SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number: 000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------------
Maryland 52-1494660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2000 West 41st Street
Baltimore, Maryland 21211
(Address of principal executive offices)
(410) 467-5005
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year-if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
As of May 5, 1998, there were 23,962,013 shares of Class A Common Stock, $.01
par value; 24,984,432 shares of Class B Common Stock, $.01 par value; 45,703
shares of Series B Preferred Stock, $.01 par value, convertible into 166,210
shares of Class A Common Stock; and 3,450,000 shares of Series D Preferred
Stock, $.01 par value, convertible into 3,991,801 shares of Class A Common
Stock; of the Registrant issued and outstanding.
In addition, 2,000,000 shares of $200 million aggregate liquidation value of
115/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., were issued and outstanding
as of May 5, 1998.
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
PAGE
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998.......................................... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1997 and 1998........................... 4
Consolidated Statements of Stockholders' Equity for the Three
Months Ended March 31, 1998............................. 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1998........................... 6
Notes to Unaudited Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K .................................. 17
Signature............................................................... 18
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1997 1998
--------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 139,327 $ 6,855
Accounts receivable, net of allowance for doubtful accounts..................... 123,018 92,445
Current portion of program contract costs....................................... 46,876 39,931
Prepaid expenses and other current assets....................................... 4,673 4,804
Deferred barter costs........................................................... 3,727 4,864
Refundable income taxes......................................................... 10,581 10,581
Broadcast assets held for sale.................................................. - 223,485
Deferred tax asset.............................................................. 2,550 7,850
------------- --------------
Total current assets..................................................... 330,752 390,815
PROGRAM CONTRACT COSTS, less current portion........................................ 40,609 32,758
LOANS TO OFFICERS AND AFFILIATES.................................................... 11,088 10,956
PROPERTY AND EQUIPMENT, net......................................................... 161,714 182,427
NON-COMPETE AND CONSULTING AGREEMENTS, net.......................................... 200 175
OTHER ASSETS.......... 167,895 137,188
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net........................................ 1,321,976 1,620,514
------------- --------------
Total Assets...................................................................... $ 2,034,234 $ 2,374,833
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 5,207 $ 6,504
Accrued liabilities............................................................. 40,532 43,896
Current portion of long-term liabilities-
Notes payable and commercial bank financing................................. 35,215 35,886
Notes and capital leases payable to affiliates.............................. 3,073 3,060
Program contracts payable................................................... 66,404 65,443
Deferred barter revenues........................................................ 4,273 5,413
------------- --------------
Total current liabilities................................................ 154,704 160,202
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing..................................... 1,022,934 1,374,885
Notes and capital leases payable to affiliates.................................. 19,500 18,845
Program contracts payable....................................................... 62,408 50,904
Deferred tax liability.......................................................... 24,092 24,092
Other long-term liabilities..................................................... 3,611 3,176
------------- -------------
Total liabilities............................................................. 1,287,249 1,632,104
------------- -------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES...................................... 3,697 3,679
------------- -------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES..................................... 200,000 200,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B Preferred Stock, $.01 par value, 10,000,000 shares authorized and 1,071,381
and 976,383 shares issued and outstanding, respectively..................... 10 10
Series D Preferred Stock, $.01 par value, 3,450,000 shares authorized, issued and
outstanding................................................................. 35 35
Class A Common Stock, $.01 par value, 100,000,000 shares authorized
and 13,733,430 and 14,369,215 shares issued and outstanding, respectively... 137 143
Class B Common Stock, $.01 par value, 35,000,000 shares authorized
and 25,436,432 and 25,166,432 shares issued and outstanding, respectively... 255 252
Additional paid-in capital...................................................... 552,949 561,386
Additional paid-in capital - equity put options................................. 23,117 23,117
Additional paid-in capital - deferred compensation.............................. (954) (7,765)
Accumulated deficit............................................................. (32,261) (38,128)
-------------- --------------
Total stockholders' equity............................................... 543,288 539,050
------------- --------------
Total Liabilities and Stockholders' Equity............................... $ 2,034,234 $ 2,374,833
============= ==============
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated statements.
3
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
--------- ---------
<S> <C> <C>
REVENUES:
Station broadcast revenues, net of agency commissions ............................ $ 98,909 $ 112,631
Revenues realized from station barter arrangements ............................... 9,315 11,207
--------- ---------
Total revenues ................................................................ 108,224 123,838
--------- ---------
OPERATING EXPENSES:
Program and production ........................................................... 22,507 25,812
Selling, general and administrative .............................................. 25,241 27,685
Expenses realized from station barter arrangements ............................... 7,444 9,277
Amortization of program contract costs and net ................................... 17,518 16,011
realizable value adjustments
Stock-based compensation ......................................................... 117 472
Depreciation and amortization of property and equipment .......................... 4,161 4,768
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets ........................ 19,021 16,134
--------- ---------
Total operating expenses .................................................. 96,009 100,159
--------- ---------
Broadcast operating income ................................................ 12,215 23,679
--------- ---------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense ............................... (27,065) (27,371)
Subsidiary trust minority interest expense ....................................... (1,210) (5,812)
Interest income .................................................................. 402 1,317
Other income ..................................................................... 144 108
--------- ---------
Loss before income tax benefit ............................................ (15,514) (8,079)
INCOME TAX BENEFIT ................................................................... 7,900 4,800
--------- ---------
NET LOSS ............................................................................. $ (7,614) $ (3,279)
========= =========
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS ............................................ $ (7,614) $ (5,867)
========= =========
Basic loss per common share .......................................................... $ (0.22) $ (0.15)
========= =========
Basic weighted average common shares outstanding ..................................... 34,769 39,384
========= =========
Diluted loss per common share ........................................................ $ (0.22) $ (0.15)
========= =========
Diluted weighted average common and common equivalent
shares outstanding ............................................................... 38,908 43,830
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated statements.
4
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
SERIES B SERIES D CLASS A CLASS B ADDITIONAL CAPITAL -
PREFERRED PREFERRED COMMON COMMON PAID-IN EQUITY PUT
STOCK STOCK STOCK STOCK CAPITAL OPTIONS
--------------- -------------- ------------ ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997............. $ 10 $ 35 $ 137 $ 255 $ 552,949 $ 23,117
Class B Common Stock converted -
into Class A Common Stock...... - 3 (3) - -
Series B Preferred Stock converted -
into Class A Common Stock...... - 3 - (3) -
Dividends payable on Series D
Preferred Stock................ - - - - - -
Equity put options................. - - - - - -
Stock option grants................ - - - - 7,106 -
Stock option grants exercised...... - - - - 476 -
Class A Common Stock shares issued
pursuant to employee benefit - - - - 858 -
plans
Amortization of deferred
compensation................... - - - - - -
Net loss........................... - - - - - -
--------------- -------------- ------------ ----------- -------------- ---------------
BALANCE, March 31, 1998................ $ 10 $ 35 $ 143 $ 252 $ 561,386 $ 23,117
=============== ============== ============ =========== ============== ===============
<CAPTION>
ADDITIONAL
PAID-IN
CAPITAL - TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
--------------- -------------- -----------------
<S> <C> <C> <C>
BALANCE, December 31, 1997............. $ (954) $ (32,261) $ 543,288
Class B Common Stock converted
into Class A Common Stock...... - - -
Series B Preferred Stock converted
into Class A Common Stock...... - - -
Dividends payable on Series D
Preferred Stock................ - (2,588) (2,588)
Equity put options................. - - -
Stock option grants................ (7,106) - -
Stock option grants exercised...... - - 476
Class A Common Stock shares issued
pursuant to employee benefit - - 858
plans
Amortization of deferred
compensation................... 295 - 295
Net loss........................... - (3,279) (3,279)
--------------- -------------- -----------------
BALANCE, March 31, 1998................ $ (7,765) $ (38,128) $ 539,050
=============== ============== =================
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated statements
5
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1998
--------------- ---------------
<S> <C> <C>
Net loss...................................................................... $ (7,614) $ (3,279)
Adjustments to reconcile net loss to net cash flows from operating activities-
Amortization of debt discount............................................. - 24
Depreciation and amortization of property and equipment................... 4,161 4,768
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets................. 19,021 16,134
Amortization of program contract costs and net realizable value adjustments 17,518 16,011
Stock-based compensation.................................................. 117 472
Deferred tax benefit...................................................... (8,434) (5,300)
Changes in assets and liabilities, net of effects of acquisitions and dispositions-
Decrease in accounts receivable, net...................................... 23,085 30,573
Increase (decrease) in prepaid expenses and other current assets.......... (170) 268
Increase in other assets and acquired intangible broadcasting assets...... (367) -
Decrease in accounts payable and accrued liabilities...................... (5,259) (1,835)
Net effect of change in deferred barter revenues
and deferred barter costs.............................................. (207) 5
Increase (decrease) in other long-term liabilities........................ 153 (174)
Increase (decrease) in minority interest.................................. 48 (18)
Payments on program contracts payable......................................... (13,732) (15,297)
-------------- --------------
Net cash flows from operating activities............................... 28,320 42,352
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment........................................... (2,244) (3,411)
Payments for acquisition of television and radio stations....................... (770) (484,313)
Loans to officers and affiliates................................................ (337) (484)
Repayments of loans to officers and affiliates.................................. 293 589
Deposit received on future sale of broadcasting assets.......................... - 631
Payments relating to future acquisitions........................................ (10,844) (37,184)
-------------- --------------
Net cash flows used in investing activities.............................. (13,902) (524,172)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial bank financing......................................... 8,046 384,000
Repayments of notes payable, commercial bank financing and capital leases...... (179,065) (31,304)
Payments of costs relating to issuance of 8 3/4% Notes.......................... - (204)
Payment of equity put options premium........................................... - (261)
Repurchases of the Company's Class A Company Stock.............................. (1,378) -
Net proceeds from subsidiary trust securities offering.......................... 194,192 -
Dividends paid on Series D Convertible Preferred Stock.......................... - (2,588)
Proceeds from exercise of stock options......................................... - 476
Prepayments of excess syndicated program contract liabilities................... (1,373) -
Repayments of notes and capital leases to affiliates............................ (476) (771)
-------------- --------------
Net cash flows from financing activities................................. 19,946 349,348
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 34,364 (132,472)
CASH AND CASH EQUIVALENTS, beginning of period...................................... 2,341 139,327
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................................$ 36,705 $ 6,855
============== ==============
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated statements.
6
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 programmed pursuant to local marketing agreements
(LMAs) and radio stations programmed pursuant to joint sales agreements (JSAs).
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the three months ended March 31, 1997
and 1998 are unaudited, but in the opinion of management, such financial
statements have been presented on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations, and cash flows for these periods.
As permitted under the applicable rules and regulations of the Securities and
Exchange Commission, these financial statements do not include all disclosures
normally included with audited consolidated financial statements, and,
accordingly, should be read in conjunction with the consolidated financial
statements and notes thereto as of December 31, 1996 and 1997 and for the years
then ended. The results of operations presented in the accompanying financial
statements are not necessarily representative of operations for an entire year.
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.
2. CONTINGENCIES AND OTHER COMMITMENTS:
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.
7
<PAGE>
3. FINANCIAL INFORMATION BY SEGMENT (IN THOUSANDS):
As of March 31, 1998, 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 March 31, 1998, the Company owned or provided
programming services pursuant to LMAs to 34 television stations located in 24
geographically diverse markets in the continental United States. As of March 31,
1998, the Company owned 52 radio stations in 12 geographically diverse markets.
Substantially all revenues represent income from unaffiliated companies.
<TABLE>
<CAPTION>
TELEVISION
THREE MONTHS ENDED
MARCH 31,
1997 1998
---- ----
<S> <C> <C>
Total revenues............................................................ $ 95,774 $ 107,721
Station operating expenses................................................ 44,636 51,585
Depreciation, program amortization and stock-based compensation........... 21,234 20,474
Amortization of intangibles and other assets.............................. 15,815 13,141
-------------- -------------
Station broadcast operating income........................................ $ 14,089 $ 22,521
============== =============
Total assets.............................................................. $ 1,406,157 $ 1,904,140
============== =============
Capital expenditures...................................................... $ 2,027 $ 2,481
============== =============
<CAPTION>
RADIO
THREE MONTHS ENDED
MARCH 31,
1997 1998
---- ----
<S> <C> <C>
Total revenues............................................................ $ 12,450 $ 16,117
Station operating expenses................................................ 10,556 11,189
Depreciation, program amortization and stock-based compensation........... 562 777
Amortization of intangibles and other assets.............................. 3,206 2,993
-------------- -------------
Station broadcast operating income (loss)................................. $ (1,874) $ 1,158
=============== =============
Total assets.............................................................. $ 303,774 $ 470,693
============== =============
Capital expenditures...................................................... $ 217 $ 930
============== =============
</TABLE>
8
<PAGE>
4. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
During the three months ended March 31, 1997 and 1998, the Company made certain
cash payments of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
---- ----
<S> <C> <C>
Interest payments.................................................. $ 30,808 $ 38,271
============ ===========
Subsidiary trust minority interest payments........................ $ - $ 5,812
============ ===========
Income tax payments................................................ $ 1,856 $ 424
============ ===========
</TABLE>
5. EARNINGS PER SHARE:
The Company adopted SFAS 128 "Earnings per Share" which requires the disclosure
of basic and diluted earnings per share and related computations as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
---- ----
<S> <C> <C>
Weighted-average number of common shares...................................... 34,769 39,384
Diluted effect of outstanding stock options .................................. 13 895
Diluted effect of conversion of preferred shares.............................. 4,126 3,551
------------ -----------
Weighted-average number of common and common
equivalent shares outstanding............................................. 38,908 43,830
============ ===========
Net loss...................................................................... $ (7,614) $ (3,279)
Preferred stock dividends payable............................................. - (2,588)
------------ ------------
Net loss available to common stockholders..................................... $ (7,614) $ (5,867)
============= ============
Basic loss per common share................................................... $ (0.22) $ (0.15)
============= ============
Diluted loss per common share................................................. $ (0.22) $ (0.15)
============= ============
</TABLE>
6. ACQUISITIONS AND DISPOSITIONS:
PENDING ACQUISITIONS AND DISPOSITIONS
Max Media Acquisition. In December 1997, the Company entered into agreements to
acquire all of the equity interests of Max Media Properties, LLC ("Max Media")
for approximately $255 million (the "Max Media Acquisition"). Upon closing of
the Max Media Acquisition, the Company will own or provide programming services
to nine additional television stations in six separate markets and eight radio
stations in two separate markets. Due to Federal Communications Commission
("FCC") restrictions, the Company will be required to divest certain of the
radio stations it owns or proposes to acquire in the Norfolk, Virginia market
prior to or simultaneously with the Max Media Acquisition. The Max Media
Acquisition is subject to, among other conditions, approval by the FCC and is
expected to occur 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
9
<PAGE>
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. Among other conditions, the
Sullivan Acquisition is subject to approval by the FCC. 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.
Entercom Disposition. In January 1998, the Company agreed to sell to
Entertainment Communications, Inc. ("Entercom") seven radio stations acquired in
the Heritage Acquisition (see below). 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,
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
programming these stations pursuant to an LMA pending closing of the sale.
Centennial Disposition. In March 1998, the Company agreed to sell the assets of
radio stations WRNO-FM, KMEZ-FM and WBYU-AM in New Orleans, Louisiana to
Centennial Broadcasting for $16 million (Centennial Disposition). The
transaction is subject to FCC and Department of Justice ("DOJ") approval. The
Company currently owns KMEZ-FM and is awaiting FCC and DOJ approval to acquire
WRNO-FM, WEZB-FM and WBYU-AM in New Orleans from Heritage Media Group, Inc.
("Heritage"). The Company is required to divest WRNO-FM, KMEZ-FM and WBYU-AM to
meet certain regulatory ownership guidelines.
1998 Acquisitions
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 $630 million (the "Heritage Acquisition"). Pursuant
to the Heritage Acquisition, and after giving effect to the Centennial
Disposition and 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 February 1998, the Company 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. In April 1998, the Company
closed on the sale of the non-license assets of the three television stations in
the Burlington, Vermont and Plattsburgh, New York market 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, 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 SBG to own the
broadcast license for more than one station in the Las Vegas market, or unless
the Company no longer owns the broadcast license for KUPN-TV in Las Vegas. At
any time the Company, at its option, may transfer the rights to acquire the
stock of Montecito. In April 1998 the Company began programming KFBT-TV through
an LMA upon expiration of the applicable HSR Act waiting period.
7. INTEREST RATE DERIVATIVE AGREEMENTS:
At March 31, 1998, the Company had several interest rate swap agreements
relating to the 1997 Bank Credit Agreement which expire from June 30, 1998 to
July 15, 2007. The swap agreements set rates in the range of 5.6% to 9.0%. The
notional amounts related to these agreements were $1.1 billion at March 31,
1998, and decrease to $100.0 million through the expiration dates. The Company
has no intention of terminating these
10
<PAGE>
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. The Company estimates
the aggregate cost to retire these instruments at March 31, 1998 to be $.4
million.
8. SUBSEQUENT EVENTS:
In April 1998, the Company and certain stockholders of the Company completed a
public offering of 6,000,000 and 2,030,187 shares, respectively of Class A
Common Stock (the Common Stock Offering). The shares were sold for an offering
price of $58.25 per share and generated proceeds to the Company of $335.6
million, net of underwriters' discount and other offering costs of approximately
$13.9 million. The Company utilized the proceeds to repay indebtedness under the
1997 Bank Credit Agreement.
In April 1998, the Company exercised its option to acquire the non-license
assets of WSYX-TV in Columbus, Ohio from River City Broadcasting, LP ("River
City") for an option exercise price of $228 million. The Company entered into an
LMA with 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.
In May 1998, the Company filed a form S-4 registration statement with the
Securities and Exchange Commission to register the issuance of shares of Class A
Common Stock with a value of up to $100 million in connection with the Sullivan
Acquisition.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in this Quarterly
Report and the audited financial statements and Management's Discussion and
Analysis contained in the Company's Form 10-K, as amended, for the fiscal year
ended December 31, 1997.
The matters discussed below include forward-looking statements. Such statements
are subject to a number of risks and uncertainties, such as the impact of
changes in national and regional economies, successful integration of acquired
television and radio stations (including achievement of synergies and cost
reductions), pricing fluctuations in local and national advertising,
availability of capital and volatility in programming costs. Additional risk
factors regarding the Company are set forth in the Company's prospectus filed
with the Securities and Exchange Commission on April 8, 1998, pursuant to rule
424(b)(5).
The following table sets forth certain operating data for comparison of the
three months ended March 31, 1997 and 1998:
OPERATING DATA (dollars in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1998
--------- ---------
<S> <C> <C>
Net broadcast revenues (a) .................................................$ 98,909 $ 112,631
Barter revenues ............................................................ 9,315 11,207
--------- ---------
Total revenues ............................................................. 108,224 123,838
--------- ---------
Operating costs (b) ........................................................ 47,748 53,497
Expenses from barter arrangements .......................................... 7,444 9,277
Depreciation, amortization and stock based compensation (c) ................ 40,817 37,385
Interest expense ........................................................... 27,065 27,371
Subsidiary trust minority interest expense (d) ............................. 1,210 5,812
Interest and other income .................................................. 546 1,425
--------- ---------
Net loss before income tax benefit ......................................... (15,514) (8,079)
Income tax benefit ......................................................... 7,900 4,800
--------- ---------
Net loss ...................................................................$ (7,614) $ (3,279)
========= =========
BROADCAST CASH FLOW (BCF) DATA:
Television BCF (e) ..................................................$ 41,201 $ 45,787
Radio BCF (e) ....................................................... 1,583 4,586
--------- ---------
Consolidated BCF (e) ................................................$ 42,784 $ 50,373
========= =========
Television BCF margin (f) ........................................... 47.3% 47.0%
Radio BCF margin (f) ................................................ 13.4% 29.9%
Consolidated BCF margin (f) ......................................... 43.3% 44.7%
</TABLE>
12
<PAGE>
OTHER DATA:
Adjusted EBITDA (g) ............................$ 39,300 $ 45,767
Adjusted EBITDA margin (f) ..................... 39.7% 40.6%
After tax cash flow (h) ........................$ 7,251 $ 10,207
Program contract payments ...................... 13,732 15,297
Corporate expenses ............................. 3,484 4,606
Capital expenditures ........................... 2,244 3,411
Cash flows from operating activities ........... 28,320 42,352
Cash flows from investing activities ........... (13,902) (524,172)
Cash flows from financing activities ........... 19,946 349,348
- ---------
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 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. The Company has presented broadcast cash flow data,
which the Company 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 the Company'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 the Company'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), 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.
Net broadcast revenues increased to $112.6 million for the three months ended
March 31, 1998 from $98.9 million for the three months ended March 31, 1997, or
13.9%. The increase in net broadcast revenues for the three months ended March
31, 1998 as compared to the three months ended March 31, 1997 was comprised of
$8.4 million related to the acquisition of television and radio stations and LMA
transactions consummated by the Company in 1997 and 1998 (collectively, "the
Acquisitions") and $5.3 million related to an increase in revenue on a same
station basis, an increase of 5.4%.
Operating costs increased to $53.5 million for the three months ended March 31,
1998 from $47.7 million for the three months ended March 31, 1997 or 12.2%. The
increase in expenses for the three months ended March 31, 1998 as compared to
the three months ended March 31, 1997 was comprised of $2.8 million related to
the Acquisitions, $1.1 million related to an increase in corporate overhead and
$1.9 million related to an increase in operating costs on a same station basis,
or 3.6%. Corporate expenses increased to $4.6 million for the three months ended
March 31, 1998 from $3.5 million for the three months ended March 31, 1997, or
31.4%. The increase in corporate expenses for the three months ended March 31,
1998 as compared to the three months ended March 31, 1997 primarily resulted
from an increase in legal fees and an increase in salary costs resulting from
managing a larger base of operations.
Interest expense increased to $27.4 million for the three months ended March 31,
1998 from $27.1 million for the three months ended March 31, 1997, or 1.1%. The
increase in interest expense resulted from indebtedness
13
<PAGE>
incurred to finance the Acquisitions, offset by a decrease in weighted average
interest rates on outstanding indebtedness during the first quarter of 1998. The
increase in subsidiary trust minority interest expense for the three months
ended March 31, 1998 primarily related to the $200 million aggregate liquidation
value of 115/8% High Yield Trust Offered Preferred Securities (the "HYTOPS")
completed March 12, 1997 being outstanding for a partial quarter during 1997.
Interest and other income increased to $1.4 million for the three months ended
March 31, 1998 from $.5 million for the three months ended March 31, 1997 or
180.0%. The increase for the three months ended March 31, 1998 was primarily due
to higher average cash balances and related interest income in the first quarter
of 1998 as compared to the first quarter of 1997 resulting from proceeds from
the issuance in December 1997 of $250 million aggregate liquidation value of 8
3/4% Senior Subordinated Notes due 2007.
Income tax benefit decreased to $4.8 million for the three months ended March
31, 1998 from $7.9 million for the three months ended March 31, 1997. The
decrease in income tax benefit for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997 primarily related to the
decrease in the pre-tax loss for the three months ended March 31, 1998. The
Company's effective tax rate increased slightly to 59.4% for the three months
ended March 31, 1998 from 50.9% for the three months ended March 31, 1997.
The net deferred tax liability decreased to $16.2 million as of March 31, 1998
from $21.5 million at December 31, 1997. The increase in the Company's net
deferred tax asset as of March 31, 1998 as compared to December 31, 1997
primarily results from the anticipation that the pre-tax loss and related
current tax asset incurred during the first quarter of 1998 will be used to
offset future taxable income during the current year.
Broadcast cash flow increased to $50.4 million for the three months ended March
31, 1998 from $42.8 million for the three months ended March 31, 1997, or 17.8%.
The increase in broadcast cash flow for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997 primarily resulted from the
Acquisitions and an increase in net broadcast revenue on a same station basis.
The Company's Broadcast Cash Flow Margin increased to 44.7% for the three months
ended March 31, 1998 from 43.3% for the three months ended March 31, 1997.
Excluding the effect of radio station broadcast cash flow, television station
Broadcast Cash Flow Margin decreased to 47.0% for the three months ended March
31, 1998 as compared to 47.3% for the three months ended March 31, 1997. On a
same station basis, Television Broadcast Cash Flow Margin increased from 43.5%
to 44.4%. Radio Broadcast Cash Flow Margin increased to 29.9% for the three
months ended March 31, 1998 from 13.4% for the three months ended March 31,
1997. This increase in Radio Broadcast Cash Flow Margin primarily resulted from
higher margins at certain of the radio stations acquired during the first
quarter of 1998 and an increase in net broadcast revenue on a same station
basis.
Adjusted EBITDA increased to $45.8 million for the three months ended March 31,
1998 from $39.3 million for the three months ended March 31, 1997, or 16.5%. The
increase in Adjusted EBITDA for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997 primarily resulted from the
Acquisitions and an increase in broadcast revenue on a same station basis. The
Company's Adjusted EBITDA Margin increased to 40.6% for the three months ended
March 31, 1998 from 39.7% for the three months ended March 31, 1997.
After Tax Cash Flow increased to $10.2 million for the three months ended March
31, 1998 from $7.3 million for the three months ended March 31, 1997, or 39.7%.
The increase in After Tax Cash Flow for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997 primarily resulted from the
Acquisitions and internal growth, offset by interest expense on the debt
incurred to consummate the Acquisitions and subsidiary trust minority interest
expenses related to the HYTOPS.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had $6.9 million in cash balances and,
excluding the effect of assets held for sale, working capital of approximately
$7.1 million. The Company'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. The Company 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 $42.4 million for the
three months ended March 31, 1998 from $28.3 million for the three months ended
March 31, 1997. The Company made income tax payments of $.4 million for the
three months ended March 31, 1998 as compared to $1.9 million for the three
months ended March 31, 1997. The Company made interest payments on outstanding
indebtedness of $38.3 million during the three months ended March 31, 1998 as
compared to $30.8 million for the three months ended March 31, 1997. Additional
interest payments for the three months ended March 31, 1998 as compared to the
three months ended March 31, 1997 primarily related to additional interest costs
on indebtedness incurred to finance the Heritage Acquisition. Program rights
payments increased to $15.3 million for the three months ended March 31, 1998
from $13.7 million for the three months ended March 31, 1997, or 11.7%. The
increase in program rights payments for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997 was comprised of $.5 million
related to the acquisition of KUPN-TV in Las Vegas, NV and $1.1 million related
to an increase in programming costs on a same station basis.
Net cash flows used in investing activities increased to $524.2 million for the
three months ended March 31, 1998 from $13.9 million for the three months ended
March 31, 1997. In February 1998, the Company made cash payments of $484.3
million for the closings related to the Heritage Acquisition. In addition, the
Company made cash payments of $37.2 million relating to acquisitions that are
expected to occur during 1998. In April 1998 the Company exercised its option to
acquire the non-license assets of WSYX-TV in Columbus, Ohio and made cash
payments totaling $228 million. Also in April 1998, the Company closed the sale
of the non-license assets for the television stations serving the Plattsburgh,
New York and Burlington, Vermont markets for a cash payment of $70 million. In
addition, the Company has agreements to divest the radio stations serving the
Portland, Rochester and Nashville markets and certain radio stations in the New
Orleans market for an aggregate amount of $177.5 million, the closings of which
are expected to occur during the second quarter of 1998. The Company anticipates
that future requirements for capital expenditures will include capital
expenditures incurred during the ordinary course of business and the cost of
additional acquisitions of television and radio stations if suitable
acquisitions can be identified on acceptable terms.
Net cash flows from financing activities increased to $349.3 million for the
three months ended March 31, 1998 from $19.9 million used in financing
activities for the three months ended March 31, 1997. In the first quarter of
1998, the Company increased its borrowings under the 1997 Bank Credit Agreement
to finance the Heritage Acquisition and subsequently repaid a portion of the
outstanding balance. In accordance with the provisions of the 1997 Bank Credit
Agreement, the Company also repaid $8.8 million of the Tranche A Term Loan under
the 1997 Bank Credit Agreement. In April 1998, the Company and certain Series B
Preferred stockholders of the Company completed a public offering of 6,000,000
and 2,030,187 shares, respectively of Class A Common Stock. The shares were sold
for an offering price of $58.25 per share and generated proceeds to the Company
of $335.6 million, net of underwriters' discount and other offering costs of
approximately $13.9 million. The Company utilized proceeds to repay indebtedness
under the 1997 Bank Credit Agreement.
The Company 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). The Company intends to finance pending acquisitions
15
<PAGE>
through a combination of available cash, an issuance of securities and available
borrowings under the 1997 Bank Credit Agreement or a new bank credit agreement.
The current terms of the 1997 Bank Credit Agreement do not allow the Company 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 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. The Company 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 the Company 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. The Company 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.
16
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
27 Financial Data Schedule
B) REPORTS ON FORM 8-K
The Company filed a current report on form 8-K dated March 17, 1998 reporting on
items 5 and 7 with respect to pro forma financial information for the Company
showing the effect of the Heritage, Max Media and Sullivan Acquisitions and
certain financing transactions and including the audited financial statements of
Heritage Media Services, Inc.-Broadcasting Segment, Max Media Properties LLC and
Sullivan Broadcast Holding, Inc. and subsidiaries.
The Company filed a current report on form 8-K/A dated March 27, 1998 reporting
on items 5 and 7 to update pro forma financial information for the Company
showing the effect of the Sullivan acquisition and certain other financing and
acquisition activities since January 1, 1997.
The Company filed a current report on form 8-K/A dated April 8, 1998 reporting
on items 5 and 7 with respect to the issuance and sale of 8,030,187 shares of
Class A Common Stock of the Company.
The Company filed a current report on form 8-K dated April 10, 1998 reporting on
item 7 with respect to the issuance and sale of 8,030,187 shares of Class A
Common Stock of the Company.
The Company filed a current report on form 8-K dated April 14, 1998 reporting on
items 5 and 7 with respect to the exercise of the Company's option to acquire
the non-license assets of WSYX-TV from River City Broadcasting, LP.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized in the city of Baltimore, Maryland
on the 12th day of May, 1998.
SINCLAIR BROADCAST GROUP, INC.
by: /s/ David B. Amy
----------------------------
David B. Amy
Chief Financial Officer
Principal Accounting Officer
18
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,855
<SECURITIES> 0
<RECEIVABLES> 95,392
<ALLOWANCES> 2,947
<INVENTORY> 0
<CURRENT-ASSETS> 390,815
<PP&E> 234,271
<DEPRECIATION> 51,844
<TOTAL-ASSETS> 2,374,833
<CURRENT-LIABILITIES> 160,202
<BONDS> 600,000
200,000
45
<COMMON> 395
<OTHER-SE> 538,610
<TOTAL-LIABILITY-AND-EQUITY> 2,374,833
<SALES> 0
<TOTAL-REVENUES> 123,838
<CGS> 0
<TOTAL-COSTS> 100,159
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,183
<INCOME-PRETAX> (8,079)
<INCOME-TAX> 4,800
<INCOME-CONTINUING> (3,279)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,279)
<EPS-PRIMARY> (0.15)<a>
<EPS-DILUTED> (0.15)<a>
<FN>
a) This information has been prepared in accordance with SFAS No. 128,
Earnings Per Share. The basic and diluted EPS calculations have been
entered in place of primary and diluted, respectively.
</FN>
</TABLE>
