocated the amount of dividends allocated to approximately 3.64 shares
of Common Stock (subject to adjustment). In addition, after the occurrence of a
Trigger Event, holders of shares of
127
<PAGE>
Series B Preferred Stock are entitled to quarterly dividends in the amount of
$3.75 per share per quarter for the first year, and in the amount of $5.00 per
share per quarter after the first year. Dividends are payable either in cash or
in additional shares of Series B Preferred Stock at the rate of $100 per share.
Dividends on Series B Preferred Stock are payable in preference to the holders
of any other class of capital stock of Sinclair, except for Senior Securities,
which will rank senior to the Series B Preferred Stock as to dividends until a
Trigger Event, after which Senior Securities will have the same rank as Series B
Preferred Stock as to dividends.
Sinclair may redeem shares of Series B Preferred Stock for an amount equal
to $100 per share plus any accrued and unpaid dividends at any time beginning
180 days after a Trigger Event, but holders have the right to retain their
shares in which case the shares will automatically be converted into shares of
Class A Common Stock on the proposed redemption date.
Each share of Series B Preferred Stock is entitled to 3.64 votes (subject
to adjustment) on all matters with respect to which Class A Common Stock has a
vote, and the Series B Preferred Stock votes together with the Class A Common
Stock as a single class, except that the Series B Preferred Stock is entitled to
vote as a separate class (and approval of a majority of such votes is required)
on certain matters, including changes in the authorized amount of Series B
Preferred Stock and actions affecting the rights of holders of Series B
Preferred Stock.
Shares of Series B Preferred Stock are convertible at any time into shares
of Class A Common Stock, with each share of Series B Preferred Stock convertible
into approximately 3.64 shares of Class A Common Stock. The conversion rate is
subject to adjustment if Sinclair undertakes a stock split, combination or stock
dividend or distribution or if Sinclair issues Common Stock or securities
convertible into Common Stock at a price less than $27.50 per share. Shares of
Series B Preferred Stock issued as payment of dividends are not convertible into
Class A Common Stock and become void at the time of conversion of a
shareholder's other shares of Series B Preferred Stock. All shares of Series B
Preferred Stock remaining outstanding on May 31, 2001 (other than shares issued
as a dividend) automatically convert into Class A Common Stock on that date.
Series C Preferred Stock. As of March 31, 1998, Sinclair has issued and
outstanding 2,062,000 shares of Series C Preferred Stock, all of which shares
are held by KDSM, Inc., a wholly-owned subsidiary of Sinclair. Each share of
Series C Preferred Stock has a liquidation preference (the "Liquidation Amount")
of $100 plus an amount equal to any accumulated and unpaid dividends (whether or
not earned or declared) to the date of payment. KDSM, Inc. purchased the Series
C Preferred Stock from the proceeds of $206,200,000 aggregate principal amount
of KDSM Senior Debentures, all of which are held by the Trust, a trust all of
the common securities of which are held by KDSM, Inc. The obligations of KDSM,
Inc. under the KDSM Senior Debentures are secured by the Series C Preferred
Stock. The Trust purchased the KDSM Senior Debentures from the proceeds of $200
million aggregate liquidation value of HYTOPS plus the proceeds of the issuance
to KDSM, Inc. of $6.2 million of common securities of the Trust. Sinclair has
guaranteed the obligations under the HYTOPS, on a junior subordinated basis in
an amount equal to the lesser of (a) the full liquidation preference plus
accumulated and unpaid dividends to which the holders of the HYTOPS are lawfully
entitled, and (b) the amount of the Trust's legally available assets remaining
after the satisfaction of all claims of other parties which, as a matter of law,
are prior to those of the holders of the HYTOPS. Sinclair has also agreed to
fully and unconditionally guarantee the payment of the KDSM Senior Debentures on
a junior subordinated basis if and effective as of the time the KDSM Senior
Debentures are distributed to holders of the HYTOPS in certain circumstances.
The Series C Preferred Stock has a maturity date of March 15, 2009, and
will be mandatorily redeemable on its maturity date. With respect to dividend
rights and rights upon liquidation, winding-up and dissolution of Sinclair, the
Series C Preferred Stock ranks senior to the Common Stock and the Series B
Preferred Stock except that upon a Trigger Event the Series C Preferred Stock
will rank pari passu with the Series B Preferred Stock in respect of dividend
rights and rights upon liquidation, dissolution and winding-up of Sinclair.
Dividends on the Series C Preferred Stock are payable quarterly at a rate
per annum of 12 5/8% of the stated Liquidation Amount of $100 per share and
cumulate from March 12, 1997. Dividends are payable quarterly in arrears on
March 15, June 15, September 15 and December 15 of each year (each a
128
<PAGE>
"Dividend Payment Date") to the holders of record on the March 1, June 1,
September 1 and December 1 next preceding each Dividend Payment Date. Sinclair
has the right, at any time and from time to time, to defer dividend payments for
up to three consecutive quarters; provided that Sinclair will be required to pay
all dividends due and owing on the Series C Preferred Stock at least once every
four quarters and must pay all dividends due and owing on the Series C Preferred
Stock on March 25, 2009. The remedy for the holders of the Series C Preferred
Stock upon a failure by Sinclair to pay all dividends due and owing thereon at
least once every four quarters (or for any other breaches under the Series C
Preferred Stock) is the right to elect two directors to Sinclair's board of
directors.
Holders of the Series C Preferred Stock do not have any voting rights in
ordinary circumstances. However, the vote of the holders of a majority in
aggregate Liquidation Amount of outstanding Series C Preferred Stock (100% in
certain circumstances) is required to approve any amendment to the Amended
Certificate or the Articles Supplementary to the Amended Certificate that govern
the Series C Preferred Stock (the "Series C Articles Supplementary") that would
adversely affect the powers, preferences or special rights of the holders of the
Series C Preferred Stock or cause the liquidation, dissolution or winding-up of
Sinclair. In addition, the approval of the holders of a majority in aggregate
Liquidation Amount of outstanding Series C Preferred Stock is required to
approve the issuance of any preferred stock by Sinclair which is senior to the
Series C Preferred Stock in right of payment. In addition, upon a Voting Rights
Triggering Event (which is defined to include a failure to pay dividends as
described above, a failure to make a Change of Control Offer (as defined), a
failure to redeem the Series C Preferred Stock upon maturity and a breach of the
covenants described below), the holders of a majority in aggregate Liquidation
Amount of the outstanding Series C Preferred Stock have the right to elect two
directors to the board of directors of Sinclair. KDSM, Inc., as the holder of
the Series C Preferred Stock, has agreed not to take or consent to any actions
or waive any rights under the Series C Preferred Stock or elect any directors
without the approval of the holders of the majority in principal amount of the
KDSM Senior Debentures. The Trust, as the holder of the KDSM Senior Debentures,
has in turn agreed that it will not provide such approval without the approval
of the holders of a majority in aggregate Liquidation Value of the outstanding
Preferred Securities (100% in certain circumstances).
The Series C Articles Supplementary contain certain covenants, including,
but not limited to, covenants with respect to the following matters: (i)
limitation on indebtedness; (ii) limitation on restricted payments; (iii)
limitation on transactions with affiliates; (iv) limitation on sale of assets;
(v) limitation on unrestricted subsidiaries; (vi) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of
Sinclair to another person; (vii) provision of financial statements; and (viii)
limitation on the issuance of senior preferred stock. Violation of any of these
covenants (after a grace period in certain circumstances) will be a Voting
Rights Triggering Event.
Upon a Change of Control of Sinclair (as defined), Sinclair is required to
make an offer (a "Change of Control Offer") to redeem all or a portion of the
shares of Series C Preferred Stock at 101% of such shares' aggregate Liquidation
Amount, plus accrued and unpaid dividends, if any, to the date of redemption
unless and for so long as such redemption is prohibited by the terms of the Bank
Credit Agreement or the Existing Indentures. If Sinclair does not make and
consummate a Change of Control Offer upon a Change of Control, the holders of
the Series C Preferred Stock will have the right to elect two directors to the
board of directors of Sinclair.
Sinclair has the option (a) at any time on or after March 15, 2002 to
redeem the Series C Preferred Stock, in whole or in part, in cash at redemption
prices declining from 105.813% to 100% (in 2006) of the Liquidation Amount, and
(b) at any time on or prior to March 15, 2000 to redeem, in whole or in part, up
to 33 1/3% of the aggregate Liquidation Amount of the Series C Preferred Stock,
with the proceeds of one or more Public Equity Offerings (as defined), at a cash
redemption price of 111.625% of the principal amount thereof, plus accrued
dividends to the date of redemption; provided that after any such redemption at
least 66 2/3% of the aggregate Liquidation Amount of the Series C Preferred
Stock originally issued remain outstanding and that such redemption be made
within 180 days of each such Public Equity Offering.
Series D Convertible Exchangeable Preferred Stock. As of March 31, 1998,
Sinclair had issued and outstanding 3,450,000 shares of Series D Convertible
Exchangeable Preferred Stock. Each share of
129
<PAGE>
Series D Convertible Exchangeable Preferred Stock has a liquidation preference
of $50 plus an amount equal to any accrued and unpaid dividends.
With respect to dividends and amounts payable upon the liquidation,
dissolution or winding up of Sinclair, the Series D Convertible Exchangeable
Preferred Stock will rank (i) junior in right of payment to all indebtedness of
Sinclair and its Subsidiaries, (ii) senior to the Class A Common Stock and the
Class B Common Stock, (iii) pari passu with the Series C Preferred Stock and
(iv) senior to Sinclair's Series B Preferred Stock except that upon a Trigger
Event the Series D Convertible Exchangeable Preferred Stock will rank pari passu
with the Series B Preferred Stock in respect of dividends and distributions upon
liquidation, dissolution and winding-up of Sinclair.
Dividends on the Series D Convertible Exchangeable Preferred Stock are
cumulative and accrue from September 23, 1997, the date of issuance, and are
payable quarterly commencing on December 15, 1997, in the amount of $3.00 per
share annually, when, as and if declared by the Board of Directors out of
legally available funds.
Holders of Convertible Exchangeable Preferred Stock do not have any voting
rights in ordinary circumstances. In exercising any voting rights, each
outstanding share of Series D Convertible Exchangeable Preferred Stock will be
entitled to one vote. Whenever dividends on the Series D Convertible
Exchangeable Preferred Stock are in arrears in an aggregate amount equal to at
least six quarterly dividends (whether or not consecutive), the size of
Sinclair's board of directors will be increased by two (or, if the size of the
board of directors cannot be so increased, Sinclair shall cause the removal or
resignation of a sufficient number of directors), and the holders of a majority
of the Series D Convertible Exchangeable Preferred Stock, voting separately as a
class, will be entitled to select two directors to the board of directors at (i)
any annual meeting of stockholders at which directors are to be elected held
during the period when the dividends remain in arrears or (ii) a special meeting
of stockholders called by Sinclair at the request of the holders of the Series D
Convertible Exchangeable Preferred Stock. These voting rights will terminate
when all dividends in arrears and for the current quarterly period have been
paid in full or declared and set apart for payment. The term of office of the
additional directors so elected will terminate immediately upon that payment or
provision for payment. Under certain circumstances, Sinclair may be required to
pay additional dividends if it fails to provide for the board seats referred to
above.
In addition, so long as any Series D Convertible Exchangeable Preferred
Stock is outstanding, Sinclair will not, without the affirmative vote or consent
of the holders of at least 66 2/3% of all outstanding shares of Series D
Convertible Exchangeable Preferred Stock (i) amend, alter or repeal (by merger
or otherwise) any provision of the Amended Certificate, or the By-Laws of
Sinclair so as to affect adversely the relative rights, preferences,
qualifications, limitations or restrictions of the Series D Convertible
Exchangeable Preferred Stock, (ii) authorize any new class of Senior Dividend
Stock (as defined), any Senior Liquidation Stock (as defined) or any security
convertible into Senior Dividend Stock or Senior Liquidation Stock, or (iii)
effect any reclassification of the Series D Convertible Exchangeable Preferred
Stock.
The shares of Series D Convertible Exchangeable Preferred Stock are
convertible at the option of the holder at any time, unless previously redeemed
or exchanged, into Class A Common Stock of Sinclair, at a conversion price of
$45.625 per share of Class A Common Stock (equivalent to a conversion rate of
1.0959 shares of Class A Common Stock per share of Series D Convertible
Exchangeable Preferred Stock), subject to adjustment in certain events.
Upon the occurrence of a Change of Control (as defined), each share of
Series D Convertible Exchangeable Preferred Stock will be convertible at the
option of its holder for a limited period into the number of shares of Class A
Common Stock determined by dividing the $50 liquidation preference of such
share, plus accrued and unpaid dividends, by the greater of (i) the average of
the last reported sales price per share of the Class A Common Stock for the last
five trading days before the Change of Control or (ii) $26.42, as adjusted for
stock splits or combinations. Upon a Change of Control, Sinclair may elect to
pay holders of the Series D Convertible Exchangeable Preferred Stock exercising
their special conversion rights an amount in cash equal to the $50 liquidation
preference of the Series D Convertible
130
<PAGE>
Exchangeable Preferred Stock plus any accrued and unpaid dividends, in which
event no conversion pursuant to the exercise of the special conversion rights
will occur, unless Sinclair defaults in payments of such amounts. A Change of
Control will result in an event of default under the Bank Credit Agreement and
could result in the acceleration of all indebtedness under the Bank Credit
Agreement. Moreover, the Bank Credit Agreement prohibits the repurchase of the
Series D Convertible Exchangeable Preferred Stock by Sinclair. A Change of
Control will also require Sinclair to offer to redeem the Existing Notes and the
Series C Preferred Stock.
The Series D Convertible Exchangeable Preferred Stock is redeemable at
Sinclair's option, in whole or from time to time in part, for cash at any time
on or after September 20, 2000, initially at a price per share equal to 104.20%
of the liquidation preference thereof, declining ratably on or after September
15 of each year thereafter to a redemption price equal to 100% of such
liquidation preference per share on or after September 15, 2007 plus, in each
case, accrued and unpaid dividends.
Subject to certain conditions, Sinclair may, at its option, on any
scheduled date for the payment of dividends on the Series D Convertible
Exchangeable Preferred Stock commencing on December 15, 2000, exchange the
Series D Convertible Exchangeable Preferred Stock, in whole but not in part, for
Sinclair's 6% Convertible Subordinated Debentures due 2012 (the "Exchange
Debentures"). Holders of Series D Convertible Exchangeable Preferred Stock so
exchanged will be entitled to $1,000 principal amount of Exchange Debentures for
each $1,000 of liquidation preference of Series D Convertible Exchangeable
Preferred Stock held by such holders at the time of exchange plus an amount per
share in cash equal to all accrued but unpaid dividends (whether or not
declared) thereon to the date of exchange. The Exchange Debentures will bear
interest payable quarterly in arrears on March 15, June 15, September 15 and
December 15 of each year, commencing on the first such payment date following
the date of exchange. Beginning on December 15, 2000, at Sinclair's option, the
Exchange Debentures will be redeemable, in whole or in part, at redemption
prices beginning at 104.20% of the principal amount of the Exchange Debentures
and decreasing to 100% of such principal amount on September 15, 2007, plus
accrued and unpaid interest. Under certain circumstances involving a Change of
Control, holders will have the right to require Sinclair to purchase their
Exchange Debentures at a price equal to 100% of the principal amount thereof
plus accrued interest. The Exchange Debentures will be convertible into Class A
Common Stock on substantially the same terms as the Series D Convertible
Exchangeable Preferred Stock is convertible into Class A Common Stock. The
Exchange Debentures will be subordinated to all Senior Indebtedness.
CERTAIN STATUTORY AND CHARTER PROVISIONS
The following paragraphs summarize certain provisions of the Maryland
General Corporation Law and Sinclair's Amended Certificate and By-Laws. The
summary does not purport to be complete and reference is made to Maryland
General Corporation Law and Sinclair's Amended Certificate and By-Laws for
complete information.
Business Combinations. Under the Maryland General Corporation Law, certain
"business combinations" (including a merger, consolidation, share exchange, or,
in certain circumstances, an asset transfer or issuance of equity securities)
between a Maryland corporation and any person who beneficially owns 10% or more
of the corporation's stock (an "Interested Stockholder") must be (a) recommended
by the corporation's board of directors; and (b) approved by the affirmative
vote of at least (i) 80% of the corporation's outstanding shares entitled to
vote and (ii) two-thirds of the outstanding shares entitled to vote which are
not held by the Interested Stockholder with whom the business combination is to
be effected, unless, among other things, the corporation's common stockholders
receive a minimum price (as defined in the statute) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for his shares. In addition, an Interested Stockholder or
any affiliate thereof may not engage in a "business combination" with the
corporation for a period of five (5) years following the date he becomes an
Interested Stockholder. These provisions of Maryland law do not apply, however,
to business combinations that are approved or exempted by the board of directors
of a Maryland corporation. It is anticipated that Sinclair's Board of Directors
will
131
<PAGE>
exempt from the Maryland statute any business combination with the Controlling
Stockholders, any present or future affiliate or associate of any of them, or
any other person acting in concert or as a group with any of the foregoing
persons.
Control Share Acquisitions. The Maryland General Corporation Law provides
that "control shares" of a Maryland corporation acquired in a "control share
acquisition" may not be voted except to the extent approved by a vote of
two-thirds of the votes entitled to be cast by stockholders excluding shares
owned by the acquirer, officers of the corporation and directors who are
employees of the corporation. "Control shares" are shares which, if aggregated
with all other shares previously acquired which the person is entitled to vote,
would entitle the acquirer to vote (i) 20% or more but less than one-third of
such shares, (ii) one-third or more but less than a majority of such shares, or
(iii) a majority of the outstanding shares. Control shares do not include shares
the acquiring person is entitled to vote because stockholder approval has
previously been obtained. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition and
who has obtained a definitive financing agreement with a responsible financial
institution providing for any amount of financing not to be provided by the
acquiring person may compel the corporation's board of directors to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders meeting.
Subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares, except those for which voting rights have
previously been approved, for fair value determined, without regard to voting
rights, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquirer is entitled to vote a majority of the shares entitled
to vote, all other stockholders may exercise appraisal rights. The fair value of
the shares as determined for purposes of such appraisal rights may not be less
than the highest price per share paid in the control share acquisition, and
certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or excepted by or pursuant to the
articles of incorporation or by-laws of the corporation.
Effect of Business Combination and Control Share Acquisition Statutes. The
business combination and control share acquisition statutes could have the
effect of discouraging offers to acquire any such offer.
Limitation on Liability of Directors and Officers. Sinclair's Amended
Certificate provides that, to the fullest extent that limitations on the
liability of directors and officers are permitted by the Maryland General
Corporation Law, no director or officer of Sinclair shall have any liability to
Sinclair or its stockholders for monetary damages. The Maryland General
Corporation Law provides that a corporation's charter may include a provision
which restricts or limits the liability of its directors or officers to the
corporation or its stockholders for money damages except (1) to the extent that
it is proved that the person actually received an improper benefit or profit in
money, property or services, for the amount of the benefit or profit in money,
property or services actually received or (2) to the extent that a judgment or
other final adjudication adverse to the person is entered in a proceeding based
on a finding in the proceeding that the person's action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. In situations to which the Amended
Certificate provision applies, the remedies available to Sinclair or a
stockholder are limited to equitable remedies such as injunction or rescission.
This provision would not, in the opinion of the Commission, eliminate or limit
the liability of directors and officers under the federal securities laws.
Indemnification. Sinclair's Amended Certificate and By-Laws provide that
Sinclair may advance expenses to its currently acting and its former directors
to the fullest extent permitted by Maryland General Corporation Law, and that
Sinclair shall indemnify and advance expenses to its officers to the
132
<PAGE>
same extent as its directors and to such further extent as is consistent with
law. The Maryland General Corporation Law provides that a corporation may
indemnify any director made a party to any proceeding by reason of service in
that capacity unless it is established that (1) the act or omission of the
director was material to the matter giving rise to the proceeding and (a) was
committed in bad faith or (b) was the result of active and deliberate
dishonesty, or (2) the director actually received an improper personal benefit
in money, property or services, or (3) in the case of an criminal proceeding,
the director had reasonable cause to believe that the act or omission was
unlawful. The statute permits Maryland corporations to indemnify its officers,
employees or agents to the same extent as its directors and to such further
extent as is consistent with law.
Sinclair has also entered into indemnification agreements with certain
officers and directors which provide that Sinclair shall indemnify and advance
expenses to such officers and directors to the fullest extent permitted by
applicable law in effect on the date of the agreement, and to such greater
extent as applicable law may thereafter from time to time permit. Such
agreements provide for the advancement of expenses (subject to reimbursement if
it is ultimately determined that the officer or director is not entitled to
indemnification) prior to the final disposition of any claim or proceeding.
FOREIGN OWNERSHIP
Under the Amended Certificate and to comply with FCC rules and regulations,
Sinclair is not permitted to issue or transfer on its books any of its capital
stock to or for the account of any Alien (as defined) if after giving effect to
such issuance or transfer, the capital stock held by or for the account of any
alien or Aliens would exceed, individually or in the aggregate, 25% of
Sinclair's capital stock at any time outstanding. Pursuant to the Amended
Certificate, Sinclair will have the right to repurchase alien-owned shares at
their fair market value to the extent necessary, in the judgment of the Board of
Directors, to comply with the alien ownership restrictions. Any issuance or
transfer of capital stock in violation of such prohibition will be void and of
no force and effect. The Amended Certificate also provides that no Alien or
Aliens shall be entitled to vote, direct or control the vote of more than 25% of
the total voting power of all the shares of capital stock of Sinclair
outstanding and entitled to vote at any time and from time to time. Such
percentage, however, is 20% in the case of Sinclair's subsidiaries which are
direct holders of FCC licenses. In addition, the Amended Certificate provides
that no Alien shall be qualified to act as an officer of Sinclair and no more
than 25% of the total number of directors of Sinclair at any time may be Aliens.
The Amended Certificate further gives the Board of Directors of Sinclair all
power necessary to administer the above provisions.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Sinclair's Class A Common Stock is
BankBoston, N.A.
133
<PAGE>
COMPARATIVE RIGHTS OF SULLIVAN
STOCKHOLDERS AND
SINCLAIR STOCKHOLDERS
Upon consummation of the Merger, if Sinclair elects to pay a portion of the
Common Merger Consideration by issuing shares of Sinclair Class A Common Stock,
the holders of Sullivan Common Equivalents issued by Sullivan, a Delaware
corporation, will become stockholders of Sinclair, a Maryland corporation.
Accordingly, the rights of stockholders of Sullivan following the Merger will be
governed by Maryland law, as well as the Sinclair Articles of Incorporation (the
"Sinclair Charter").
The following is a summary of the material differences between the rights
and privileges of Sullivan stockholders and those of holders of Sinclair Class A
Common Stock. References to the "DGCL" are to the General Corporation Law of
Delaware, while references to the "MGCL" are to the General Corporation Law of
Maryland. This summary is not meant to be relied upon as an exhaustive
description of such differences and is qualified in its entirety by reference to
the Sinclair Charter, the Sinclair Bylaws, Sullivan's Certificate of
Incorporation (the "Sullivan Charter") and Bylaws (the "Sullivan Bylaws"), the
DGCL and the MGCL.
VOTING RIGHTS
Sinclair. The rights of holders of Sinclair Class A Common Stock and Class
B Common Stock are substantially identical in all respects, except for voting
rights. See "Description of Capital Stock -- Common Stock." Holders of Preferred
Stock have voting rights in certain circumstances. See "Description of Capital
Stock -- Preferred Stock."
Sullivan. The rights of holders of Sullivan Class B-1, Class B-2 and Class
C shares are substantially equivalent, except that the holders of Class B-2 and
Class C shares have ten votes per share and holders of Class B-1 shares have one
vote per share.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
Sinclair. Under the MGCL, any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting if all stockholders
entitled to vote on the matter consent to the action in writing and any
stockholder entitled to notice of the meeting but not entitled to vote at it
provides a written waiver of any right to dissent.
Sullivan. Consistent with the DGCL, the Sullivan Bylaws allow stockholders
to take any action without a meeting, without prior notice and without a vote,
upon the written consent of stockholders having not less than the minimum number
of votes that would be necessary to take such action at a meeting at which all
shares entitled to vote thereon were present and voted.
AMENDMENT OF CHARTER DOCUMENTS AND BYLAWS
Sinclair. Under the MGCL, unless otherwise provided in a corporation's
charter, a proposed charter amendment requires an affirmative vote of two-thirds
of the outstanding stock entitled to be cast on the matter. The Sinclair Charter
provides that it may be amended upon the affirmative vote of a majority (or, as
applicable, two-thirds) of the stock entitled to be cast generally in the
election of directors ("voting stock"). Under the MGCL, the power to adopt,
alter, and repeal the bylaws is vested in the stockholders, except to the extent
that the charter or the bylaws vest it in the board of directors. The Sinclair
Bylaws provide that they may be amended by vote of a majority of the Sinclair
Board. An amendment to any provision of the Sinclair Bylaws relating to their
repeal or the removal of directors may be effected only by the vote of
two-thirds of the voting stock.
Sullivan. The DGCL provides that an amendment to a corporation's
certificate of incorporation requires the approval of the corporation's board of
directors, the approval of a majority of all shares entitled to vote thereon
voting together as a single class, and the approval of a majority of the
outstanding stock of each class entitled to vote thereon as a class. The
Sullivan Bylaws may be amended by the Sullivan Board (except with respect to the
amendment provisions thereof) and may also be amended by the Sullivan
stockholders.
134
<PAGE>
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Sinclair. In order to comply with FCC rules and regulations, the Sinclair
Charter includes provisions restricting the ownership by Aliens (as defined) of
capital stock of Sinclair. See "Description of Capital Stock -- Foreign
Ownership."
Sullivan. Sullivan's Charter does not include any restrictions on the
ownership of capital stock of Sullivan.
BUSINESS COMBINATIONS
Sinclair. Generally, under the MGCL, the approval by the affirmative vote
of two-thirds of all the votes entitled to be cast on the matter is required for
mergers, consolidations, share exchanges and any transfers of all or
substantially all of the assets of a corporation, unless the charter increases
or reduces the vote to not less than a majority. The Sinclair Charter does not
alter the two-thirds vote requirement.
Subtitle 6 of Title 3 of the MGCL prohibits any business combination
(defined to include a variety of transactions, including mergers,
consolidations, share exchanges, sales or dispositions of assets, issuances of
stock, liquidations, reclassification and benefits from the corporation,
including loans or guarantees) between a Maryland corporation and any interested
stockholder (defined generally as any person who, directly or indirectly,
beneficially owns 10% or more of the voting power of the outstanding voting
stock of the corporation) for a period of five years after the most recent date
such stockholder became an interested stockholder. After such five-year period,
a business combination between a Maryland corporation and such interested
stockholder is prohibited unless either certain "fair-price" provisions are
complied with or the business combination is approved by certain supermajority
stockholder votes. The MGCL restrictions do not apply to a business combination
with an interested stockholder if such business combination is approved or
exempted from the MGCL by a resolution of the board of directors adopted prior
to the date on which the interested stockholder became an interested
stockholder. The Sinclair Board has not adopted any such resolution.
A Maryland corporation also may adopt an amendment to its charter electing
not to be subject to the business combination provisions of the MGCL in whole or
in part. Any such amendment generally must be approved by the affirmative vote
of at least 80 percent of the votes entitled to be cast by all holders of
outstanding shares of voting stock and two-thirds of the votes entitled to be
cast by holders of outstanding shares of voting stock who are not interested
stockholders. No such amendment to the Sinclair Charter has been adopted.
Sullivan. With certain exceptions, Section 203 of the DGCL prohibits a
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" (as defined below) for three years following the date
that such person becomes an interested stockholder. In general and with certain
exceptions, an interested stockholder is a person who owns 15% or more of the
corporation's outstanding voting stock, or is an affiliate or associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the three years immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or of a
direct or indirect majority-owned subsidiary of the corporation equal to 10% or
more of the aggregate market value of the corporation's consolidated assets or
the corporation's outstanding stock; the issuance or transfer by the corporation
or such a subsidiary of stock of the corporation or such subsidiary to the
interested stockholder (except for, among other transactions, certain transfers
in a conversion or exchange, certain pro rata distributions or certain other
transactions); and receipt by the interested stockholder (except proportionately
as a stockholder), directly or indirectly, of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation or a
direct or indirect majority-owned subsidiary, subject to certain exceptions.
135
<PAGE>
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the time at which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) upon consummation of the transaction which made him
an interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the Corporation outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding those shares owned by, among others, certain employee stock plans);
or (iii) at or subsequent to the time such person becomes an interested
stockholder, the business combination is approved by the board of directors and
is authorized at a meeting of stockholders by 66 2/3% of the outstanding voting
stock of the corporation which is not owned by the interested stockholder.
Section 203 generally applies to Delaware corporations which have a class
of voting stock that is listed on a national securities exchange, authorized for
quotation on Nasdaq or held of record by more than 2,000 stockholders. A
Delaware corporation may elect in its original certificate of incorporation that
it will not be governed by Section 203. Sullivan is not subject to the
provisions of Section 203.
APPRAISAL RIGHTS
Sinclair. Except as otherwise provided by the MGCL, stockholders have the
right to demand and receive payment of the "fair value" of their stock in the
event of (i) a merger or consolidation, (ii) a share exchange, (iii) a transfer
of all or substantially all assets not in the ordinary course of business, (iv)
an amendment to the charter which alters the contract rights, as expressly set
forth in the charter, of any outstanding stock and which substantially adversely
affects the stockholder's rights, unless the right to do so is preserved by the
charter (which it is not, in the case of Sinclair), (v) certain business
combinations with interested stockholders or (vi) unless the charter or bylaws
otherwise provide, after an approval by the stockholders of voting rights for
control shares which constitute a majority of the voting power of the
corporation. However, except as otherwise provided by the provisions of the MGCL
regarding business combinations with interested stockholders, stockholders do
not have appraisal rights if, among other things, the stock is listed on a
national securities exchange, with respect to (i) a merger of a 90% or more
owned subsidiary into its parent, on the date notice of such merger is given or
waived, or (ii) any other transaction, on the record date for determining
stockholders entitled to vote on the transaction.
Sullivan. The DGCL provides for appraisal rights only in the case of
certain statutory mergers or consolidations of the corporation where the
petitioning stockholder has neither voted in favor of nor consented in writing
to the transaction. In addition, no appraisal rights are available for the
shares of a corporation if the corporation is to be the surviving corporation
and a vote of its stockholders is not required under DGCL Section 251(f). In
general, unless otherwise provided for in a corporation's certificate of
incorporation, there are no appraisal rights for shares of stock (i) listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the NASD, or (ii) held of record by more
than 2,000 holders, unless the holders of such shares would be required to
accept for such stock anything other than shares of stock of the surviving
corporation, shares of another corporation so listed, designated, or held by
such number of holders of record, cash in lieu of fractional shares of such
stock, or any combination thereof.
PREEMPTIVE RIGHTS
Neither Sinclair nor Sullivan stockholders have preemptive rights with
respect to issuances of capital stock.
INDEMNIFICATION
Sinclair. Under the MGCL, a corporation may indemnify any director or
officer made a party to any proceeding unless it is established that (i) the
director's or officer's act or omission was material to the matter giving rise
to the proceeding and was committed in bad faith or resulted from active and
deliberate dishonesty, (ii) the director or officer actually received an
improper benefit in money, property or
136
<PAGE>
services, or (iii) in the case of criminal proceedings, the director or officer
had reasonable cause to believe the act or omission was unlawful. The Sinclair
Charter provides that Sinclair will indemnify its directors and its officers to
the fullest extent permitted by Maryland law.
The MGCL provides that a determination must be made that a director or
officer has met the standard of conduct set forth above before the director or
officer may be indemnified. The determination may be made by a majority vote of
disinterested directors, by special legal counsel (selected by the disinterested
directors) or by the stockholders.
The MGCL also establishes several mandatory rules for indemnification. In a
stockholder derivative suit, a corporation may not indemnify a director or
officer if he or she is adjudged to be liable to the corporation. A corporation
may not indemnify a director or officer in respect of any proceeding charging
improper personal benefit to the director, whether or not involving action in
his or her official capacity, in which the director is adjudged to be liable on
the basis that personal benefit was improperly received. A director or officer
who is successful, on the merits or otherwise, in the defense of any proceeding
for which indemnification is permitted, must be indemnified by the corporation
against reasonable expenses in connection with the proceeding (including
attorneys' fees).
The MGCL permits a corporation to advance reasonable expenses to directors
and officers upon the director's or officer's written affirmation of his or her
good faith belief that he or she has met the required standard of conduct and
after his or her written undertaking to repay the corporation if it is
determined that the standard has not been met. The Sinclair Charter provides
further that Sinclair will indemnify any other persons permitted to be
indemnified by the MGCL, including employees and agents, to such extent such
indemnification is authorized by the Sinclair Board.
Sullivan. Subject to certain limitations, Section 145 of the DGCL empowers
a Delaware corporation to indemnify any person who was, is, or is threatened to
be made, a party in any, threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another entity, for expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with any such action, suit or proceeding. With
respect to actions by or in the right of a corporation, the DGCL, subject to
certain limitations, permits indemnification of such person for expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit. To be entitled
to indemnification, a person must have acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such conduct was unlawful. With respect to actions
by or in the right of the corporation, court approval is required for
indemnification relating to any claim, issue, or matter as to which a person has
been adjudged liable to the corporation.
The DGCL requires indemnification for expenses actually and reasonably
incurred by any director, officer, employee or agent in defense of a proceeding
against such person for actions in such capacity to the extent that the person
has been successful on the merits or otherwise. Advancement of expenses (i.e.,
payment prior to a determination on the merits) is permitted, but not required,
by the DGCL. A director or officer must undertake to repay such advanced
expenses if it is ultimately determined that he or she is not entitled to
indemnification. Unless ordered by a court, the members of the board who are not
parties to such action, suit, or proceeding, by majority vote, (or independent
legal counsel or stockholders) must determine, in each instance where
indemnification is sought but is not required by the DGCL, whether such person
has met the applicable standard of conduct. The DGCL provides that the statutory
indemnification is not exclusive.
The Sullivan Bylaws provide for indemnification of officers and directors
as permitted by Section 145 of the DGCL.
137
<PAGE>
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Sinclair. The MGCL provides that a corporation's charter may include a
provision eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for money damages except (i) to
the extent that it is proved that the person actually received an improper
benefit or profit in money, property or services, for the amount of the benefit
or profit in money, property, or services actually received or (ii) to the
extent that a court finds that the person's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. The Sinclair Charter provides that its
directors and officers have no personal liability to Sullivan or its
stockholders for money damages to the maximum extent permitted by Maryland law.
Sullivan. Section 102(b)(7) of the DGCL allows a Delaware corporation to
limit or eliminate the personal liability of directors to a corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
subject to certain limitations. The Sullivan Charter provides for the limitation
of liability as permitted by Section 102(b)(7).
CLASSIFIED BOARD OF DIRECTORS
Sinclair. The MGCL permits, but does not require, a classified board of
directors. Sinclair does not currently have a classified board of directors. The
Sinclair Charter and Bylaws provide that Sinclair shall have at least three and
not more than nine directors. The Sinclair Board has approved and submitted to
the stockholders of Sinclair an amendment to the Sinclair Charter that would, if
adopted, increase the maximum number of directors to 11.
Sullivan. The DGCL permits, but does not require, a classified board of
directors. The Sullivan Board is not divided into classes. The Sullivan Bylaws
provide that the Sullivan Board shall consist of not more than 8 members.
CUMULATIVE VOTING FOR DIRECTORS
Neither Sinclair nor Sullivan uses cumulative voting in the election of
directors.
ELECTION AND REMOVAL OF DIRECTORS
Sinclair. Under the MGCL, except as otherwise provided in a corporation's
charter, the stockholders generally may remove any director, with or without
cause, by the vote of a majority of all the votes entitled to be cast in the
election of the directors. The Sinclair Charter provides that a director may be
removed only for cause upon the vote of a majority of all the votes entitled to
be cast in the election of the directors.
The Controlling Stockholders have entered into a stockholders agreement
pursuant to which they have agreed, for a period of ten years commencing June
12, 1995, to vote for each other as candidates for election to the Board of
Directors.
In connection with Sinclair's 1996 acquisition of certain assets of River
City Broadcasting, L.P., Sinclair agreed to increase the size of the Board of
Directors from seven members to nine to accommodate the prospective appointment
of each o Barry Baker ad Roy F. Coppedge, III or such other designee as Boston
Ventures Limited Partnership IV and Boston Ventures Limited Partnership IVA
(collectively, "Boston Ventures") may select. Mr. Baker currently serves as a
consultant to Sinclair. Sinclair's obligation to appoint Mr. Coppedge another
designee of Boston Ventures has ended as a result of the sale by Boston Ventures
of shares of Sinclair Class A Common Stock in a public offering in April 1998.
Sullivan. Under the DGCL the affirmative vote of a majority of the votes
entitled to be cast at the election of directors is required to remove
directors, with or without cause.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Sinclair. Consistent with the MGCL, the Sinclair Charter provides that a
majority of the remaining directors, even if less than a quorum or, if
applicable, a sole remaining director, may appoint a director to fill a vacancy
which results from any cause except an increase in the number of directors, and
a
138
<PAGE>
majority of the entire board may fill a vacancy which results from an increase
in the number of directors. Any director elected to fill a vacancy shall serve
until the next annual meeting of stockholders, upon which a successor director
shall be elected to serve the remaining term, if any.
Sullivan. If the position of any director of Sullivan is or becomes vacant
between annual meetings, such vacancy may be filled by a majority of the
remaining directors or by the stockholders.
SPECIAL MEETINGS
Sinclair. The MGCL provides that a special meeting of stockholders may be
called by the President or a majority of the Sinclair Board. The Sinclair Bylaws
further provide that the Chairman or Vice Chairman may call a special meeting of
stockholders. In addition, the MGCL provides that the Secretary shall call a
special meeting of stockholders on the written request of stockholders entitled
to cast at least 25% of all the votes entitled to be cast at the meeting.
Sullivan. A special meeting of stockholders of Sullivan may be called by
the Chief Executive Officer and President and shall be called by the President
or Secretary at the request in writing of shareholders holding shares
representing two-thirds of the votes.
INSPECTION RIGHTS
Sinclair. Under the MGCL any stockholder has the right to inspect and copy
bylaws, minutes of stockholder proceedings, annual statements of affairs, voting
trust agreements on file at the principal corporate office and statements
showing all stock and securities issued by the corporation during a specified
period of not more than twelve months before the date of the request. In
addition, one or more persons who together are and for the last six months have
been stockholders of record of at least 5% of the outstanding stock of any class
may inspect and copy the corporation's books of account and stock ledger and may
request a statement of the corporation's affairs or a list of the corporation's
stockholders, which must be prepared by the corporation and made available
within 20 days of such request.
Sullivan. Under the DGCL, any stockholder, following a proper written
request, has the right to inspect the corporation's books and records, including
the stockholder list, during normal business hours for a proper purpose.
DIVIDENDS AND DISTRIBUTIONS
Sinclair. Under the MGCL, a board of directors may authorize a corporation
to make distributions to its stockholders, subject to any restrictions in the
corporation's charter and except, if after giving effect to the distribution,
the corporation would not be able to pay its indebtedness as the indebtedness
becomes due in the usual course of business or the corporation's total assets
would be less than the sum of its total liabilities plus, unless the charter
permits otherwise, the amount needed, if the corporation were dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights on dissolution are superior to those
receiving the distribution.
Sullivan. The DGCL provides that, subject to any restrictions in a
corporation's certificate of incorporation, dividends may be declared out of a
corporation's surplus or, if there is no surplus, out of its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
However, if the corporation's capital (generally defined in the DGCL as the sum
of the aggregate par value of all shares of the corporation's capital stock,
where all such shares have a par value and the board of directors has not
established a higher level of capital) has been diminished to an amount less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets, dividends may not be declared and paid out of such net profits until the
deficiency in such capital has been repaired.
139
<PAGE>
LEGAL MATTERS
The validity of the Sinclair Class A Common Stock being offered hereby and
certain other legal matters regarding the Sinclair Class A Common Stock will be
passed upon for Sinclair by Thomas & Libowitz, P.A., Baltimore, Maryland,
counsel to Sinclair, and by Wilmer, Cutler & Pickering, Baltimore, Maryland,
special securities counsel to Sinclair. Basil A. Thomas, a director of Sinclair,
is of counsel to Thomas & Libowitz, P.A.
EXPERTS
The Consolidated Financial Statements and schedules of Sinclair as of
December 31, 1996 and 1997 and for each of the years ended December 31, 1995,
1996 and 1997, included in this Information Statement/Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are incorporated herein in reliance upon
the authority of said firm as experts in giving said reports.
The financial statements of Heritage Media Services, Inc. -- Broadcasting
Segment as of December 31, 1997 and 1996 and for each of the periods in the two
year period ended December 31, 1997 included herein have been audited by Arthur
Andersen, LLP, independent public accountants, as stated in their report with
respect thereto, and are included herein in reliance on the authority of said
firm as experts in giving said reports.
The consolidated financial statements of Max Media Properties LLC as of
December 31, 1997 and 1996 and for each of the years in the two year period
ended December 31, 1997 have been included herein in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, included
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Sullivan Broadcast Holdings, Inc. and
Subsidiaries as of December 31, 1997 and 1996 and for the years ended December
31, 1997 and 1996 and for the period from inception (June 2, 1995) through
December 31, 1995 and the financial statements of Sullivan Broadcasting Company,
Inc. and Subsidiaries for the year ended December 31, 1995, included in this
Information Statement/Prospectus, have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
140
<PAGE>
GLOSSARY OF DEFINED TERMS
"ABC" means Capital Cities/ABC, Inc.
"Adjusted EBITDA" means broadcast cash flow less corporate overhead expense
and is a commonly used measure of performance for broadcast companies. Adjusted
EBITDA does not purport to represent cash provided by operating activities as
reflected in Sinclair's consolidated statements of cash flows, is not a measure
of financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
"Adjusted EBITDA margin" means the Adjusted EBITDA divided by net broadcast
revenues.
"Amended Certificate" means the Amended and Restated Articles of
Incorporation of Sinclair as amended.
"Arbitron" means Arbitron, Inc.
"Bank Credit Agreement" means the Third Amended and Restated Credit
Agreement, dated as of May 20, 1997, among Sinclair, the Subsidiaries, certain
lenders named therein, and The Chase Manhattan Bank, as agent, as amended and as
such agreement may be further amended, renewed, extended, refinanced,
restructured, replaced or modified.
"Broadcast cash flow margin" means broadcast cash flow divided by net
broadcast revenues.
"Broadcast Cash Flow" means operating income plus corporate overhead
expenses, special bonuses paid to executive officers, non-cash deferred
compensation, depreciation and amortization, including both tangible and
intangible assets and program rights, less cash payment for program rights. Cash
program payments represent cash payments made for current program payables and
sports rights and do not necessarily correspond to program usage. Special
bonuses paid to executive officers are considered unusual and non-recurring.
Sinclair has presented broadcast cash flow data, which Sinclair believes are
comparable to the data provided by other companies in the industry, because such
data are commonly used as a measure of performance for broadcast companies.
However, broadcast cash flow (i) does not purport to represent cash provided by
operating activities as reflected in Sinclair's consolidated statements of cash
flow, (ii) is not a measure of financial performance under generally accepted
accounting principles and (iii) should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
"CBS" means CBS, Inc.
"Class A Common Stock" means Sinclair's Class A Common Stock, par value
$.01 per share.
"Class B Common Stock" means Sinclair's Class B Common Stock, par value
$.01 per share.
"Columbus Option" means Sinclair's option to purchase both the Non-License
Assets and the License Assets of WSYX-TV, Columbus, Ohio.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Class A Common Stock and the Class B Common Stock.
"Communications Act" means the Communications Act of 1934, as amended.
"Company" means Sinclair Broadcast Group, Inc. and its wholly owned
subsidiaries.
"Controlling Stockholders" means David D. Smith, Frederick G. Smith, J.
Duncan Smith and Robert E. Smith.
"DAB" means digital audio broadcasting.
"Debt Repurchase" means Sinclair's repurchase of approximately $98.1
million principal amount of its 10% Senior Subordinated Notes due 2003 in
December 1997.
"December 1997 Notes Issuance" means the issuance of the December 1997
Notes.
G-1
<PAGE>
"December 1997 Notes" means Sinclair's 8 3/4% Senior Subordinated Notes Due
2007.
"DBS" means direct-to-home broadcast satellite television.
"Designated Market Area" or "DMA" means one of the 211 generally-recognized
television market areas according to Nielsen.
"DOJ" means the United States Justice Department.
"DTV" means digital television.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FCC" means the Federal Communications Commission.
"FCN" means the Fox Children's Network.
"Flint Acquisition" means Sinclair's acquisition of the assets of WSMH-TV
(Flint, Michigan).
"Fox" means Fox Broadcasting Company.
"Glencairn" means Glencairn, Ltd. and its subsidiaries.
"Greenville Stations" means radio stations WFBC-FM, WORD-AM, WFBC-AM,
WSPA-AM, WSPA-FM, WOLI-FM, and WOLT-FM located in the Greenville/Spartanburg,
South Carolina area.
"Heritage Acquisition" means the acquisition of license and non-license
assets of the radio and television stations of Heritage Media Group, Inc.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"HYTOPS" means Sinclair's 11 5/8% High Yield Trust Offered Preferred
Securities issued pursuant to the HYTOPS Issuance.
"HYTOPS Issuance" means Sinclair's private placement of HYTOPS, in a
liquidation amount of $200,000,000, on March 14, 1997.
"Independent" means a station that is not affiliated with any of ABC, CBS,
NBC, FOX, UPN or WB.
"JSAs" means joint sales agreements pursuant to which an entity has the
right, for a fee paid to the owner and operator of a station, to sell
substantially all of the commercial advertising on the station.
"July 1997 Note Issuance" means the issuance of the July 1997 Notes.
"July 1997 Notes" means Sinclair's 9% Senior Subordinated Notes due 2007.
"KSC" means Keymarket of South Carolina, Inc.
"Lakeland Acquisition" means the acquisition of 100% of the capital stock
of Lakeland Group Television, Inc.
"License Assets" means the television and radio station assets essential
for broadcasting a television or radio signal in compliance with regulatory
guidelines, generally consisting of the FCC license, transmitter, transmission
lines, technical equipment, call letters and trademarks, and certain furniture,
fixtures and equipment.
"License Assets Option" means Sinclair's option to purchase the License
Assets of KDNL-TV, St. Louis, MO; KOVR-TV, Sacramento, CA; WTTV-TV and WTTK-TV,
Indianapolis, IN; WLOS-TV, Asheville, NC; KABB-TV, San Antonio, TX; and KDSM-TV,
Des Moines, IA.
"LMAs" means program services agreements, time brokerage agreements or
local marketing agreements pursuant to which an entity provides programming
services to television or radio stations that are not owned by the entity.
"Max Media Acquisition" means the acquisition of all of the equity
interests of Max Media Properties, LLC.
G-2
<PAGE>
"Montecito Acquisition" means the acquisition of all of the capital stock
of Montecito Broadcasting Corporation.
"MSA" means the Metro Survey Area as defined by Arbitron.
"MMDS" means multichannel multipoint distribution services.
"NBC" means the National Broadcasting Company.
"Nielsen" means the A.C. Nielsen Company Station Index dated May 1996.
"1993 Notes" means Sinclair's 10% Senior Subordinated Notes due 2003.
"1995 Notes" means Sinclair's 10% Senior Subordinated Notes due 2005.
"1996 Acquisitions" means the 16 television and 33 radio stations that
Sinclair acquired, obtained options to acquire, or obtained the right to program
during 1996 for an aggregate consideration of approximately $1.2 billion.
"1996 Act" means the Telecommunications Act of 1996.
"1997 Common Stock Issuance" means the issuance of 4,345,000 shares of
Class A Common Stock in September 1997.
"1997 Preferred Stock Issuance" means the issuance of 3,450,000 shares of
Series D Preferred Stock in September 1997.
"1997 Financings" means the HYTOPS Issuance, the July 1997 Note Issuance,
the 1997 Common Stock Issuance, the 1997 Preferred Stock Issuance, the December
1997 Note Issuance and the Debt Repurchase.
"Non-License Assets" means the assets relating to operation of a television
or radio station other than License Assets.
"River City" means River City Broadcasting, L.P.
"River City Acquisition" means Sinclair's acquisition from River City and
the owner of KRRT of certain Non-License Assets, options to acquire certain
License and Non-License Assets and rights to provide programming or sales and
marketing for certain stations, which was completed May 31, 1996.
"SCI" means Sinclair Communications, Inc., a wholly owned subsidiary of
Sinclair that owns all of the capital stock of the operating subsidiaries of
Sinclair.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Stock" means Sinclair's Series A Exchangeable Preferred
Stock, par value $.01 per share, each share of which has been exchanged for a
share of Sinclair's Series B Convertible Preferred Stock.
"Series B Preferred Stock" means Sinclair's Series B Convertible Preferred
Stock, par value $.01 per share.
"Series C Preferred Stock" means Sinclair's Series C Preferred Stock, par
value $.01 per share.
"Series D Preferred Stock" means Sinclair's Series D Preferred Stock, par
value $.01 per share.
"Significant Acquisitions" means the Heritage Acquisition and the Max Media
Acquisition.
"Sinclair" means Sinclair Broadcast Group, Inc. and its wholly owned
subsidiaries.
"Sullivan Acquisition" means the Merger and the Sullivan II Merger.
"Superior Acquisition" means Sinclair's acquisition of the stock of
Superior Communications, Inc.
"Superior" means Superior Communications, Inc.
"TBAs" means time brokerage agreements; see definition of "LMAs."
G-3
<PAGE>
"Traditional Networks" means each of ABC, CBS or NBC, singly or
collectively.
"UHF" means ultra-high frequency.
"UPN" means United Paramount Television Network Partnership.
"VHF" means very-high frequency.
"WB" and the "WB Network" mean The WB Television Network Partners.
G-4
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ................................................ F-3
Consolidated Balance Sheets as of December 31, 1996 and 1997 ............................ F-4
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 .................................................................................. F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
1996 and 1997 ......................................................................... F-6, F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 .................................................................................. F-8, F-9
Notes to Consolidated Financial Statements .............................................. F-10
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
Report of Independent Public Accountants ................................................ F-40
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................ F-41
Consolidated Statements of Operations for the Four Months Ended December 31, 1997, the
Eight Months Ended August 31, 1997 and for the Year Ended December 31, 1996 ........... F-42
Consolidated Statements of Stockholders' Equity for the Four Months Ended December 31,
1997, the Eight Months Ended August 31, 1997 and for the Year Ended December 31,
1996 .................................................................................. F-43
Consolidated Statements of Cash Flows for the Four Months Ended December 31, 1997, the
Eight Months Ended August 31, 1997 and for the Year Ended December 31, 1996 ........... F-44
Notes to Consolidated Financial Statements .............................................. F-45
MAX MEDIA PROPERTIES LLC
Independent Auditors' Report ............................................................ F-53
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................ F-54
Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996 .... F-55
Consolidated Statements of Members' Capital for the Years Ended December 31, 1997 and
1996 .................................................................................. F-56
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 .... F-57
Notes to Consolidated Financial Statements .............................................. F-58
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants ....................................................... F-70
Consolidated Balance Sheet as of December 31, 1996 and 1997 ............................. F-71
Consolidated Statement of Operations for the Period from Inception (June 2, 1995) through
December 31, 1995 and for the Years Ended December 31, 1996 and 1997 .................. F-72
Consolidated Statement of Cash Flows for the Period from Inception (June 2, 1995) through
December 31, 1995 and for the Years Ended December 31, 1996 and 1997 .................. F-73
Consolidated Statement of Changes in Shareholders' Equity for the Period from Inception
(June 2, 1995) through December 31, 1995 and for the Years Ended December 31, 1996 and
1997 .................................................................................. F-74
Notes to Consolidated Financial Statements .............................................. F-75
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES -- (FORMERLY
ACT III BROADCASTING, INC. AS SUCCESSOR BY MERGER WITH A-3 ACQUISITION, INC.)
<S> <C>
Report of Independent Accountants ............................................ F-86
Consolidated Statement of Operations for the Year Ended December 31, 1995 .... F-87
Consolidated Statement of Cash Flows for the Year Ended December 31, 1995 .... F-88
Consolidated Statement of Changes in Shareholders' Deficit ................... F-89
Notes to Consolidated Financial Statements ................................... F-90
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited the accompanying consolidated balance sheets of Sinclair
Broadcast Group, Inc. (a Maryland corporation) and Subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1995, 1996
and 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sinclair Broadcast Group,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1995, 1996 and
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 9, 1998, except for Note 24,
as to which the date is February 23, 1998
F-3
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, and cash equivalents .................................................. $ 2,341 $ 139,327
Accounts receivable, net of allowance for doubtful accounts
of $2,472 and $2,920, respectively ......................................... 112,313 123,018
Current portion of program contract costs ................................... 44,526 46,876
Prepaid expenses and other current assets ................................... 3,704 4,673
Deferred barter costs ....................................................... 3,641 3,727
Refundable income taxes ..................................................... -- 10,581
Deferred tax assets ......................................................... 1,245 2,550
---------- ----------
Total current assets ....................................................... 167,770 330,752
PROGRAM CONTRACT COSTS, less current portion ................................. 43,037 40,609
LOANS TO OFFICERS AND AFFILIATES ............................................. 11,426 11,088
PROPERTY AND EQUIPMENT, net .................................................. 154,333 161,714
NON-COMPETE AND CONSULTING AGREEMENTS, net of
accumulated amortization of $54,236 and $64,229, respectively ............... 10,193 200
OTHER ASSETS ................................................................. 64,235 167,895
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net of
accumulated amortization of $85,155 and $138,061, respectively .............. 1,256,303 1,321,976
---------- ----------
Total Assets ............................................................... $1,707,297 $2,034,234
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 11,886 $ 5,207
Income taxes payable ........................................................ 730 --
Accrued liabilities ......................................................... 35,074 40,532
Current portion of long-term liabilities- ...................................
Notes payable and commercial bank financing ................................ 62,144 35,215
Notes and capital leases payable to affiliates ............................. 1,774 3,073
Program contracts payable .................................................. 58,461 66,404
Deferred barter revenues ................................................... 3,576 4,273
---------- ----------
Total current liabilities .................................................. 173,645 154,704
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ................................. 1,212,000 1,022,934
Notes and capital leases payable to affiliates .............................. 12,185 19,500
Program contracts payable ................................................... 56,194 62,408
Deferred tax liability ...................................................... 463 24,092
Other long-term liabilities ................................................. 2,739 3,611
---------- ----------
Total liabilities .......................................................... 1,457,226 1,287,249
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ............................... 3,880 3,697
---------- ----------
COMMITMENTS AND CONTINGENCIES
EQUITY PUT OPTIONS ........................................................... 8,938 --
---------- ----------
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES ...................... -- 200,000
---------- ----------
STOCKHOLDERS' EQUITY:
Series B Preferred stock, $.01 par value, 10,000,000 shares authorized and
1,150,000 and 1,071,381 issued and outstanding ............................. 11 10
Series D Preferred stock, $.01 par value, 3,450,000 shares authorized and
-0- and 3,450,000 shares issued and outstanding, respectively .............. -- 35
Class A Common stock, $.01 par value, 100,000,000 shares authorized
and 6,911,880 and 13,733,430 shares issued and outstanding,
respectively ............................................................... 70 137
Class B Common stock, $.01 par value, 35,000,000 shares authorized and
27,850,581 and 25,436,432 shares issued and outstanding .................... 279 255
Additional paid-in capital .................................................. 256,954 552,949
Additional paid-in capital -- equity put options ............................ -- 23,117
Additional paid-in capital -- deferred compensation ......................... (1,129) (954)
Accumulated deficit ......................................................... (18,932) (32,261)
---------- ----------
Total stockholders' equity ................................................. 237,253 543,288
---------- ----------
Total Liabilities and Stockholders' Equity ................................. $1,707,297 $2,034,234
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Station broadcast revenue, net of agency commissions of
$31,797, $56,040 and $74,984, respectively .......................... $ 187,934 $ 346,459 $ 471,228
Revenue realized from station barter arrangements ..................... 18,200 32,029 45,207
--------- --------- ---------
Total revenue ....................................................... 206,134 378,488 516,435
--------- --------- ---------
OPERATING EXPENSES:
Program and production ................................................ 28,152 66,652 92,178
Selling, general and administrative ................................... 36,174 75,924 106,084
Expenses realized from station barter arrangements .................... 16,120 25,189 38,114
Amortization of program contract costs and net
realizable value adjustments ........................................ 29,021 47,797 66,290
Stock-based compensation .............................................. -- 739 1,636
Depreciation and amortization of property and equipment ............... 5,400 11,711 18,040
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets .............. 45,989 58,530 67,840
Amortization of excess syndicated programming ......................... -- 3,043 --
--------- --------- ---------
Total operating expenses ............................................ 160,856 289,585 390,182
--------- --------- ---------
Broadcast operating income .......................................... 45,278 88,903 126,253
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense .................... (39,253) (84,314) (98,393)
Subsidiary trust minority interest expense.. .......................... -- -- (18,600)
Interest income ....................................................... 3,942 3,136 2,174
Other income. ......................................................... 221 342 54
--------- --------- ---------
Income before provision for income taxes and extraordinary item ..... 10,188 8,067 11,488
PROVISION FOR INCOME TAXES. ............................................ 5,200 6,936 15,984
--------- --------- ---------
Net income (loss) before extraordinary item ........................... 4,988 1,131 (4,496)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of related income
tax benefit of $3,357 and $4,045, respectively. ..................... (4,912) -- (6,070)
--------- --------- ---------
NET INCOME (LOSS) ...................................................... $ 76 $ 1,131 $ (10,566)
========= ========= =========
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS .......................................................... $ 76 $ 1,131 $ (13,329)
========= ========= =========
BASIC EARNINGS PER SHARE:
Income (loss) per share before extraordinary item ..................... $ .15 $ .03 $ (.20)
========= ========= =========
Net income (loss) per share ........................................... $ - $ .03 $ (.37)
========= ========= =========
Average shares outstanding ............................................ 32,198 34,748 35,951
========= ========= =========
DILUTED EARNINGS PER SHARE:
Income (loss) per share before extraordinary item ..................... $ .15 $ .03 $ (.20)
========= ========= =========
Net income (loss) per share ........................................... $ - $ .03 $ (.37)
========= ========= =========
Average shares outstanding ............................................ 32,205 37,381 40,078
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
PAGE 1 OF 2
-----------
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B CLASS A CLASS B
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
----- ----- ----- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 ..................... $ -- $-- $-- $ 290
Issuance of common shares, net of
related expenses of $9,288 ................... -- -- 58 --
Non-cash distribution prior to KCI merger ..... -- -- -- --
Realization of deferred gain .................. -- -- -- --
Net income .................................... -- -- -- --
------ --- --- -----
BALANCE, December 31, 1995 ..................... -- -- 58 290
Class B Common Stock converted into
Class A Common Stock ......................... -- -- 11 (11)
Issuance of Series A Preferred Stock .......... 12 -- -- --
Series A Preferred Stock converted
into Series B Preferred Stock ................ (12) 12 -- --
Series B Preferred Stock converted into
Class A Common Stock ......................... -- (1) 1 --
Repurchase of 30,000 shares of
Class A Common Stock ......................... -- -- -- --
Stock option grants ........................... -- -- -- --
Income tax provision for deferred
compensation ................................. -- -- -- --
Equity put options ............................ -- -- -- --
Amortization of deferred
compensation. ................................ -- -- -- --
Net income. ................................... -- -- -- --
------ --- --- -----
BALANCE, December 31, 1996 ..................... $ -- $11 $70 $ 279
====== === === =====
<CAPTION>
ADDITIONAL
ADDITIONAL PAID-IN CAPITAL - TOTAL
PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT EQUITY
------- ------------ ------- ------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 ..................... $ 4,774 $ -- $ (18,787) $ (13,723)
Issuance of common shares, net of
related expenses of $9,288 ................... 111,403 -- -- 111,461
Non-cash distribution prior to KCI merger ..... (109) -- (1,352) (1,461)
Realization of deferred gain .................. 21 -- -- 21
Net income .................................... -- -- 76 76
-------- -------- --------- ---------
BALANCE, December 31, 1995 ..................... 116,089 -- (20,063) 96,374
Class B Common Stock converted into
Class A Common Stock ......................... -- -- -- --
Issuance of Series A Preferred Stock .......... 125,067 -- -- 125,079
Series A Preferred Stock converted
into Series B Preferred Stock ................ -- -- -- --
Series B Preferred Stock converted into
Class A Common Stock ......................... -- -- -- --
Repurchase of 30,000 shares of
Class A Common Stock ......................... (748) -- -- (748)
Stock option grants ........................... 25,784 (1,868) -- 23,916
Income tax provision for deferred
compensation ................................. (300) -- -- (300)
Equity put options ............................ (8,938) -- -- (8,938)
Amortization of deferred
compensation. ................................ -- 739 -- 739
Net income. ................................... -- -- 1,131 1,131
-------- -------- --------- ---------
BALANCE, December 31, 1996 ..................... $256,954 $ (1,129) $ (18,932) $ 237,253
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
PAGE 2 OF 2
-----------
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES D CLASS A CLASS B
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
----- ----- ----- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 ......................... $11 $-- $70 $ 279
Repurchase of 186,000 shares of
Class A Common Stock ............................. -- -- (2) --
Class B Common Stock converted into Class A Common
Stock ............................................ -- -- 24 (24)
Series B Preferred Stock converted
into Class A Common Stock ........................ (1) -- 2 --
Issuance of Class A Common Stock,
net of related issuance costs of $7,572........... -- -- 43 --
Issuance of Series D Preferred Stock,
net of related issuance costs of $5,601........... -- 35 -- --
Dividends payable on Series D
Preferred Stock .................................. -- -- -- --
Income tax provision for deferred
compensation ..................................... -- -- -- --
Equity put options ................................ -- -- -- --
Equity put options premium ........................ -- -- -- --
Stock option grants ............................... -- -- -- --
Stock option grants exercised ..................... -- -- -- --
Amortization of deferred compensation ............. -- -- -- --
Net loss .......................................... -- -- -- --
----- --- ----- -----
BALANCE, December 31, 1997 ......................... $10 $35 $137 $ 255
===== === ===== =====
<CAPTION>
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
ADDITIONAL CAPITAL - CAPITAL - TOTAL
PAID-IN EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDERS'
CAPITAL OPTIONS COMPENSATION DEFICIT EQUITY
------- ------- ------------ ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 ......................... $256,954 $ -- $ (1,129) $ (18,932) $ 237,253
Repurchase of 186,000 shares of
Class A Common Stock ............................. (4,597) -- -- -- (4,599)
Class B Common Stock converted into Class A Common
Stock ............................................ -- -- -- -- --
Series B Preferred Stock converted
into Class A Common Stock ........................ (1) -- -- -- --
Issuance of Class A Common Stock,
net of related issuance costs of $7,572........... 150,978 -- -- -- 151,021
Issuance of Series D Preferred Stock,
net of related issuance costs of $5,601........... 166,864 -- -- -- 166,899
Dividends payable on Series D
Preferred Stock .................................. -- -- -- (2,763) (2,763)
Income tax provision for deferred
compensation ..................................... (240) -- -- -- (240)
Equity put options ................................ (14,179) 23,117 -- -- 8,938
Equity put options premium ........................ (3,365) -- -- -- (3,365)
Stock option grants ............................... 430 -- (430) -- --
Stock option grants exercised ..................... 105 -- -- -- 105
Amortization of deferred compensation ............. -- -- 605 -- 605
Net loss .......................................... -- -- -- (10,566) (10,566)
-------- ------- -------- --------- ---------
BALANCE, December 31, 1997 ......................... $552,949 $23,117 $ (954) $ (32,261) $ 543,288
======== ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
PAGE 1 OF 2
-----------
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ 76 $ 1,131 $ (10,566)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities--
Extraordinary loss .............................................. 8,269 -- 10,115
Amortization of excess syndicated programming ................... -- 3,043 --
Amortization of debt discount ................................... -- -- 4
(Gain) loss on sales of assets .................................. (221) -- 226
Depreciation and amortization of property and equipment ......... 5,400 11,711 18,040
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets ......... 45,989 58,530 67,840
Amortization of program contract costs and net realizable
value adjustments .............................................. 29,021 47,797 66,290
Stock-based compensation ........................................ -- 739 1,636
Deferred tax provision (benefit) ................................ (5,089) 2,330 20,582
Realization of deferred gain .................................... (42) -- --
Net effect of change in deferred barter revenues
and deferred barter costs ...................................... 230 (908) 591
Decrease in minority interest ................................... (38) (121) (183)
Changes in assets and liabilities, net of effects of
acquisitions and dispositions ...................................
Increase in accounts receivable, net ............................ (12,245) (41,310) (9,468)
Increase in prepaid expenses and other current assets ........... (273) (217) (591)
Increase in refundable income taxes ............................. -- -- (10,581)
Increase (decrease) in accounts payable and
accrued liabilities ............................................ 7,274 19,941 (4,360)
Decrease in income taxes payable ................................ (2,427) (3,214) (970)
Increase (decrease) in other long-term liabilities .............. -- 297 (921)
Payments on program contracts payable ............................. (19,938) (30,451) (51,059)
--------- --------- ---------
Net cash flows from operating activities ....................... $ 55,986 $ 69,298 $ 96,625
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
PAGE 2 OF 2
-----------
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES ................................. $ 55,986 $ 69,298 $ 96,625
---------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ................................... (1,702) (12,609) (19,425)
Payments for acquisition of television and radio station assets ......... (101,000) (74,593) (90,598)
Payments related to the acquisition of the non-license assets
of River City Broadcasting ............................................ -- (818,083) (2,992)
Payments for acquisition of certain other non-license assets ............ (14,283) (29,532) --
Payments for the purchase of outstanding stock of
Superior Communications, Inc. ......................................... -- (63,504) --
Payments to exercise options to acquire certain FCC licenses ............ -- (6,894) (11,079)
Proceeds from assignment of FCC purchase option. ........................ 4,200 -- 2,000
Purchase option extension payments ...................................... -- (6,960) (15,966)
Payments for consulting and non-compete agreements ...................... (1,000) (50) --
Payments to acquire and exercise purchase options ....................... (10,000) -- --
Distributions from (investments in) joint ventures ...................... 240 (380) 380
Proceeds from disposal of property and equipment ........................ 3,330 -- 470
Payment for WPTT subordinated convertible debenture ..................... (1,000) -- --
Loans to officers and affiliates ........................................ (205) (854) (1,199)
Repayments of loans to officers and affiliates .......................... 2,177 1,562 1,694
Deposits and other costs relating to future acquisitions ................ (77) (328) (82,275)
---------- ------------ ----------
Net cash flows used in investing activities.. ........................ (119,320) (1,012,225) (218,990)
---------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and commercial bank financing ............... 138,000 982,500 126,500
Repayments of notes payable, commercial bank financing
and capital leases .................................................... (362,928) (110,657) (693,519)
Repayments of notes and capital leases to affiliates .................... (3,171) (1,867) (2,313)
Payments of costs related to financing .................................. (3,200) (20,009) (4,707)
Payments for interest rate derivative agreements.. ...................... -- (851) (474)
Prepayments of excess syndicated program contract liabilities ........... -- (15,116) (1,373)
Repurchases of the Company's Class A Common Stock ....................... -- (748) (4,599)
Payments relating to redemption of 1993 Notes ........................... -- -- (98,101)
Payment of premium and other costs related to
redemption of 1993 Notes .............................................. -- -- (8,407)
Payments for costs related to subsequent year securities offering ....... -- (434) --
Dividends paid on Series D Preferred Stock .............................. -- -- (2,357)
Proceeds from exercise of stock options ................................. -- -- 105
Payment of equity put option premium .................................... -- -- (507)
Net proceeds from issuances of Senior Subordinated Notes. ............... 293,176 -- 438,427
Net proceeds from issuance of Class A Common Stock ...................... 111,461 -- 151,021
Net proceeds from issuance of Series D Preferred Stock .................. -- -- 166,899
Net proceeds from subsidiary trust securities offering .................. -- -- 192,756
---------- ------------ ----------
Net cash flows from financing activities ............................. 173,338 832,818 259,351
---------- ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................................. 110,004 (110,109) 136,986
CASH AND CASH EQUIVALENTS, beginning of period. .......................... 2,446 112,450 2,341
---------- ------------ ----------
CASH AND CASH EQUIVALENTS, end of period ................................. $ 112,450 $ 2,341 $ 139,327
========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Sinclair Broadcast Group, Inc., Sinclair Communications, Inc. and all other
consolidated subsidiaries, which are collectively referred to hereafter as "the
Company, Companies or SBG." The Company owns and operates television and radio
stations throughout the United States. Additionally, included in the
accompanying consolidated financial statements are the results of operations of
certain television stations pursuant to local marketing agreements (LMAs) and
radio stations pursuant to joint sales agreements (JSAs).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all its wholly-owned and majority-owned subsidiaries. Minority interest
represents a minority owner's proportionate share of the equity in two of the
Company's subsidiaries. In addition, the Company uses the equity method of
accounting for 20% to 50% ownership investments. All significant intercompany
transactions and account balances have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from those estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying consolidated financial statements.
Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates
fair value. Cash equivalents are highly liquid investment grade debt instruments
with an original maturity of three months or less and consist of time deposits
with a number of consumer banks with high credit ratings.
Programming
The Companies have agreements with distributors for the rights to television
programming over contract periods which generally run from one to seven years.
Contract payments are made in installments over terms that are generally shorter
than the contract period. Each contract is recorded as an asset and a liability
when the license period begins and the program is available for its first
showing. The portion of the program contracts payable within one year is
reflected as a current liability in the accompanying consolidated balance
sheets.
The rights to program materials are reflected in the accompanying consolidated
balance sheets at the lower of unamortized cost or estimated net realizable
value. Estimated net realizable values are based upon management's expectation
of future advertising revenues net of sales commissions to be generated by the
program material. Amortization of program contract costs is generally computed
under either a four year accelerated method or based on usage, whichever yields
the greater amortization for each program. Program contract costs, estimated by
management to be amortized in the succeeding year, are classified as current
assets. Payments of program contract liabilities are typically paid on a
scheduled basis and are not affected by adjustments for amortization or
estimated net realizable value.
F-10
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Barter Arrangements
Certain program contracts provide for the exchange of advertising air time in
lieu of cash payments for the rights to such programming. These contracts are
recorded as the programs are aired at the estimated fair value of the
advertising air time given in exchange for the program rights. Network
programming is excluded from these calculations.
The Company broadcasts certain customers' advertising in exchange for equipment,
merchandise and services. The estimated fair value of the equipment, merchandise
or services received is recorded as deferred barter costs and the corresponding
obligation to broadcast advertising is recorded as deferred barter revenues. The
deferred barter costs are expensed or capitalized as they are used, consumed or
received. Deferred barter revenues are recognized as the related advertising is
aired.
Other Assets
Other assets as of December 31, 1996 and 1997 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Unamortized debt acquisition costs ................................ $26,453 $ 43,011
Investments in limited partnerships ............................... 3,039 2,850
Notes receivable .................................................. 10,773 11,102
Purchase options and related extension fees ....................... 22,902 27,826
Deposits and other costs relating to future acquisitions .......... 328 82,275
Other ............................................................. 740 831
------- --------
$64,235 $167,895
======= ========
</TABLE>
Non-Compete and Consulting Agreements
The Company has entered into non-compete and consulting agreements with various
parties. These agreements range from two to three years. Amounts paid under
these agreements are amortized over the life of the agreement.
Acquired Intangible Broadcasting Assets
Acquired intangible broadcasting assets are being amortized over periods of 1 to
40 years. These amounts result from the acquisition of certain television and
radio station license and non-license assets (see Note 12). The Company monitors
the individual financial performance of each of the stations and continually
evaluates the realizability of intangible and tangible assets and the existence
of any impairment to its recoverability based on the projected undiscounted cash
flows of the respective stations.
F-11
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Intangible assets, at cost, as of December 31, 1996 and 1997, consist of the
following (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1996 1997
------ ---- ----
<S> <C> <C> <C>
Goodwill ............................... 40 years $ 676,219 $ 755,858
Intangibles related to LMAs ............ 15 years 120,787 128,080
Decaying advertiser base ............... 1 -- 15 years 93,896 95,657
FCC licenses ........................... 25 years 370,533 400,073
Network affiliations ................... 1 -- 25 years 55,966 55,966
Other .................................. 1 -- 40 years 24,057 24,403
---------- ----------
1,341,458 1,460,037
Less- Accumulated amortization ......... (85,155) (138,061)
---------- ----------
$1,256,303 $1,321,976
========== ==========
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following as of December 31, 1996 and 1997
(in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Compensation .......... $10,850 $10,608
Interest .............. 11,915 18,359
Other ................. 12,309 11,565
------- -------
$35,074 $40,532
======= =======
</TABLE>
Supplemental Information - Statement of Cash Flows
During 1995, 1996 and 1997 the Company incurred the following transactions (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
o Purchase accounting adjustments related to deferred
taxes ................................................. $ 3,400 $ 18,051 $ --
======= ======== =======
o Capital lease obligations incurred .................... $ -- $ -- $10,927
======= ======== =======
o Issuance of Series A Preferred Stock (see Note 12)..... $ -- $125,079 $ --
======= ======== =======
o Income taxes paid ..................................... $ 7,941 $ 6,837 $ 6,502
======= ======== =======
o Subsidiary trust minority interest payments ........... $ -- $ -- $17,631
======= ======== =======
o Interest paid ......................................... $24,770 $ 82,814 $98,521
======= ======== =======
</TABLE>
Local Marketing Agreements
The Company generally enters into LMAs, JSAs and similar arrangements with
stations located in markets in which the Company already owns and operates a
station, and in connection with acquisitions, pending regulatory approval of
transfer of License Assets. Under the terms of these agreements, the Company
makes specified periodic payments to the owner-operator in exchange for the
grant to the Company of the right to program and sell advertising on a specified
portion of the station's inventory of
F-12
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
broadcast time. Nevertheless, as the holder of the Federal Communications
Commission (FCC) license, the owner-operator retains full control and
responsibility for the operation of the station, including control over all
programming broadcast on the station.
Included in the accompanying consolidated statements of operations for the years
ended December 31, 1995, 1996 and 1997, are net revenues of $49.5 million,
$153.0 million (including $103.3 million relating to River City), and $135.0
million (including $71.9 million relating to River City) respectively, that
relate to LMAs, JSAs and time brokerage agreements ("TBAs").
In connection with the River City Acquisition, the Company entered into an LMA
in the form of TBAs with River City and the owner of KRRT with respect to each
of the nine television and 21 radio stations with respect to which the Company
acquired Non-License Assets. During 1997, the Company exercised its options and
now owns the License Assets of (or has entered into an LMA with respect to) all
of these stations other than WTTV-TV and WTTK-TV in Indianapolis, Indiana.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
2. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements .................................... 10 -- 35 years
Station equipment ............................................. 5 -- 10 years
Office furniture and equipment ................................ 5 -- 10 years
Leasehold improvements ........................................ 10 -- 31 years
Automotive equipment .......................................... 3 -- 5 years
Property and equipment and autos under capital leases ......... Shorter of 10 years
or the lease term
</TABLE>
Property and equipment consisted of the following as of December 31, 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Land and improvements .......................... $ 9,795 $ 10,225
Buildings and improvements ..................... 39,008 41,436
Station equipment .............................. 112,994 130,586
Office furniture and equipment ................. 10,140 14,037
Leasehold improvements ......................... 3,377 8,457
Automotive equipment ........................... 3,280 4,090
Construction in progress ....................... 6,923 --
--------- ---------
185,517 208,831
Less- Accumulated depreciation and amortization (31,184) (47,117)
--------- ---------
$ 154,333 $ 161,714
========= =========
</TABLE>
3. INTEREST RATE DERIVATIVE AGREEMENTS:
The Company entered into interest rate derivative agreements to reduce the
impact of changing interest rates on its floating rate debt, primarily relating
to the 1997 Bank Credit Agreement (see Note 4 ). The 1997 Bank Credit Agreement,
as amended and restated, requires the Company to enter into Interest
F-13
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Rate Protection Agreements at rates not to exceed 9.5% per annum as to a
notional principal amount at least equal to 60% of the Tranche A term loans
scheduled to be outstanding from time to time and at rates not to exceed 9.75%
per annum as to a notional principal amount of 60% of the aggregate amount of
Tranche B scheduled to be outstanding from time to time.
As of December 31, 1997, the Company had several interest rate swap agreements
relating to the Company's indebtedness which expire from June 10, 1998 to July
15, 2007. The swap agreements set rates in the range of 5.64% to 9.0%. The
notional amounts related to these agreements were $1.0 billion at December 31,
1997, and decrease to $200 million through the expiration dates. The Company has
no intentions of terminating these instruments prior to their expiration dates
unless it were to prepay a portion of its bank debt.
The floating interest rates are based upon the three month London Interbank
Offered Rate (LIBOR) rate, and the measurement and settlement is performed
quarterly. Settlements of these agreements are recorded as adjustments to
interest expense in the relevant periods. Premiums paid under these agreements
were approximately $1.1 million in 1994, $851,000 in 1996 and $474,000 in 1997
and are amortized over the life of the agreements as a component of interest
expense. The counter parties to these agreements are major national financial
institutions. The Company estimates the aggregate cost to retire these
instruments at December 31, 1997 to be $726,000.
4. NOTES PAYABLE AND COMMERCIAL BANK FINANCING:
FIRST AMENDED AND RESTATED BANK CREDIT AGREEMENT
------------------------------------------------
In connection with the 1994 Acquisitions, the Company amended and restated its
Bank Credit Agreement (the "1994 Bank Credit Agreement"). The 1994 Bank Credit
Agreement consisted of three classes: Facility A Revolving Credit and Term Loan,
Facility B Credit Loan and Facility C Term Loan. In August 1995, the Company
utilized the net proceeds from the 1995 Notes discussed below to repay amounts
outstanding under the 1994 Bank Credit Agreement.
The weighted average interest rates during 1995, while amounts were outstanding
and as of August 28, 1995 (when outstanding indebtedness relating to Bank Credit
Agreement were repaid) and December 31, 1995 were 8.44% and 7.63%, respectively.
Interest expense relating to the Bank Credit Agreement was $15.6 million for the
year ended December 31, 1995. Simultaneously with the acquisition of the
non-license assets of River City, the 1994 Bank Credit Agreement was amended and
restated with new terms as outlined below.
SECOND AMENDED AND RESTATED BANK CREDIT AGREEMENT
-------------------------------------------------
In order to finance the acquisition of the non-license assets of River City and
potential future acquisitions, the Company amended and restated its Bank Credit
Agreement on May 31, 1996 (the "1996 Bank Credit Agreement"). The 1996 Bank
Credit Agreement consisted of three classes: Tranche A Term Loan, Tranche B Term
Loan and a Revolving Credit Commitment.
The Tranche A Term Loan was a term loan in a principal amount not to exceed $550
million and was scheduled to be paid in quarterly installments beginning
December 31, 1996 through December 31, 2002. The Tranche B Term Loan was a term
loan in a principal amount not to exceed $200 million and was scheduled to be
paid in quarterly installments beginning December 31, 1996 through November
2003. The Revolving Credit Commitment was a revolving credit facility in a
principal amount not to exceed $250 million and was scheduled to have reduced
availability quarterly beginning March 31, 1999 through November 30, 2003. The
Company incurred amendment acquisition costs of approximately $20 million
associated with this indebtedness which are being amortized over the life of the
debt.
F-14
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
The applicable interest rate for the Tranche A Term Loan and the Revolving
Credit Commitment was either LIBOR plus 1.25% to 2.5% or the base rate plus zero
to 1.25%. The applicable interest rate for the Tranche A Term Loan and the
Revolving Credit Commitment was adjusted based on the ratio of total debt to
four quarters trailing earnings before interest, taxes, depreciation and
amortization. The applicable interest rate for Tranche B was either LIBOR plus
2.75% or the base rate plus 1.75%. The weighted average interest rates for
outstanding indebtedness relating to the 1996 Bank Credit Agreement during 1996
and as of December 31, 1996, were 8.08% and 8.12%, respectively. Interest
expense relating to the 1996 Bank Credit Agreement was $40.4 million for the
year ended December 31, 1996. The Company amended and restated the 1996 Bank
Credit Agreement as discussed below.
THIRD AMENDED AND RESTATED BANK CREDIT AGREEMENT
------------------------------------------------
In order to expand its capacity and obtain more favorable terms with its
syndicate of banks, the Company amended and restated its Bank Credit Agreement
in May 1997 (the "1997 Bank Credit Agreement"). In connection with the amendment
and restatement, the Company incurred amendment acquisition costs of
approximately $4.7 million, which are being amortized over the life of the debt.
Contemporaneously with the Preferred Stock Offering and the Common Stock
Offering (see Notes 15 and 16) consummated in September 1997, the Company
amended its 1997 Bank Credit Agreement. The 1997 Bank Credit Agreement, as
amended, consists of two classes: Tranche A Term Loan and a Revolving Credit
Commitment. The Tranche A Term Loan is a term loan in a principal amount not to
exceed $325 million and is scheduled to be paid in quarterly installments
through December 31, 2004. The Revolving Credit Commitment is a revolving credit
facility in a principal amount not to exceed $675 million and is scheduled to
have reduced availability quarterly through December 31, 2004. As of December
31, 1997, outstanding indebtedness under the Tranche A Term Loan and the
Revolving Credit Commitment were $307.1 million and $-0- respectively.
The applicable interest rate for the Tranche A Term Loan and the Revolving
Credit Commitment is either LIBOR plus 0.5% to 1.875% or the base rate plus zero
to 0.625%. The applicable interest rate for the Tranche A Term Loan and the
Revolving Credit Commitment is adjusted based on the ratio of total debt to four
quarters' trailing earnings before interest, taxes, depreciation and
amortization. The weighted average interest rates for outstanding indebtedness
relating to the 1997 Bank Credit Agreement during 1997 and as of December 31,
1997 were 7.43% and 8.5%, respectively. The interest expense relating to the
1997 Bank Credit Agreement was $46.7 million for the year ended December 31,
1997.
The Company is required to maintain certain debt covenants in connection with
the 1997 Bank Credit Agreement. As of December 31, 1997, the Company is in
compliance with all debt covenants.
8 3/4% SENIOR SUBORDINATED NOTES DUE 2007:
------------------------------------------
In December 1997, the Company completed an issuance of $250 million aggregate
principal amount of 8 3/4% Senior Subordinated Notes due 2007 (the "8 3/4%
Notes") pursuant to the Shelf Registration statement (see Note 14) and generated
net proceeds to the Company of $242.8 million. Of the net proceeds from the
issuance, $106.2 million was utilized to tender the Company's 1993 Notes with
the remainder retained for general corporate purposes which may include payments
relating to future acquisitions.
Interest on the 8 3/4% Notes is payable semiannually on June 15 and December 15
of each year, commencing June 15, 1998. Interest expense for the year ended
December 31, 1997 was $0.9 million. The 8 3/4% Notes are issued under an
Indenture among SBG, its subsidiaries (the guarantors) and the trustee. Costs
associated with the offering totaled $5.8 million, including an underwriting
discount of $5.0 million. These costs were capitalized and are being amortized
over the life of the debt.
Based upon the quoted market price, the fair value of the 8 3/4% Notes as of
December 31, 1997 is $250.6 million.
F-15
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
9% SENIOR SUBORDINATED NOTES DUE 2007:
--------------------------------------
In July 1997, the Company completed an issuance of $200 million aggregate
principal amount of 9% Senior Subordinated Notes due 2007 (the "9% Notes"). The
9% Notes were sold to "qualified institutional buyers" (as defined in Rule 144A
under the Securities Act) and a limited number of institutional "accredited
investors" and the offering was exempt from registration under the Securities
Act, pursuant to Section 4(2) of the Securities Act and Rule 144A thereunder.
The Company utilized $162.5 million of the approximately $195.6 million net
proceeds of the private issuance to repay outstanding revolving credit
indebtedness under the 1997 Bank Credit Agreement and utilized the remainder to
pay a portion of the $63 million cash down payment relating to the Heritage
Acquisition (see Note 12).
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the 9% Notes, the Company offered to holders of the 9%
Notes the right to exchange the 9% Notes with new 9% Notes (the "Notes Exchange
Offer") having the same terms as the existing notes, except that the exchange of
the new Notes for the existing Notes will be registered under the Securities
Act. On October 8, 1997 the Company filed a registration statement on Form S-4
with the Securities and Exchange Commission (the "Commission") for the purpose
of registering the new 9% Notes to be offered in exchange for the aforementioned
existing 9% Notes. The Company's Notes Exchange Offer became effective on
October 10, 1997 and was closed on November 7, 1997, at which time all of the
existing 9% Notes were exchanged for new 9% Notes.
Interest on the 9% Notes is payable semiannually on January 15 and July 15 of
each year, commencing January 15, 1998. Interest expense for the year ended
December 31, 1997 was $9.0 million. The 9% Notes are issued under an Indenture
among SBG, its subsidiaries (the guarantors) and the trustee. Costs associated
with the offering totaled $4.8 million, including an underwriting discount of
$4.0 million. These costs were capitalized and are being amortized over the life
of the debt.
Based upon the quoted market price, the fair value of the 9% Notes as of
December 31, 1997 is $206.4 million.
10% SENIOR SUBORDINATED NOTES DUE 2005
--------------------------------------
In August 1995, the Company completed an issuance of $300 million aggregate
principal amount of 10% Senior Subordinated Notes (the "1995 Notes"), due 2005,
generating net proceeds to the Company of $293.2 million. The net proceeds of
this offering were utilized to repay outstanding indebtedness under the then
existing Bank Credit Agreement of $201.8 million with the remainder being
retained and eventually utilized to make payments related to certain
acquisitions consummated during 1996. In conjunction with the repayment of
outstanding indebtedness under the Bank Credit Agreement, the Company recorded
an extraordinary loss of $4.9 million, net of a tax benefit of $3.4 million.
Interest on the Notes is payable semiannually on March 30 and September 30 of
each year, commencing March 30, 1996. Interest expense for the years ended
December 31, 1996 and 1997, was $30.0 million and $30.0 million, respectively.
The notes are issued under an indenture among SBG, its subsidiaries (the
guarantors) and the trustee. Costs associated with the offering totaled $6.8
million, including an underwriting discount of $6.0 million and are being
amortized over the life of the debt.
Based upon the quoted market price, the fair value of the Notes as of December
31, 1997 is $322.2 million.
10% SENIOR SUBORDINATED NOTES DUE 2003 AND 1997 TENDER OFFER
------------------------------------------------------------
In December 1993, the Company completed an issuance of $200 million aggregate
principal amount of 10% Senior Subordinated Notes (the "1993 Notes"), due 2003.
Subsequently, the Company determined that a redemption of $100.0 million was
required. This redemption and a refund of $1.0 million of fees from the
underwriters took place in the first quarter of 1994.
F-16
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
In December 1997, the Company completed a tender offer of $98.1 million
aggregate principal amount of the 1993 Notes (the "Tender Offer"). Total
consideration per $1,000 principal amount note tendered was $1,082.08 resulting
in total consideration paid to consummate the Tender Offer of $106.2 million. In
conjunction with the Tender Offer, the Company recorded an extraordinary loss of
$6.1 million, net of a tax benefit of $4.0 million.
Interest on the Notes not tendered is payable semiannually on June 15 and
December 15 of each year. Interest expense for the years ended December 31,
1995, 1996 and 1997, was $10.0 million, $10.0 million and $9.6 million,
respectively. The Notes are issued under an Indenture among SBG, its
subsidiaries (the guarantors) and the trustee.
SUMMARY
- -------
Notes payable and commercial bank financing consisted of the following as of
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Bank Credit Agreement, Tranche A Term Loan .......................... $ 520,000 $ 307,125
Bank Credit Agreement, Tranche B Term Loan .......................... 198,500 --
Bank Credit Agreement, Revolving Credit Commitment .................. 155,000 --
8 3/4% Senior Subordinated Notes, due 2007 ......................... -- 250,000
9% Senior Subordinated Notes, due 2007 .............................. -- 200,000
10% Senior Subordinated Notes, due 2003 ............................. 100,000 1,899
10% Senior Subordinated Notes, due 2005 ............................. 300,000 300,000
Installment note for certain real estate interest at 8.0% ........... -- 101
Unsecured installment notes to former minority stockholders of
CRI and WBFF, interest at 18% ...................................... 644 --
---------- ----------
1,274,144 1,059,125
Less: Discount on 8 3/4% Senior Subordinated Notes, due 2007 ........ -- (976)
Less: Current portion ............................................... (62,144) (35,215)
---------- ----------
$1,212,000 $1,022,934
========== ==========
</TABLE>
F-17
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
The Revolving Credit Commitment is a revolving credit facility in a principal
amount not to exceed $675 million and is scheduled to have reduced availability
quarterly beginning March 31, 1999 through December 31, 2004. Indebtedness under
Tranche A of the 1997 Bank Credit Agreement and notes payable as of December 31,
1997, mature as follows (in thousands):
<TABLE>
<S> <C>
1998 ................................................................ $ 35,215
1999 ................................................................ 37,924
2000 ................................................................ 48,758
2001 ................................................................ 48,759
2002 ................................................................ 48,759
2003 and thereafter ................................................. 839,710
----------
1,059,125
Less: Discount on 8 3/4% Senior Subordinated Notes, due 2007 ........ (976)
----------
$1,058,149
==========
</TABLE>
Substantially all of the Company's assets have been pledged as security for
notes payable and commercial bank financing. See Note 23 for Guarantor and
Non-Guarantor Subsidiaries under the Company's Indentures.
5. NOTES AND CAPITAL LEASES PAYABLE TO AFFILIATES:
Notes and capital leases payable to affiliates consisted of the following as of
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Subordinated installment notes payable to former majority own-
ers, interest at 8.75%, principal payments in varying amounts
due annually beginning October 1991, with a balloon payment
due at maturity in May 2005 ........................................... $ 10,448 $ 9,574
Capital lease for building, interest at 17.5% .......................... 1,372 1,198
Capital leases for broadcasting tower facilities, interest rates aver-
aging 10% ............................................................. 249 3,720
Capitalization of time brokerage agreements, interest at 6.73% ......... -- 6,611
Capital leases for building and tower, interest at 8.25% ............... 1,890 1,470
-------- --------
13,959 22,573
Less: Current portion .................................................. (1,774) (3,073)
-------- --------
$ 12,185 $ 19,500
======== ========
</TABLE>
F-18
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Notes and capital leases payable to affiliates, as of December 31, 1997, mature
as follows (in thousands):
<TABLE>
<S> <C>
1998 ............................................................. $ 4,694
1999 ............................................................. 4,696
2000 ............................................................. 4,615
2001 ............................................................. 4,044
2002 ............................................................. 2,854
2003 and thereafter .............................................. 7,503
--------
Total minimum payments due ....................................... 28,406
Less: Amount representing interest ............................... (5,833)
--------
Present value of future notes and capital lease payments ......... $ 22,573
========
</TABLE>
6. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998 ................................................... $ 66,404
1999 ................................................... 40,026
2000 ................................................... 20,375
2001 ................................................... 1,770
2002 ................................................... 208
2003 and thereafter .................................... 29
---------
128,812
Less: Current portion .................................. (66,404)
---------
Long-term portion of program contracts payable ......... $ 62,408
=========
</TABLE>
Included in the current portion amounts are payments due in arrears of $14.3
million. In addition, the Companies have entered into noncancelable commitments
for future program rights aggregating $56.9 million as of December 31, 1997.
The Company has estimated the fair value of its program contract payables and
noncancelable commitments at approximately $102.7 million and $43.1 million,
respectively, as of December 31, 1996, and $118.9 million and $46.7 million,
respectively, at December 31, 1997, based on future cash flows discounted at the
Company's current borrowing rate.
7. PREPAYMENT OF SYNDICATED PROGRAM CONTRACT LIABILITIES:
In connection with the 1996 acquisitions (see Note 12), the Company assumed
certain syndicated program contracts payable for which the underlying value of
the associated syndicated program assets was determined, by management, to be of
little or no value. The Company negotiated the prepayment of syndicated program
contracts payable for certain of the 1996 acquisitions, as well as certain other
of the Company's subsidiaries. During the years ended December 31, 1996 and
1997, the Company made cash payments totaling $15.1 million and $1.4 million,
respectively, relating to these negotiations. For subsidiaries owned prior to
1996, the Company recognized related amortization of excess syndicated
programming of $3.0 million for the year ended December 31, 1996.
F-19
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
8. RELATED PARTY TRANSACTIONS:
In connection with the start-up of an affiliate in 1990, certain SBG Class B
Stockholders issued a note allowing them to borrow up to $3.0 million from the
Company. This note was amended and restated June 1, 1994, to a term loan bearing
interest of 6.88% with quarterly principal payments beginning March 31, 1996
through December 31, 1999. As of December 31, 1996 and 1997, the balance
outstanding was approximately $1.8 and $1.3 million, respectively.
During the year ended December 31, 1993, the Company loaned Gerstell Development
Limited Partnership (a partnership owned by Class B Stockholders) $2.1 million.
The note bears interest at 6.18%, with principal payments beginning on November
1, 1994, and a final maturity date of October 1, 2013. As of December 31, 1996
and 1997, the balance outstanding was approximately $1.9 million.
Concurrently with the initial public offering (see Note 13), the Company
acquired options from certain stockholders of Glencairn that will grant the
Company the right to acquire, subject to applicable FCC rules and regulations,
up to 97% of the capital stock of Glencairn. The Glencairn options were
purchased by the Company for nominal consideration and will be exercisable only
upon payment of an aggregate price equal to Glencairn's cost for the underlying
stations, plus a 10% annual return. Glencairn is the owner-operator and FCC
licensee of WNUV in Baltimore, WVTV in Milwaukee, WRDC in Raleigh/Durham, WABM
in Birmingham, KRRT in Kerrville and WFBC in Asheville/Greenville/Spartanburg.
The Company has entered into five-year LMA agreements (with five-year renewal
options) with Glencairn pursuant to which the Company provides programming to
Glencairn for airing on WNUV, WVTV, WRDC, WABM, KRRT and WFBC during the hours
of 6:00 a.m. to 2:00 a.m. each day and has the right to sell advertising during
this period. During the years ended December 31, 1995, 1996 and 1997, the
Company made payments of $5.6 million, $7.3 million and $8.4 million
respectively, to Glencairn under these LMA agreements.
During the years ended December 31, 1995, 1996 and 1997, the Company from time
to time entered into charter arrangements to lease airplanes owned by certain
Class B Stockholders. During the years ended December 31, 1995, 1996 and 1997,
the Company incurred expenses of approximately $489,000, $336,000 and $736,000
related to these arrangements, respectively.
In May 1996, the Company acquired certain assets from River City, obtained
options to acquire other assets from River City and entered into an LMA to
provide programming services to certain television and radio stations, of which
River City is the owner of the License Assets. Certain individuals who have
direct or indirect beneficial owners of equity interests in River City are
affiliates of the Company. During the years ended December 31, 1996 and 1997,
the Company incurred LMA expenses relating to River City of $1.4 million and
$896,000, respectively.
In September 1996, the Company entered into a five-year agreement with River
City pursuant to which River City will provide to the Company certain production
services. Pursuant to this agreement, River City will provide certain services
to the Company in return for an annual fee of $416,000, subject to certain
adjustments on each anniversary date. During the years ended December 31, 1996
and 1997, the Company incurred expenses relating to this agreement of $166,000
and $397,000, respectively.
An individual who is an affiliate of the Company is the owner of 100% of the
common stock of Keymarket of South Carolina, Inc. ("KSC"). The Company has
exercised its option to acquire all of the assets of KSC for consideration of
forgiveness of KSC debt in an aggregate principal amount of approximately $7.4
million, plus a payment of approximately $1.0 million, less certain adjustments.
The Company will close this transaction upon FCC approval which is anticipated
to occur during 1998. The Company also purchased two properties from this
affiliate for an aggregate purchase price of approximately $1.75 million as
required by certain leases assigned to the Company in connection with the River
City acquisition.
During May 1996, the Company, along with the Class B Stockholders, formed Beaver
Dam Limited Partnership (BDLP), of which the Company owned a 45% interest. BDLP
was formed for the purpose of
F-20
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
constructing and owning a building which may be the site for the Company's
corporate headquarters. The Company made capital contributions of approximately
$380,000. During 1997, the Partnership made a liquidating distribution to the
Company of approximately $380,000 and the Company no longer owns an interest in
BDLP.
Certain assets used by the Company's operating subsidiaries are leased from
Cunningham, KIG and Gerstell (entities owned by the Class B Stockholders). Lease
payments made to these entities were $1.3 million, $1.3 million, and $1.4
million for the years ended December 31, 1995, 1996 and 1997, respectively.
9. INCOME TAXES:
The Company files a consolidated federal income tax return and separate company
state tax returns. The provision (benefit) for income taxes consists of the
following as of December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes before extraordinary item .......... $ 5,200 $6,936 $ 15,984
Income tax effect of extraordinary item ....................... (3,357) -- (4,045)
-------- ------ ---------
$ 1,843 $6,936 $ 11,939
======== ====== =========
Current:
Federal ...................................................... $ 5,374 $ 127 $ (10,581)
State ........................................................ 1,558 4,479 1,938
-------- ------ ---------
6,932 4,606 (8,643)
-------- ------ ---------
Deferred:
Federal ...................................................... (4,119) 2,065 18,177
State ........................................................ (970) 265 2,405
-------- ------ ---------
(5,089) 2,330 20,582
-------- ------ ---------
$ 1,843 $6,936 $ 11,939
======== ====== =========
</TABLE>
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision (benefit):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income taxes ............................................ 34.0% 34.0% 34.0%
Adjustments-
State income and franchise taxes, net of federal effect .................. 2.8 16.7 6.3
Goodwill amortization .................................................... 16.4 24.3 17.0
Non-deductible expense items.. ........................................... 3.7 6.1 8.5
Tax liability related to dividends on Parent Preferred Stock (a) ......... -- -- 70.3
Other .................................................................... (5.9) 4.9 3.0
---- ---- -----
Provision for income taxes ................................................ 51.0% 86.0% 139.1%
==== ==== =====
</TABLE>
- ----------
(a) In March 1997, the Company issued the HYTOPS securities (see Note 17). In
connection with this transaction, Sinclair Broadcast Group, Inc. (the
"Parent") issued $206.2 million of Series C Preferred Stock (the "Parent
Preferred Stock") to KDSM, Inc., a wholly owned subsidiary. Parent Preferred
Stock dividends paid to KDSM, Inc. are considered taxable income for Federal
tax purposes and not considered income for book purposes. Also for Federal
tax purposes, KDSM, Inc. is allowed a tax deduction for dividends received
on the Parent Preferred Stock in an amount equal to Parent Preferred Stock
dividends received in each taxable year limited to the extent that the
Parent's consolidated group has "earnings and profits". To the extent that
dividends received by KDSM, Inc. are in excess of the Parent's consolidated
group earnings and profits, the Parent will reduce its tax basis in the
Parent Preferred Stock which gives rise to a deferred tax liability (to be
recognized upon redemption) and KDSM, Inc.'s dividend income is treated as a
permanent difference between taxable income and book income. During the year
ended December 31, 1997, the Parent did not generate earnings and profits
which resulted in a reduction in basis of the Parent's Series C Preferred
Stock of $20.8 million which generated a related deferred tax liability of
$8.4 million.
F-21
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Temporary differences between the financial reporting carrying amounts and the
tax basis of assets and liabilities give rise to deferred taxes. The Company had
a net deferred tax asset and deferred tax liability of $782,000 and $21.5
million as of December 31, 1996 and 1997, respectively. The realization of
deferred tax assets is contingent upon the Company's ability to generate
sufficient future taxable income to realize the future tax benefits associated
with the net deferred tax asset. Management believes that deferred assets will
be realized through future operating results.
The Company has total available Federal NOL's of approximately $57.3 million as
of December 31, 1997, which expire during various years from 2004 to 2012. These
NOL's are recorded within refundable income taxes and deferred taxes in the
accompanying Consolidated Balance Sheet as of December 31, 1997. Certain of
these NOL's are limited to use within a specific entity, and certain NOL's are
subject to annual limitations under Internal Revenue Code Section 382 and
similar state provisions.
Total deferred tax assets and deferred tax liabilities as of December 31, 1996
and 1997, including the effects of businesses acquired, and the sources of the
difference between financial accounting and tax bases of the Company's assets
and liabilities which give rise to the deferred tax assets and deferred tax
liabilities and the tax effects of each are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Accruals and reserves ................................................. $ 2,195 $ 3,015
Loss on disposal of fixed assets ...................................... -- 148
Net operating losses .................................................. 4,829 10,435
Program contracts ..................................................... 2,734 3,410
Other ................................................................. 713 903
------- -------
$10,471 $17,911
======= =======
Deferred Tax Liabilities:
FCC license ........................................................... $ 2,613 $ 5,346
Parent Preferred Stock deferred tax liability [see (a) above] ......... -- 8,388
Hedging instruments. .................................................. 188 15
Fixed assets and intangibles .......................................... 4,430 23,572
Capital lease accounting .............................................. 1,304 1,647
Affiliation agreement.. ............................................... 691 --
Investment in partnerships. ........................................... 209 420
Other ................................................................. 254 65
------- -------
$ 9,689 $39,453
======= =======
</TABLE>
During 1996, the Company made a $1.1 million deferred tax adjustment to decrease
its deferred tax asset and increase goodwill under the purchase accounting
guidelines of APB 16 and in accordance with SFAS 109 related to the opening
deferred tax asset balances of certain 1995 acquisitions.
10. EMPLOYEE BENEFIT PLAN:
The Sinclair Broadcast Group, Inc. 401(k) Profit Sharing Plan and trust (the
"SBG Plan") covers eligible employees of the Company. Contributions made to the
SBG Plan include an employee elected salary reduction amount, company matching
contributions and a discretionary amount determined each year by the Board of
Directors. The Company's 401(k) expense for the years ended December 31, 1995,
1996 and 1997, was $271,000, $657,000 and $1.0 million, respectively. There were
no discretionary contributions during these periods. During December 1997, the
Company registered 400,000 shares of its Class "A" Common Stock with the
Securities and Exchange Commission (the "Commission") to be issued as a matching
contribution for the 1997 plan year and subsequent plan years.
F-22
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
11. CONTINGENCIES AND OTHER COMMITMENTS:
LITIGATION
----------
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages,
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company's financial position or results of operations.
OPERATING LEASES
----------------
The Company has entered into operating leases for certain property and equipment
under terms ranging from three to ten years. The rent expense under these
leases, as well as certain leases under month-to-month arrangements, for the
years ended December 31, 1995, 1996 and 1997, aggregated approximately $1.1
million, $3.1 million and $3.9 million, respectively.
Future minimum payments under the leases are as follows (in thousands):
<TABLE>
<S> <C>
1998 ........................ $ 3,427
1999 ........................ 2,226
2000 ........................ 1,583
2001 ........................ 1,382
2002 ........................ 1,172
2003 and thereafter ......... 4,988
-------
$14,778
=======
</TABLE>
12. ACQUISITIONS:
1995 ACQUISITIONS AND DISPOSITIONS
----------------------------------
In January and May 1995, the Company acquired the non-license and license
assets, respectively, of WTVZ in Norfolk, Virginia for a purchase price of $49.0
million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and programming
assets, acquired intangible broadcasting assets and other intangible assets for
$1.4 million, $12.6 million and $35.0 million, respectively, based upon an
independent appraisal. Intangible assets are being amortized over 1 to 40 years.
In January 1995, the Company acquired the license and non-license assets of the
Paramount Station Group of Raleigh/Durham, Inc. which owned and operated WLFL in
Raleigh/Durham, North Carolina for $55.5 million, plus the assumption of $3.7
million in liabilities. The acquisition was accounted for under the purchase
method of accounting whereby the purchase price was allocated to property and
programming assets, acquired intangible broadcasting assets and other intangible
assets for $8.6 million, $15.9 million and $34.7 million, respectively, based
upon an independent appraisal. Intangible assets are being amortized over
periods of 1 to 40 years.
On March 31, 1995, the Company exercised its option to acquire 100% of the
voting stock of FSFA for the exercise price of $100. FSFA was merged into WLFL,
Inc. and became a wholly-owned subsidiary of the Company. Simultaneously, the
Company sold the license assets of FSFA to Glencairn for $2.0 million, and
entered into a five-year LMA (with a five-year renewal option) with Glencairn
(see Note 8).
F-23
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
On May 5, 1995, Keyser Communications, Inc. (KCI), an affiliated entity
wholly-owned by the stockholders of the Company, was merged into the Company for
common stock. Certain assets and liabilities of KCI (other than programming
items, an LMA agreement and consulting agreements), were distributed to the KCI
shareholders immediately prior to the merger. The merger of KCI is being treated
as a reorganization and has been accounted for as a pooling of interests
transaction. Accordingly, the consolidated financial statements for all periods
presented have been restated to include the accounts of KCI.
In July 1995, the Company acquired the non-license assets of WABM in Birmingham,
Alabama for a purchase price of $2.5 million. The acquisition was accounted for
under the purchase method of accounting whereby $1.1 million of the purchase
price was allocated to property and program assets, based upon an independent
appraisal. The excess of the purchase price over the acquired assets of
approximately $1.4 million was allocated to other intangible assets and is being
amortized over 15 years. Simultaneously with the purchase, the Company entered
into a five-year LMA agreement (with a five-year renewal option) with Glencairn.
In November 1995, the Company acquired the non-license assets of WDBB in
Tuscaloosa, Alabama for a purchase price of $400,000. In addition, the Company
made "Option Grant Payments" of $11.3 million to certain parties for options to
purchase the issued and outstanding stock of WDBB, Inc., which holds the license
assets of WDBB. The option agreement further provides for the payment of option
grant installments of $2.6 million over five years and a final option exercise
price of $100,000. The acquisition was accounted for under the purchase method
of accounting whereby $11.1 million was allocated to the property and program
assets based upon an independent appraisal. The total of Option Grant Payments
paid and grant installments accrued of $14.0 million was allocated to other
intangible assets and is being amortized over 15 years.
1996 ACQUISITIONS
- -----------------
RIVER CITY ACQUISITION
In April 1996, the Company entered into an agreement to purchase certain
non-license assets of River City. In May 1996, the Company closed the
transaction for a purchase price of $967.1 million, providing as consideration
1,150,000 shares of Series A Convertible Preferred Stock with a fair market
value of $125.1 million, 1,382,435 stock options with a fair market value of
$23.9 million and cash payments totaling $818.1 million. The Company utilized
indebtedness under its Bank Credit Agreement to finance the transaction. The
acquisition was accounted for under the purchase method of accounting whereby
the purchase price was allocated to property and programming assets, acquired
intangible broadcasting assets and other intangible assets for $82.8 million,
$375.6 million and $508.7 million, respectively, based upon an independent
appraisal. Intangible assets are being amortized over 1 to 40 years.
Simultaneously, the Company entered into option agreements to purchase certain
license assets for an aggregate option exercise price of $20 million. In
September 1996, after receiving FCC approval for license transfer, the Company
made a cash payment of $6.9 million to acquire certain radio station FCC
licenses. During 1997, the Company exercised its options to acquire certain
other FCC licenses and now owns all of the License Assets (or has entered into
an LMA with respect to) all of the television and radio stations with respect to
which it acquired non-license assets from River City, other than WTTV-TV and
WTTK-TV in Indianapolis, Indiana.
Also, simultaneously with the acquisition, the Company entered into an option
agreement to purchase the license and non-license assets of WSYX-TV in Columbus,
Ohio. The option purchase price for this television station is $100 million plus
the amount of River City indebtedness secured by the WSYX assets on the exercise
date (not to exceed the amount at the date of closing of $135 million). Pursuant
to
F-24
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
the WSYX option agreement, the Company is required to make certain "Option
Extension Fees", as defined. These fees are required to begin quarterly
beginning with December 31, 1996, through the earlier of the "Option Grant Date"
or the expiration date of June 30, 1999. The Option Extension Fees are
calculated as 8% per annum of the option purchase price through the first
anniversary of the Option Grant Date, 15% per annum of the option purchase price
through the second anniversary of the Option Grant Date and 25% per annum of the
option purchase price through the expiration of the WSYX option agreement. As of
December 31, 1997, the Company incurred Option Extension Fees and other costs
relating to WSYX-TV totaling $22.9 million.
In conjunction with the River City acquisition, the Company entered into an
agreement to purchase the non-license assets of KRRT, Inc., a television station
in San Antonio, Texas, for a purchase price of $29.5 million. The acquisition
was accounted for under the purchase method of accounting whereby the purchase
price was allocated to property and programming assets, acquired intangible
broadcasting assets and other intangible assets for $3.8 million, $0.4 million
and $25.3 million, respectively, based upon an independent appraisal. Intangible
assets are being amortized over 1 to 15 years.
In connection with the River City acquisition, the Company consummated the
following transactions concurrent with or subsequent to the closing:
1. In June 1996, the Board of Directors of the Company adopted, upon approval
of the stockholders by proxy, an amendment to the Company's amended and
restated charter. This amendment increased the number of Class A Common
Stock shares authorized to be issued by the Company from 35,000,000 shares
to 100,000,000 shares. The amendment also increased the number of shares of
Preferred Stock authorized from 5,000,000 shares to 10,000,000 shares.
2. Series A Preferred Stock -- As partial consideration for the acquisition of
the non-license assets of River City, the Company issued 1,150,000 shares of
Series A Preferred Stock. In June 1996, the Board of Directors of the
Company adopted, upon approval of the stockholders by proxy, an amendment to
the Company's amended and restated charter at which time Series A Preferred
Stock was exchanged for and converted into Series B Preferred Stock. The
Company recorded the issuance of Series A Preferred Stock based on the fair
market value at the date the River City acquisition was announced at the
exchange rate of 3.64 shares of Class A Common Stock for each share of
Series A Preferred Stock.
3. Series B Preferred Stock -- Shares of Series B Preferred Stock are
convertible at any time into shares of Class A Common Stock, with each share
of Series B Preferred Stock convertible into approximately 3.64 shares of
Series A Common Stock. The Company may redeem shares of Series B Preferred
Stock only after the occurrence of certain events. If the Company seeks to
redeem shares of Series B Preferred Stock and the stockholder elects to
retain the shares, the shares will automatically be converted into common
stock on the proposed redemption date. All shares of Series B Preferred
Stock remaining outstanding as of May 31, 2001, will automatically convert
into Class A Common Stock. Series B Preferred Stock is entitled to 3.64
votes on all matters with respect to which Class A Common Stock has a vote.
F-25
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
4. Stock Options and Awards:
Long-Term Incentive Plan-
In June 1996, the Board of Directors adopted, upon approval of the
stockholders by proxy, the 1996 Long-Term Incentive Plan of the Company (the
"LTIP"). The purpose of the LTIP is to reward key individuals for making
major contributions to the success of the Company and its subsidiaries and to
attract and retain the services of qualified and capable employees. A total
of 2,073,673 shares of Class A Common Stock is reserved and available for
awards under the plan. In connection with the River City acquisition, 244,500
options were granted to certain employees and 1,382,454 were granted to Barry
Baker (see Executive Employment Agreement below) under this plan with an
exercise price of $30.11 per share.
The Company recorded deferred compensation of $1.9 million as additional
paid-in capital at the stock option grant date. During the years ended
December 31, 1996 and 1997, compensation expense of $739,000 and $605,000 was
recorded relating to the options issued under the LTIP, respectively. The
remaining deferred compensation of approximately $954,000 will be recognized
as expense on a straight-line basis over the vesting period.
Incentive Stock Option Plan-
In June 1996, the Board of Directors adopted, upon approval of the
stockholders by proxy, certain amendment to the Company's Incentive Stock
Option Plan. The purpose of the amendments was (i) to increase the number of
shares of Class A Common Stock approved for issuance under the plan from
400,000 to 500,000, (ii) to delegate to Barry Baker the authority to grant
certain options, (iii) to lengthen the period after the date of grant before
options become exercisable, from two years to three (iv) and to provide
immediate termination and three-year ratable vesting of options in certain
circumstances. In connection with the River City acquisition, the Company
granted 287,000 options to key management employees at an exercise price of
$37.75, the fair market value at the date of grant.
5. Executive Employment Agreement
In connection with the acquisition of River City, the Company entered into a
five-year employment agreement (the "Baker Employment Agreement") with Barry
Baker, pursuant to which Mr. Baker will become President and Chief Executive
Officer of SCI and Executive Vice President of the Company, at such time as
Mr. Baker is able to hold those positions consistent with applicable FCC
regulations. Until such time as Mr. Baker is able to become an officer of the
Company, he serves as a consultant to the Company pursuant to a consulting
agreement and received compensation that he would be entitled to as an
officer under the Baker Employment Agreement. If the Baker Employment
Agreement is terminated by the Company other than for cause (as defined) or
by Mr. Baker for good cause (constituting certain occurrences specified in
the agreement), Mr. Baker shall be entitled to certain termination payments
entitling him to his salary and bonuses which would have been paid under the
agreement; to purchase certain television or radio assets acquired by the
Company from River City at fair market value, and all stock options held by
Mr. Baker shall vest immediately.
OTHER 1996 ACQUISITIONS
In May 1995, the Company entered into option agreements to acquire all of the
license and non-license assets of WSMH-TV in Flint, Michigan (WSMH). In July
1995, the Company paid the $1.0 million option exercise price to exercise its
option and in February 1996, the Company consummated the acquisition for a
purchase price of $35.4 million. The acquisition was accounted for under the
purchase
F-26
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
method of accounting whereby the purchase price was allocated to property and
programming assets, acquired intangible broadcasting assets and other intangible
assets for $1.9 million, $6.0 million and $27.5 million, respectively, based
upon an independent appraisal.
In March 1996, the Company entered into an agreement to acquire the outstanding
stock of Superior Communications, Inc. (Superior) which owns the license and
non-license assets of the television stations KOCB in Oklahoma City, Oklahoma
and WDKY in Lexington, Kentucky. In May 1996, the Company consummated the
acquisition for a purchase price of $63.5 million. The acquisition was accounted
for under the purchase method of accounting whereby the purchase price was
allocated to property and programming assets, acquired intangible broadcasting
assets and other intangible assets for $7.3 million, $20.4 million and $35.8
million, respectively, based upon an independent appraisal.
In January 1996, the Company entered into an agreement to acquire license and
non-license assets of the television station WYZZ in Peoria, Illinois. In July
1996, the Company consummated the acquisition for a purchase price of $21.1
million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and programming
assets, acquired intangible broadcasting assets and other intangible assets for
$2.2 million, $4.3 million and $14.6 million, respectively, based upon an
independent appraisal.
In July 1996, the Company entered into an agreement to acquire license and
non-license assets of the television station KSMO in Kansas City, Missouri
through the exercise of its options described in Note 13 for a total purchase
price of $10.0 million. The acquisition was accounted for under the purchase
method of accounting whereby the purchase price was allocated to property and
programming assets and acquired intangible broadcasting assets for $4.6 million
and $5.4 million, respectively, based upon an independent appraisal.
In August 1996, the Company acquired the license and non-license assets of the
television station WSTR in Cincinnati, Ohio for a total purchase price of $8.7
million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and programming
assets and acquired intangible broadcasting assets for $6.2 million and $2.5
million, respectively, based upon an independent appraisal.
1997 ACQUISITIONS AND AGREEMENTS TO ACQUIRE CERTAIN ASSETS:
- -----------------------------------------------------------
1997 ACQUISITIONS
In January 1997, the Company entered into a purchase agreement to acquire the
license and non-license assets of KUPN-TV, the UPN affiliate in Las Vegas,
Nevada, for a purchase price of $87.5 million. Under the terms of this
agreement, the Company made cash deposit payments of $9.0 million and in May
1997, the Company closed on the acquisition making cash payments of $78.5
million for the remaining balance of the purchase price and other related
closing costs. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and programming
assets, acquired intangible broadcasting assets and other intangible assets for
$1.6 million, $17.9 million and $68.0 million, respectively, based upon an
independent appraisal. The Company financed the transaction by utilizing
proceeds from the HYTOPS offering (see Note 17) combined with indebtedness under
the 1997 Bank Credit Agreement.
In 1997, the Company exercised options to acquire the license and non-license
assets of the following radio stations: WGR-AM and WWWS-AM (Buffalo, New York)
and WWFH-FM, WILP-AM, WWSH-FM and WKRF-FM (Wilkes-Barre/Scranton, Pennsylvania).
During the year ended December 31, 1997, the Company made payments totaling
approximately $3.1 million to acquire the license and non-license assets of
these radio stations.
F-27
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
EXERCISE OF OPTIONS TO ACQUIRE RIVER CITY LICENSE ASSETS
Since March 31, 1997, the FCC has granted approval for transfer of FCC licenses
with respect to the following television stations: KDNL-TV (St. Louis,
Missouri), KOVR-TV (Sacramento, California), WLOS-TV (Asheville, North
Carolina), KABB-TV (San Antonio, Texas) and KDSM-TV (Des Moines, Iowa). The
Company exercised options to acquire the License Assets (the television and
radio assets essential for broadcasting a television or radio signal in
compliance with regulatory guidelines) of each of these stations from River City
Broadcasting, L.P. ("River City") for aggregate option exercise payments of $9.3
million. In July 1997, the Company made an option exercise payment of $0.5
million to River City related to the license assets of WFBC-TV (Greenville,
South Carolina) and simultaneously assigned its option to acquire the License
Assets of WFBC-TV to Glencairn, Ltd. ("Glencairn") for an option assignment fee
of $2.0 million. The Company entered into a local marketing agreement ("LMA")
with Glencairn whereby the Company, in exchange for an hourly fee, obtained the
right to program and sell advertising on substantially all of the station's
inventory of broadcast time. The Company also received FCC approval for the
transfer of the FCC licenses of KPNT-FM and WVRV-FM in St. Louis, Missouri, and
exercised its option to acquire the License Assets of these radio stations for
an option exercise price of $1.2 million. As a result of these license approvals
and option exercises, the Company now owns the License Assets of (or has entered
into an LMA with Glencairn with respect to) all of the television and radio
stations with respect to which it acquired Non-License Assets (assets involved
in the operation of radio and television stations other than License Assets)
from River City, other than WTTV-TV and WTTK-TV in Indianapolis, Indiana.
AGREEMENT TO ACQUIRE HERITAGE
On July 16, 1997, the Company entered into agreements (the "Heritage Acquisition
Agreements") with The News Corporation Limited, Heritage Media Group, Inc. and
certain subsidiaries of Heritage Media Corporation (collectively, "Heritage"),
pursuant to which the Company agreed to acquire certain television and radio
station assets. Under the Heritage Acquisition Agreements, the Company will
acquire the assets of, or the right to program pursuant to LMAs, six television
stations in three markets and the assets of 24 radio stations in seven markets
(the "Heritage Acquisition"). The aggregate purchase price for the assets is
$630 million payable in cash at closing, less deposits paid of $65.5 million.
During the first quarter of 1998, the Company completed the acquisition of the
Heritage television and radio stations except for the radio stations in the New
Orleans, Louisiana market (see Note 24).
AGREEMENT TO ACQUIRE LAKELAND GROUP
In November 1997, the Company entered into an agreement to acquire 100% of the
stock of Lakeland Group Television Inc. for a purchase price of $50 million (the
"Lakeland Acquisition") and made a cash deposit of $1.5 million. Upon the
closing of the Lakeland Acquisition, the Company will acquire television station
KLGT in Minneapolis, Minnesota. The Lakeland Acquisition is expected to close in
the second quarter of 1998.
AGREEMENT TO ACQUIRE MAX MEDIA
On December 2, 1997, the Company entered into agreements to acquire, directly or
indirectly, all of the equity interests of Max Media Properties, L.L.C. ("Max
Media"). As a result of this transaction, the Company will acquire, or acquire
the right to program pursuant to LMAs, nine television stations and eight radio
stations in eight markets (the "Max Media Acquisition"). The aggregate purchase
price is $255 million payable in cash at closing (less a deposit of $12.8
million paid at the time of signing the acquisition agreement), a portion of
which will be used to retire existing debt of Max Media at closing. Max Media's
television station WKEF-TV in Dayton, Ohio has an overlapping service area with
the
F-28
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Company's television stations WTTE-TV in Columbus, Ohio, WSTR-TV in Cincinnati,
Ohio, and with Company LMA station WTTV-TV in Indianapolis, Indiana. In
addition, Max Media's television station WEMT-TV in Tri-Cities,
Tennessee/Virginia has an overlapping service area with the Company's television
station WLOS-TV in Asheville, North Carolina and Max Media's television station
KBSI-TV in Paducah, Kentucky/Cape Girardeau, Missouri has an overlapping service
area with the Company's television station KDNL-TV in St. Louis, Missouri.
Furthermore, the Company owns a television station (and proposes to acquire
radio stations from Heritage) in the Norfolk-Virginia Beach-Newport News,
Virginia market, where four of Max Media's radio stations are located.
Consequently, the Company has requested waivers from the FCC to allow the
Company to complete the Max Media Acquisition. There can be no assurance that
such waivers will be granted. As a result of the Max Media Acquisition and the
Heritage Acquisition, the Company intends to dispose of two of the FM radio
stations in the Norfolk-Virginia Beach-Newport News, Virginia radio market that
it has agreed to acquire from Heritage and Max Media in order to be in
compliance with the FCC regulations that limit the number of radio stations that
can be owned in a market. The Max Media Acquisition is subject to FCC and
Department of Justice (DOJ) approval and certain other conditions, and is
anticipated to be completed in the second quarter of 1998. The transaction is
expected to be financed through borrowings under the Company's Bank Credit
Agreement.
13. INITIAL PUBLIC OFFERING:
In June 1995, the Company consummated an initial public offering of 5,750,000
shares of Class A Common Stock at an initial public offering price of $21.00 per
share realizing net proceeds of approximately $111.5 million. The net proceeds
to the Company from this offering were used to reduce long-term indebtedness.
The Company consummated the following transactions concurrent with or prior to
the offering:
1. The Company purchased the options to acquire the partnership interests and
liabilities of KSMO in Kansas City, Missouri and WSTR in Cincinnati, Ohio
("Option Stations") from the stockholders for an aggregate purchase price
was $9.0 million. The stockholders also assigned to the Company their rights
and obligations under an option agreement among the stockholders and a
commercial bank which held secured debt of KSMO and WSTR.
2. The stockholders assigned the subordinated convertible debenture relating to
the sale of WPTT to the Company in exchange for $1.0 million, a portion of
which was used to retire the outstanding balance of a note due from the
controlling stockholders.
3. The Company acquired options from certain stockholders of Glencairn that
will grant the Company the right to acquire, subject to applicable FCC rules
and regulations, up to 97% of the capital stock of Glencairn.
4. The Board of Directors of the Company adopted Amended and Restated Articles
of Incorporation to authorize up to 35,000,000 shares of Class A Common
Stock, par value $.01 per share, 35,000,000 shares of Class B Common Stock,
par value $.01 per share and 5,000,000 shares of Preferred Stock, par value
$.01 per share; completed a reclassification and conversion of its
outstanding common stock into shares of Class B Common Stock; and effected
an approximately 49.1 for 1 stock split of the Company's common stock
(resulting in 29,000,000 shares of Class B Common Stock outstanding). The
reclassification, conversion and stock split have been retroactively
reflected in the accompanying consolidated balance sheets and statements of
stockholders' equity. In June 1996, the Company amended its charter,
increasing the number of shares of Class A Common Stock authorized to be
issued from 35,000,000 to 100,000,000 (see Note 12).
F-29
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
5. The Board of Directors of the Company adopted an Incentive Stock Option Plan
for Designated Participants (the Designated Participants Stock Option Plan)
pursuant to which options for shares of Class A Common Stock will be granted
to certain designated employees of the Company upon adoption.
6. On March 27, 1995, the Board of Directors of the Company adopted an
Incentive Stock Option Plan (the Stock Option Plan) pursuant to which
options for shares of Class A Common Stock may be granted to certain
designated classes of employees of the Company. The Stock Option Plan
provides that the maximum number of shares of Class A Common Stock reserved
for issuance under the Stock Option Plan is 500,000, as amended, and that
options to purchase Class A Common Stock may be granted under the plan until
the tenth anniversary of its adoption.
14. SHELF REGISTRATION STATEMENTS:
In September 1996, the Company filed and in November 1996 obtained effectiveness
of a registration statement on Form S-3 with the Commission with respect to the
sale by certain selling stockholders of 5,564,253 shares of Class A Common
Stock. These shares represent 4,181,818 shares of Class A Common Stock issuable
upon conversion of Series B Preferred Stock and 1,382,435 shares of Class A
Common Stock issuable upon exercise of options held by Barry Baker.
In October 1996, the Company filed a registration statement on Form S-3 with the
Commission for the purpose of offering additional shares of its Class A Common
Stock to the public. In August 1997, the Company amended this registration
statement to reflect the registration of $1 billion of securities to be offered
to the public, covering Class A Common Stock, Preferred Stock and debt
securities (the "Shelf Registration"). In September 1997, the Company completed
offerings of its Class A Common Stock and Series D Preferred Stock pursuant to
the Shelf Registration. In December 1997, the Company issued the 8 3/4% Notes
pursuant to the Shelf Registration.
15. SECONDARY PUBLIC OFFERING OF CLASS A COMMON STOCK:
In September 1997, the Company and certain stockholders of the Company completed
a public offering of 4,345,000 and 1,750,000 shares, respectively of Class A
Common Stock (the "Common Stock Offering"). The shares were sold pursuant to the
Shelf Registration for an offering price of $36.50 per share and generated
proceeds to the Company of $151.0 million, net of underwriters' discount and
other offering costs of $7.6 million. The Company utilized a significant portion
of the Common Stock Offering proceeds to repay indebtedness under the 1997 Bank
Credit Agreement (see Note 4).
16. PUBLIC OFFERING OF SERIES D PREFERRED STOCK:
Concurrent with the Common Stock Offering, the Company completed a public
offering of 3,450,000 shares of Series D Convertible Exchangeable Preferred
Stock (the "Preferred Stock Offering"). The shares were sold pursuant to the
Shelf Registration at an offering price of $50 per share and generated proceeds
to the Company of $166.9 million, net of underwriters' discount and other
offering costs of $5.0 million.
The Convertible Exchangeable Preferred Stock has a liquidation preference of $50
per share and a stated annual dividend of $3.00 per share payable quarterly out
of legally available funds and are convertible into shares of Class A Common
Stock at the option of the holders thereof at a conversion price of $45.625 per
share, subject to adjustment. The shares of Convertible Exchangeable Preferred
Stock are exchangeable at the option of the Company, for 6% Convertible
Subordinated Debentures of the Company, due 2012, and are redeemable at the
option of the Company on or after September 20, 2000 at specified prices plus
accrued dividends.
F-30
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
The Company received total net proceeds of $317.9 million from the Preferred
Stock Offering and the Common Stock Offering. The Company utilized $285.7
million of the net proceeds from the Common Stock Offering and the Preferred
Stock Offering to repay outstanding borrowings under the revolving credit
facility, $8.9 million to repay outstanding amounts under the Tranche A term
loan of the 1997 Bank Credit Agreement and retained the remaining net proceeds
of approximately $23.3 million for general corporate purposes.
17. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST:
In March 1997, the Company completed a private placement of $200 million
aggregate liquidation value of 11 5/8% High Yield Trust Offered Preferred
Securities (the "HYTOPS") of Sinclair Capital, a subsidiary trust of the
Company. The HYTOPS were issued March 12, 1997, mature March 15, 2009, and
provide for quarterly distributions to be paid in arrears beginning June 15,
1997. The HYTOPS were sold to "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act of 1933, as amended) and a limited number of
institutional "accredited investors" and the offering was exempt from
registration under the Securities Act of 1933, as amended ("the Securities
Act"), pursuant to Section 4(2) of the Securities Act and Rule 144A thereunder.
The Company utilized $135 million of the approximately $192.8 million net
proceeds of the private placement to repay outstanding debt and retained the
remainder for general corporate purposes, which included the acquisition of
KUPN-TV in Las Vegas, Nevada.
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the HYTOPS, the Company offered holders of the HYTOPS the
right to exchange the HYTOPS for new HYTOPS having the same terms as the
existing securities, except that the exchange of the new HYTOPS for the existing
HYTOPS has been registered under the Securities Act. On May 2, 1997, the Company
filed a registration statement on Form S-4 with the Commission for the purpose
of registering the new HYTOPS to be offered in exchange for the aforementioned
existing HYTOPS issued by the Company in March 1997 (the "Exchange Offer"). The
Company's Exchange Offer was closed and became effective August 11, 1997, at
which time all of the existing HYTOPS were exchanged for new HYTOPS.
Amounts payable to the holders of HYTOPS are recorded as "Subsidiary trust
minority interest expense" in the accompanying financial statements and were
$18.6 million for the year ended December 31, 1997.
18. STOCK-BASED COMPENSATION PLANS:
As permitted under SFAS 123, "Accounting for Stock-Based Compensation," the
Company measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro
forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
F-31
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
A summary of changes in outstanding stock options follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------- ----- ----------- -----
<S> <C> <C> <C> <C>
Outstanding at end of 1994 ......... -- $ -- -- $ --
1995 Activity:
Granted ........................... 68,000 21.00 -- --
------ ------ -- ------
Outstanding at end of 1995 ......... 68,000 21.00 -- --
1996 Activity:
Granted ........................... 1,904,785 31.50 -- --
Exercised ......................... -- -- -- --
Forfeited ......................... 3,750 21.00 -- --
--------- ------ -- ------
Outstanding at end of 1996 ......... 1,969,035 31.16 736,218 30.11
--------- ------ ------- ------
1997 Activity:
Granted ........................... 274,450 33.74 -- --
Exercised ......................... 5,000 21.00 -- --
Forfeited ......................... 126,200 35.69 -- --
--------- ------ ------- ------
Outstanding at end of 1997 ......... 2,112,285 $ 34.19 1,214,076 $ 29.82
========= ======= ========= =======
</TABLE>
Additional information regarding stock options outstanding at December 31, 1997,
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
REMAINING REMAINING WEIGHTED-
VESTING CONTRACTUAL AVERAGE
EXERCISE PERIOD LIFE EXERCISE
OUTSTANDING PRICE (IN YEARS) (IN YEARS) EXERCISABLE PRICE
----------- ----- ---------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
54,250 $ 21.00 0.13 7.44 38,250 $ 21.00
1,708,935 30.11 0.67 8.49 1,175,826 30.11
326,100 37.75 1.76 8.76 -- --
23,000 41.875 2.97 9.97 -- --
---------- -------- ---- ---- --------- --------
2,112,285 $ 34.19 0.85 8.52 1,214,076 $ 29.82
========== ======== ==== ==== ========= ========
</TABLE>
F-32
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Had compensation cost for the Company's 1995, 1996, and 1997 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income, net income applicable to common share before extraordinary
items, and net income per common share for these years would approximate the pro
forma amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before extraor-
dinary item ........................ $ 4,988 $4,799 $ 1,131 $ (1,639) $ (4,496) $ (5,871)
------- ------ ------- -------- --------- ---------
Net income (loss) ................... $ 76 $ (113) $ 1,131 $ (1,639) $ (10,566) $ (11,941)
------- ------ ------- -------- --------- ---------
Net income (loss) available to
common shareholders ................ $ 76 $ (113) $ 1,131 $ (1,639) $ (13,329) $ (14,704)
------- ------ ------- -------- --------- ---------
Basic net income per share before
extraordinary items ................ $ .15 $ .15 $ .03 $ (.05) $ (.20) $ (.24)
------- ------ ------- -------- --------- ---------
Basic net income per share after
extraordinary items ................ $ -- $ -- $ .03 $ (.05) $ (.37) $ (.41)
------- ------ ------- -------- --------- ---------
Diluted net income per share be-
fore extraordinary items ........... $ .15 $ .15 $ .03 $ (.05) $ (.20) $ (.24)
------- ------ ------- -------- --------- ---------
Diluted net income per share af-
ter extraordinary items ............ $ -- $ -- $ .03 $ (.05) $ (.37) $ (.41)
------- ------ ------- -------- --------- ---------
</TABLE>
The Company has computed for pro forma disclosure purposes the value of all
options granted during 1995, 1996, and 1997 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 and the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.78% 6.66% 5.66 - 6.35%
Expected lives 5 years 5 years 5 years
Expected volatility 35% 35% 35%
</TABLE>
Adjustments are made for options forfeited prior to vesting.
19. EQUITY PUT AND CALL OPTIONS:
During December 1996, the Company entered into physically settled in cash put
and call option contracts related to the Company's common stock. These option
contracts were entered into for the purpose of hedging the dilution of the
Company's common stock upon the exercise of stock options granted. The Company
entered into 250,000 call options for common stock and 320,600 put options for
common stock, with a strike price of $37.75 and $27.88 per common share,
respectively. To the extent that the Company entered into put option contracts,
the additional paid-in capital amounts were adjusted accordingly and reflected
as Equity Put Options in the accompanying balance sheet as of December 31, 1996.
In March 1997, the Company amended its put option contracts from physically
settled in cash to physically or net physically settled in shares, at the
election of the Company, and reclassified amounts reflected as Equity Put
Options to "Additional paid-in capital -- equity put options" as reflected in
the accompanying balance sheet as of December 31, 1997.
In April 1997, the Company entered into put and call option contracts related to
its common stock for the purpose of hedging the dilution of the common stock
upon the exercise of stock options granted. The Company entered into 550,000
European style (that is, exercisable on the expiration date only) put
F-33
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
options for common stock with a strike price of $25.78 per share which provide
for settlement in cash or in shares, at the election of the Company. The Company
entered into 550,000 American style (that is, exercisable any time on or before
the expiration date) call options for common stock with a strike price of $25.78
per share which provide for settlement in cash or in shares, at the election of
the Company. The option premium amount of $3.4 million for these contracts,
which was recorded as a reduction of additional paid-in capital, is payable in
quarterly installments at 8.1% interest per annum through the maturity date,
July 13, 2000.
20. EARNINGS PER SHARE:
The Company adopted SFAS 128 "Earnings per Share" which requires the restatement
of prior periods and disclosure of basic and diluted earnings per share and
related computations.
<TABLE>
<CAPTION>
THE YEARS ENDED
---------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average number of common shares ............................... 32,198 34,748 35,951
Dilutive effect of outstanding stock options ........................... 7 170 119
Dilutive effect of conversion of preferred shares ...................... -- 2,463 4,008
------ ------ ------
Weighted-average number of common
equivalent shares outstanding .......................................... 32,205 37,381 40,078
====== ====== ======
Net income (loss) before extraordinary item ............................ $ 4,988 $ 1,131 $ (4,496)
======== ======== =========
Net income (loss) ...................................................... $ 76 $ 1,131 $ (10,566)
Preferred stock dividends payable ...................................... -- -- (2,763)
-------- -------- ---------
Net income (loss) available to common shareholders ..................... $ 76 $ 1,131 $ (13,329)
======== ======== =========
Basic net income (loss) per share before extraordinary items ........... $ .15 $ .03 $ (.20)
======== ======== =========
Basic net income (loss) per share after extraordinary items ............ $ -- $ .03 $ (.37)
======== ======== =========
Diluted net income (loss) per share before extraordinary items ......... $ .15 $ .03 $ (.20)
======== ======== =========
Diluted net income (loss) per share after extraordinary items .......... $ -- $ .03 $ (.37)
======== ======== =========
</TABLE>
21. FINANCIAL INFORMATION BY SEGMENT:
In June 1997, the Financial Accounting Standards Board (FASB) released Statement
of Financial Accounting Standards (SFAS) 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
statements. SFAS 131 supercedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise" and is effective for financial statements for periods
beginning after December 15, 1997.
As of December 31, 1997, the Company consisted of two principal business
segments - television broadcasting and radio broadcasting. Prior to the
acquisition of River City Broadcasting, L.P. in May 1996, the Company did not
own, operate or program radio stations. As of December 31, 1997 the Company owns
or provides programming services pursuant to LMAs to 29 television stations
located in 21 geographically diverse markets in the continental United States.
The Company owns 30 radio stations in seven geographically diverse markets.
Substantially all revenues represent income from unaffiliated companies.
F-34
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
<TABLE>
<CAPTION>
TELEVISION
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
<S> <C> <C>
Total revenue ................................................... $ 338,467 $ 449,878
Station operating expenses. ..................................... 142,231 192,049
Depreciation, program amortization and stock-based compensation.. 56,420 80,799
Amortization of intangibles and other assets. ................... 55,063 57,897
Amortization of excess syndicated programming.. ................. 3,043 --
---------- ----------
Station broadcast operating income .............................. $ 81,710 $ 119,133
========== ==========
Total assets. ................................................... $1,400,521 $1,736,149
========== ==========
Capital expenditures. ........................................... $ 12,335 $ 16,613
========== ==========
</TABLE>
<TABLE>
<CAPTION>
RADIO
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
<S> <C> <C>
Total revenue ................................................... $ 40,021 $ 66,557
Station operating expenses. ..................................... 25,534 44,327
Depreciation, program amortization and stock-based compensation.. 3,827 5,167
Amortization of intangibles and other assets. ................... 3,467 9,943
Amortization of excess syndicated programming.. ................. -- --
-------- --------
Station broadcast operating income.. ............................ $ 7,193 $ 7,120
======== ========
Total assets. ................................................... $306,776 $298,085
======== ========
Capital expenditures. ........................................... $ 274 $ 2,812
======== ========
</TABLE>
F-35
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
22. UNAUDITED PRO FORMA SUMMARY RESULTS OF OPERATIONS:
The unaudited pro forma summary consolidated results of operations for the years
ended December 31, 1996 and 1997, assuming the 1996 and 1997 acquisitions had
been consummated on January 1, 1996, are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
1996 1997
---- ----
<S> <C> <C>
Revenue, net ........................................................... $ 489,270 $ 520,359
========== =========
Net loss before extraordinary item ..................................... $ (12,750) $ (3,643)
========== =========
Net Loss ............................................................... $ (12,750) $ (9,713)
========== =========
Net loss available to common shareholders .............................. $ (12,750) $ (12,476)
========== =========
Basic and diluted earnings per share before extraordinary item ......... $ (0.37) $ (0.18)
========== =========
Basic and diluted earnings per share ................................... $ (0.37) $ (0.35)
========== =========
</TABLE>
23. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:
Prior to the HYTOPS issuance in March 1997, the 1993 Notes and the 10% Notes
were guaranteed by all of the Company's subsidiaries other than Cresap
Enterprises, Inc. (the Company believes that Cresap Enterprises, Inc. is
inconsequential to its operations). In conjunction with the HYTOPS issuance,
KDSM, Inc., KDSM Licensee, Inc. and Sinclair Capital (the "Non-Guarantor
Subsidiaries") are no longer guarantors of indebtedness under the 1993 Notes or
the 10% Notes. Furthermore, the Non-Guarantor Subsidiaries are not guarantors
under the Company's 1997 Bank Credit Agreement or the indentures relating to the
9% Notes or the 8 3/4% Notes issued in July 1997 and December 1997,
respectively. The following supplemental financial information sets forth on a
condensed basis the balance sheet and statement of operations as of and for the
year ended December 31, 1997 for Sinclair Broadcast Group, Inc. (without its
subsidiaries, the "Parent"), the Non-Guarantor Subsidiaries, and the
subsidiaries (the "Guarantor Subsidiaries") that continue to guarantee
indebtedness under the 1997 Bank Credit Agreement, the 1993 Notes, the 10%
Notes, the 9% Notes and the 8 3/4% Notes. Certain reclassifications have been
made to provide for uniform disclosure of all periods presented. The Company
believes that these reclassifications are not material.
F-36
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Balance Sheet information as of December 31, 1997:
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATION
PARENT SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
------ ------------ ------------ ------- -----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ..................... $ 137,683 $ 1,633 $ 11 $ -- $ 139,327
Accounts receivable, net ...................... 6,127 125,322 2,150 -- 133,599
Other current assets .......................... 1,826 53,794 2,206 -- 57,826
---------- ---------- -------- ------------ ----------
Total current assets .......................... 145,636 180,749 4,367 -- 330,752
Other long-term assets and acquired in-
tangible broadcasting assets, net ............ 1,390,698 1,259,250 254,173 (1,200,639) 1,703,482
---------- ---------- -------- ------------ ----------
Total assets .................................. $1,536,334 $1,439,999 $258,540 $ (1,200,639) $2,034,234
========== ========== ======== ============ ==========
Accounts payable and accrued expenses.......... $ 27,507 $ 17,806 $ 426 $ -- $ 45,739
Notes payable and commercial bank fi-
nancing ...................................... 35,207 8 -- -- 35,215
Other current liabilities ..................... 1,595 1,021,272 2,790 (951,907) 73,750
---------- ---------- -------- ------------ ----------
Total current liabilities ..................... 64,309 1,039,086 3,216 (951,907) 154,704
Notes payable and commercial bank fi-
nancing ...................................... 1,022,841 93 -- -- 1,022,934
Other long-term liabilities ................... 9,916 98,120 1,575 -- 109,611
---------- ---------- -------- ------------ ----------
Total liabilities ............................. 1,097,066 1,137,299 4,791 (951,907) 1,287,249
Minority interest in consolidated subsid-
iaries ....................................... -- 3,697 -- -- 3,697
Company Obligated Mandatorily Re-
deemable Security of Subsidiary Trust
Holding Solely KDSM Senior Deben-
tures ........................................ -- -- 200,000 -- 200,000
Stockholders' equity .......................... 439,268 299,003 53,749 (248,732) 543,288
---------- ---------- -------- ------------ ----------
Total liabilities and stockholders' equity..... $1,536,334 $1,439,999 $258,540 $ (1,200,639) $2,034,234
========== ========== ======== ============ ==========
</TABLE>
F-37
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
Statement of operations information for the year ended December 31, 1997:
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATION
PARENT SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
------ ------------ ------------ ------- -----
<S> <C> <C> <C> <C> <C>
Total revenue ................................. $ -- $ 507,897 $ 8,538 $ -- $ 516,435
--------- --------- --------- --------- ----------
Program and production including barter
expenses ..................................... -- 128,810 1,482 -- 130,292
Selling, general and administrative ........... 7,501 96,124 2,459 -- 106,084
Amortization of program contract costs
and net realizable value adjustments ......... -- 64,711 1,579 -- 66,290
Amortization of acquired intangible
broadcasting assets, non-compete and
consulting agreements and other assets 4,916 61,336 1,588 -- 67,840
Other depreciation and amortization ........... 713 18,586 377 -- 19,676
--------- --------- --------- --------- ----------
Broadcast operating income .................... (13,130) 138,330 1,053 -- 126,253
Interest and amortization of debt dis-
count expense ................................ (97,625) (98,392) (18,600) 97,624 (116,993)
Interest and other income (expense) ........... 96,297 (17,271) 20,826 (97,624) 2,228
--------- --------- --------- --------- ----------
Income (loss) before provision (benefit)
for income taxes and extraordinary
item ......................................... (14,458) 22,667 3,279 -- 11,488
Provision (benefit) for income taxes .......... 14,740 (140) 1,384 -- 15,984
--------- --------- --------- --------- ----------
Net income before extraordinary item .......... (29,198) 22,807 1,895 -- (4,496)
Extraordinary item net of income tax
benefit ...................................... (5,239) (831) -- -- (6,070)
--------- --------- --------- --------- ----------
Net income (loss) ............................. $ (34,437) $ 21,976 $ 1,895 $ -- $ (10,566)
========= ========= ========= ========= ==========
</TABLE>
24. SUBSEQUENT EVENTS:
Heritage Acquisition. As of the date hereof and pursuant to the Heritage
Acquisition, (dispositions described below) the Company has acquired or is
providing programming services to three television stations in two separate
markets and 13 radio stations in four separate markets. The Company has made
cash payments totaling $544 million in connection with the closing of these
stations during the first quarter of 1998. The Company also has the right to
acquire three radio stations in the New Orleans, Louisiana market. Acquisition
of the Heritage radio stations in the New Orleans market is subject to approval
by the FCC and termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). The Company has reached an agreement to divest certain radio stations it
owns or has the right to acquire in the New Orleans market and expects to
receive FCC approval and clearance under the HSR Act in connection with such
disposition.
The Company has entered into agreements to sell to STC Broadcasting of Vermont,
Inc. ("STC") two television stations and the Non-License Assets and rights to
program a third television station, all of which were acquired in the Heritage
Acquisition. The three television stations are in the Burlington, Vermont and
Plattsburgh, New York market and will be sold for aggregate consideration of
approximately $72 million. The Company expects to close the sale to STC during
the second quarter of 1998 subject to, among other conditions, approval by the
FCC and termination of the applicable waiting period under the HSR Act.
F-38
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED)
The Company has also agreed to sell to Entertainment Communications, Inc.
("Entercom") seven radio stations it acquired in the Heritage Acquisition. The
seven stations are located in the Portland, Oregon and Rochester, New York
markets and will be sold for aggregate consideration of approximately $126.5
million. Subject to approval by the FCC and termination of the applicable
waiting period under the HSR Act, the Company anticipates it will close on the
sale of the Portland and Rochester radio stations to Entercom during the second
quarter of 1998. Entercom is operating these stations pursuant to an LMA pending
closing of the sale.
Montecito Acquisition. In February 1998, the Company entered into an agreement
to acquire all of the capital stock of Montecito Broadcasting Corporation
("Montecito") for approximately $33 million (the "Montecito Acquisition").
Montecito owns all of the issued and outstanding stock of Channel 33, Inc. which
owns and operates KFBT-TV in Las Vegas, Nevada. Currently, the Company is a
Guarantor of Montecito Indebtedness of approximately $33 million. The Company
cannot acquire Montecito unless and until FCC rules permit Sinclair to own the
broadcast license for more than one station in the Las Vegas market, or unless
Sinclair no longer owns the broadcast license for KUPN-TV in Las Vegas. The
Company will operate KFBT-TV through an LMA upon expiration of the applicable
HSR Act waiting period. The Company expects to be able to enter into the LMA in
the second quarter of 1998.
Sullivan Acquisition. In February 1998, the Company entered into an agreement to
acquire all of the capital stock of Sullivan Broadcast Holdings, Inc. ("Sullivan
Holdings") and Sullivan Broadcasting Company II, Inc. ("Sullivan II" and,
together with Sullivan Holdings, "Sullivan") for a purchase price expected to be
approximately $950 million to $1 billion, less the amount of certain outstanding
indebtedness of Sullivan Holdings assumed by the Company (the "Sullivan
Acquisition"). Upon the closing of all aspects of the Sullivan Acquisition, the
Company will own or provide programming services to 13 additional television
stations in 11 separate markets. The final purchase price will be based on a
multiple of Sullivan's projected 1998 cash flow calculated at the initial
closing of the Sullivan Acquisition. As part of the total consideration, the
Company, at its option, may issue to the sellers up to $100 million of Class A
Common Stock based on an average closing price of the Class A Common Stock.
Among other conditions, the Sullivan Acquisition is subject to approval by the
FCC and termination of the applicable waiting period under the HSR Act. An
initial closing, at which the Company will acquire control of operating assets
(excluding the License Assets) of, and acquire the right to program, the 13
television stations, is expected to occur in the second quarter of 1998. A
second closing, at which the Company will acquire control of the License Assets
of six of the stations, is expected to occur in the third quarter of 1998.
F-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Heritage
Media Services, Inc. -- Broadcasting Segment (the Company) as of December 31,
1997, and Heritage Media Services, Inc. - Broadcasting Segment (the Predecessor)
as of December 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows of the Company for the four months ended
December 31, 1997, and of the Predecessor for the eight months ended August 31,
1997, and the year ended December 31, 1996. These financial statements are the
responsibility of the Company's and the Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997, and the Predecessor as of December 31, 1996, and the
results of operations and cash flows of the Company for the four months ended
December 31, 1997, and of the Predecessor for the eight months ended August 31,
1997, and for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
February 17, 1998
F-40
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ...................................................................... $ 2,520 $ 2,151
Accounts receivable, net of allowance for doubtful accounts of $1,450 and
$1,348, respectively .................................................... 20,869 20,036
Current portion of program contract costs ................................. 1,704 1,006
Prepaid expenses and other current assets ................................. 998 138
Deferred barter costs ..................................................... 880 1,911
Deferred tax asset ........................................................ 279 215
-------- ---------
Total current assets .................................................... 27,250 25,457
PROGRAM CONTRACT COSTS, less current portion .............................. 1,323 1,498
PROPERTY, PLANT AND EQUIPMENT, net ........................................ 45,840 30,005
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net .............................. 564,157 163,626
OTHER ASSETS .............................................................. 19 821
-------- ---------
Total Assets ............................................................ $638,589 $ 221,407
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ..................................... $ 5,876 $ 5,399
Deferred revenue .......................................................... 587 428
Deferred barter revenue ................................................... 676 1,746
Current portion of program contracts payable .............................. 2,194 2,079
-------- ---------
Total current liabilities ............................................... 9,333 9,652
PROGRAM CONTRACTS PAYABLE, less current portion ............................ 857 1,165
DUE TO AFFILIATE ........................................................... -- 178,393
DEFERRED TAX LIABILITY ..................................................... 609 563
OTHER LONG-TERM LIABILITIES ................................................ 910 152
-------- ---------
Total Liabilities ....................................................... 11,709 189,925
-------- ---------
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 3,576,000 shares authorized, and 2,591,586
shares issued and outstanding ........................................... 2,592 2,592
Additional paid-in capital ................................................ 630,333 66,174
Accumulated deficit ....................................................... (6,045) (37,284)
-------- ---------
Total Stockholders' Equity .............................................. 626,880 31,482
-------- ---------
Total Liabilities and Stockholders' Equity .............................. $638,589 $ 221,407
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-41
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------- ---------------------------
FOUR MONTHS EIGHT MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET REVENUES:
Station broadcasting revenues, net of agency commissions of
$7,303, $10,820 and $16,727,respectively....................... $ 36,906 $ 62,180 $ 95,302
Revenues realized from station barter arrangements .............. 2,029 3,610 4,292
-------- -------- ---------
Total net revenues ............................................ 38,935 65,790 99,594
-------- -------- ---------
OPERATING EXPENSES:
Programming and production ...................................... 13,437 22,515 20,089
Selling, general and administrative ............................. 8,569 15,477 31,916
Expenses realized from station barter arrangements .............. 1,912 3,035 3,478
Amortization of program contract costs and net realizable value
adjustments ................................................... 870 1,879 3,165
Depreciation of property and equipment .......................... 2,286 3,790 5,472
Amortization of acquired intangible broadcasting assets and
other assets .................................................. 12,867 7,127 8,460
-------- -------- ---------
Total operating expenses ...................................... 39,941 53,823 72,580
-------- -------- ---------
Broadcast operating income (loss) ............................. (1,006) 11,967 27,014
-------- -------- ---------
OTHER INCOME (EXPENSE):
Interest expense ................................................ (2,026) (6,499) (17,949)
Gain on sale of assets .......................................... -- 9,401 6,031
Other expense, net .............................................. (588) (177) (203)
-------- -------- ---------
Income (loss) before provision for income taxes ............... (3,620) 14,692 14,893
PROVISION FOR INCOME TAXES ....................................... (2,425) (7,605) (7,853)
-------- -------- ---------
Net income (loss) ............................................. $ (6,045) $ 7,087 $ 7,040
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-42
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
PREDECESSOR:
BALANCE, December 31, 1995 .................. 2,592 $ 2,592 $ 14,368 $ (13,804) $ 3,156
HMC capital contributions ................. -- -- 43,024 -- 43,024
HMC noncash capital contributions ......... -- -- 8,782 -- 8,782
Dividends to HMC .......................... -- -- -- (30,520) (30,520)
Net income ................................ -- -- -- 7,040 7,040
----- ------- -------- --------- ---------
BALANCE, December 31, 1996 .................. 2,592 2,592 66,174 (37,284) 31,482
HMC noncash capital contributions ......... -- -- 7,109 -- 7,109
Net income ................................ -- -- -- 7,087 7,087
----- ------- -------- --------- ---------
BALANCE, August 31, 1997 .................... 2,592 $ 2,592 $ 73,283 $ (30,197) $ 45,678
===== ======= ======== ========= =========
COMPANY:
Impact of acquisition by News Corporation
and related push down accounting ......... 2,592 $ 2,592 $627,408 -- $ 630,000
News Corporation noncash capital contribu-
tions .................................... -- -- 2,925 -- 2,925
Net loss .................................. -- -- -- (6,045) (6,045)
----- ------- -------- --------- ---------
BALANCE, December 31, 1997 .................. 2,592 $ 2,592 $630,333 $ (6,045) $ 626,880
===== ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-43
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------- ---------------------------
FOUR MONTHS EIGHT MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ (6,045) $ 7,087 $ 7,040
Adjustments to reconcile net income (loss) to net cash flows from
operating activities-
Depreciation of property and equipment ............................ 2,286 3,790 5,472
Amortization-
Acquired intangible broadcasting assets and other assets ......... 12,867 7,127 8,460
Program contract costs and net realizable value adjustments . 870 1,879 3,165
Gain on sale of assets ............................................ -- (9,401) (6,031)
Amortization of deferred compensation ............................. -- -- 135
Deferred tax provision (benefit) .................................. 40 (57) (101)
Changes in assets and liabilities, net of effects of acquisitions-
(Increase) decrease in accounts receivable, net ................... (1,329) 496 (1,681)
Net effect of change in deferred barter revenue and deferred
barter costs ..................................................... 2,471 (2,507) (53)
Increase in other assets .......................................... (108) (1,309) (147)
Decrease (increase) in prepaid expenses and other current as-
sets ............................................................. 401 (1,261) 810
(Decrease) increase in accounts payable and accrued expenses . (1,036) 1,705 (3,486)
Increase in deferred revenue ...................................... 93 66 151
Increase (decrease) in other liabilities .......................... 498 260 (44)
Payments on program contracts payable ............................... (941) (1,882) (2,565)
-------- --------- ---------
Net cash flows from operating activities ....................... 10,067 5,993 11,125
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ............................... (317) (4,118) (6,938)
Proceeds from sale of station ....................................... -- -- 13,759
Receipts (payments) from exchange of stations ....................... -- 11,240 (9,384)
-------- --------- ---------
Net cash flows from investing activities ....................... (317) 7,122 (2,563)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to Parent ................................................. -- -- (30,520)
Decrease in due to affiliates ....................................... (9,293) (13,203) (20,714)
Capital contributions made by Parent ................................ -- -- 43,024
-------- --------- ---------
Net cash flows from financing activities ....................... (9,293) (13,203) (8,210)
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH ...................................... 457 (88) 352
CASH, beginning of period ............................................ 2,063 2,151 1,799
-------- --------- ---------
CASH, end of period .................................................. $ 2,520 $ 2,063 $ 2,151
======== ========= =========
SUPPLEMENTAL DISCLOSURE:
Program rights acquired ............................................. $ 2,152 $ 693 $ 3,674
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-44
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Heritage Media Services, Inc. ("HMSI") operates in two segments - Marketing
Services and Broadcasting. The parent company of HMSI is Heritage Media
Corporation ("HMC"). The accompanying consolidated financial statements include
the accounts of the television and radio operations, which are collectively
referred to hereafter as "the Company, the Companies or the Broadcasting
Segment." The Broadcasting Segment was wholly-owned and operated by HMSI, which
was owned by HMC through August 31, 1997 (the Predecessor). In July 1997, HMC
entered into an asset sale agreement with Sinclair Broadcast Group, Inc. ("SBG")
whereby SBG would acquire 100% of the Broadcast Segment for $630 million in
cash. The sale to SBG is expected to close during the first quarter of 1998.
Effective September 1, 1997, The News Corporation Limited ("News Corporation")
acquired all of the outstanding stock of HMC. Due to certain regulatory
requirements, News Corporation has established a trust to hold all of the
license and nonlicense assets of the Broadcasting Segment until the sale to SBG
has closed. The acquisition of the Broadcasting Segment was accounted for
utilizing push down accounting whereby the purchase price was allocated to
property and programming assets and acquired intangible broadcasting assets of
$51.4 million and $578.6 million, based upon an independent appraisal.
As a result of the News Corporation acquisition, the accompanying December 31,
1997, balance sheet and related statements of operations and cash flows for the
four-month period ended December 31, 1997, are presented on a new basis of
accounting. The accompanying financial statements for the eight-month period
ended August 31, 1997, and for the year ended December 31, 1996, are presented
as "Predecessor" financial statements.
The Company owns and operates television and radio stations throughout the
United States. Also included in the accompanying consolidated financial
statements are the results of operations of WFGX-TV Channel 35 in Ft. Walton
Beach, Florida, and WFFF in Burlington, Vermont, pursuant to a local marketing
agreement (LMA).
Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In the opinion of management, credit risk with respect to trade receivables is
limited due to the large number of diversified customers and the geographic
diversification of the Company's customer base. The Company performs ongoing
credit evaluations of its customers and believes that adequate allowances for
any uncollectable trade receivables are maintained. At December 31, 1997 and
1996, no receivable from any customer exceeded 5% of stockholders' equity, and
no customer accounted for more than 10% of net revenues in 1997 and 1996.
Acquired Intangible Broadcasting Assets
Acquired intangible broadcasting assets are being amortized over periods of four
to 40 years. These amounts result from the acquisition of certain television and
radio station license and nonlicense assets. The Company monitors the individual
financial performance of each of the stations and continually evaluates the
realizability of intangible and tangible assets and the existence of any
impairment to its recoverability based on the projected undiscounted cash flows
of the respective stations.
F-45
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
Intangible assets consist of the following as of December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
AMORTIZATION COMPANY PREDECESSOR
PERIOD 1997 1996
------ ---- ----
<S> <C> <C> <C>
Goodwill ............................... 40 years $ 298,466 $ 63,979
FCC licenses ........................... 15 -- 25 years 275,391 147,040
Other .................................. 4 - 25 years 912 1,319
--------- ---------
574,769 212,338
Less: Accumulated amortization ......... (10,612) (48,712)
--------- ---------
$ 564,157 $ 163,626
========= =========
</TABLE>
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded on the straight-line basis over the estimated useful
lives of the assets. Property and equipment at December 31, 1997 and 1996, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
USEFUL LIFE 1997 1996
----------- ---- ----
<S> <C> <C> <C>
Land ................................... -- $ 3,101 $ 2,685
Broadcasting equipment ................. 5-25 years 35,548 41,268
Buildings and improvements ............. 12-30 years 10,417 7,369
Other equipment ........................ 4-8 years 2,350 9,904
-------- ---------
51,416 61,226
Less: Accumulated depreciation ......... (5,576) (31,221)
-------- ---------
$ 45,840 $ 30,005
======== =========
</TABLE>
Programming
The Company has agreements with distributors for the rights to television
programming over contract periods which generally run from one to seven years.
Contract payments are made in installments over terms that are generally shorter
than the contract period. Each contract is recorded as an asset and a liability
when the license period begins and the program is available for its first
showing. The portion of the program contracts payable within one year is
reflected as a current liability in the accompanying consolidated balance
sheets.
The rights to program materials are reflected in the accompanying consolidated
balance sheets at the lower of unamortized cost or estimated net realizable
value. Estimated net realizable values are based upon management's expectation
of future advertising revenues, net of sales commissions to be generated by the
program material. Amortization of program contract costs is charged to
operations by the straight-line method over the contract period or based on
usage, whichever yields the greater amortization for each program. Program
contract costs estimated by management to be amortized in the succeeding year
are classified as current assets. Payments of program contract liabilities are
typically paid on a scheduled basis and are not affected by adjustments for
amortization or estimated net realizable value.
F-46
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
Barter Transactions
Certain program contracts provide for the exchange of advertising air time in
lieu of cash payments for the rights to such programming. These contracts are
recorded as the programs are aired at the estimated fair value of the
advertising air time given in exchange for the program rights. Network
programming is excluded from these calculations.
The Company broadcasts certain customers' advertising in exchange for equipment,
merchandise and services. The estimated fair value of the equipment, merchandise
or services received is recorded as deferred barter costs and the corresponding
obligation to broadcast advertising is recorded as deferred barter revenues. The
deferred barter costs are expensed or capitalized as they are used, consumed or
received. Deferred barter revenues are recognized as the related advertising is
aired.
Other Assets
Debt issuance costs are amortized to interest expense using the effective
interest method over the period of the related debt agreement.
Revenues
Broadcast revenues are derived primarily from local, regional and national
advertising and network compensation. Advertising revenues are recognized upon
the airing of commercials, while network revenues are recognized monthly as
earned. Revenues are presented net of advertising agency and national sales
representative commissions.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" on January 1, 1996. These
statements require that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Initial adoption of these statements,
as of January 1, 1996, did not have a material impact on the Company's financial
position or results of operations.
Local Marketing Agreements
The Company generally enters into LMA's and similar arrangements with stations
located in markets in which the Company already owns and operates a station, and
in connection with acquisitions pending regulatory approval of transfer of
license assets. Under the terms of these agreements, the Company makes specified
periodic payments to the owner-operator in exchange for the grant to the Company
of the right to program and sell advertising on a specified portion of the
station's inventory of broadcast time. Nevertheless, as the holder of the
Federal Communication Commission (FCC) license, the owner-operator retains full
control and responsibility for the operation of the station, including control
over all programming broadcast on the station.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation.
F-47
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
2. ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31, 1997 and 1996, (in
thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
1997 1996
---- ----
<S> <C> <C>
Commissions ........................... $3,429 $1,449
Payroll and employee benefits ......... 702 960
Other ................................. 1,740 2,842
------ ------
$5,871 $5,251
====== ======
</TABLE>
3. DUE TO AFFILIATE:
The Predecessor had an arrangement with HMSI whereby HMSI would provide certain
management and other services to the Predecessor. The services provided included
consultation and direct management assistance with respect to operations and
strategic planning. The Predecessor was allocated approximately $4.7 million and
$2.0 million of corporate overhead expenses for these services for the eight
months ended August 31, 1997, and for the year ended December 31, 1996,
respectively.
In order to fund acquisitions and provide operating funds, HMSI entered into a
Bank Credit Agreement. The debt was used to finance acquisitions and fund daily
operations of the Predecessor and was recorded by the Predecessor as due to
affiliate in the accompanying consolidated balance sheets as of December 31,
1996. HMSI allocated interest at a rate of approximately 10.0%, which
approximated the average rate paid on the borrowings. Associated with the HMSI
debt, the Predecessor was allocated approximately $0.6 million of deferred
financing costs in 1996. The deferred financing costs were fully amortized in
conjunction with the acquisition by News Corporation on September 1, 1997.
4. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998 ................................................... $ 2,194
1999 ................................................... 666
2000 ................................................... 175
2001 ................................................... 16
--------
3,051
Less: Current portion .................................. (2,194)
--------
Long-term portion of program contracts payable ......... $ 857
========
</TABLE>
The Company has estimated the fair value of its program contract payables and
noncancelable commitments at approximately $2.5 million and $0.4 million,
respectively, at December 31, 1997 and $2.6 million and $0.4 million,
respectively, at December 31, 1996, based on future cash flows discounted at the
Company's current borrowing rate.
Broadcast Program Rights
The Company has entered into contracts for broadcast program rights that expire
at various dates during the next four years. Contracts totaling approximately
$0.5 million relate to programs which are not currently available for use and,
therefore, are not reflected as assets or liabilities in the accompanying
consolidated balance sheets at December 31, 1997 and 1996.
F-48
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
5. INCOME TAXES:
The Parent files a consolidated federal tax return and separate state tax
returns for each of its subsidiaries in certain filing jurisdictions. It is the
Parent's policy to pay the federal income tax provision of the Company. The
accompanying financial statements have been prepared in accordance with the
separate return method of FASB 109, whereby the allocation of the federal tax
provision due to the Parent is based on what the Company's current and deferred
federal tax provision would have been had the Company filed a federal income tax
return outside of its consolidated group. The Company is not required to
reimburse the Parent for its federal tax provision. Accordingly, this amount is
recorded as a capital contribution in the accompanying consolidated financial
statements. No federal deferred tax assets or liabilities are recorded because
those amounts are considered currently paid to or received by the Parent. The
federal and state tax provision was calculated based on pretax income, plus or
minus permanent book-to-tax differences, times the statutory tax rate of 40%.
The Company had no alternative minimum tax credit carryforwards as of December
31, 1997 and 1996.
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------- ---------------------------------------
FOUR MONTHS ENDED EIGHT MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 AUGUST 31, 1997 DECEMBER 31, 1996
------------------- -------------------- ------------------
<S> <C> <C> <C>
Current:
Federal ............................ $2,241 $7,202 $7,477
State .............................. 144 460 477
------ ------ ------
2,385 7,662 7,954
------ ------ ------
Deferred:
Federal ............................ -- -- --
State .............................. 40 (57) (101)
------ ------ ------
40 (57) (101)
------ ------ ------
Provision for income taxes ......... $2,425 $7,605 $7,853
====== ====== ======
</TABLE>
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------- ---------------------------------------
FOUR MONTHS ENDED EIGHT MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 AUGUST 31, 1997 DECEMBER 31, 1996
------------------- -------------------- ------------------
<S> <C> <C> <C>
Statutory federal income taxes ................. $ (1,231) $4,995 $5,064
Adjustments:
State income taxes, net of federal effect..... (143) 582 590
Non-deductible goodwill amortization ......... 3,789 1,725 1,659
Non-deductible expense items ................. -- 20 38
Other ........................................ 10 283 502
-------- ------ ------
Provision for income taxes ..................... $ 2,425 $7,605 $7,853
======== ====== ======
</TABLE>
The following table summarizes the state tax effects of the significant types of
temporary differences between financial reporting basis and tax basis which were
generated during the years ended December 31, 1997 and 1996 (in thousands):
F-49
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
1997 1996
---- ----
<S> <C> <C>
Deferred Tax Assets:
Bad debt reserve .......... $ 87 $ 80
Accruals .................. 172 135
Other intangibles ......... 20 --
---- ----
$279 $215
==== ====
Deferred Tax Liability:
Depreciation .............. $609 $563
==== ====
</TABLE>
6. EMPLOYEE BENEFIT PLAN:
Company employees were covered by HMC's Retirement Savings Plan (the Plan)
through December 31, 1997, whereby participants contributed portions of their
annual compensation to the Plan and certain contributions were made at the
discretion of the Company based on criteria set forth in the Plan Agreement.
Participants are generally 100% vested in Company contributions after five years
of employment with the Company. Company expenses under the Plan were not
material for the year ended December 31, 1997.
7. RELATED PARTY TRANSACTIONS:
The Company received certain advances from HMC during the eight months ended
August 31, 1997, which were evidenced by a subordination agreement. All advances
from HMC were repaid on August 31, 1997.
8. CONTINGENCIES AND OTHER COMMITMENTS:
Leases and Contracts
The Company and its subsidiaries lease certain real property and transportation
and other equipment under noncancelable operating leases expiring at various
dates through 2010. The Company also has long-term contractual obligations with
two major broadcast ratings firms that provide monthly ratings services and
guaranteed store contracts. Rent expense under these leases for the four months
ended December 31, 1997, the eight months ended August 31, 1997, and the year
ended December 31, 1996, was approximately $.6 million, $.9 million and $1.6
million, respectively.
Future minimum payments under the leases are as follows (in thousands):
<TABLE>
<S> <C>
1998 ........................ $ 997
1999 ........................ 950
2000 ........................ 921
2001 ........................ 901
2002 ........................ 920
2003 and thereafter ......... 2,428
------
$7,117
======
</TABLE>
Litigation
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business which are generally incidental to its business.
Management of the Company does not believe the resolution of such matters will
have a significant effect on its liquidity, financial position or results of
operations.
F-50
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
9. ACQUISITIONS AND EXCHANGES:
On January 7, 1997, the Company acquired all of the license and nonlicense
assets of radio station WHRR (FM), serving the Rochester, New York, market for
approximately $2.0 million. The acquisition was accounted for under the purchase
method of accounting whereby the purchase price was allocated to property and
programming assets and acquired intangible broadcasting assets of $.1 million
and $1.9 million, respectively.
On January 20, 1997, the Company entered into a like-kind exchange with Journal
Broadcast Group ("JBG") whereby the Company transferred radio stations WMYU (FM)
and WWST (FM) in exchange for radio station KQRC (FM). The assets exchanged were
used in the same line of business, no monetary consideration was received and
the fair value of the assets exchanged were greater than their carrying cost
and, as such, no gain was recognized in the accompanying statement of
operations.
On January 24, 1997, the Company acquired all of the license and nonlicense
assets of radio stations KXTR (FM) and KCAZ (FM), serving the Kansas City,
Missouri, market for approximately $10.5 million. The acquisition was accounted
for under the purchase method of accounting whereby the purchase price was
allocated to property and programming assets and acquired intangible
broadcasting assets of $.9 million and $9.6 million, respectively.
On February 17, 1997, the Company entered into a like-kind exchange with
Susquehanna Radio Corporation ("SRC") whereby the Company transferred radio
station WVAE (FM) to SRC and received radio stations WGH (AM), WGH (FM) and WVCL
(FM), along with $5.0 million in cash. In connection with the exchange, a gain
of approximately $4.6 million was recorded in the accompanying statement of
operations.
On April 11, 1997, the Company entered into a like-kind exchange with American
Radio System Corporation ("ARSC") whereby the Company transferred radio stations
KCIN (FM) and KRPM (AM) to ARSC and received radio stations WRNO (FM), WEZB (FM)
and WBYU (AM), along with approximately $6.2 million in cash. In connection with
the exchange, a gain of approximately $4.8 million was recorded in the
accompanying statement of operations.
10. FINANCIAL INFORMATION BY SEGMENT:
In June 1997, the Financial Accounting Standards Board (FASB) released SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial statements. SFAS 131 supercedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise" and is effective for
financial statements for periods beginning after December 15, 1997.
The Company operates in two principal business segments -- television
broadcasting and radio broadcasting. At December 31, 1997 and 1996, the
television segment included five television stations for which the Company is
the licensee and two stations which are operated under a local marketing
agreement. These seven stations operate in seven different markets in the
continental United States.
The radio group currently operates 23 radio stations in seven of the top 50
largest markets by population. The holdings include at least three stations (and
two FM stations) in every market.
F-51
<PAGE>
HERITAGE MEDIA SERVICES, INC. -- BROADCASTING SEGMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------- -----------------------------
FOUR MONTHS EIGHT MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
TELEVISION
Total revenues .................................... $ 16,213 $ 28,360 $ 46,316
Station operating expenses ........................ 8,265 14,862 19,365
Depreciation and program amortization ............. 2,101 4,402 6,707
Amortization of goodwill and other assets ......... 5,769 4,136 4,910
-------- -------- --------
Station broadcast operating income ................ $ 78 $ 4,960 $ 15,334
======== ======== ========
Total assets ...................................... $313,235 $134,071 $ 83,479
======== ======== ========
Capital expenditures .............................. $ -- $ 3,265 $ 5,791
======== ======== ========
RADIO
Total revenues .................................... $ 22,722 $ 37,430 $ 53,278
Station operating expenses ........................ 15,653 26,165 36,118
Depreciation ...................................... 1,055 1,267 1,930
Amortization of goodwill and other assets ......... 7,098 2,991 3,550
-------- -------- --------
Station broadcast operating income ................ $ (1,084) $ 7,007 $ 11,680
======== ======== ========
Total assets ...................................... $329,169 $ 93,201 $137,928
======== ======== ========
Capital expenditures .............................. $ 317 $ 853 $ 1,147
======== ======== ========
CONSOLIDATED
Total revenues .................................... $ 38,935 $ 65,790 $ 99,594
Station operating expenses ........................ 23,918 41,027 55,483
Depreciation and program amortization ............. 3,156 5,669 8,637
Amortization of goodwill and other assets ......... 12,867 7,127 8,460
-------- -------- --------
Station broadcast operating income ................ $ (1,006) $ 11,967 $ 27,014
======== ======== ========
Total assets ...................................... $642,404 $227,272 $221,407
======== ======== ========
Capital expenditures .............................. $ 317 $ 4,118 $ 6,938
======== ======== ========
</TABLE>
11. SUBSEQUENT EVENTS:
In January 1998, the Company closed on the sale to SBG of television stations
serving the Charleston/ Huntington market, the Mobile/Pensacola market and the
Oklahoma City market for an aggregate purchase price of $215 million.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Managers and Members
Max Media Properties LLC:
We have audited the accompanying consolidated balance sheets of Max Media
Properties LLC and its limited partnerships as of December 31, 1997 and 1996 and
the related consolidated statements of operations, members' capital and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 3 to the consolidated financial statements, on
December 2, 1997 the Company and its members entered into agreements that will
result in the sale of all of the membership interests of the Company to an
unrelated party.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Max Media
Properties LLC and its limited partnerships as of December 31, 1997 and 1996 and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
February 18, 1998
F-53
<PAGE>
MAX MEDIA PROPERTIES LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS (NOTE 9)
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 1,789,194 $ 1,175,542
Restricted cash (note 4) ....................................... 512,856 --
Accounts receivable, net (note 6) .............................. 11,484,849 9,655,084
Program contract rights, current portion ....................... 2,325,431 1,960,224
Deferred charges, primarily barter agreements (note 5) ......... 640,145 679,776
Prepaid expenses and other current assets ...................... 851,502 672,926
------------- -------------
Total current assets ......................................... 17,603,977 14,143,552
Property and equipment, net (note 7) ............................ 25,709,048 18,412,542
Program contract rights, long-term portion ...................... 2,182,349 2,506,632
Intangible assets, net (note 8) ................................. 82,137,183 63,606,370
Due from related party (note 13) ................................ 1,800,370 1,531,530
Notes receivable (note 14) ...................................... 457,445 107,168
Deposits on pending acquisitions ................................ -- 2,383,056
Other assets .................................................... 92,667 113,103
------------- -------------
$ 129,983,039 $ 102,803,953
============= =============
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt (note 9) ..................... $ 4,751,520 $ 3,064,076
Program contract rights payable, current portion (note 14) 2,430,572 2,211,002
Accounts payable ............................................... 717,748 1,406,923
Accrued compensation and benefits (note 11) .................... 2,043,859 881,924
Other accrued expenses ......................................... 979,409 1,112,412
Deferred revenue, primarily barter agreements (note 5) ......... 1,026,238 866,365
------------- -------------
Total current liabilities .................................... 11,949,346 9,542,702
Long-term debt, excluding current portion (note 9) .............. 68,927,774 56,172,774
Program contract rights payable, long-term portion (note 14) 1,736,102 2,042,981
------------- -------------
Total liabilities ............................................ 82,613,222 67,758,457
Members' capital (notes 2, 9 and 10):
Class A -- 3,069,000 member units at December 31, 1997
and 1996 ..................................................... 21,346,430 21,346,430
Class B -- 5,140,500 and 6,831,000 member units at De-
cember 31, 1997 and 1996, respectively ....................... 6,738,406 19,211,365
Class C -- 3,421,931 and 100,000 member units at Decem-
ber 31, 1997 and 1996, respectively .......................... 21,893,829 695,550
Accumulated deficit ............................................ (2,608,848) (6,207,849)
------------- -------------
Total members' capital ....................................... 47,369,817 35,045,496
------------- -------------
$ 129,983,039 $ 102,803,953
============= =============
Commitments and contingencies (notes 9 and 14)
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<PAGE>
MAX MEDIA PROPERTIES LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Gross revenues .................................................... $ 64,281,296 $ 50,298,698
Less agency commissions ........................................... 7,567,894 6,042,708
------------ -------------
Net revenues ................................................... 56,713,402 44,255,990
------------ -------------
Operating expenses:
General and administrative ....................................... 11,812,056 9,393,933
Sales ............................................................ 11,443,544 8,040,303
News ............................................................. 2,845,499 1,922,426
Programming and production:
Program amortization ........................................... 5,545,904 4,881,056
Operations ..................................................... 4,768,127 4,727,219
Promotions ....................................................... 3,066,572 2,806,561
Engineering ...................................................... 3,223,911 2,255,699
Depreciation and amortization of property and equipment .......... 4,713,124 3,120,049
Amortization of intangible assets ................................ 8,028,187 6,696,048
------------ -------------
Total operating expenses ....................................... 55,446,924 43,843,294
------------ -------------
Income from operations ............................................ 1,266,478 412,696
------------ -------------
Other income (expenses):
Interest expense ................................................. (6,078,296) (4,139,088)
Gain on station sales, net (note 4) .............................. 8,452,216 --
Other income, net ................................................ 358,777 95,782
------------ -------------
Total other income (expenses), net ............................. 2,732,697 (4,043,306)
------------ -------------
Income (loss) .................................................... $ 3,999,175 $ (3,630,610)
============ =============
Pro forma income data:
Income (loss) .................................................... $ 3,999,175 $ (3,630,610)
Pro forma income tax expense (benefit) (unaudited) (note 12) . 1,559,678 (1,415,938)
------------ -------------
Pro forma net income (loss) (unaudited) .......................... $ 2,439,497 $ (2,214,672)
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE>
MAX MEDIA PROPERTIES LLC
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
MEMBERSHIP INTERESTS
------------------------------------------------ ACCUMULATED
CLASS A CLASS B CLASS C DEFICIT
------- ------- ------- -------
<S> <C> <C> <C> <C>
Membership interests issued at formation
(note 2) .................................. $ 21,346,430 $ 19,211,365 $ 695,550 $ --
Member distributions ....................... -- -- -- (2,577,239)
Loss ....................................... -- -- -- (3,630,610)
------------ -------------- ------------ -------------
Balances at December 31, 1996 .............. $ 21,346,430 19,211,365 695,550 (6,207,849)
------------ -------------- ------------ -------------
Cancellation of Class B member units (note
10) ....................................... -- (12,472,959) -- --
Issuance of Class C member units, net of
transactions costs of $1,721 (note 10)..... -- -- 21,198,279 --
Member distributions ....................... -- -- -- (400,174)
Income ..................................... -- -- -- 3,999,175
------------ -------------- ------------ -------------
Balances at December 31, 1997 .............. $ 21,346,430 $ 6,738,406 $ 21,893,829 $ (2,608,848)
============ ============== ============ =============
<CAPTION>
TOTAL MEMBERSHIP UNITS
MEMBERS' ------------------------------
CAPITAL CLASS A CLASS B CLASS C TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Membership interests issued at formation
(note 2) .................................. $ 41,253,345 $ 3,069,000 6,831,000 100,000 10,000,000
Member distributions ....................... (2,577,239) -- -- -- --
Loss ....................................... (3,630,610) -- -- -- --
------------- ----------- --------- ------- ----------
Balances at December 31, 1996 .............. 35,045,496 3,069,000 6,831,000 100,000 10,000,000
------------- ----------- --------- ------- ----------
Cancellation of Class B member units (note
10) ....................................... (12,472,959) -- (1,690,500) -- (1,690,500)
Issuance of Class C member units, net of
transactions costs of $1,721 (note 10)..... 21,198,279 -- -- 3,321,931 3,321,931
Member distributions ....................... (400,174) -- -- -- --
Income ..................................... 3,999,175 -- -- -- --
------------- ----------- ---------- --------- ----------
Balances at December 31, 1997 .............. $ 47,369,817 3,069,000 5,140,500 3,421,931 11,631,431
============= =========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-56
<PAGE>
MAX MEDIA PROPERTIES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Income (loss) ........................................................................... $ 3,999,175 $ (3,630,610)
Reconciliation of income (loss) to net cash provided by operating activities:
Depreciation and amortization of property and equipment ................................ 4,713,124 3,120,049
Amortization of intangible assets ...................................................... 8,028,187 6,696,048
Amortization of program contract rights ................................................ 2,475,600 2,683,563
Barter program amortization ............................................................ 3,070,304 2,197,493
Barter program revenue ................................................................. (3,070,304) (2,197,493)
Gain on station sales, net ............................................................. (8,452,216) --
Loss on disposal of equipment .......................................................... 62,396 32,762
Changes in assets and liabilities, net of effect of station acquisitions:
Accounts receivable, net .............................................................. (1,829,765) (788,868)
Deferred charges, primarily barter agreements ......................................... (14,896) (257,504)
Prepaid expenses and other current assets ............................................. (178,576) (80,949)
Accounts payable ...................................................................... (689,175) 651,095
Accrued compensation and benefits ..................................................... 1,161,935 210,192
Other accrued expenses ................................................................ (133,003) (94,621)
Deferred revenue, primarily barter agreements ......................................... 259,009 236,416
------------- -------------
Net cash provided by operating activities ........................................... 9,401,795 8,777,573
------------- -------------
Cash flows from investing activities:
Acquisition of stations, net of cash deposits ........................................... (34,309,611) (10,400,000)
Deposits on pending acquisitions ........................................................ -- (2,383,056)
Payments for program contract rights .................................................... (2,376,966) (1,944,977)
Purchases of property and equipment ..................................................... (6,305,013) (4,370,388)
Payment of organizational and start-up costs ............................................ (613,552) (931,829)
Restricted cash deposited in escrow ..................................................... (512,856) --
Issuance of notes receivable ............................................................ (365,500) --
Proceeds from sale of stations, net ..................................................... 12,564,111 --
Proceeds from sale of property and equipment ............................................ 510,000 --
Other ................................................................................... (124,629) (158,787)
------------- -------------
Net cash used in investing activities ............................................... (31,534,016) (20,189,037)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ................................................ $ 39,100,000 $ 22,000,000
Proceeds from issuance of Class C member units, net of expenses ......................... 21,198,279 --
Payment to cancel Class B member units .................................................. (11,200,000) --
Repayment of long-term debt:
Credit Facility ........................................................................ (25,150,000) (7,425,000)
Other .................................................................................. (336,627) (149,321)
Payments of loan, financing and equity issuance costs ................................... (465,605) (882,408)
Member distributions .................................................................... (400,174) (2,577,239)
Cash contributed at inception (note 2) .................................................. -- 1,620,974
------------- -------------
Net cash provided by financing activities ........................................... 22,745,873 12,587,006
------------- -------------
Net increase in cash and cash equivalents ............................................... 613,652 1,175,542
Cash and cash equivalents at beginning of year .......................................... 1,175,542 --
------------- -------------
Cash and cash equivalents at end of year ................................................ $ 1,789,194 $ 1,175,542
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .................................................. $ 6,169,698 $ 4,174,128
============= =============
Supplemental disclosure of noncash investing and financing activities:
Noncash additions to program contract rights and program contract rights payable ........ $ 1,778,868 $ 1,390,596
============= =============
Noncash additions to long-term debt obligations (note 10) ............................... $ 817,811 $ 1,064,758
============= =============
The Company assumed liabilities in 1997 and 1996 in connection with station
acquisitions as more fully described in note 4.
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Operations and Basis of Presentation
Max Media Properties LLC, a Virginia limited liability company (the "Company"),
owns and operates radio and television broadcasting stations. At December 31,
1997, the Company owned or operated under time brokerage agreements ("TBA"s) the
following stations:
<TABLE>
<CAPTION>
RADIO MARKET STATION FORMAT OWNERSHIP
------------ ------- ------ ---------
<S> <C> <C> <C>
Norfolk, VA ............. WWDE-FM Adult Contemporary Owned
WNVZ-FM Contemporary Hits Owned
WFOG-FM Adult Contemporary Owned
WPTE-FM Alternative Rock Owned
Greensboro, NC .......... WMQX-FM Oldies Owned
WJMH-FM Urban Owned
WQMG-AM Religious Owned
WQMG-FM Urban Owned
</TABLE>
<TABLE>
<CAPTION>
TELEVISION MARKET STATION AFFILIATION OWNERSHIP
----------------- ------- ----------- ---------
<S> <C> <C> <C>
Dayton, OH WKEF-TV NBC Owned
Syracuse, NY WSYT-TV Fox Owned
WNYS-TV UPN TBA
Cape Girardeau, MO KBSI-TV Fox Owned
Paducah, KY WDKA-TV UPN TBA
Tri-Cities, TN WEMT-TV Fox Owned
Charleston, SC WMMP-TV UPN Owned
Tyler, TX KETK-TV NBC Owned
Nacogdoches, TX KLSB-TV NBC TBA
</TABLE>
At December 31, 1996, the Company owned and operated KKLZ-FM, Las Vegas, Nevada,
which was sold in January 1997 (note 4).
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and seven limited partnerships. All significant intercompany balances
and transactions have been eliminated in consolidation.
(c) Advertising Revenue Recognition
The Company recognizes revenue on the sale of advertising air time when the
related advertising is broadcast.
F-58
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
(d) Cash and Cash Equivalents
Cash equivalents consist of overnight repurchase agreements and certificates of
deposit with an initial term of less than three months.
(e) Program Contract Rights
The Company has entered into agreements with program distributors granting it
the right to broadcast programs over contract periods which generally run from
one to seven years. The total cost of each contract is recorded as an asset and
liability when the license period begins and the program is available for its
first showing. The Company amortizes program contract rights using the
straight-line method based on program usage. Program contract rights are stated
at the lower of unamortized cost or net realizable value as estimated
periodically by management. Contract payments are generally made in installments
over a term somewhat shorter than the contract period.
Program contract rights expected to be amortized in the succeeding year and
program contract rights payable due within one year are classified as current
assets and current liabilities, respectively.
(f) Barter Agreements
Certain program contract rights provide for the exchange of advertising air time
in lieu of cash payments for the programming. As the program is aired, equal
amounts of revenue and program amortization expense are recorded, at estimated
fair market value, in results of operations.
In addition, the Company provides advertising air time to certain customers in
exchange for equipment, merchandise or services. The estimated fair value of the
equipment, merchandise or services to be received is recorded as an asset and
the corresponding obligation to broadcast advertising is recorded as deferred
revenue. Property and equipment acquired through barter agreements are
depreciated over their estimated useful lives. Services and other assets are
charged to expense as they are used or consumed. Deferred revenue is recognized
in operations as the related advertising is broadcast.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term and the estimated useful lives of the assets.
(h) Intangible Assets
Intangible assets include Federal Communications Commission ("FCC") licenses,
advertiser base, network affiliation agreements, goodwill and favorable
contractual agreements resulting from acquisitions. These assets are recorded at
their fair value as of the date of acquisition as determined by independent
appraisals and are amortized using the straight-line method over their estimated
useful lives. Intangible assets also include loan costs which are recorded at
cost and amortized using the straight-line method over the term of the credit
facility.
(i) Income Taxes
The Company operates as a partnership for income tax purposes. As a result, the
Company is generally not subject to federal and state income taxes. Such income
taxes are the obligation of the members of the Company. The Company distributes
to its members amounts sufficient to pay income and franchise taxes on the
income of the Company allocated to these members.
F-59
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
(j) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
The Company reviews long-lived assets and certain identifiable intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
held and used is measured by a comparison of the carrying amount of the assets
to future undiscounted net cash flows expected to be generated by the assets. If
such assets are considered impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(l) Value Appreciation Rights
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its value appreciation rights, as opposed to
the fair value accounting provided for under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FASB 123"). There
is no difference in the accounting for value appreciation rights under APB 25 or
FASB 123. The required accounting is to treat the future compensation (value
above awarded rights) as a liability. The liability is measured each period
based on the current valuation, as required under FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans."
(m) Reclassifications
Certain reclassifications have been made in the 1996 financial statements to
conform with the 1997 financial statement presentation.
(n) Time Brokerage Agreements
The Company operates certain stations pursuant to TBAs under which the Company
purchases from the broadcast station licensee substantially all of the broadcast
time on the station and provides programming to and sells advertising on the
station during the purchased time. The Company receives all the revenue derived
from the advertising sold during the purchased time, pays substantially all
operating expenses of the station and performs other functions. The broadcast
station licensee retains responsibility for ultimate control of the station in
accordance with FCC policies. Net revenues of $3,888,339 and $2,739,168 and
operating losses of $260,238 and $691,698 resulting from stations operated under
TBAs during 1997 and 1996, respectively, are included in the accompanying
consolidated financial statements.
2. FORMATION OF THE COMPANY
Effective January 1, 1996, Max Television Company ("Max TV"), Max Radio Inc.
("Max Radio") and MTR Holding Corp. ("MTR") each contributed substantially all
their assets to the Company and the Company assumed all their liabilities,
including, all liabilities under program license agreements, barter agreements,
operating leases and bank loans. In exchange, the Company issued 6,831,000 Class
B member units to Max TV, 3,069,000 Class A member units to Max Radio and
100,000 Class C member units to MTR.
F-60
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
The assets contributed and liabilities assumed are as follows:
<TABLE>
<CAPTION>
MAX
MAX TV RADIO MTR TOTAL
------ ----- --- -----
<S> <C> <C> <C> <C>
Cash .................................... $ 263,351 $ 662,073 $ 695,550 $ 1,620,974
Accounts receivable ..................... 5,943,235 2,672,543 -- 8,615,778
Deferred charges ........................ 260,350 157,355 -- 417,705
Program contract rights ................. 5,759,823 -- -- 5,759,823
Property and equipment .................. 10,099,872 4,373,153 -- 14,473,025
Intangible assets ....................... 38,112,329 21,612,173 -- 59,724,502
Other assets ............................ 2,061,532 310,800 -- 2,372,332
------------ ------------ --------- ------------
Total assets contributed ............... 62,500,492 29,788,097 695,550 92,984,139
------------ ------------ --------- ------------
Long-term debt .......................... 36,062,933 7,683,480 -- 43,746,413
Program contract rights payable ......... 4,808,160 -- -- 4,808,160
Accounts payable ........................ 572,265 95,507 -- 667,772
Deferred revenue ........................ 436,746 192,939 -- 629,685
Other liabilities ....................... 1,409,023 469,741 -- 1,878,764
------------ ------------ --------- ------------
Total liabilities assumed .............. 43,289,127 8,441,667 -- 51,730,794
------------ ------------ --------- ------------
Net contribution ....................... $ 19,211,365 $ 21,346,430 $ 695,550 $ 41,253,345
============ ============ ========= ============
</TABLE>
The Company and Max TV are under common control, therefore, in accordance with
Accounting Principles Board Opinion No. 16 and the Securities and Exchange
Commission's Staff Accounting Bulletin No. 97, the Company recorded the Max TV
contribution at book value. The Company accounted for the Max Radio and MTR
contributions as a purchase, therefore, their assets and liabilities were
recorded at fair market value as of the date of inception.
3. SALE OF THE COMPANY
On December 2, 1997, the Class A member and one of the Class C members entered
into agreements to sell all the issued and outstanding shares of each member to
one buyer. Simultaneously, the Class B member and one of the other Class C
members entered into agreements to sell their respective member units, equity
interests in other members and limited partnership interests to this buyer. The
Company is also a party to each of these purchase agreements. The aggregate
purchase price is $255,000,000 plus the assumption of certain liabilities
consisting primarily of program contract rights payable. A portion of this
purchase price will be used to repay all long-term debt and make certain
payments contingent on the closing of the transaction (note 14). Cash, accounts
receivable, notes receivable and certain other immaterial assets are excluded
from this transaction. The transaction is subject to certain regulatory
approvals and is expected to close in the second quarter of 1998.
4. ACQUISITIONS AND DISPOSITIONS
(a) Acquisitions
On January 3, 1997, the Company completed the acquisition of WMMP-TV,
Charleston, South Carolina for approximately $3.4 million plus the assumption of
approximately $612,000 of liabilities and paid $850,000 for a three-year
agreement not to compete. In May 1996, the Company entered into a TBA with the
seller to operate the station pending closing of the acquisition. On the
commencement date of the TBA, the Company assumed certain obligations of the
seller and the seller assigned all accounts receivable to the Company. During
1996, the Company made payments under the TBA to the seller of $200,000 which
were applied against the purchase price. In conjunction with this acquisition,
the TBA was terminated.
F-61
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
On January 31, 1997, the Company completed the acquisition of WFOG AM/FM and
WPTE-FM, Norfolk, Virginia for approximately $15.2 million. In July 1996, the
Company entered into a TBA with the seller to operate the stations pending
closing of the acquisition. During 1997 and 1996, the Company made payments
under the TBA to the seller of $75,000 and $375,000, respectively, which have
been included in operating expenses in the accompanying consolidated financial
statements. In conjunction with this acquisition, the TBA was terminated.
On March 14, 1997, the Company acquired the assets of KETK-TV, Tyler, Texas and
substantially all the assets of KLSB-TV, Nacogdoches, Texas (other than FCC
licenses and certain related assets) for approximately $16.9 million plus the
assumption of certain immaterial liabilities. Simultaneously, the Company
entered into a 10-year TBA to operate KLSB-TV.
On June 5, 1997, the Company commenced commercial broadcast operations of
WDKA-TV, Paducah, Kentucky. The Company invested approximately $2.0 million for
the construction of studio, transmission and office facilities. The Company had
previously entered into a 10-year TBA to build and operate this station.
On July 1, 1996, the Company acquired certain assets of WNYS-TV, Syracuse, New
York, for $3,650,000 and paid $100,000 for a one-year agreement not to compete.
Simultaneously, the Company entered into a 10-year TBA to operate the station.
Additionally, the Company invested approximately $1.6 million for the
construction of a new studio, transmission and office facilities.
On August 26, 1996, the Company acquired the assets of WQMG AM/FM, Greensboro,
North Carolina, for approximately $6,650,000 cash and entered into a three-year
agreement not to compete for $214,758.
Each of these acquisitions was accounted for by the Company as a purchase. The
results of operations of the acquired stations are included in the accompanying
consolidated financial statements at the earlier of the commencement of the TBA
or the date of acquisition.
The following is a summary of the assets acquired, liabilities assumed and
consideration given for the above-stated acquisitions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accounts receivable ............................................ $ -- $ 250,444
Deferred charges, primarily barter agreements .................. 225,177 --
Program contract rights ........................................ 737,652 13,850
Property and equipment ......................................... 7,023,608 1,646,991
FCC licenses ................................................... 20,105,728 3,353,000
Goodwill ....................................................... 249,553 229,857
Other intangible assets ........................................ 9,119,698 5,197,801
------------ ------------
Total assets acquired ......................................... 37,461,416 10,691,943
------------ ------------
Less:
Seller financing ............................................... -- 214,758
Deferred revenue assumed, primarily barter agreements .......... 225,177 --
Program contract rights payable assumed ........................ 510,858 13,850
Other liabilities assumed ...................................... 32,714 385,346
------------ ------------
Cash paid for acquisitions ..................................... $ 36,692,667 $ 10,077,989
============ ============
</TABLE>
The Company allocated the aggregate consideration to the tangible and intangible
assets based on their respective fair values. Goodwill was recorded as the
excess of the purchase price over the assets acquired.
F-62
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
The following unaudited pro forma summary combines the results of operations of
the Company and the acquired stations as if the acquisitions occurred at the
beginning of 1996, after giving effect to certain adjustments, including the
depreciation and amortization of assets based on their fair values and increased
interest expense resulting from the additional borrowings to finance the
acquisitions. The unaudited pro forma information does not purport to represent
what the results of operations of the Company would have been if such
acquisitions had in fact occurred on such date or to project the Company's
results of operations as of any future date or for any future period.
<TABLE>
<CAPTION>
PRO FORMA
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Net revenues ........................................ $ 58,274,280 $ 55,991,292
============ =============
Income (loss) from operations ....................... $ 2,290,632 $ (1,125,087)
============ =============
Income (loss) before pro forma income taxes ......... $ 4,945,258 $ (6,711,206)
============ =============
</TABLE>
(b) Dispositions
On January 28, 1997, the Company sold the assets of KKLZ-FM, Las Vegas, Nevada
for approximately $12.5 million, net of commissions and other selling expenses,
including a two-year agreement not to compete, which resulted in a gain of
approximately $8.5 million. The Company agreed to indemnify and hold harmless
the purchaser from certain losses, liabilities, damages, costs and expenses. The
Company placed $500,000 in escrow for a period of one year to serve as security
for the performance of the Company's indemnification obligations. The escrow
fund is included in restricted cash in the accompanying consolidated financial
statements. The station had net revenues of $144,361 and operating losses of
$94,665 in 1997 and net revenues of $3,207,168 and operating income of $8,361 in
1996, which are included in the accompanying consolidated financial statements.
On August 12, 1997, the Company sold the assets of WFOG-AM, Norfolk, Virginia
for approximately $107,000, net of selling expenses.
These sales resulted in the disposition of FCC licenses and other intangible
assets, net of accumulated amortization, aggregating $3,451,837 as of the date
of the disposition.
5. BARTER AGREEMENTS
The Company's liability to broadcast commercial spots in fulfillment of barter
contracts is recorded as deferred revenue. Future amounts to be recognized on
receipt of assets, goods or services on barter agreements are recorded as
deferred charges.
Barter agreements (excluding barter program agreements of $3,070,304 and
$2,197,493 in 1997 and 1996, respectively) resulted in $2,291,420 and $1,647,754
in net barter revenue, $2,333,436 and $1,635,875 in operating expenses for
merchandise and services received and $193,409 and $23,000 in property and
equipment additions during 1997 and 1996, respectively.
F-63
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
6. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Activity in the allowance for doubtful accounts receivable was as follows in
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year .......... $ 518,512 $ 421,924
Amounts charged to expense .......... 526,487 323,257
Deductions .......................... 456,957 398,389
Acquisitions ........................ -- 171,720
--------- ---------
Balance, end of year ................ $ 588,042 $ 518,512
========= =========
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
USEFUL
LIVES
(IN YEARS) 1997 1996
---------- ---- ----
<S> <C> <C> <C>
Land ................................................... $ 895,875 $ 614,807
Buildings and real estate improvements ................. 15-39 5,973,366 3,279,959
Broadcasting equipment, furniture and fixtures ......... 3-7 27,745,616 17,678,119
Vehicles ............................................... 3 921,109 563,066
Leasehold improvements ................................. 2-15 506,999 865,266
Construction in progress ............................... 26,595 1,577,495
------------ ------------
36,069,560 24,578,712
Less accumulated depreciation and amortization ......... 10,360,512 6,166,170
------------ ------------
$ 25,709,048 $ 18,412,542
============ ============
</TABLE>
8. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
PERIOD OF
AMORTIZATION
(IN YEARS) 1997 1996
---------- ---- ----
<S> <C> <C> <C>
FCC licenses ............................................. 10-15 $ 47,910,031 $ 31,478,717
Advertiser base .......................................... 15 15,223,747 15,968,506
Network affiliation agreements ........................... 15 19,082,142 12,335,307
Time brokerage agreement ................................. 10 3,650,000 3,650,000
Loan costs ............................................... 8 3,385,234 3,374,776
Other intangibles including organizational costs ......... 1-15 7,398,324 4,619,611
------------ ------------
96,649,478 71,426,917
Less accumulated amortization ............................ 14,512,295 7,820,547
------------ ------------
$ 82,137,183 $ 63,606,370
============ ============
</TABLE>
F-64
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Credit Facility:
Term A facility .................................. $ 32,610,000 $ 36,000,000
Term B facility .................................. 10,640,000 --
Reducing revolving credit facility ............... 28,700,000 22,000,000
Other ............................................. 1,729,294 1,236,850
------------ ------------
Total long-term debt ............................. 73,679,294 59,236,850
Less current portion .............................. 4,751,520 3,064,076
------------ ------------
Long term debt, excluding current portion ......... $ 68,927,774 $ 56,172,774
============ ============
</TABLE>
In January 1996, the Company entered into a $50 million Credit Facility (the
"Credit Facility") by amending and restating the Max TV credit facility to
reflect the formation of the Company (note 2). The bank loan assumed from Max
Radio was repaid in full with proceeds of borrowings under the Credit Facility.
In August 1996, the Credit Facility was amended, among other things, to increase
total availability to $100 million.
In February 1997, the Credit Facility was further amended, among other things,
to create an $11.2 million term facility, reduce the availability under the
reducing revolving credit facility by $11.2 million and allow the Company to
make a distribution to Max TV in conjunction with the cancellation of Class B
membership units (note 10). As amended, the Credit Facility consists of a $36
million term facility, an $11.2 million term facility, a $47.8 million reducing
revolving credit facility and a $5 million non-reducing revolving credit
facility. Amounts outstanding under the $11.2 million term facility are
guaranteed by the Class B member.
The Credit Facility is secured by all of the member units and assets of the
Company. Outstanding principal under the Credit Facility bears interest at a
floating rate based in part on the Company achieving certain operating cash flow
ratios. The weighted average interest rate on the Credit Facility was 8.16% and
7.95% in 1997 and 1996, respectively. The Company is obligated to pay a
quarterly commitment fee on the average daily unused portion of the reducing and
non-reducing revolving credit facilities at an annual rate of 0.375% to 0.50%
depending on certain operating cash flow ratios and an annual agency fee of
$30,000.
Amounts outstanding under the term loans must be repaid over an eight-year
period in quarterly installments beginning in 1997 with final payment required
no later than June 30, 2004. The maximum commitment under the reducing revolving
credit facility reduces by 7.5% in 1998, 10% in 1999, 12.5% in 2000, 15% in
2001, 17.5% in 2002 and 32.5% thereafter with maturity on June 30, 2004. The
non-reducing revolving credit facility must be paid in full by June 30, 2004.
Generally, the Company is required to make principal prepayments with the net
cash proceeds from asset sales and the issuance of additional equity and debt.
The Company must also make annual prepayments of 50% of excess cash flow, as
defined in the Credit Facility, after the Company achieves certain operating
cash flow ratios.
The Credit Facility contains substantial restrictive covenants, including
restrictions on the Company's ability to incur additional debt, acquire
interests in other business entities, sell, mortgage, pledge or otherwise
encumber any of its assets, make capital expenditures or make distributions to
the members (other than distributions used to pay taxes attributable to the
operations of the Company (note 1(i))), without the prior written consent of the
lenders. In addition, the Company is required, among other things, to maintain
certain operating ratios.
F-65
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
To reduce the impact of changes in interest rates, the Company is required to
maintain interest rate protection on a minimum of 50% of the aggregate amount
outstanding under the Credit Facility. At December 31, 1997, the Company has two
outstanding interest rate cap agreements which expire on September 30, 1999 and
October 1, 1999 and which limit the rate of interest to 8.50% and 7.50%,
respectively. The principal amounts related to these agreements aggregate
$41,150,000 at December 31, 1997. Any net gain or loss from interest rate
protection agreements is included in interest expense in the period incurred.
The counterparties to these interest rate cap agreements are major financial
institutions with which the Company also has other financial relationships. The
Company is exposed to credit loss in the event of nonperformance by these
counterparties. The Company, however, does not anticipate nonperformance by the
other parties, and in the event of such nonperformance no material loss is
expected.
Estimated aggregate maturities of the Credit Facility and other long-term debt
after December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CREDIT OTHER
FACILITY DEBT TOTAL
-------- ---- -----
<S> <C> <C> <C>
1998 ........................ $ 4,440,000 $ 311,520 $ 4,751,520
1999 ........................ 5,440,000 337,210 5,777,210
2000 ........................ 6,800,000 280,681 7,080,681
2001 ........................ 11,880,000 737,468 12,617,468
2002 ........................ 16,085,000 30,007 16,115,007
2003 and thereafter ......... 27,305,000 32,408 27,337,408
------------ ----------- ------------
$ 71,950,000 $ 1,729,294 $ 73,679,294
============ =========== ============
</TABLE>
10. MEMBERS' CAPITAL
The Company was organized under the Virginia Limited Liability Company Act (note
2) and the members are generally not liable for any debts or other obligations
of the Company. Under the terms of its January 1, 1996 Operating Agreement, the
Company will cease to exist on December 31, 2045 unless earlier terminated. The
Company has three classes of member units. With the exception of the right to
elect the Company's Board of Managers, all units are identical. Holders of a
majority of the Class A and Class B member units each have the right to elect
four of the eight members of the Company's Board of Managers. Holders of Class C
member units are not entitled to vote for members of the Board. Net profits and
losses are allocated in proportion to the members' respective percentage
interests.
On February 14, 1997, the Operating Agreement was amended to admit additional
members. The Company issued 3,321,931 Class C member units to the new members
for net proceeds of approximately $21.2 million. On March 13, 1997, the Company
paid $11.2 million and incurred transactions costs of approximately $455,000 and
other long-term obligations of approximately $818,000 in connection with the
cancellation of 1,690,500 Class B member units.
11. EMPLOYEE BENEFIT PLANS
(a) Benefit Plans
The Company has retirement savings and cafeteria plans pursuant to Sections
401(k) and 125 of the Internal Revenue Code, respectively, which cover
substantially all of the Company's employees. The Company's discretionary
contribution to the 401(k) plan is determined annually by the Company's Board of
Managers. The Company did not contribute to the 401(k) plan for the years ended
December
F-66
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
31, 1997 and 1996. Under the cafeteria plan, employees may elect to participate
in health, dental, life, medical expense reimbursement and dependent care
reimbursement benefit plans funded through employee payroll deductions.
(b) Value Appreciation Rights Plan
In 1996, the Company established a Value Appreciation Rights Plan (the "VAR
Plan") to encourage the retention of key employees and the achievement of
improved financial results. The award of value appreciation rights is at the
discretion of the Company's Board of Managers. The VAR Plan provides for cash
payments equal to appreciation in the value of the rights on retirement, death
or disability of the VAR Plan participant or a change in ownership of the
Company. At December 31, 1997 and 1996, 500,000 rights were authorized, and
500,000 and 155,000 rights were awarded as of December 31, 1997 and 1996,
respectively. The Company incurred approximately $940,000 and $40,000 of expense
with respect to the VAR Plan in 1997 and 1996, respectively. The amounts are
included in accrued compensation and benefits in the accompanying balance
sheets.
12. INCOME TAXES
The unaudited pro forma income tax expense (benefit) presented on the
consolidated statements of operations represents the estimated taxes that would
have been recorded had the Company been a C corporation for income tax purposes
for each of the years presented. The pro forma income tax expense (benefit) is
as follows:
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
----------------------------------
1997 1996
---- ----
<S> <C> <C>
Federal ................. $ 1,359,719 $ (1,234,407)
State ................... 199,959 (181,531)
----------- -------------
Total pro forma ......... $ 1,559,678 $ (1,415,938)
=========== =============
</TABLE>
A reconciliation of the statutory federal income tax rate and the pro forma
effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory tax rate ............................. 34% 34%
Effect of state income taxes, net of federal tax
benefit ....................................... 5% 5%
-- --
Pro forma effective tax rate ................... 39% 39%
== ==
</TABLE>
13. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Company has a receivable of approximately
$1,339,000 from an entity owned by certain shareholders of a member of the
Company. The receivable is secured by all of the assets of the related entity,
which consists primarily of an aircraft, bears interest at a floating rate equal
to the rate under the Credit Facility (note 9) and is payable on demand, subject
to certain limitations. No principal payments were made in 1997 or 1996. Accrued
interest and other amounts owed to the Company from the related entity totaled
approximately $462,000 and $193,000 at December 31, 1997 and 1996, respectively.
During 1997 and 1996, the Company paid approximately $253,000 and $95,000,
respectively, to the entity for use of the aircraft.
The Company leases office space from an entity owned by certain shareholders of
a member of the Company. The lease has a 10-year term ending November 30, 2005
with three five-year renewal options. During 1997 and 1996, the Company paid
approximately $77,000 and $68,000, respectively, under the lease.
F-67
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
At December 31, 1997, the Company has employment agreements with two of its
senior officers. These employment agreements require total annual payments of
$396,000 through December 31, 1998.
The Company paid management fees of $300,000 in 1997 and 1996 to entities
affiliated with entities which hold approximately 80% of the ownership interests
of the Class A member and 100% of the ownership of one of the Class C members.
14. COMMITMENTS AND CONTINGENCIES
(a) Program Contract Rights
At December 31, 1997, the Company's liability for available program contract
rights totals approximately $4.2 million. Additionally, the Company has
commitments to pay approximately $5.0 million under program contract rights not
yet available and approximately $1.0 million for sports broadcasting and news
co-production agreements.
Future minimum payments by year for program contract rights payable, commitments
for future program contract rights and other agreements are as follows:
<TABLE>
<CAPTION>
COMMITMENTS FOR
PROGRAM CONTRACT FUTURE PROGRAM OTHER
RIGHTS PAYABLE CONTRACT RIGHTS AGREEMENTS
------------------ ----------------- --------------
<S> <C> <C> <C>
1998 ............... $ 2,430,572 $ 364,360 $ 364,800
1999 ............... 1,224,933 1,069,586 229,150
2000 ............... 411,648 1,221,594 229,150
2001 ............... 99,521 994,653 200,750
2002 ............... -- 648,825 --
Thereafter ......... -- 725,408 --
----------- ----------- -----------
$ 4,166,674 $ 5,024,426 $ 1,023,850
=========== =========== ===========
</TABLE>
(b) Leases
The Company incurred total rental expense of $982,058 and $844,900 for the years
ended December 31, 1997 and 1996, respectively, under operating leases for
office space, land, vehicles and equipment (note 13). Future minimum annual
payments under non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1998 ....................... $ 1,079,709
1999 ....................... 980,341
2000 ....................... 877,395
2001 ....................... 852,697
2002 ....................... 789,516
Thereafter ................. 2,245,771
-----------
$ 6,825,429
===========
</TABLE>
F-68
<PAGE>
MAX MEDIA PROPERTIES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 - (CONTINUED)
(c) Other Commitments
At December 31, 1997, future minimum payments under the Company's three TBAs,
which expire between June 30, 2005 and March 13, 2007, are as follows:
<TABLE>
<S> <C>
1998 ....................... $ 301,750
1999 ....................... 301,750
2000 ....................... 1,122,192
2001 ....................... 679,375
2002 ....................... 95,000
Thereafter ................. 342,000
-----------
$ 2,842,067
===========
</TABLE>
The Company is required to satisfy $880,000 of the minimum payments due in 2000
and $550,000 of the minimum payments due in 2001 as a condition to closing the
transactions described in note 3.
In July 1997, the Company paid $25,000 for an option to purchase certain assets
and the FCC licenses of WWBI-LPTV, Burlington, Vermont for $2 million. The
option expires December 31, 1998, however, the Company may extend the option to
June 30, 1999 for a one-time payment of $25,000. The sellers have issued to the
Company non-interest bearing promissory notes in the aggregate amount of
$359,000 that will be applied to the purchase price if the option is exercised.
In connection with the closing of the transactions discussed in note 3, the
Company is committed to pay an aggregate of approximately $10 million under the
VAR Plan, other incentive plans and for transaction costs.
(d) Year 2000 Conversion (unaudited)
The Company is currently evaluating its information systems to determine the
scope of its year 2000 issues and has not fully developed a year 2000
transformation plan or determined the costs associated with implementing such a
plan. Failure to achieve year 2000 compliance by the Company could adversely
impact the Company's ability to conduct business for an extended period of time.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the estimated fair value of the Company's financial
instruments at December 31, 1997:
(a) Long-term Debt
The carrying amount of long-term debt approximates fair value. Fair value is
estimated by discounting the future cash flows under the debt at rates currently
offered to the Company.
(b) Program Contract Rights Payable
The amount reflected in program contract rights payable at December 31, 1997
represents future payments to be made under program license agreements. The fair
value of program contract rights payable is the present value of these future
payments. At December 31, 1997, the present value of these future payments is
approximately $3.7 million.
(c) Other
The carrying value of cash, accounts receivable, other receivables, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these instruments. The fair value of the interest rate cap
agreements (note 9) is insignificant.
F-69
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Sullivan Broadcast Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Sullivan Broadcast Holdings, Inc. and its subsidiaries (the "Company") at
December 31, 1996 and 1997, and the results of their operations and their cash
flows for the period from inception (June 2, 1995) through December 31, 1995 and
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
March 10, 1998
F-70
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 6,469 $ 3,840
Accounts receivable, net of allowance for doubtful accounts of $1,297 and
$1,325...................................................................... 31,686 34,990
Current portion of programming rights ........................................ 23,360 22,850
Current deferred tax asset ................................................... 4,535 4,310
Prepaid expenses and other current assets .................................... 733 941
--------- ---------
Total current assets ....................................................... 66,783 66,931
Property and equipment, net .................................................. 44,454 39,723
Programming rights, net of current portion ................................... 21,319 23,432
Deferred financing costs, net of accumulated amortization of $1,238 and
$2,120...................................................................... 14,016 13,134
Intangible assets, net ....................................................... 590,972 567,096
--------- ---------
Total assets ............................................................... $ 737,544 $ 710,316
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of senior debt ............................................... $ 18,583 $ 23,562
Interest payable ............................................................. 4,362 3,882
Accounts payable ............................................................. 1,925 2,262
Current portion of programming contracts payable ............................. 24,281 24,944
Income taxes payable ......................................................... 2,865 195
Accrued expenses ............................................................. 3,771 4,367
--------- ---------
Total current liabilities .................................................. 55,787 59,212
Senior debt, net of current portion ........................................... 195,917 171,820
Borrowings under revolving lines of credit .................................... 56,500 59,500
Subordinated debt ............................................................. 155,326 155,508
Interest payable .............................................................. 4,942 10,394
Programming contracts payable, net of current portion ......................... 20,392 22,710
Deferred tax liability and other non-current liabilities ...................... 84,124 82,132
--------- ---------
Total liabilities .......................................................... 572,988 561,276
--------- ---------
15% Mandatorily redeemable cumulative preferred stock, non-voting $.001 par
value; authorized 1,500,000 shares; 1,150,000 shares issued and outstanding .. 111,483 133,185
--------- ---------
Commitments and contingencies (Note 11) ....................................... -- --
SHAREHOLDERS' EQUITY:
Class B-1 common stock, $.001 par value; 5,000,000 shares authorized; 1,204,077
and 1,201,577 shares issued and outstanding at December 31,
1996 and 1997, respectively ................................................ 1 1
Class B-2 common stock; $.001 par value; 7,000,000 shares authorized;
6,158,211 shares issued and outstanding at December 31, 1996 and 1997 ...... 6 6
Class C common stock; $.001 par value; 2,000,000 shares authorized; 896,229
and 853,854 shares issued and outstanding at December 31, 1996 and 1997,
respectively ............................................................... 1 1
Additional paid-in capital ................................................... 76,861 55,117
Accumulated deficit .......................................................... (23,796) (39,270)
--------- ---------
Total shareholders' equity ................................................. 53,073 15,855
--------- ---------
Total liabilities and shareholders' equity ................................. $ 737,544 $ 710,316
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 2, 1995) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, ----------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues (excluding barter) ......................... $ -- $ 129,711 $ 144,169
Less: commissions .................................. -- 21,997 24,045
--------- --------- ---------
Net revenues (excluding barter) ..................... -- 107,714 120,124
Trade and barter revenues ........................... -- 14,808 17,650
--------- --------- ---------
Total net revenues ............................... -- 122,522 137,774
--------- --------- ---------
Expenses:
Operating expenses ................................. 1,601 15,005 17,301
Selling, general and administrative ................ -- 23,921 28,319
Amortization of programming rights ................. -- 26,673 30,197
Depreciation and amortization ...................... -- 48,051 42,220
--------- --------- ---------
1,601 113,650 118,037
--------- --------- ---------
Operating (loss) income ......................... (1,601) 8,872 19,737
Interest expense, net, including amortization of debt
discount and deferred loan costs ................... 258 41,187 40,711
Other expenses (income) ............................. -- 131 (12)
--------- --------- ---------
Loss before income taxes ............................ (1,859) (32,446) (20,962)
Income tax benefit .................................. 335 10,174 5,488
--------- --------- ---------
Net loss ........................................... $ (1,524) $ (22,272) $ (15,474)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 2, 1995) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, -----------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................................. $ (1,524) $ (22,272) $ (15,474)
Adjustments to reconcile net loss to net cash (used for) provided
by operating activities:
Deferred income taxes .............................................. (349) (11,767) (8,332)
Depreciation of property and equipment ............................. -- 7,865 9,251
Amortization of intangible assets .................................. -- 40,186 32,969
Amortization of programming rights (excluding barter) .............. -- 12,911 13,198
Payments for programming rights .................................... -- (9,087) (11,820)
Amortization of deferred financing costs and debt discount ......... 38 2,765 1,064
Changes in assets and liabilities:
Increase in accounts receivable .................................... -- (2,707) (3,048)
Increase in prepaid expenses and other assets ...................... -- (477) (131)
Increase (decrease) in amounts due to related party ................ 1,547 (2,717) --
Increase (decrease) in income taxes payable ........................ 14 (179) (1,328)
Increase in interest payable ....................................... 485 8,819 4,972
Increase in deferred debt issuance costs ........................... (6,647) -- --
Increase in accounts payable ....................................... -- 383 337
Increase (decrease) in accrued expenses ............................ 5,163 (7,060) (201)
Decrease in non-current liabilities ................................ -- -- (96)
---------- ---------- ---------
Net cash (used for) provided by operating activities .............. (1,273) 16,663 21,361
---------- ---------- ---------
Cash flows from investing activities:
(Increase) decrease in restricted cash ............................. (162,599) 162,599 --
Acquisition of Act III Broadcasting, Inc., net of cash acquired -- (550,045) 751
Acquisition of WFXV and WPNY (Note 3) .............................. -- (792) --
Acquisition of WMSN (Note 3) ....................................... -- (26,584) --
Purchase of CTBC stock (Note 3) .................................... -- (26,950) --
Payments for purchase options ...................................... -- (2,800) --
Acquisition of Cascom stock (Note 3) ............................... -- -- (4,142)
Capital expenditures ............................................... -- (3,105) (4,439)
---------- ---------- ---------
Net cash used for investing activities ............................ (162,599) (447,677) (7,830)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................. 6,972 61,692 10
Proceeds from issuance of subordinated debt ........................ 125,000 -- --
Proceeds from issuance of long-term debt ........................... -- 220,000 --
Proceeds from borrowings under credit facilities ................... -- 56,500 3,000
Proceeds from bridge loan .......................................... 1,300 -- --
Proceeds from issuance of preferred stock .......................... -- 115,000 --
Proceeds from issuance of senior accrual debentures ................ 35,000 -- --
Repayment of long-term debt ........................................ -- (5,500) (19,118)
Repurchase of common stock ......................................... -- (129) (52)
Debt and preferred stock issuance costs ............................ (4,400) (5,684) --
Advance buydown of programming rights .............................. -- (4,396) --
---------- ---------- ---------
Net cash provided by (used for) financing activities .............. 163,872 437,483 (16,160)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents .............. -- 6,469 (2,629)
Cash and cash equivalents, beginning of period .................... -- -- 6,469
---------- ---------- ---------
Cash and cash equivalents, end of period .......................... $ -- $ 6,469 $ 3,840
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS B-1 CLASS B-2
---------------------- ---------------------
COMMON STOCK COMMON STOCK
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Issuance of Class B-1 common stock ............. 560,000 $ 1 -- $--
Issuance of Class B-2 common stock- ............ -- -- 697,243 1
Net loss ....................................... -- -- -- --
------- --- ------- ---
Balance at December 31, 1995 ................... 560,000 1 697,243 1
Issuance of Class B-1 common stock ............. 651,577 -- -- --
Repurchase of Class B-1 common stock ........... (7,500) -- -- --
Issuance of Class B-2 common stock ............. -- -- 5,460,968 5
Issuance of Class C common stock ............... -- -- -- --
Repurchase of Class C common stock ............. -- -- -- --
Issuance of common stock purchase warrants ..... -- -- -- --
Accretion of preferred stock ................... -- -- -- --
Net loss ....................................... -- -- -- --
------- --- --------- ---
Balance at December 31, 1996 ................... 1,204,077 1 6,158,211 6
Repurchase of Class B-1 common stock ........... (2,500) -- -- --
Issuance of Class C common stock ............... -- -- -- --
Repurchase of Class C common stock ............. -- -- -- --
Accretion of preferred stock ................... -- -- -- --
Net loss ....................................... -- -- --
--- --------- ---
Balance at December 31, 1997 ................... 1,201,577 $ 1 6,158,211 $ 6
========= === ========= ===
<CAPTION>
CLASS C
---------------------
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Issuance of Class B-1 common stock ............. -- $-- $ 5,599 $ -- $ 5,600
Issuance of Class B-2 common stock- ............ -- -- 6,971 -- 6,972
Net loss ....................................... -- -- -- (1,524) (1,524)
-- --- ---------- --------- ----------
Balance at December 31, 1995 ................... -- -- 12,570 (1,524) 11,048
Issuance of Class B-1 common stock ............. -- -- 6,515 -- 6,515
Repurchase of Class B-1 common stock ........... -- -- (75) -- (75)
Issuance of Class B-2 common stock ............. -- -- 54,605 -- 54,610
Issuance of Class C common stock ............... 990,979 1 566 -- 567
Repurchase of Class C common stock ............. (94,750) -- (54) -- (54)
Issuance of common stock purchase warrants ..... -- -- 24,063 -- 24,063
Accretion of preferred stock ................... -- -- (21,329) -- (21,329)
Net loss ....................................... -- -- -- (22,272) (22,272)
------- --- ---------- --------- ----------
Balance at December 31, 1996 ................... 896,229 1 76,861 (23,796) 53,073
Repurchase of Class B-1 common stock ........... -- -- (25) -- (25)
Issuance of Class C common stock ............... 5,000 -- 10 -- 10
Repurchase of Class C common stock ............. (47,375) -- (27) -- (27)
Accretion of preferred stock ................... -- -- (21,702) -- (21,702)
Net loss ....................................... -- -- -- (15,474) (15,474)
------- --- ---------- --------- ----------
Balance at December 31, 1997 ................... 853,854 $ 1 $ 55,117 $ (39,270) $ 15,855
======= === ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of those financial statements.
F-74
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS OPERATIONS
A-3 Holdings Inc. ("Holdings" or the "Company") was incorporated on June 2, 1995
in the State of Delaware for the sole purpose of acquiring 100% of the
outstanding capital stock of Act III Broadcasting, Inc. ("Act III"), through its
wholly owned subsidiary A-3 Acquisition, Inc. ("A-3"), under a purchase
agreement dated June 19, 1995. The purchase of Act III was consummated on
January 4, 1996 (the "Act III Acquisition"), at which time A-3 merged with and
into Act III and changed its name to Sullivan Broadcasting Company, Inc. ("SBC")
(Note 3).
The Company currently owns, operates and programs, through its subsidiaries,
nine Fox Broadcasting Company ("Fox") affiliated television stations, one
television station affiliated with the American Broadcasting Companies, Inc.
("ABC"), and one independent television station throughout the Northeast,
Southeast, and the Mid-Atlantic states. The Company programs two independent
television stations under local marketing agreements ("LMA") in markets where
the Company owns another television station (Note 4). Television broadcasting is
subject to the jurisdiction of the Federal Communications Commission ("FCC")
under the Communications Act of 1934, as amended (the "Communications Act"). The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke, and modify broadcasting licenses, determine the
location of the stations, regulate the equipment used by the stations, adopt
regulations to carry out the provision of the Communications Act, and impose
penalties for violation of such regulations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidations
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents.
Revenue Recognition
Advertising revenues are recognized in the period during which the advertising
spots are aired. Revenues from other sources are recognized in the period when
the services are provided.
Trade and Barter Transactions
The Company trades certain advertising time for various goods and services.
These transactions are recorded at the estimated fair value of the goods or
services received. Revenues from trade transactions are recognized when
advertisements are broadcast and services or merchandise received are charged to
expense when received or used.
The Company barters advertising time for certain program material. These
transactions are recorded at management's estimate of the value of the
advertising time exchanged, which approximates the fair value of the program
material received.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to a concentration of
credit risk include cash, cash equivalents and accounts receivable. The Company
maintains cash in excess of federally insured deposits at several financial
institutions at December 31, 1997. The Company does not believe
F-75
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
that such deposits are subject to any unusual credit risk beyond the normal
credit risk associated with operating its business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations.
Programming Rights and Contracts Payable
Programming rights, primarily in the form of syndicated programs and feature
film packages, represent amounts paid or payable to program suppliers for the
limited right to broadcast the suppliers' programming and are recorded when
available for use. Programming rights are stated at the lower of unamortized
cost or net realizable value. Amortization is computed using the straight-line
method based on the license period or based on usage, whichever yields the
greater accumulated amortization for each program. The current portion of
programming rights represents those rights available for broadcast which will be
amortized in the succeeding year.
The Company has estimated the fair value of these programming contracts payable
at approximately $49,480,000 as of December 31, 1997 based on future cash flows
discounted at the Company's current borrowing rate.
Property and Equipment
Property and equipment is stated on the basis of cost or estimated fair value at
the date of acquisition. Major renewals and betterments are capitalized and
ordinary repairs and maintenance are charged to expense in the period incurred.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets which range from three to thirty-nine years.
Intangible Assets
Intangible assets represent the estimated fair value of both identifiable
intangible assets and goodwill resulting from acquisitions. Identifiable
intangibles include FCC broadcast licenses, network affiliation agreements,
non-competition agreements, and favorable leases and are being amortized on a
straight-line basis over periods ranging from 5 to 15 years. Goodwill is the
excess of the purchase price over the fair value of the net assets acquired,
determined through an independent appraisal, and is amortized over 40 years
using the straight-line method. The Company evaluates the recoverability of its
intangible assets whenever adverse events or changes in business climate
indicate that the expected undiscounted future cash flows from the related
intangible assets may be less than previously anticipated. If the net book value
of the related intangible asset exceeds the undiscounted future cash flows of
the intangible asset, the carrying value would be reduced to the present value
of its expected future cash flows and an impairment loss would be recognized.
The Company did not recognize any impairment loss during the years ended
December 31, 1996 and 1997.
Deferred Financing Costs
Deferred financing costs represent costs incurred in obtaining long-term
financing. These costs are expensed as interest over the lives of the related
loans, using the effective interest method.
Accounting for Income Taxes
The Company accounts for income taxes under the liability method of accounting
as set forth in Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes". Under the method prescribed by this statement, deferred
income taxes are recognized at enacted tax rates to reflect the future effects
of income tax carryforwards and temporary differences arising between the tax
basis of assets and liabilities and their financial reporting amounts at each
period end.
F-76
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Interest Rate Risk Management
The Company enters into interest rate swap agreements with commercial banks to
mitigate the risk of possible rising interest rates. These agreements are
designated as hedges of interest rates, and the differential to be paid or
received on interest rate swaps is accrued as an adjustment to interest expense
as interest rates change. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreements;
however, the Company does not anticipate nonperformance by the counterparties.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect the reported amounts of assets and liabilities and the disclosure
for contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results may vary from estimates used.
3. ACQUISITIONS
In 1996 and 1997, the Company made the acquisitions set forth below, each of
which has been accounted for as a purchase. The consolidated financial
statements include the operating results of each business from the date of
acquisition, except for the Act III Acquisition which includes the operating
results of Act III from January 1, 1996 through January 4, 1996 due to the
immateriality of the results in relation to the financial statements taken as a
whole. Pro forma results of operations of the other acquisitions made in 1996
and 1997 are not considered material.
The Act III Acquisition
On January 4, 1996, the Company acquired all of the outstanding stock of Act
III. The acquisition cost consisted of the following:
<TABLE>
<S> <C>
Cash paid to Act III shareholders ......... $ 359,108,000
Cash paid to retire debt .................. 167,764,000
Acquisition costs ......................... 23,173,000
-------------
$ 550,045,000
=============
</TABLE>
The excess of the purchase price over the fair value of the net assets acquired
was $208,861,000. In 1997, the Company received $751,000 from the sellers due to
the settlement of certain items for which funds were being held in escrow. This
amount, net of expenses, was recorded as a reduction of goodwill during the year
ended December 31, 1997.
The Utica Acquisition
On February 7, 1996, the Company executed an asset purchase agreement to acquire
certain assets of Mohawk Valley Broadcasting, Inc. ("Mohawk") and Acme T.V.
Corporation ("Acme"), the owners and operators of WFXV and WPNY in Utica, New
York, for a total purchase price of $400,000. In addition, the Company paid
$2,600,000 for the option to purchase the remaining assets of Mohawk and Acme
pending FCC approval for $250,000 and simultaneously entered into a LMA with
Mohawk and Acme (Note 4). One June 24, 1996, the FCC granted approval for the
Company to purchase the remaining assets at which time the LMA with Mohawk and
Acme was terminated and the remaining assets were purchased. The Company
allocated the total cost of $3,250,000 plus fees and expenses of $142,000 to the
net assets acquired. The excess of the purchase price over the fair value of the
net assets acquired was $1,322,000.
F-77
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
The Madison Acquisition
On July 1, 1996, the Company acquired substantially all of the assets of Channel
47 Limited Partnership, owner and operator of a television station in Madison,
Wisconsin (WMSN) for a total purchase price of $26,500,000 plus fees and
expenses of $84,000. The excess of the purchase price over the fair value of the
net assets acquired was $4,155,000.
The Nashville Acquisition
On February 22, 1996, the Company entered into a LMA with Central Tennessee
Broadcasting Corporation ("CTBC"), owner and operator of WXMT, an independent
television station in Nashville, Tennessee. Additionally, the Company paid
$200,000 for the option to acquire the stock of CTBC based upon certain events
defined in the underlying agreement for $13,710,000 in cash plus the repayment
of $13,030,000 of CTBC's debt. On July 12, 1996, the Company exercised the
option and purchased the stock of CTBC. The cost plus fees of $210,000 were
allocated to the net assets acquired. The excess of the purchase price over the
fair value of the net assets acquired was $17,505,000.
The Cascom Acquisition
On January 2, 1997, the Company acquired substantially all of the assets of
Cascom International, Inc. and related film libraries for $4,038,000 plus fees
and expenses of $104,000. The excess of the purchase price over the fair value
of the net assets acquired was $1,877,000.
4. LOCAL MARKETING AGREEMENTS
As part of the Act III Acquisition, the Company was assigned Act III's right,
title and interest in a LMA with Guilford Telecasters, Inc. ("Guilford"), owner
of WUPN (formerly WGGT), an independent television station in Greensboro, North
Carolina (the "WUPN LMA"). Under the WUPN LMA, the Company sells and collects
the advertising revenues of WUPN, programs WUPN, and reimburses Guilford for
operating expenses. In connection with the Act III Acquisition, the Company also
acquired Act III's right, title and interest in a prepayment made under the WUPN
LMA, which released the Company from the quarterly payments based on the cash
flows of WUPN which were initially required under the WUPN LMA. In July 1996,
Guilford sold the assets of WUPN to Mission Broadcasting II, Inc. ("Mission II")
and assigned their right, title and interest in the WUPN LMA to Mission II under
substantially similar terms.
On July 12, 1996, the Company entered into an LMA with Mission Broadcasting I,
Inc. ("Mission I"), owner of WUXP (formerly WXMT), an independent station in
Nashville, Tennessee (the "WUXP LMA"). Under the terms of the WUXP LMA, the
Company sells and collects the advertising revenues of WUXP and reimburses
Mission I for operating expenses and debt service requirements.
Net revenues of $7,121,000 and $11,989,000, respectively, and expenses of
$2,818,000, and $3,397,000, respectively, related to the WUXP and WUPN LMAs have
been included in the Company's consolidated statement of operations for the
years ended December 31, 1996 and 1997. The Company has guaranteed an aggregate
amount of debt of $3,850,000 related to WUXP and WUPN as of December 31, 1997.
F-78
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE -------------------------------
(YEARS) 1996 1997
------- ---- ----
<S> <C> <C> <C>
Land .................................................... -- $ 1,385,000 $ 1,426,000
Buildings and improvements .............................. 15-39 6,262,000 6,556,000
Broadcasting equipment .................................. 3-5 39,978,000 43,845,000
Furniture and other equipment ........................... 5-7 3,070,000 3,724,000
Construction in progress ................................ -- 1,624,000 1,288,000
------------ ------------
52,319,000 56,839,000
Less: accumulated depreciation and amortization ......... 7,865,000 17,116,000
------------ ------------
$ 44,454,000 $ 39,723,000
============ ============
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
AMORTIZATION DECEMBER 31,
PERIOD -----------------------------------
(YEARS) 1996 1997
------- ---- ----
<S> <C> <C> <C>
Commercial advertising contracts ........................ 15 $ 148,986,000 $ 148,986,000
Goodwill ................................................ 40 231,494,000 238,508,000
Affiliation agreements .................................. 10 98,445,000 98,445,000
FCC licenses ............................................ 15 81,297,000 81,297,000
Canadian cable rights ................................... 10 59,000,000 59,000,000
Other intangible assets ................................. 5- 15 11,936,000 14,015,000
------------- -------------
631,158,000 640,251,000
Less: accumulated amortization ........... 40,186,000 73,155,000
------------- -------------
$ 590,972,000 $ 567,096,000
============= =============
</TABLE>
7. LONG-TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997
---- ----
<S> <C> <C>
SENIOR DEBT:
Revolving credit facility ........... $ 30,000,000 $ 6,000,000
Acquisition credit facility ......... 26,500,000 53,500,000
Term loan ........................... 214,500,000 195,382,000
------------- -------------
271,000,000 254,882,000
Less: current portion ............... 18,583,000 23,562,000
------------- -------------
$ 252,417,000 $ 231,320,000
============= =============
</TABLE>
F-79
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997
---- ----
<S> <C> <C>
SUBORDINATED DEBT:
Senior accrual debentures, interest at 13.25%
compounded semi-annually payable
on June 15, 2001 and payable semi-
annual thereafter, principal due December 15, 2005 ......... $ 35,000,000 $ 35,000,000
Less: unamortized discount ................................... (4,859,000) (4,677,000)
------------- -------------
30,141,000 30,323,000
Senior subordinated notes, interest at 10.25% payable semi-
annually, principal due December 15, 2005 .................. 125,000,000 125,000,000
Senior subordinated notes, interest at 9.625% payable semi-
annually, principal due December 31, 2003 .................. 185,000 185,000
------------- -------------
$ 155,326,000 $ 155,508,000
============= =============
</TABLE>
On January 4, 1996, the Company entered into a Credit Agreement (the "Credit
Agreement") to provide a $220,000,000 term loan to finance the Act III
Acquisition. The Credit Agreement also provides for a revolving credit facility
and an acquisition credit facility allowing for borrowings of $30,000,000 and
$75,000,000, respectively, through 2003. During 1997, the Company rolled
$24,000,000 of borrowings under the revolving credit facility into the
acquisition credit facility per the lenders permission as the borrowings were
utilized to finance acquisitions. All borrowings under the Credit Agreement bear
interest at the lender's base rate plus a percentage determined based upon the
Company's most recent quarterly leverage ratio as defined in the Credit
Agreement (8.49% at December 31, 1997). The interest is payable quarterly or at
other increments if the Company has chosen a LIBOR interest rate for a period
greater than 90 days. These borrowings are secured by substantially all of the
Company's assets. The term loan is payable in varying quarterly installments
beginning in December 1996 through December 2003. The lender may require
prepayments based upon the meeting of certain cash flow criteria as defined in
the Credit Agreement.
The Credit Agreement requires the Company to enter into interest rate swap
agreements for notional amounts of at least 50% of its total outstanding
floating rate debt under the Credit Agreement. At December 31, 1997, the Company
had several interest rate swap agreements. These financial instruments, which
are not held for trading purposes, expire from 1998 to 2001. The swap agreements
set rates in the range of 5.14% to 5.61%. The notional amount related to these
agreements was $200,000,000 at December 31, 1997. The Company has no intentions
of terminating these instruments prior to their expiration dates unless it
repays a portion of its bank debt in advance of scheduled payments. The Company
estimates the fair value of these instruments at December 31, 1997 to be
$1,576,000.
On December 21, 1995, the Company issued and sold 35,000 units through a public
offering consisting in the aggregate of $35,000,000 in principal amount of
13.25% senior accrual debentures (the "Debentures") due in 2006 and 560,000
shares of Holdings Class B-1 common stock, the proceeds of which were used to
finance the acquisition of Act III. An estimated value of $5,600,000 was
assigned to the shares of Class B-1 common stock resulting in a discount of the
same amount on the Debentures. This discount is being amortized through charges
to interest expense over the life of the Debentures using the effective interest
method.
Interest on the Debentures for the period of issuance until June 15, 2001 will
accrue at the stated interest rate, compounded on a semi-annual basis, and will
be payable in cash on that date in an aggregate amount of $35,879,000.
Thereafter, interest on the Debentures will accrue at the stated rate and will
be payable semi-annually in arrears on June 15 and December 15 of each year,
commencing December 15, 2001. The Company is required to redeem $2,772,000 in
aggregated principal of the Debentures on June 15, 2001.
F-80
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
On December 21, 1995, the Company issued and sold $125,000,000 of 10.25% senior
subordinated notes (the "Notes") due on December 15, 2005 in a public offering,
the proceeds of which were used to finance the Act III Acquisition. The Notes
are unsecured and are subordinated to all existing and future debt of the
Company.
Interest on the Notes is payable semi-annually on June 15 and December 15 of
each year, commencing June 15, 1996. The Notes are subject to redemption on or
after December 15, 2000 at the option of the Company at redemption prices
specified in the debt agreement. In addition, on or prior to December 15, 1998,
the Company may redeem additional principal amounts of the Notes with the
proceeds from an initial public offering of equity at redemption prices
specified in the agreement, so long as 67% of the original principal of the
Notes is still outstanding.
Concurrent with the Act III Acquisition, the Company made a tender offer for
$100,000,000 9 5/8% senior subordinated notes (the "9 5/8 Notes") originally
issued by Act III. At December 31, 1997, $185,000 of the 9 5/8 Notes were still
outstanding.
The Credit Agreement, Debentures and Notes contain covenants which, among other
restrictions, require the Company to comply with certain financial ratios and
provisions and limit the Company's ability to incur additional indebtedness and
pay dividends. The Company was in compliance with all covenants as of December
31, 1997.
The Company has estimated the fair value of long-term debt at December 31, 1996
and 1997 to approximate the carrying value. The fair value was estimated by
discounting the future cash flows of loans with similar terms and remaining
maturities at the Company's current borrowing rate.
As of December 31, 1997, scheduled maturities, including debt discount, are
summarized as follows:
<TABLE>
<S> <C>
1998 ............... $ 23,562,000
1999 ............... 31,513,000
2000 ............... 42,017,000
2001 ............... 42,963,000
2002 ............... 42,963,000
Thereafter ......... 232,049,000
-------------
$ 415,067,000
=============
</TABLE>
F-81
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
8. INCOME TAXES
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 2, 1995) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, ------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current tax expense:
Federal ........................ $ -- $ -- $ 166,000
State .......................... 14,000 1,593,000 2,678,000
----------- -------------- ------------
14,000 1,593,000 2,844,000
Deferred tax benefit:
Federal ........................ (324,000) (8,779,000) (5,884,000)
State .......................... (25,000) (2,988,000) (2,448,000)
----------- -------------- ------------
(349,000) (11,767,000) (8,332,000)
----------- -------------- ------------
Net income tax benefit ......... $ (335,000) $ (10,174,000) $ (5,488,000)
=========== ============== ============
</TABLE>
Reconciling amounts, stated below as a percentage of pretax income, between the
statutory federal income tax rate and the Company's effective tax rate are as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 2, 1995) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, -----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate ........... 35.0% 35.0% 35.0%
State and local taxes, net ............ 1.2 4.3 (1.5)
Amortization of goodwill .............. -- (7.9) (9.5)
Other ................................. 0.6 -- --
Change in valuation allowance ......... (18.8) -- --
----- ---- ----
Effective tax rate .................... 18.0% 31.4% 24.0%
===== ==== ====
</TABLE>
The components of the net deferred tax liability at December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997
---- ----
<S> <C> <C>
Property and equipment .................................. $ (9,699,000) $ (7,624,000)
Programming rights ...................................... 770,000 239,000
Bad debts ............................................... 1,739,000 1,885,000
Intangible assets ....................................... (131,966,000) (119,912,000)
Accrued interest ........................................ 576,000 783,000
Net operating loss and charitable carryforwards ......... 61,357,000 46,073,000
Other assets ............................................ 2,649,000 2,879,000
Other ................................................... (4,882,000) (2,098,000)
-------------- --------------
Net deferred tax liability .............................. $ (79,456,000) $ (77,775,000)
-------------- --------------
</TABLE>
F-82
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
At December 31, 1997, the Company had net operating loss and charitable
contribution carryforwards of approximately $109,857,000 and $10,000,000,
respectively, for federal income tax purposes, available to reduce future
taxable income. To the extent not used, federal net operating loss carryforwards
expire in varying amounts beginning in 2003. In addition, the Company had net
operating loss carryforwards of approximately $38,604,000 for state and local
income tax purposes in various jurisdictions.
A corporation that undergoes a "change of ownership" pursuant to Section 382 of
the Internal Revenue Code is subject to limitations on the amount of its net
operating loss carryforwards which may be used in the future. An ownership
change occurred on January 4, 1996. The annual limitation on the use of the net
operating loss is $10,050,000. The Company estimates the limitation on the net
operating loss will not have a material adverse impact on the Company's
consolidated financial position or results of operations. No assurance can be
given that an ownership change will not occur as a result of other transactions
entered into by the Company, or by certain other parties over which the Company
has no control. If a "change in ownership" for income tax purposes occurs, the
Company's ability to use "pre-change losses" could be postponed or reduced,
possibly resulting in accelerated or additional tax payments which, with respect
to tax periods beyond 1997, could have a material adverse impact on the
Company's consolidated financial position or results of operations.
In 1996, the tax benefit related to the repurchase of stock options of
approximately $3,850,000 was recorded as a reduction of goodwill. In 1997, an
adjustment of approximately $4,500,000 was made to goodwill resulting from a
change in management's estimate of the ultimate tax benefit of acquired assets,
liabilities and carryforwards related to the Act III Acquisition.
9. MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
On January 4, 1996, the Company issued $115,000,000, 15% mandatorily redeemable
cumulative preferred stock (the "Preferred Stock"). Dividends accrue on the
outstanding shares of Preferred Stock at a rate of 15% per year compounding
annually. Accrued dividends are payable on March 15, 2001 and will be payable
annually subsequent to that date. In connection with the issuance of the
Preferred Stock, the Company issued 2,406,307 warrants to purchase Class B-1
common stock at $.001 per share. These warrants are currently exercisable and do
not expire. Accretion to record the value of the Preferred Stock at its
redemption value is calculated using the effective interest method. Such amounts
have been charged to additional-paid-in-capital.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid interest of $33,828,000 and $34,666,000 during the years ended
December 31, 1996 and 1997, respectively.
During the years ended December 31, 1996 and 1997, the programming rights
increased $44,679,000 and $31,800,000 due to the assumption of programming
liabilities.
During the years ended December 31, 1996 and 1997, the Company paid
approximately $1,749,000 and $3,600,000, respectively, for income taxes.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating lease agreements for land, office space, office
equipment and other property which expire on various dates through 2005. Rental
expense was $750,000 and $884,000 during the years ended December 31, 1996 and
1997, respectively. As of December 31, 1997, minimum required annual payments
under noncancelable operating leases are as follows:
F-83
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
<TABLE>
<S> <C>
1998 ............... $ 978,000
1999 ............... 968,000
2000 ............... 984,000
2001 ............... 836,000
2002 ............... 715,000
Thereafter ......... 1,230,000
-----------
$ 5,711,000
===========
</TABLE>
Programming Contracts
Programming contracts acquired under license agreements are recorded as an asset
and a corresponding liability at the inception of the license period. In
addition to the programming contracts payable at December 31, 1997, the Company
has $17,575,000 of commitments to acquire programming rights for which the
license period has not commenced and, accordingly, for which no asset or
liability has been recorded. Future minimum payments arising from such
commitments outstanding at December 31, 1997, excluding $18,976,000 of barter
commitments, are as follows:
<TABLE>
<S> <C>
1998 ............... $ 14,798,000
1999 ............... 11,437,000
2000 ............... 9,351,000
2001 ............... 5,868,000
2002 ............... 3,632,000
Thereafter ......... 1,167,000
------------
$ 46,253,000
============
</TABLE>
Litigation
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business. In the opinion of management, no existing or
contingent claims will have a material adverse effect on the Company's financial
position or results of operations.
Employment Contracts
The Company has entered into an employment contract with an executive officer of
the Company providing for a minimum aggregate amount of $500,000 payable
annually commencing September 13, 1995 for an initial term of eight years.
Additionally, the Company has guaranteed annual bonus arrangements with two
other executive officers which have historically been paid.
12. RELATED PARTY TRANSACTIONS
Operating expenses include reimbursements to ABRY Partners, Inc. ("ABRY"), an
entity related through common ownership, for the Company's allocable share of
rent paid by ABRY for the Company. These expenses approximated $73,000 and
$106,000 for the years ended December 31, 1996 and 1997, respectively, and are
included in selling, general and administrative expenses in the Company's
consolidated statement of operations.
The Company also pays ABRY a management fee for financial and other advisory
services. Management fees paid to ABRY were approximately $252,000 and $265,000
for the years ended December 31, 1996 and 1997, respectively, and are included
in selling general and administrative expenses in the Company's consolidated
statement of operations.
F-84
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
13. SUBSEQUENT EVENT
On February 23, 1998, the Company entered into a Plan of Merger (the "Merger").
Under the terms of the Merger, 100% of the issued and outstanding common stock
of the Company will be acquired by means of a merger. The Merger is subject to
approval of the FCC and is expected to close prior to August 1998.
F-85
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Sullivan Broadcasting Company, Inc.
(formerly Act III Broadcasting, Inc. as successor by
merger with A-3 Acquisition, Inc.)
In our opinion, the accompanying consolidated statements of operations, of cash
flows and of changes in shareholders' deficit present fairly, in all material
respects, the results of operations and cash flows of Sullivan Broadcasting
Company, Inc. and its subsidiaries (the "Company") for the year ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
March 25, 1996
F-86
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----
<S> <C>
Revenues ......................................................... $112,039
Less -- commissions ............................................ 19,914
--------
Net revenues ..................................................... 92,125
Trade and barter revenues ........................................ 7,876
--------
Total net revenues ............................................. 100,001
Expenses:
Operating expenses ............................................. 11,136
Selling, general and administrative ............................ 23,447
Amortization of programming rights ............................. 18,033
Depreciation and amortization .................................. 11,780
========
64,396
--------
Operating income ............................................... 35,605
Interest expense, including amortization of debt dis-
count and deferred loan costs .................................. 17,777
Other expenses ................................................... 247
--------
Income before benefit for income taxes ........................... 17,581
Benefit for income taxes ......................................... (4,762)
--------
Net income ....................................................... $ 22,343
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 22,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustment to goodwill relating to realization of
net operating loss ............................... 484
Depreciation of property and equipment ............ 3,147
Amortization of intangibles ....................... 8,633
Amortization of programming rights, excluding
barter ........................................... 10,728
Payments for programming rights ................... (8,368)
Prepayment of WGGT time brokerage fees ............ (6,000)
Amortization of debt issuance costs and discount... 851
Loss on sale or retirement of fixed assets ........ 24
Increase in interest payable ...................... 95
Amortization of deferred compensation ............. 153
Changes in assets and liabilities:
Increase in accounts receivable ................... (3,121)
Increase in prepaid expenses and other assets ..... (515)
Increase in deferred tax assets ................... (7,326)
Increase in taxes payable ......................... 1,105
Decrease in accounts payable and other accrued
liabilities ...................................... (413)
---------
Net cash provided by operating activities ........ 21,820
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for WGGT option ............................ (1,000)
Purchase of fixed assets ........................... (5,560)
---------
Net cash used for investing activities ........... (6,560)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of principal amounts ....................... (14,971)
---------
Net cash used for financing activities ........... (14,971)
---------
Net increase in cash and cash equivalents ........ 289
Cash and cash equivalents, beginning of year ..... 3,295
---------
Cash and cash equivalents, end of year ........... $ 3,584
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS C
----------------- -----------------
COMMON STOCK COMMON STOCK
----------------- -----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ........ 893.720 $ 9 666.879 $ 7
Accretion of discount and divi-
dends on 8% Cumulative Re-
deemable Preferred Stock ........... -- -- -- --
Amortization of deferred compen-
sation ............................. -- -- -- --
Net income .......................... -- -- -- --
------- --- ------- ---
Balance at December 31, 1995 ........ 893.720 $ 9 666.879 $ 7
======= === ======= ===
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED DEFERRED SHAREHOLDERS'
CAPITAL DEFICIT COMPENSATION DEFICIT
------- ------- ------------ -------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ........ $ 6,285 $ (114,639) $ (153) $ (108,491)
Accretion of discount and divi-
dends on 8% Cumulative Re-
deemable Preferred Stock ........... (2,518) -- -- (2,518)
Amortization of deferred compen-
sation ............................. -- -- 153 153
Net income .......................... -- 22,343 -- 22,343
--------- ---------- ------ ----------
Balance at December 31, 1995 ........ $ 3,767 $ (92,296) $ -- $ (88,513)
========= ========== ====== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
On January 4, 1996, all of the outstanding capital stock of Act III Broadcasting
(the "Company") was purchased by and the Company was merged with and into A-3
Acquisition, Inc. The Company then changed its name to Sullivan Broadcasting
Company, Inc. (Note 11).
The Company was incorporated in Delaware in 1986 and at December 31, 1995 owned,
operated and/or programmed, through its subsidiaries, seven Fox Broadcasting
Company ("Fox") affiliated stations, one television station affiliated with the
American Broadcasting Companies, Inc. ("ABC"), and two independent television
stations that the Company programs under time brokerage agreements throughout
the Northeast, Southeast, and Mid-Atlantic states. Television broadcasting is
subject to the jurisdiction of the Federal Communications Commission ("FCC")
under the Communications Act of 1934, as amended (the "Communications Act"). The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke and modify broadcasting licenses, determine the
location of the stations, regulate the equipment used by the stations, adopt
regulations to carry out the provisions of the Communications Act and impose
penalties for violation of such regulations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
As of December 31, 1995, Act III Communications Holdings, L.P. ("Holdings")
directly owned approximately 15%, 100% and 6% of the Company's 8% Cumulative
Redeemable Preferred Stock ("Senior Preferred Stock"), Class A Common Stock and
Class C Common Stock, respectively.
Revenue Recognition
Advertising revenues are recognized in the period during which the time spots
are aired. Revenues from other sources are recognized in the period when the
services are provided.
Trade and Barter Transactions
The Company trades certain advertising time for various goods and services.
These transactions are recorded at the estimated fair value of the goods or
services received. The related revenue is recognized when commercials are
broadcast. Goods or services received are recorded as assets or expenses when
received or used, respectively.
The Company barters advertising time for certain program material. These
transactions are recorded at management's estimate of the value of the
advertising time exchanged, which approximates the fair value of the program
material received.
Programming Rights and Contracts Payable
Programming rights, primarily in the form of syndicated programs and feature
film packages, represent amounts paid or payable to program suppliers for the
limited right to broadcast the suppliers' programming and are recorded when
available for use. Programming rights are stated at the lower of unamortized
cost or net realizable value. Amortization is computed using the straight-line
method based on the license period or based on usage, whichever yields the
greater accumulated amortization for each program.
F-90
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property and Equipment
Property and equipment is stated on the basis of cost or estimated fair value at
the date of acquisition. Expenditures for renewals and improvements that
significantly add to productive capacity or extend the useful life of an asset
are capitalized. Expenditures for maintenance and repairs are charged to income
when incurred. Depreciation is computed on the straight-line basis over the
estimated useful lives of the assets which range from 3 to 37 years.
Intangible Assets
Intangible assets represent the estimated fair value of both identifiable assets
and goodwill resulting from acquisitions. Identifiable intangibles include FCC
broadcast licenses, non-competition agreements, favorable leases, accelerated
market growth assets and underdeveloped market competition assets and are being
amortized on a straight-line basis over periods ranging from 5 to 15 years.
Goodwill is being amortized over 40 years using the straight-line method. The
Company evaluates the recoverability of its intangible assets whenever adverse
events or changes in business climate indicate that the expected undiscounted
future cash flows from the related intangible assets may be less than previously
anticipated. If the net book value of the related intangible asset exceeds the
undiscounted future cash flows of the intangible asset, the carrying value would
be reduced to the present value of its expected future cash flows and an
impairment loss would be recognized. The Company did not recognize any
impairment loss for the year ended December 31, 1995.
Deferred Loan Costs
Deferred loan costs represent costs incurred in obtaining long-term financing.
These costs are expensed as interest over the lives of the related loan using
the effective interest method.
Accounting for Income Taxes
The Company accounts for income taxes under the liability method of accounting
as set forth in Statement of Financial Accounting Standards No. 109; "Accounting
for Income Taxes". Under the method prescribed by this statement, deferred
income taxes are recognized at enacted tax rates to reflect the future effects
of income tax carryforwards and temporary differences arising between the tax
basis of assets and liabilities and their financial reporting amounts at each
period end.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect the reported amounts of assets and liabilities and the disclosure
for contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results may vary from estimates used.
Supplementary Statement of Operations Information
Included in operating expenses for the year ended December 31, 1995 were
advertising costs of $1,694,000 and music license fees of $548,000.
2. TIME BROKERAGE AGREEMENT
On September 30, 1991, the Company entered into a time brokerage agreement with
Guilford Telectasters, Inc. ("Guilford") for WGGT, an independent television
station in Greensboro, North Carolina. The purchase price was $2,000,000, plus
the assumption of $821,000 in film liabilities. Under the terms of the
agreement, Guilford sells certain broadcast time of WGGT to the Company for the
F-91
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
purpose of retransmitting the signal of WXLV, the Company's television station
in Winston-Salem, North Carolina. In addition to the purchase price, the Company
will remit quarterly payments, not to be lower than $50,000, to Guilford based
on a specified calculation. The term of the contract is five years with a
five-year extension that may be exercised by Guilford.
On June 30, 1995, the Company and Guilford amended the time brokerage agreement.
Under the terms of the amended agreement, the Company paid Guilford $6,000,000
in exchange for the right to broadcast the signal of WXLV on WGGT through
September 30, 2001. This payment released the Company from the quarterly
payments originally required under the agreement. This amount is being amortized
on a straight line basis, over the term of the agreement.
In conjunction with the amendment, the Company also paid Guilford $1,000,000 and
Guilford granted to a third party an option to purchase certain assets of WGGT
of an exercise price of $1,000,000. The third party granted the Company the
right to require such third party to assign this option to the Company or
another third party.
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
<S> <C>
Senior Debt:
Bank Credit Agreement, $60,000,000 revolving credit, commitment reducing
year by year, due December 31, 2000 ............................................ $ 24,000,000
Series A Senior Notes, interest at 11.34% payable semi-annually, principal
payable in semi-annual installments commencing June 30, 1993 ................... 15,260,000
Less: unamortized discount ...................................................... (109,000)
-------------
15,151,000
-------------
Series B Senior Notes, interest at 12.03% payable semi-annually, principal
payable in semi-annual installments commencing June 30, 1993 ................... 2,723,000
Series C Senior Notes, interest at 12.60% payable semi-annually, principal
due on December 31, 1996 ....................................................... 13,432,000
Less: unamortized discount ...................................................... (61,000)
-------------
13,371,000
-------------
Series D Senior Notes, interest at 13.31% payable semi-annually, principal
due on December 31, 1996 ....................................................... 4,368,000
Senior Acquisition Notes, interest at 12.92% payable semi-annually, principal
payable in semi-annual installments commencing June 30, 1993 ................... 3,363,000
-------------
62,976,000
Less: current maturities ........................................................ (24,078,000)
-------------
$ 38,898,000
=============
Subordinated Debt:
Senior Subordinated Notes, interest at 9.625% payable semi-annually, princi-
pal due December 15, 2003 ...................................................... $ 100,000,000
=============
</TABLE>
On December 22, 1993, the Company refinanced a substantial portion of its
outstanding debt. The Company secured a revolving credit facility (the "Bank
Credit Agreement") originally in the amount of $50 million, currently at $57.6
million, to mature on December 31, 2000, and issued $100 million of 9 5/8%
Senior Subordinated Notes due December 2003 ("Notes"). With the proceeds from
these transactions,
F-92
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Company repaid $35,000,000 of its Floating Rate Senior Notes, $36,867,000
Series A Senior Notes, $10,054,000 Series B Senior Notes, $8,689,000 Senior
Acquisition Notes, $7,568,000 Series A Subordinated Notes and $9,632,000 of its
Series B Subordinated Notes. In connection with the issuance of the Notes and
Bank Credit Agreement, the Company amended its existing loan agreement (the
"Amended Existing Agreement") which extended the maturity of a portion of the
Company's existing senior and subordinated debt from its then current maturity
of December 31, 1996 to December 31, 1997. Of the $40,615,000 of remaining notes
under the Amended Existing Agreement, $15 million is due December 31, 1997. All
the notes under the Amended Existing Agreement rank pari passu with the debt
issued under the Bank Credit Agreement. Concurrent with the refinancing, the
Company redeemed 17.2 shares of 8% Cumulative Redeemable Preferred Stock
("Senior Preferred Stock") at a price of $22,865,000 (see Note 5) and 606.478
shares of Class C Common Stock at a price of $16,557,000 (see Note 6).
The interest rate under the Bank Credit Agreement will be based, at the
Company's option, on the lender's (i) ABR; (ii) Eurodollar or (iii) CD rates
(each as defined therein), each plus an applicable margin which is based on the
Company's ratio of Total Funded Debt to Operating Cash Flow (as defined
therein). Interest rates will be adjusted monthly, with the applicable margins
varying between .5% to 1.5% for the ABR rate, 1.5% to 2.5% for the Eurodollar
rate, and 1.625% to 2.625% for the CD rate. The Company is required to pay to
the lender an annual commitment and an annual agency fee. The interest rate at
December 31, 1995 was 7.25%.
Borrowings under the Bank Credit Agreement are subject to a maximum available
amount (the "Maximum Amount"), currently $57.6 million, and may be repaid and
reborrowed at any time. The Maximum Amount is being reduced in varying quarterly
amounts beginning June 30, 1995 through December 31, 2000. Principal amounts
outstanding on such dates must be repaid to reduce total outstanding principal
to at least the Maximum Amount. Generally, the Company may prepay a greater
amount of borrowed funds than is required without premium or penalty, except for
certain breakage costs associated with prepayment of CD and Eurodollar loans.
The Series A Senior Notes require principal payments of $260,000 on each June 30
and December 31 through June 30, 1996, with the remaining $15,000,000 due on
December 31, 1997. In consideration for extending this maturity to 1997 the
Company will be required to pay a 3% premium or $450,000 upon maturity. The
Company has recorded the liability for this premium. The Series B Senior Notes
require principal payments of $359,000 on each June 30 and December 31 through
June 30, 1996 with the remaining $2,364,000 due December 31, 1996. The Series C
Senior Notes and Series D Senior Notes are due in full on December 31, 1996. A
principal payment on Senior Acquisition Notes totaling $214,000 is due on June
30, 1996 with the remaining $3,147,000 due on December 31, 1996. Interest is
payable in semi-annual installments on June 30 and December 31.
The Notes mature on December 15, 2003. Interest on the Notes accrues at the rate
of 9 5/8% per annum and will be payable semiannually in arrears on June 15, and
December 15. Although the Notes are general unsecured obligations of the Company
and are subordinate to all indebtedness, the Notes are guaranteed jointly and
severally by each of the Company's subsidiaries.
As of December 31, 1995, scheduled maturities, including discounts, are
summarized as follows:
<TABLE>
<S> <C>
1996 ......................... $ 24,145,000
1997 ......................... 15,000,000
1998 ......................... --
1999 ......................... 9,000,000
2000 ......................... 15,000,000
Thereafter ................... 100,000,000
------------
$163,145,000
</TABLE>
F-93
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Notes, Bank Credit Agreement and Amended Existing Agreement of the Company
contain covenants which, among other restrictions, require the maintenance of
certain financial ratios and cash flow, restrict asset purchases and the
encumbrance of existing assets, require lender approval for proposed
acquisitions, and limit the incurrence of additional indebtedness and the
payment of dividends.
The Company has estimated the fair value of long-term debt at December 31, 1995
to approximate the carrying value. The fair value was estimated by discounting
the future cash flows of loans with similar terms and remaining maturities at
the Company's current borrowing rate.
4. INCOME TAXES
The Company accounts for income taxes in accordance with Financial Accounting
Standards Statement No. 109, "Accounting for Income Taxes" ("FAS 109"), which
mandates the liability method for computing deferred income taxes. The provision
for income taxes charged to continuing operations was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----
<S> <C>
Current tax expense:
Federal ....................................... $ 373,000
State ......................................... 1,265,000
------------
1,638,000
Deferred tax expense (benefit):
Federal ....................................... (7,000,000)
State ......................................... 116,000
------------
(6,884,000)
Benefit of acquired loss carryforward used to re-
duce goodwill ................................. 484,000
------------
Total benefit ................................... $ (4,762,000)
============
</TABLE>
Reconciling amounts, stated below as a percentage of pretax income, between the
statutory federal income tax rate and the Company's effective tax rate are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----
<S> <C>
U.S. federal statutory rate ....................... 35.0%
State and local taxes, net ........................ 5.1%
Amortization of goodwill .......................... 1.3%
Realized benefit for net operating losses ......... (27.1)%
Other ............................................. 0.3%
Change in valuation allowance ..................... (41.7)%
-----
Effective tax rate ................................ (27.1)%
=====
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
<S> <C>
Property and equipment ......... $ (744,000)
Programming rights ............. 3,498,000
</TABLE>
F-94
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Bad debts ................................ 443,000
Intangible assets ........................ 745,000
Music license fees ....................... 12,000
Net operating loss carryforwards ......... 25,373,000
Other .................................... (944,000)
----------
28,383,000
Less -- valuation allowance .............. (21,057,000)
-----------
Net deferred tax asset ................... $ 7,326,000
=============
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $60,303,000 for federal income tax purposes, available to reduce
future taxable income. To the extent not used, federal net operating loss
carryforwards expire in varying amounts beginning in 2002. In addition, the
Company had net operating loss carryforwards of approximately $44,147,000 for
state and local income tax purposes in various jurisdictions. Under FAS 109, the
Company has recorded valuation allowances against the realization of the federal
and state and local tax benefits resulting from net operating losses in the
amounts of $16,647,000 at December 31, 1995. In 1995, the valuation allowance
decreased by $11,438,000, of this $7,326,000 was a result of the determination
by management that it is more likely than not that certain deferred tax assets
will be utilized in future periods. The remaining valuation allowances are based
on management's estimates and analysis, which include the impact of tax laws
which may limit the Company's ability to utilize such loss carryforwards.
A corporation that undergoes a "change of ownership" pursuant to Section 382 of
the Internal Revenue Code is subject to limitations on the amount of its net
operating loss carryforwards which may be used in the future. An ownership
change occurred on January 4, 1996. The Company estimates the limitation on the
net operating loss will not have a material adverse impact on the Company's
consolidated financial position or results of operations. No assurance can be
given that an ownership change will not occur as a result of other transactions
entered into by the Company, or by certain other parties over which the Company
has no control. If a "change in ownership" for income tax purposes occurs, the
Company's ability to use "pre-change losses" could be postponed or reduced,
possibly resulting in accelerated or additional tax payments which, with respect
to tax periods beyond 1995, could have a material adverse impact on the
Company's consolidated financial position or results of operations.
In addition, net operating loss carryforwards acquired through the acquisition
of a corporation are also subject to limitations on the amount which may be used
in the future. If the acquired net operating loss carryforwards are utilized,
the tax benefit will result in an adjustment to the purchase price allocations
of the acquired corporation. As a result of the acquisition of Act III
Broadcasting of Dayton, Inc. (formerly Meridian Communications Corporation) and
Act III Broadcasting of West Virginia, Inc. (formerly West Virginia Telecasting,
Inc.) by the Company, federal tax net operating loss carryforwards were
acquired. During 1995, the Company utilized approximately $1.4 million of the
acquired net operating loss carryforwards with a resulting reduction of
approximately $.5 million to goodwill.
5. 8% CUMULATIVE REDEEMABLE PREFERRED STOCK ("SENIOR PREFERRED STOCK")
Dividends accrue on the outstanding shares of the Senior Preferred Stock at a
rate of 8% per annum of the dividend base. The dividend base is the number of
shares outstanding times $1,000,000 per share plus accrued dividends and is
adjusted on December 31 of each year for dividends accrued during the year. The
accrued dividends converted to shares of Senior Preferred Stock on December 31,
1995 at $1,000,000 per share. All dividends earned subsequent to that date shall
be paid, in cash, on each December 31. With the exception of stock dividends on
securities that are subordinate to the Senior Preferred Stock, dividends may not
be paid on the Class A Common Stock or Class C Common Stock
F-95
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
until all accrued dividends relating to the Senior Preferred Stock are paid and
there is no outstanding mandatory redemption obligation. Accretion to record the
value of the Senior Preferred Stock at its redemption value on its scheduled
redemption date is calculated using the effective interest method. Such amounts
have been charged to additional paid-in capital in the accompanying financial
statements. Holders of the Senior Preferred Stock are entitled to elect one
director if any dividends payable are in arrears and unpaid for two consecutive
periods or the Company fails to discharge its mandatory redemption obligation
and have no voting rights except under certain specified circumstances.
The Company has estimated the fair value of the Senior Preferred Stock at
December 31, 1995 to approximate the carrying value based on the recently
negotiated redemption values.
In connection with the issuance of the Notes and the Bank Credit Agreement, the
Company redeemed 17.2 shares of Senior Preferred Stock at a price of $1,000,000
per share plus accrued dividends totaling $22,865,000. The mandatory redemption
on the remaining 16.627 shares of Senior Preferred Stock has been extended from
December 31, 1996 to December 31, 2004. Beginning January 1, 1994, the dividend
on the Senior Preferred Stock increased to 9% from 8%. On January 1, 1997, the
dividend rate will increase to 11% per annum. Dividends are payable in cash or
in-kind at the Company's option. The Senior Preferred Stock will be redeemable,
in whole or in part, at anytime without premium. If the Senior Preferred Stock
is outstanding after December 31, 1996, the holders are entitled to a one-time
2% dividend payable at redemption. Beginning January 1, 2000, the Company will
issue to the holders of Senior Preferred Stock, warrants to purchase Class C
Common Stock every three months.
Each holder will receive thirty-six and one-half warrants for each share of
Senior Preferred Stock owned. Each warrant will entitle the holder to purchase
one share of Class C Common Stock at a price of $27,397 per share. A warrant may
be exercised with cash or by tendering Senior Preferred Stock to the Company.
The warrants expire at the end of each three month period.
6. SHAREHOLDERS' DEFICIT
Class C Common Stock is convertible into Class A Common Stock on a one-to-one
ratio upon the occurrence of certain events. Any necessary approval of the FCC
must be obtained prior to all stock conversions.
Holders of the Class A Common Stock are entitled to one vote per share on all
matters submitted to shareholder vote. Holders of Class C Common Stock have no
voting rights except under certain specified circumstances.
In the event of liquidation, dissolution or winding-up of the affairs of the
Company, the holders of Class A Common Stock and Class C Common Stock are
entitled to share ratably, based on the number of shares held by each holder, in
the remaining assets of the Company.
Holdings has pledged all of its Class A Common Stock of the Company (the
"Holdings Pledge") to secure a promissory note (the "Holdings Note") in the
amount of $12 million held by Mediafin USA Incorporated, a Delaware corporation
("Mediafin") and a wholly owned subsidiary of Tractebel S.A., a Belgian company.
Any foreclosure by Mediafin on the Company's stock, however, would require prior
approval of the FCC. Current FCC rules restrict foreign ownership of broadcast
companies and Mediafin is owned by a foreign entity. The Holdings Note is
assignable in whole or in part, however, the Holdings Pledge of the Company's
Class A Common Stock to Mediafin is not assignable without Holdings' consent.
On November 30, 1989, the Company implemented a stock option plan (the "Plan")
whereby 250 shares of the authorized but unissued shares of Class B Common Stock
have been reserved for issuance upon the exercise of nonqualified stock options
to be granted to certain key personnel. These options are exercisable for a
period of up to ten years from the date of grant. The Class B Common Stock is
convertible into Class A Common Stock at a ratio of one-to-one upon the
occurrence of certain events.
F-96
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following options were outstanding under the Plan at December 31, 1995:
<TABLE>
<CAPTION>
PER SHARE
EXERCISE
NUMBER PRICE
------ -----
<S> <C> <C>
Options outstanding at December 31, 1994 ......... 250.0
Option granted during 1995 ....................... 33.0 $11,850
-----
Options outstanding at December 31, 1995 ......... 283.0
=====
</TABLE>
No options were exercised during the year ended December 31, 1995. There is no
compensation expense associated with the options granted in 1995 as the exercise
price approximates the fair value at the date of the grant.
7. LEASES
The Company has operating lease agreements for land, office space, office
equipment and other property which expire on various dates through 2005. Rental
expense was $691,000 during the year ended December 31, 1995.
As of December 31, 1995, minimum required annual payments under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1996 ....................... $ 650,000
1997 ....................... 620,000
1998 ....................... 594,000
1999 ....................... 595,000
2000 ....................... 510,000
Thereafter ................. 2,518,000
----------
$5,487,000
==========
</TABLE>
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid interest of $16,862,000 during the year ended December 31,
1995.
During the year ended December 31, 1995 the programming rights increased
$12,913,000, due to the assumption of programming liabilities.
During the year ended December 31, 1995 the Company paid approximately $995,000
for income taxes.
9. COMMITMENTS AND CONTINGENCIES
The Company has executed contracts for programming rights totaling approximately
$18,961,000 at December 31, 1995, for which the broadcast period has not begun.
Accordingly, the asset and related liability are not recorded at such dates.
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business. In the opinion of management, no existing or
contingent claims will have a material adverse effect on the Company's financial
position or results of operations.
The Company has entered into employment contracts with two of its executive
officers in the minimum aggregate amount of $425,000 payable annually commencing
June 1, 1993 and ending December 31, 1996. In addition, the Company has
quarterly bonus arrangements for its executive officers which are based on
achieving budgeted performance goals. Such budgeted performance goals have been
met historically.
F-97
<PAGE>
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has no post-retirement or post-employment benefit plans.
10. RELATED PARTY TRANSACTIONS
The Company has a management agreement with Holdings to reimburse certain salary
and operating expenses incurred on behalf of the Company. Operating expenses
include reimbursements to Holdings for $6,100 per month representing an
allocable share of rent paid by Holdings under its lease. During the year ended
December 31, 1995, the Company paid $913,000 in management fees and other
charges to Holdings. Such amounts have been included in selling, general and
administrative expenses in the Company's consolidated statements of operations.
A former member of the Company's Board of Directors, who was a member from 1990
through October 1993, also serves as Chairman and President of the Buffalo
Sabres, a professional hockey team. Total programming rights fees payable to the
Buffalo Sabres are $340,000 at December 31, 1995.
11. SUBSEQUENT EVENT
On January 4, 1996, A-3 Acquisition, Inc. ("A-3") acquired substantially all of
the outstanding stock of the Company for approximately $517,000,000 plus certain
amounts defined in the purchase and sale agreement which are based on working
capital and less the amounts necessary to repurchase or repay the existing
indebtedness of the Company. The acquisition will be accounted for by the
purchase method. Accordingly, the results of operations of the Company will be
included with those of A-3 for periods subsequent to the date of acquisition.
The unaudited pro forma combined condensed balance sheet of the Company and A-3
as of December 31, 1995 after giving effect to certain pro forma adjustments is
as follows:
<TABLE>
<S> <C>
ASSETS
Current assets ............................. $ 49,728,000
Property and equipment, net ................ 44,164,000
Other assets and intangible assets ......... 649,054,000
------------
$742,946,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities ........................ $ 29,043,000
Long-term debt ............................. 488,395,000
Shareholders' equity ....................... 225,508,000
------------
$742,946,000
============
</TABLE>
The unaudited pro forma combined results of operations of the Company and A-3
for the year ended December 31, 1995 after giving effect to certain pro forma
adjustments are as follows:
<TABLE>
<S> <C>
Net revenues .................. $ 101,082,000
Net loss ...................... $ (10,367,000)
</TABLE>
F-98
<PAGE>
ANNEX A
SECTION 262 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation or consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation: and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more share, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to sec.
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
nation market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a and b of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a, b and c of this
paragraph.
A-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidated has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of deter-
A-2
<PAGE>
mining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given; provided that, if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the notice
is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall by borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial up on the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporate pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
A-3
<PAGE>
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holder of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
A-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Amendment and Restatement and By-Laws of Sinclair state
that Sinclair shall indemnify, and advance expenses to, its directors and
officers whether serving Sinclair or at the request of another entity to the
fullest extent permitted by and in accordance with Section 2-418 of the Maryland
General Corporation Law. Section 2-418 contains certain provisions which
establish that a Maryland corporation may indemnify any director or officer made
party to any proceeding by reason of service in that capacity, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by the director or officer in connection with such proceeding unless it
is established that the director's or officer's act or omission was material to
the matter giving rise to the proceeding and the director or officer (i) acted
in bad faith or with active and deliberate dishonesty; (ii) actually received an
improper personal benefit in money, property or services; or (iii) in the case
of a criminal proceeding, had reasonable cause to believe that his act was
unlawful. However, if the proceeding was one by or in the right of the
corporation, indemnification may not be made if the director or officer is
adjudged to be liable to the corporation. The statute also provides for
indemnification of directors and officers by court order.
Section 12 of Article II of the Amended By-Laws of Sinclair provides as
follows:
A director shall perform his duties as a director, including his duties as
a member of any Committee of the Board upon which he may serve, in good faith,
in a manner he reasonably believes to be in the best interests of the
Corporation, and with such care as an ordinarily prudent person in a like
position would use under similar circumstances. In performing his duties, a
director shall be entitled to rely on information, opinions, reports, or
statements, including financial statements and other financial data, in each
case prepared or presented by:
(a) one or more officers or employees of the Corporation whom the
director reasonably believes to be reliable and competent in the
matters presented;
(b) counsel, certified public accountants, or other persons as to
matters which the director reasonably believes to be within such
person's professional or expert competence; or
(c) a Committee of the Board upon which he does not serve, duly
designated in accordance with a provision of the Articles of
Incorporation or the By-Laws, as to matters within its designated
authority, which Committee the director reasonably believes to
merit confidence.
A director shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause such
reliance described above to be unwarranted. A person who performs his
duties in compliance with this Section shall have no liability by reason of
being or having been a director of the Corporation.
Sinclair has also entered into indemnification agreements with certain
officers and directors which provide that Sinclair shall indemnify and
advance expenses to such officers and directors to the fullest extent
permitted by applicable law in effect on the date of the agreement, and to
such greater extent as applicable law may thereafter from time to time
permit. Such agreements provide for the advancement of expenses (subject to
reimbursement if it is ultimately determined that the officer or director
is not entitled to indemnification) prior to the disposition of any claim
or proceeding.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 See Exhibit Numbers 10.66 and 10.67
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended By-Laws of Sinclair Broadcast Group, Inc., as amended as of May 31, 1995 (2)
4.1 Indenture, dated as of December 9, 1993, among Sinclair Broadcast Group, Inc., its
wholly-owned subsidiaries and First Union National Banks of North Carolina, as trustee.
(2)
4.2 Indenture, dated as of August 28, 1995, among Sinclair Broadcast Group, Inc., its wholly-
owned subsidiaries and the United States Trust Company of New York as trustee. (2)
4.3 Form of Senior Subordinated Indenture among Sinclair Broadcast Group, Inc. and First
Union National Bank, as trustee. (9)
4.4 Form of First Supplemental Indenture among Sinclair Broadcast Group, Inc. the Guaran-
tors named therein and First Union National Bank, as trustee, including Form of Note. (9)
5.1* Opinion of Wilmer, Cutler & Pickering as to the legality of the Class A Common Stock
5.2* Opinion of Thomas & Libowitz as to the legality of the Class A Common Stock
10.1 Asset Purchase Agreement, dated as of April 10, 1996, by and between River City Broadcast-
ing, L.P. as seller and Sinclair Broadcast Group, Inc. as buyer. (3)
10.2 Option Agreement, dated as of April 10, 1996, by and among River City Broadcasting, L.P., as
sellers and Sinclair Broadcast Group, Inc. (3)
10.3 Modification Agreement, dated as of April 10, 1996, by and between River City Broadcast
Group, L.P. as seller, and Sinclair Broadcast Group, Inc. as buyer, with reference to Asset
Purchase Agreement. (3)
10.4 Stock Option Agreement dated April 10, 1996 by and between Sinclair Broadcast Group, Inc.
and Barry Baker. (10)
10.5 Employment Agreement, dated as of April 10, 1996, with Barry Baker. (1)
10.6 Indemnification Agreement, dated as of April 10, 1996, with Barry Baker. (1)
10.7 Time Brokerage Agreement, dated as of May 31, 1996, by and among Sinclair Communica-
tions, Inc., River City Broadcasting, L.P. and River City License Partnership and Sinclair
Broadcast Group, Inc. (1)
10.8 Registration Rights Agreement, dated as of May 31, 1996, by and between Sinclair Broadcast
Group, Inc. and River City Broadcasting, L.P. (1)
10.9 Time Brokerage Agreement, dated as of August 3, 1995, by and between River City Broad-
casting, L.P. and KRRT, Inc. and Assignment and Assumption Agreement dated as of May
31, 1996 by and among KRRT, Inc., River City Broadcasting, L.P. and KABB, Inc. (as As-
signee of Sinclair Broadcast Group, Inc.). (1)
10.10 Loan Agreement, dated as of July 7, 1995, by and between Keymarket of South Carolina, Inc.
and River City Broadcasting, L.P. and First Amendment to Loan Agreement dated as of May
24, 1996. (1)
10.11 Option Agreement, dated as of July 7, 1995, by and among Keymarket of South Carolina,
Kerby E. Confer and River City Broadcasting, L.P. (1)
10.12 Letter Agreement, dated August 20, 1996, between Sinclair Broadcast Group, Inc., River City
Broadcasting, L.P. and Fox Broadcasting Company. (4)
10.13 Asset Purchase Agreement, dated January 31, 1997, by and between Channel 21, L.P. and
KUPN, Inc. (10)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.14 Promissory Note, dated as of May 17, 1990, in the principal amount of $3,000,000 among
David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith (as makers)
and Sinclair Broadcast Group, Inc., Channel 63, Inc., Commercial Radio Institute, Inc.,
WTTE, Channel 28, Inc. and Chesapeake Television, Inc. (as holders). (5)
10.15 Term Note, dated as of September 30, 1990, in the principal amount of $7,515,000 between
Sinclair Broadcast Group, Inc. (as borrower) and Julian S. Smith (as lender). (6)
10.16 Replacement Term Note dated as of September 30, 1990 in the principal amount of
$6,700,000 between Sinclair Broadcast Group, Inc. (as borrower) and Carolyn C. Smith (as
lender) (2)
10.17 Note dated as of September 30, 1990 in the principal amount of $1,500,000 between
Frederick G. Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as borrowers
and Sinclair Broadcast Group, Inc. (as lender) (5)
10.18 Amended and Restated Note dated as of June 30, 1992 in the principal amount of
$1,458,489 between Frederick G. Smith, David D. Smith, J. Duncan Smith and Robert E.
Smith (as borrowers) and Sinclair Broadcast Group, Inc. (as lender) (5)
10.19 Term Note dated August 1, 1992 in the principal amount of $900,000 between Frederick
G. Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as borrowers) and
Commercial Radio Institute, Inc. (as lender) (5)
10.20 Management Agreement dated as of January 6, 1992 between Keyser Communications,
Inc. and WPGH, Inc. (5)
10.21 Promissory Note dated as of December 28, 1986 in the principal amount of $6,421,483.53
between Sinclair Broadcast Group, Inc. (as maker) and Frederick H. Himes, B. Stanley
Resnick and Edward A. Johnston (as representatives for the holders) (5)
10.22 Term Note dated as of March 1, 1993 in the principal amount of $6,559,000 between Julian
S. Smith and Carolyn C. Smith (as makers-borrowers) and Commercial Radio Institute,
Inc. (as holder-lender) (5)
10.23 Restatement of Stock Redemption Agreement by and among Sinclair Broadcast Group,
Inc. and Chesapeake Television, Inc., et al. dated June 19, 1990 (5)
10.24 Corporate Guaranty Agreement dated as of September 30, 1990 by Chesapeake Televi-
sion, Inc., Commercial Radio, Inc., Channel 63, Inc. and WTTE, Channel 28, Inc. (as
guarantors) to Julian S. Smith and Carolyn C. Smith (as lenders) (5)
10.25 Security Agreement dated as of September 30, 1990 among Sinclair Broadcast Group, Inc.,
Chesapeake Television, Inc., Commercial Radio Institute, Inc., WTTE, Channel 28, Inc.
and Channel 63, Inc. (as borrowers and subsidiaries of the borrower) and Julian S. Smith
and Carolyn C. Smith (as lenders) (5)
10.26 Term Note dated as of September 22, 1993, in the principal amount of $1,900,000 between
Gerstell Development Limited Partnership (as maker-borrower) and Sinclair Broadcast
Group, Inc. (as holder-lender) (5)
10.27 Third Amended and Restated Credit Agreement, dated as of May 20, 1997, by and among
Sinclair Broadcast Group, Inc., Certain Subsidiary Guarantors, Certain Lenders and the
Chase Manhattan Bank as Agent. (11)
10.28 Incentive Stock Option Plan for Designated Participants. (2)
10.29 Incentive Stock Option Plan of Sinclair Broadcast Group, Inc. (2)
10.30 First Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc.,
adopted April 10, 1996. (10)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.31 Second Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc.,
adopted May 31, 1996. (10)
10.32 1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc. (10)
10.33 Employment Agreement by and between Sinclair Broadcast Group, Inc. and Robert E.
Smith, dated as of June 12, 1995. (10)
10.34 Employment Agreement by and between Sinclair Broadcast Group, Inc. and J. Duncan
Smith, dated as of June 12, 1995. (10)
10.35 Employment Agreement by and between Sinclair Broadcast Group, Inc. and Frederick G.
Smith, dated as of June 12, 1995. (10)
10.36 Employment Agreement by and between Sinclair Broadcast Group, Inc. and David D.
Smith, dated as of June 12, 1995. (10)
10.37 Common Stock Option dated as of August 26, 1994 by and between Communications
Corporation of America (as optionee) and Sinclair Broadcast Group, Inc. (as optionor) (2)
10.38 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and William Richard Schmidt, as trustee (2)
10.39 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and C. Victoria Woodward, as trustee (2)
10.40 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and Dyson Ehrhardt, as trustee (2)
10.41 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and Mark Knobloch, as trustee (2)
10.42 Agreement and Plan of Merger of Keyser Communications, Inc. into Sinclair Broadcast
Group, Inc. dated May 4, 1995 and Articles of Merger dated May 4, 1995 (2)
10.43 Amended and Restated Asset Purchase Agreement by and between River City Broadcast-
ing, L.P. and Sinclair Broadcast Group, Inc. dated as of April 10, 1996 and amended and
restated as of May 31, 1996 (7)
10.44 Group I Option Agreement by and among River City Broadcasting, L.P. and Sinclair
Broadcast Group, Inc. dated as of May 31, 1996 (7)
10.45 Columbus Option Agreement by and among River City Broadcasting, L.P. and River City
License Partnership and Sinclair Broadcast Group, Inc. dated as of May 31, 1996 (7)
10.46 Option Agreement dated as of May 24, 1994 between Kansas City TV 62 Limited Partner-
ship and the Individuals Named Herein, on Behalf of an Entity To Be Formed (1)
10.47 Option Agreement dated as of May 24, 1994 between Cincinnati 64 Limited Partnership
and the Individuals Named Herein, on Behalf of an Entity To Be Formed (1)
10.48 Stock Purchase Agreement dated as of March 1, 1996 by and between Sinclair Broadcast
Group, Inc. and The Stockholders of Superior Communications Group, Inc. (1)
10.49 Asset Purchase Agreement dated as of January 16, 1996 by and between Bloomington
Comco, Inc. And WYZZ, Inc. (1)
10.50 Asset Purchase Agreement dated as of June 10, 1996 by and between WTTE, Channel 28,
Inc. and WTTE, Channel 28 Licensee, Inc. and Glencairn, Ltd. (1)
10.51 Asset Purchase Agreement dated April 10, 1996 by and between KRRT, Inc. and SBGI,
Inc. (8)
10.52 Agreement for the purchase of assets dated as of January 16, 1996 and escrow agreement
dated as of January 16, 1996 between Bloomington Comco, Inc. and Sinclair Broadcast
Group (6)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.53 Stock Purchase Agreement dated as of March 1, 1996 by and among Sinclair Broadcast
Group, Inc. and PNC Capital Corp., Primus Capital Fund II, Ltd., Albert M. Holtz, Perry
A. Sook, Richard J. Roberts, George F. Boggs, Albert M. Holtz, as Trustee for the Irre-
vocable Deed of Trust for Tara Ellen Holtz, dated December 6, 1994, and Albert M. Holtz
as trustee for the Irrevocable Deed of Trust for Meghan Ellen Holtz, dated December 6,
1994 (6)
10.54 Primary Television Affiliation Agreement dated as of March 24, 1997 by and between
American Broadcasting Companies, Inc., River City Broadcasting, L.P. and Chesapeake
Television, Inc. (Confidential treatment has been requested. The copy filed omits the in-
formation subject to a confidentiality request.)
10.55 Primary Television Affiliation Agreement dated as of March 24, 1997 by and between
American Broadcasting Companies, Inc., River City Broadcasting, L.P. and WPGH, Inc.
(Confidential treatment has been requested. The copy filed omits the information subject
to a confidentiality request.)
10.56 Asset Purchase Agreement by and among Entertainment Communications, Inc., Tuscaloosa
Broadcasting, Inc., Sinclair Radio of Portland Licensee, Inc. and Sinclair Radio of Roch-
ester Licensee, Inc., dated as of January 26, 1998. (13)
10.57 Time Brokerage Agreement by and among Entertainment Communications, Inc.,
Tuscaloosa Broadcasting, Inc., Sinclair Radio of Portland Licensee, Inc. and Sinclair Radio
or Rochester Licensee, Inc., dated as of January 26, 1998. (13)
10.58 Stock Purchase Agreement by and among the sole stockholders of Montecito Broadcasting
Corporation, Montecito Broadcasting Corporation and Sinclair Communications, Inc.,
dated as of February 3, 1998. (13)
10.59 Stock Purchase Agreement by and among Sinclair Communications, Inc., the stockholders
of Max Investors, Inc., Max Investors, Inc. and Max Media Properties LLC., dated as of
December 2, 1997. (13)
10.60 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Manage-
ment LLC and Max Media Properties LLC., dated as of December 2, 1997. (13)
10.61 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Television
Company, Max Media Properties LLC and Max Media Properties II LLC., dated as of
December 2, 1997. (13)
10.62 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Television
Company, Max Media Properties LLC and Max Media Properties II LLC., dated as of
January 21, 1998. (13)
10.63 Asset Purchase Agreement by and among Tuscoloosa Broadcasting, Inc., WPTZ Licensee,
Inc., WNNE Licensee, Inc., and STC Broadcasting of Vermont, Inc., dated as of February 3,
1998. (13)
10.64 Stock Purchase Agreement by and among Sinclair Communications, Inc. and the stockholders
of Lakeland Group Television, Inc., dated as of November 14, 1997. (13)
10.65 Stock Purchase Agreement by and among Sinclair Communications, Inc., the stockholders of
Max Radio, Inc., Max Radio Inc. and Max Media Properties LLC, dated as of December 2,
1997. (13)
10.66 Agreement and Plan of Merger among Sullivan Broadcasting Company II, Inc., Sinclair
Broadcast Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998. (13)
10.67 Agreement and Plan of Merger among Sullivan Broadcast Holdings, Inc., Sinclair Broadcast
Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998. (13)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.68 Amendment No. 1 dated as of September 2, 1997 to the Third Amended and Restated
Credit Agreement dated as of May 20, 1997 by and among Sinclair Broadcast Group, Inc.,
certain Subsidiary Guarantors, certain Lenders and The Chase Manhattan Bank as Agent.
(12)
21 Subsidiaries of the Registrant (13)
23.1 Consent of Arthur Andersen LLP, independent certified public accountants
23.2 Consent of Price Waterhouse LLP, independent certified public accountants, relating to
financial statements of Sullivan Broadcast Holdings, Inc. and Subsidiaries
23.3 Consent of Price Waterhouse LLP, independent accountants, relating to financial state-
ments of Sullivan Broadcasting Company, Inc. and Subsidiaries
23.4 Consent of KPMG Peat Marwick LLP, independent accountants, relating to financial
statements of Max Media Properties LLC
24 Powers of Attorney (Included in the signature pages to the Registration Statement)
</TABLE>
- ----------
* To be supplied by amendment.
(1) Incorporated by reference from Sinclair's Report on Form 10-Q/A for the
quarterly period ended June 30, 1996
(2) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-90682
(3) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended March 31, 1996
(4) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended September 30, 1996.
(5) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-69482
(6) Incorporated by reference from Sinclair's Report on Form 10-K for the
annual period ended December 31, 1995.
(7) Incorporated by reference from Sinclair's Amended Current Report on Form
8-K/A, filed May 9, 1996.
(8) Incorporated by reference from Sinclair's Current Report on Form 8-K, filed
May 17, 1996.
(9) Incorporated by reference from Sinclair's Current Report on Form 8-K, dated
as of December 16, 1997.
(10) Incorporated by reference from Sinclair's Report on Form 10-K for the
annual period ended December 31, 1996.
(11) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended June 30, 1997.
(12) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended September 30, 1997.
(13) Incorporated by reference from Sinclair's Report on Form 10-K for the
annual period ended December 31, 1997.
ITEM 22. UNDERTAKINGS
Each of the undersigned registrants hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
Each of the undersigned registrants also hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
Each of the undersigned registrants hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Each of the undersigned registrants hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
Each of the undersigned registrants hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuers undertake that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
Each of the registrants undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
certify that they have reasonable grounds to believe that they meet all of the
requirements for filing on Form S-4 and have duly caused this Registration
Statement to be signed on their behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, Maryland on the 5th day of May, 1998.
SINCLAIR BROADCAST GROUP, INC.
By: /s/ David D. Smith
--------------------------------------
David D. Smith
Chief Executive Officer and President
Each person whose signature appears below hereby appoints David D. Smith
and David B. Amy, and both of them, either of whom may act without the joinder
of the other, as his true and lawful attorney-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and any registration
statements for the same offering filed pursuant to Rule 462 under the Securities
Act of 1933, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Commission, granting unto said
attorney-in-fact and agents full power and authority to perform each and every
act and thing appropriate or necessary to be done, as full and for all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agents or their substitute may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David D. Smith Chairman of The Board, May 5, 1998
- --------------------------- Chief Executive Officer, President and
David D. Smith Director (Principal Executive Officer)
/s/ David B. Amy Chief Financial Officer (Principal May 5, 1998
- --------------------------- Financial and Accounting Officer)
David B. Amy
/s/ Frederick G. Smith Director May 5, 1998
- ---------------------------
Frederick G. Smith
/s/ J. Duncan Smith Director May 5, 1998
- ---------------------------
J. Duncan Smith
/s/ Robert E. Smith Director May 5, 1998
- ---------------------------
Robert E. Smith
/s/ Basil A. Thomas Director May 5, 1998
- ---------------------------
Basil A. Thomas
/s/ Lawrence E. McCanna Director May 5, 1998
- ---------------------------
Lawrence E. McCanna
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 See Exhibit Numbers 10.66 and 10.67
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Amended By-Laws of Sinclair Broadcast Group, Inc., as amended as of May 31, 1995 (2)
4.1 Indenture, dated as of December 9, 1993, among Sinclair Broadcast Group, Inc., its
wholly-owned subsidiaries and First Union National Banks of North Carolina, as trustee.
(2)
4.2 Indenture, dated as of August 28, 1995, among Sinclair Broadcast Group, Inc., its wholly-
owned subsidiaries and the United States Trust Company of New York as trustee. (2)
4.3 Form of Senior Subordinated Indenture among Sinclair Broadcast Group, Inc. and First
Union National Bank, as trustee. (9)
4.4 Form of First Supplemental Indenture among Sinclair Broadcast Group, Inc. the Guaran-
tors named therein and First Union National Bank, as trustee, including Form of Note. (9)
5.1* Opinion of Wilmer, Cutler & Pickering as to the legality of the Class A Common Stock
5.2* Opinion of Thomas & Libowitz as to the legality of the Class A Common Stock
10.1 Asset Purchase Agreement, dated as of April 10, 1996, by and between River City Broadcast-
ing, L.P. as seller and Sinclair Broadcast Group, Inc. as buyer. (3)
10.2 Option Agreement, dated as of April 10, 1996, by and among River City Broadcasting, L.P., as
sellers and Sinclair Broadcast Group, Inc. (3)
10.3 Modification Agreement, dated as of April 10, 1996, by and between River City Broadcast
Group, L.P. as seller, and Sinclair Broadcast Group, Inc. as buyer, with reference to Asset
Purchase Agreement. (3)
10.4 Stock Option Agreement dated April 10, 1996 by and between Sinclair Broadcast Group, Inc.
and Barry Baker. (10)
10.5 Employment Agreement, dated as of April 10, 1996, with Barry Baker. (1)
10.6 Indemnification Agreement, dated as of April 10, 1996, with Barry Baker. (1)
10.7 Time Brokerage Agreement, dated as of May 31, 1996, by and among Sinclair Communica-
tions, Inc., River City Broadcasting, L.P. and River City License Partnership and Sinclair
Broadcast Group, Inc. (1)
10.8 Registration Rights Agreement, dated as of May 31, 1996, by and between Sinclair Broadcast
Group, Inc. and River City Broadcasting, L.P. (1)
10.9 Time Brokerage Agreement, dated as of August 3, 1995, by and between River City Broad-
casting, L.P. and KRRT, Inc. and Assignment and Assumption Agreement dated as of May
31, 1996 by and among KRRT, Inc., River City Broadcasting, L.P. and KABB, Inc. (as As-
signee of Sinclair Broadcast Group, Inc.). (1)
10.10 Loan Agreement, dated as of July 7, 1995, by and between Keymarket of South Carolina, Inc.
and River City Broadcasting, L.P. and First Amendment to Loan Agreement dated as of May
24, 1996. (1)
10.11 Option Agreement, dated as of July 7, 1995, by and among Keymarket of South Carolina,
Kerby E. Confer and River City Broadcasting, L.P. (1)
10.12 Letter Agreement, dated August 20, 1996, between Sinclair Broadcast Group, Inc., River City
Broadcasting, L.P. and Fox Broadcasting Company. (4)
10.13 Asset Purchase Agreement, dated January 31, 1997, by and between Channel 21, L.P. and
KUPN, Inc. (10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.14 Promissory Note, dated as of May 17, 1990, in the principal amount of $3,000,000 among
David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith (as makers)
and Sinclair Broadcast Group, Inc., Channel 63, Inc., Commercial Radio Institute, Inc.,
WTTE, Channel 28, Inc. and Chesapeake Television, Inc. (as holders). (5)
10.15 Term Note, dated as of September 30, 1990, in the principal amount of $7,515,000 between
Sinclair Broadcast Group, Inc. (as borrower) and Julian S. Smith (as lender). (6)
10.16 Replacement Term Note dated as of September 30, 1990 in the principal amount of
$6,700,000 between Sinclair Broadcast Group, Inc. (as borrower) and Carolyn C. Smith (as
lender) (2)
10.17 Note dated as of September 30, 1990 in the principal amount of $1,500,000 between
Frederick G. Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as borrowers
and Sinclair Broadcast Group, Inc. (as lender) (5)
10.18 Amended and Restated Note dated as of June 30, 1992 in the principal amount of
$1,458,489 between Frederick G. Smith, David D. Smith, J. Duncan Smith and Robert E.
Smith (as borrowers) and Sinclair Broadcast Group, Inc. (as lender) (5)
10.19 Term Note dated August 1, 1992 in the principal amount of $900,000 between Frederick
G. Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as borrowers) and
Commercial Radio Institute, Inc. (as lender) (5)
10.20 Management Agreement dated as of January 6, 1992 between Keyser Communications,
Inc. and WPGH, Inc. (5)
10.21 Promissory Note dated as of December 28, 1986 in the principal amount of $6,421,483.53
between Sinclair Broadcast Group, Inc. (as maker) and Frederick H. Himes, B. Stanley
Resnick and Edward A. Johnston (as representatives for the holders) (5)
10.22 Term Note dated as of March 1, 1993 in the principal amount of $6,559,000 between Julian
S. Smith and Carolyn C. Smith (as makers-borrowers) and Commercial Radio Institute,
Inc. (as holder-lender) (5)
10.23 Restatement of Stock Redemption Agreement by and among Sinclair Broadcast Group,
Inc. and Chesapeake Television, Inc., et al. dated June 19, 1990 (5)
10.24 Corporate Guaranty Agreement dated as of September 30, 1990 by Chesapeake Televi-
sion, Inc., Commercial Radio, Inc., Channel 63, Inc. and WTTE, Channel 28, Inc. (as
guarantors) to Julian S. Smith and Carolyn C. Smith (as lenders) (5)
10.25 Security Agreement dated as of September 30, 1990 among Sinclair Broadcast Group, Inc.,
Chesapeake Television, Inc., Commercial Radio Institute, Inc., WTTE, Channel 28, Inc.
and Channel 63, Inc. (as borrowers and subsidiaries of the borrower) and Julian S. Smith
and Carolyn C. Smith (as lenders) (5)
10.26 Term Note dated as of September 22, 1993, in the principal amount of $1,900,000 between
Gerstell Development Limited Partnership (as maker-borrower) and Sinclair Broadcast
Group, Inc. (as holder-lender) (5)
10.27 Third Amended and Restated Credit Agreement, dated as of May 20, 1997, by and among
Sinclair Broadcast Group, Inc., Certain Subsidiary Guarantors, Certain Lenders and the
Chase Manhattan Bank as Agent. (11)
10.28 Incentive Stock Option Plan for Designated Participants. (2)
10.29 Incentive Stock Option Plan of Sinclair Broadcast Group, Inc. (2)
10.30 First Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc.,
adopted April 10, 1996. (10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.31 Second Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc.,
adopted May 31, 1996. (10)
10.32 1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc. (10)
10.33 Employment Agreement by and between Sinclair Broadcast Group, Inc. and Robert E.
Smith, dated as of June 12, 1995. (10)
10.34 Employment Agreement by and between Sinclair Broadcast Group, Inc. and J. Duncan
Smith, dated as of June 12, 1995. (10)
10.35 Employment Agreement by and between Sinclair Broadcast Group, Inc. and Frederick G.
Smith, dated as of June 12, 1995. (10)
10.36 Employment Agreement by and between Sinclair Broadcast Group, Inc. and David D.
Smith, dated as of June 12, 1995. (10)
10.37 Common Stock Option dated as of August 26, 1994 by and between Communications
Corporation of America (as optionee) and Sinclair Broadcast Group, Inc. (as optionor) (2)
10.38 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and William Richard Schmidt, as trustee (2)
10.39 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and C. Victoria Woodward, as trustee (2)
10.40 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and Dyson Ehrhardt, as trustee (2)
10.41 Common Non-Voting Capital Stock Option dated as of May 3, 1995 by and between
Sinclair Broadcast Group, Inc. and Mark Knobloch, as trustee (2)
10.42 Agreement and Plan of Merger of Keyser Communications, Inc. into Sinclair Broadcast
Group, Inc. dated May 4, 1995 and Articles of Merger dated May 4, 1995 (2)
10.43 Amended and Restated Asset Purchase Agreement by and between River City Broadcast-
ing, L.P. and Sinclair Broadcast Group, Inc. dated as of April 10, 1996 and amended and
restated as of May 31, 1996 (7)
10.44 Group I Option Agreement by and among River City Broadcasting, L.P. and Sinclair
Broadcast Group, Inc. dated as of May 31, 1996 (7)
10.45 Columbus Option Agreement by and among River City Broadcasting, L.P. and River City
License Partnership and Sinclair Broadcast Group, Inc. dated as of May 31, 1996 (7)
10.46 Option Agreement dated as of May 24, 1994 between Kansas City TV 62 Limited Partner-
ship and the Individuals Named Herein, on Behalf of an Entity To Be Formed (1)
10.47 Option Agreement dated as of May 24, 1994 between Cincinnati 64 Limited Partnership
and the Individuals Named Herein, on Behalf of an Entity To Be Formed (1)
10.48 Stock Purchase Agreement dated as of March 1, 1996 by and between Sinclair Broadcast
Group, Inc. and The Stockholders of Superior Communications Group, Inc. (1)
10.49 Asset Purchase Agreement dated as of January 16, 1996 by and between Bloomington
Comco, Inc. And WYZZ, Inc. (1)
10.50 Asset Purchase Agreement dated as of June 10, 1996 by and between WTTE, Channel 28,
Inc. and WTTE, Channel 28 Licensee, Inc. and Glencairn, Ltd. (1)
10.51 Asset Purchase Agreement dated April 10, 1996 by and between KRRT, Inc. and SBGI,
Inc. (8)
10.52 Agreement for the purchase of assets dated as of January 16, 1996 and escrow agreement
dated as of January 16, 1996 between Bloomington Comco, Inc. and Sinclair Broadcast
Group (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.53 Stock Purchase Agreement dated as of March 1, 1996 by and among Sinclair Broadcast
Group, Inc. and PNC Capital Corp., Primus Capital Fund II, Ltd., Albert M. Holtz, Perry
A. Sook, Richard J. Roberts, George F. Boggs, Albert M. Holtz, as Trustee for the Irre-
vocable Deed of Trust for Tara Ellen Holtz, dated December 6, 1994, and Albert M. Holtz
as trustee for the Irrevocable Deed of Trust for Meghan Ellen Holtz, dated December 6,
1994 (6)
10.54 Primary Television Affiliation Agreement dated as of March 24, 1997 by and between
American Broadcasting Companies, Inc., River City Broadcasting, L.P. and Chesapeake
Television, Inc. (Confidential treatment has been requested. The copy filed omits the in-
formation subject to a confidentiality request.)
10.55 Primary Television Affiliation Agreement dated as of March 24, 1997 by and between
American Broadcasting Companies, Inc., River City Broadcasting, L.P. and WPGH, Inc.
(Confidential treatment has been requested. The copy filed omits the information subject
to a confidentiality request.)
10.56 Asset Purchase Agreement by and among Entertainment Communications, Inc., Tuscaloosa
Broadcasting, Inc., Sinclair Radio of Portland Licensee, Inc. and Sinclair Radio of Roch-
ester Licensee, Inc., dated as of January 26, 1998. (13)
10.57 Time Brokerage Agreement by and among Entertainment Communications, Inc.,
Tuscaloosa Broadcasting, Inc., Sinclair Radio of Portland Licensee, Inc. and Sinclair Radio
or Rochester Licensee, Inc., dated as of January 26, 1998. (13)
10.58 Stock Purchase Agreement by and among the sole stockholders of Montecito Broadcasting
Corporation, Montecito Broadcasting Corporation and Sinclair Communications, Inc.,
dated as of February 3, 1998. (13)
10.59 Stock Purchase Agreement by and among Sinclair Communications, Inc., the stockholders
of Max Investors, Inc., Max Investors, Inc. and Max Media Properties LLC., dated as of
December 2, 1997. (13)
10.60 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Manage-
ment LLC and Max Media Properties LLC., dated as of December 2, 1997. (13)
10.61 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Television
Company, Max Media Properties LLC and Max Media Properties II LLC., dated as of
December 2, 1997. (13)
10.62 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Television
Company, Max Media Properties LLC and Max Media Properties II LLC., dated as of
January 21, 1998. (13)
10.63 Asset Purchase Agreement by and among Tuscoloosa Broadcasting, Inc., WPTZ Licensee,
Inc., WNNE Licensee, Inc., and STC Broadcasting of Vermont, Inc., dated as of February 3,
1998. (13)
10.64 Stock Purchase Agreement by and among Sinclair Communications, Inc. and the stockholders
of Lakeland Group Television, Inc., dated as of November 14, 1997. (13)
10.65 Stock Purchase Agreement by and among Sinclair Communications, Inc., the stockholders of
Max Radio, Inc., Max Radio Inc. and Max Media Properties LLC, dated as of December 2,
1997. (13)
10.66 Agreement and Plan of Merger among Sullivan Broadcasting Company II, Inc., Sinclair
Broadcast Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998. (13)
10.67 Agreement and Plan of Merger among Sullivan Broadcast Holdings, Inc., Sinclair Broadcast
Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998. (13)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.68 Amendment No. 1 dated as of September 2, 1997 to the Third Amended and Restated
Credit Agreement dated as of May 20, 1997 by and among Sinclair Broadcast Group, Inc.,
certain Subsidiary Guarantors, certain Lenders and The Chase Manhattan Bank as Agent.
(12)
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, independent certified public accountants
23.2 Consent of Price Waterhouse LLP, independent certified public accountants, relating to
financial statements of Sullivan Broadcast Holdings, Inc. and Subsidiaries
23.3 Consent of Price Waterhouse LLP, independent accountants, relating to financial state-
ments of Sullivan Broadcasting Company, Inc. and Subsidiaries
23.4 Consent of KPMG Peat Marwick LLP, independent accountants, relating to financial
statements of Max Media Properties LLC
24 Powers of Attorney (Included in the signature pages to the Registration Statement)
</TABLE>
- ----------
* To be supplied by amendment.
(1) Incorporated by reference from Sinclair's Report on Form 10-Q/A for the
quarterly period ended June 30, 1996
(2) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-90682
(3) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended March 31, 1996
(4) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended September 30, 1996.
(5) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-69482
(6) Incorporated by reference from Sinclair's Report on Form 10-K for the
annual period ended December 31, 1995.
(7) Incorporated by reference from Sinclair's Amended Current Report on Form
8-K/A, filed May 9, 1996.
(8) Incorporated by reference from Sinclair's Current Report on Form 8-K, filed
May 17, 1996.
(9) Incorporated by reference from Sinclair's Current Report on Form 8-K, dated
as of December 16, 1997.
(10) Incorporated by reference from Sinclair's Report on Form 10-K for the
annual period ended December 31, 1996.
(11) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended June 30, 1997.
(12) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarterly period ended September 30, 1997.
(13) Incorporated by reference from Sinclair's Report on Form 10-K for the
annual period ended December 31, 1997.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Form S-4 Registration Statement under the Securities Act of 1933.
/s/ Arthur Andersen LLP
Baltimore, Maryland
May 1, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Prospectus constituting part of this
Registration Statement on Form S-4 of Sinclair Broadcast Group, Inc. of our
report dated March 10, 1998 relating to the financial statements of Sullivan
Broadcast Holdings, Inc., which appears in such Prospectus. We also consent to
the reference to us under the headings "Experts" in such Prospectus.
Price Waterhouse LLP
Boston, MA
May 5, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Sinclair Broadcast Group, Inc. of our
report dated March 25, 1996 relating to the financial statements of Sullivan
Broadcasting Company, Inc., which appears in such Prospectus. We also consent to
the reference to us under the headings "Experts" in such Prospectus.
Price Waterhouse LLP
Boston, MA
May 5, 1998
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Managers and Members
Max Media Properties, LLC:
We consent to the inclusion of our report dated February 18, 1998, with
respect to the consolidated balance sheets of Max Media Properties LLC and its
limited partnerships as of December 31, 1997 and 1996, and the related
consolidated statements of operations, members' capital and cash flows for the
years then ended, which report appears in the Form S-4 (No. 333-______) of
Sinclair Broadcast Group, Inc. dated May 5, 1998. We also consent to the
reference to our firm under the heading "Experts" in the registration statement.
KPMG Peat Marwick LLP
Norfolk, Virginia
May 1, 1998
