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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER:
000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
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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)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Class A Common Stock, par value $.01 per share Series D
Preferred Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be files 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
Based on the closing sale price of $14.50 per share as of March 23, 1999, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $695.2 million.
As of March 23, 1999, there were 47,941,885 shares of Class A Common stock, $.01
par value; 48,630,231 shares of Class B Common Stock, $.01 par value; 39,181
shares of Series B Preferred Stock, $.01 par value, convertible into 284,952
shares of Class A Common Stock; and 3,450,000 shares of Series D Preferred
Stock, $.01 par value, convertible into 7,561,644 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 11
5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., are issued and outstanding.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the 1999 Annual Meeting of Shareholders are incorporated by
reference into Part III.
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PART I
FORWARD-LOOKING STATEMENTS
The matters discussed in this report include forward-looking statements.
When used in this report, 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
in Sinclair Broadcast Group, Inc.'s (referred to herein as the "Company,"
"Sinclair," or "SBG") prospectus filed with the Securities and Exchange
Commission on April 19, 1998, pursuant to rule 424(b)(5). The Company 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.
ITEM 1. BUSINESS
The Company is a diversified broadcasting company that owns or provides
programming services to more television stations than any other commercial
broadcasting group in the United States. The Company currently owns, or provides
programming services pursuant to Local Marketing Agreements ("LMAs") to, 57
television stations, has pending acquisitions of four additional television
stations, and has entered into an agreement to sell two television stations. The
Company believes it is also one of the top ten radio groups in the United States
when measured by the total number of radio stations owned or programmed pursuant
to LMAs. The Company owns, or programs pursuant to LMAs, 54 radio stations, two
of which the Company has exercised options to acquire, and five of which the
Company holds for sale.
The 57 television stations the Company owns or programs pursuant to LMAs
are located in 36 geographically diverse markets, with 33 of the stations in the
top 51 television designated market areas ("DMAs") in the United States. The
Company's television station group is diverse in network affiliation with 20
stations affiliated with Fox Broadcasting Company ("Fox"), 16 with The WB
Television Network ("WB"), eight with United Paramount Television Network
Partnership ("UPN"), six with ABC, three with NBC and one with CBS. Three
stations operate as independents.
The Company's radio station group is also geographically diverse with a
variety of programming formats including country, urban, news/talk/sports,
progressive rock and adult contemporary. Of the 54 stations owned or provided
programming services by the Company, 18 broadcast on the AM band and 36 on the
FM band. The Company owns between three and nine stations in all of the radio
markets it serves.
The Company has undergone rapid and significant growth over the course of
the last eight years. Since 1991, the Company has increased the number of
stations it owns or provides services to from three television stations to 57
television stations and 54 radio stations. From 1991 to 1998, net broadcast
revenues and Adjusted EBITDA (as defined herein) increased from $39.7 million to
$672.8 million, and from $15.5 million to $331.3 million, respectively.
The Company is a Maryland corporation formed in 1986. The Company's
principal offices are located at 2000 West 41st Street, Baltimore, Maryland
21211, and its telephone number is (410) 467-5005.
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TELEVISION BROADCASTING
The Company owns and operates, provides programming services to, or has
agreed to acquire the following television stations:
<TABLE>
<CAPTION>
NUMBER OF
COMMERCIAL EXPIRATION
MARKET STATIONS IN STATION DATE OF
MARKET RANK(A) STATIONS STATUS(B) CHANNEL AFFILIATION THE MARKET(C) RANK(D) FCC LICENSE
- ------------------------------ --------- ---------- ----------- --------- ------------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tampa, Florida ............... 14 WTTA LMA 38 IND(h)(q) 7 7 2/1/05
Minneapolis/St. Paul,
Minnesota ................... 15 KMWB O&O 23 WB 6 6 4/1/06
Pittsburgh, Pennsylvania ..... 19 WPGH O&O 53 FOX 5 4 8/1/99
WCWB LMA 22 WB 5 8/1/99
Sacramento, California ....... 20 KOVR O&O 13 CBS 6 3 12/1/06
St. Louis, Missouri .......... 21 KDNL O&O 30 ABC 5 4 2/1/06
Baltimore, Maryland .......... 24 WBFF O&O 45 FOX 5 4 10/1/04
WNUV LMA 54 WB 5 10/1/04
Indianapolis, Indiana ........ 25 WTTV LMA(e) 4 WB 8 5 8/1/05
WTTK LMA(e)(g) 29 WB 5 8/1/05
Raleigh-Durham,
North Carolina .............. 29 WLFL O&O 22 WB 7 4 ` 12/1/04
WRDC LMA 28 UPN 5 12/1/04
Nashville, Tennessee ......... 30 WZTV LMA(m) 17 FOX 6 4 8/1/05
WUXP LMA 30 UPN 5 8/1/05
Milwaukee, Wisconsin ......... 31 WCGV O&O 24 UPN 6 5 12/1/05
WVTV LMA 18 WB 6 12/1/05
Cincinnati, Ohio ............. 32 WSTR O&O 64 WB 5 5 10/1/05
Kansas City, Missouri ........ 33 KSMO O&O 62 WB 8 5 2/1/06
Columbus, Ohio ............... 34 WSYX O&O 6 ABC 5 4 10/1/05
WTTE LMA 28 FOX 3 10/1/05
Asheville, North Carolina
and Greenville/
Spartanburg/Anderson,
South Carolina .............. 35 WLOS O&O 13 ABC 6 3 12/1/04
WFBC LMA 40 IND(h)(q) 5 12/1/04
San Antonio, Texas ........... 37 KABB O&O 29 FOX 7 4 8/1/98(f)(r)
KRRT LMA 35 WB 6 8/1/98(f)(r)
Birmingham, Alabama .......... 39 WTTO O&O 21 WB 6 5 4/1/05
WDBB LMA(i) 17 WB 5 4/1/05
WABM LMA 68 UPN 6 4/1/05
Norfolk, Virginia ............ 40 WTVZ O&O 33 WB 6 4 10/1/04
Buffalo, New York ............ 42 WUTV LMA(m) 29 FOX 5 4 6/1/99(f)
WNEQ Pending 23 (o) 6/1/99(f)
Oklahoma City,
Oklahoma .................... 45 KOCB O&O 34 WB 5 5 6/1/98(f)
KOKH LMA 25 FOX 4 6/1/06
Greensboro/Winston-Salem,
Salem/Highpoint,
North Carolina .............. 47 WXLV LMA(m) 45 ABC 7 4 12/1/04
WUPN LMA 48 UPN 5 12/1/04
Dayton, Ohio ................. 54 WKEF LMA(p) 22 NBC 4 3 10/1/05
WRGT LMA 45 FOX 4 10/1/05
Las Vegas, Nevada ............ 56 KVWB O&O 21 WB 8 5 10/1/06
KFBT LMA 33 IND(h) 8 10/1/06(f)
Charleston and Huntington,
West Virginia ............... 58 WCHS O&O 8 ABC 4 3 10/1/04
WVAH LMA 11 FOX 4 10/1/04
Richmond, Virginia ........... 61 WRLH LMA(m) 35 FOX 5 4 10/1/04
Mobile, Alabama and
Pensacola, Florida .......... 62 WEAR O&O 3 ABC 6 2 2/1/05
WFGX LMA 35 WB 6 2/1/05
Flint/Saginaw/Bay City,
Michigan .................... 64 WSMH O&O 66 FOX 4 4 10/1/05
Lexington, Kentucky .......... 67 WDKY O&O 56 FOX 5 4 8/1/05
Des Moines, Iowa ............. 70 KDSM O&O 17 FOX 4 4 2/1/06
Syracuse, New York ........... 74 WSYT O&O 68 FOX 5 4 6/1/99(f)
WNYS LMA 43 UPN 5 6/1/99(f)
Paducah, Kentucky/
Cape Girardeau,
Missouri .................... 76 KBSI O&O 23 FOX 5 4 2/1/06
WDKA LMA 49 UPN 5 (n)
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF
COMMERCIAL EXPIRATION
MARKET STATIONS IN STATION DATE OF
MARKET RANK(A) STATIONS STATUS(B) CHANNEL AFFILIATION THE MARKET(C) RANK(D) FCC LICENSE
- ------------------------------- --------- ---------- ------------ -------- ------------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rochester, New York ........... 77 WUHF LMA 31 FOX 4 4 6/1/99(f)
Portland, Maine ............... 80 WGME Pending(k) 13 CBS 5 2 4/1/99(f)
Madison, Wisconsin ............ 84 WMSN LMA(m) 47 FOX 4 4 12/1/05
Tri-Cities, Tennessee ......... 92 WEMT LMA(p) 39 FOX 5 4 8/1/05
Springfield, Massachusetts .... 104 WGGB Pending(k) 40 ABC 4 2 4/1/99(f)
Tyler-Longview, Texas ......... 107 KETK O&O(l) 56 NBC 3 2 8/1/06
KLSB LMA(l) 19 NBC (j) 8/1/06
Peoria/Bloomington, Illinois .. 110 WYZZ O&O 43 FOX 4 4 12/1/05
Tallahassee, Florida .......... 114 WTWC Pending(k) 40 NBC 4 4 2/1/05
Charleston, South
Carolina ..................... 120 WMMP O&O 36 UPN 5 5 12/1/04
WTAT LMA 24 FOX 4 12/1/04
</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 the Company, "LMA" refers
to stations to which the Company provides programming services pursuant to
an LMA and "Pending" refers to stations the Company has agreed to acquire.
See "-- 1998 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 1998
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 the Company has an option to acquire the License Assets. Will
become owned and operated by the Company upon FCC approval of transfer of
License Assets and closing of acquisition of License Assets.
(f) License renewal application pending.
(g) WTTK 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) WDBB simulcasts the programming broadcast on WTTO.
(j) KLSB simulcasts the programming broadcast of KETK.
(k) These stations will be acquired in connection with the Guy Gannett
Acquisition.
(l) An agreement has been entered into to sell KETK and transfer the LMA for
KLSB.
(m) The FCC License Assets for these stations are currently owned by Sullivan
Broadcasting Company II, Inc. and the Company intends to close on these
assets upon FCC approval.
(n) This station began broadcast operations in August 1997 pursuant to program
test authority and does not yet have a license. This station has not yet
established a rank.
(o) This station is currently a non-commercial station and is not ranked by
Nielsen.
(p) This station will become owned and operated by the Company upon FCC
approval of transfer of License Assets and closing of acquisition of
License Assets.
(q) These stations are expected to become an affiliate of the WB in 1999.
(r) A petition to deny was filed against the license renewals for these
stations and the renewals are currently pending.
Operating Strategy
The Company's television operating strategy includes the following key
elements:
Attracting Viewership
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The Company seeks to attract viewership and expand its audience share
through selective, high-quality programming.
Popular Programming. The Company seeks to obtain, at attractive prices,
popular syndicated programming that is complementary to the station's network
affiliation. The Company also believes that an important factor in attracting
viewership to its stations is their network affiliations with Fox, WB, ABC, CBS,
NBC and UPN. These affiliations enable the Company to attract viewers by virtue
of the quality first-run original programming provided by these networks and the
networks' promotion of such programming. The Company focuses on obtaining
popular syndicated programming for key programming periods (generally 6:00 p.m.
to 8:00 p.m.) for broadcast on its Fox, WB and UPN affiliates. Examples of this
programming include "Friends," "Frasier," "3rd Rock From the Sun," "The
Simpsons," "Drew Carey" and "Seinfeld." In addition to network programming, the
Company's network
3
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affiliates broadcast news magazine, talk show, and game show programming such as
"Hard Copy," "Entertainment Tonight," "Regis and Kathie Lee," "Roseanne," "Rosie
O'Donnel," "Wheel of Fortune" and "Jeopardy."
Local News. The Company 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. The
Company 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. The Company
currently provides local news programming at 25 of its television stations
located in 21 separate markets. The possible introduction of local news at the
other Company stations is reviewed periodically and the Company has recently
expanded its news programming in some of the markets in which it programs a
second station pursuant to an LMA. The Company can produce news programming in
these markets at relatively low cost per hour of programming and the programming
serves the local community by providing additional news outlets in these
markets. The Company'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.
Popular Sporting Events. The Company attempts to capture a portion of
advertising dollars designated to sports programming in selected DMAs. The
Company's WB and UPN affiliated 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 certain prohibitions against
preemptions of network programming. The Company 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. The Company seeks to expand its
sports broadcasting in DMAs as profitable opportunities arise. In addition, the
Company's stations that are affiliated with Fox, ABC, NBC and CBS broadcast
certain Major League Baseball games, NFL football games and NHL hockey games as
well as other popular sporting events.
Counter-Programming. The Company'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. The Company believes that implementation of
this strategy enables its stations to achieve competitive rankings in households
in the 18-49 and 25-54 demographics and to offer greater diversity of
programming in each of its DMAs.
Control of Operating and Programming Costs
- ------------------------------------------
By employing a disciplined approach to managing programming acquisition and
other costs, the Company has been able to achieve operating margins that the
Company believes are among the highest in the television broadcast industry. The
Company 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 57 stations in 36 DMAs reaching approximately 23.5% of
U.S. television households (without giving effect to the Guy Gannett
Acquisition), the Company believes that it is able to negotiate favorable terms
for the acquisition of programming. Moreover, the Company 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.
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Attract and Retain High Quality Management
- ------------------------------------------
The Company 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 general
managers, sales managers and other station managers is based on their achieving
certain operating results. The Company also provides its corporate and station
managers with deferred compensation plans offering options to acquire Class A
Common Stock.
Community Involvement
- ---------------------
Each of the Company's stations actively participates in various community
activities and offers many community services. The Company's activities include
broadcasting programming of local interest and sponsorship of community and
charitable events. The Company also encourages its station employees to become
active members of their communities and to promote involvement in community and
charitable affairs. The Company 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.
Establish LMAs
- --------------
The Company believes that it can attain significant growth in operating
cash flow through the utilization of LMAs. By expanding its presence in certain
of its markets in which it already owns a station, the Company can improve its
competitive position with respect to a demographic sector. In addition, by
providing programming services to an additional station in a market, the Company
is able to realize significant economies of scale in marketing, programming,
overhead and capital expenditures. The Company provides programming services
pursuant to an LMA to an additional station in 21 of the 36 television markets
in which the Company owns or programs another station.
Innovative Local Sales and Marketing
- ------------------------------------
The Company 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. The Company 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. In seven of the Company's markets, the
Company owns both television and radio stations. In these markets, the Company
can offer an advertiser an efficient means to reach its customer base. The
Company seeks to increase its share of an advertisers business by
cross-marketing radio and television time. Through its strong local sales and
marketing focus, the Company seeks to capture an increasing share of its
revenues from local sources, which are generally more stable than national
advertising.
Programming and Affiliations
The Company 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, the Company 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. The Company seeks to
purchase only those programs with contractual periods that permit programming
flexibility and which complement a station's overall programming and
counter-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.
Fifty-four of the 57 television stations owned or provided programming
services by the Company currently operate as affiliates of Fox (20 stations), WB
(16 stations), ABC (six stations), NBC (three stations), UPN (eight stations),
or CBS (one station). 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, WB and UPN pay each affiliated station a fee for each
network-sponsored program broadcast by the station.
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On August 21, 1996, the Company entered into an agreement with Fox (the
"Fox Agreement") which, among other things, provides that the affiliation
agreements between Fox and eight stations then owned or provided programming
services by the Company would be amended to have new five-year terms commencing
on the date of the Fox Agreement. The eight affected stations are: WPGH-TV in
Pittsburgh, WBFF-TV in Baltimore, KABB-TV in San Antonio, WTTE-TV in Columbus,
WSMH-TV in Flint, KDSM-TV in Des Moines, WDKY-TV in Lexington and WYZZ-TV in
Peoria. 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,
during the term of the affiliation agreements, the Company will have the right
to purchase, for fair market value, any station Fox acquires in any of the
foregoing markets if Fox determines to terminate the affiliation agreement with
the Company's station in that market and operate the station being acquired by
Fox as a Fox affiliate.
The Fox-affiliated stations acquired, to be acquired or being programmed by
the Company as a result of the Sullivan Acquisition and Max Media Acquisition
continue to carry Fox programming notwithstanding the fact that their
affiliation agreements have expired. The Company is in negotiations with Fox to
secure long-term affiliation agreements. While Fox completes its revision of its
standard-form Station Affiliation Agreement, Fox has prepared to enter into
90-day rolling affiliation agreements with these stations.
On July 4, 1997, the Company entered into an agreement with WB (the "WB
Agreement"), pursuant to which the Company affiliated certain of its stations
with the WB for a ten year term expiring January 15, 2008. Under the terms of
the WB Agreement (as modified by the subsequent letter agreement entered into by
the Company and WB on May 18, 1998), WB agreed to pay the Company $64 million in
aggregate amount in monthly installments during the first eight years commencing
on January 16, 1998 in consideration for entering into affiliation agreements
with WB.
RADIO BROADCASTING
The Company owns, provides programming or sales services to, or has agreed
to acquire the following radio stations:
<TABLE>
<CAPTION>
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S STATION PRIMARY IN PRIMARY DATE
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED (A) REVENUE (B) FORMAT TARGET (C) TARGET (D) LICENSE
- ---------------------------- ------------- --------------------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
St. Louis, Missouri ........ 18
KPNT-FM Alternative Rock Adults 18-34 5 2/1/05
KXOK-FM (e) Classic Rock Adults 25-54 8 2/1/05
WVRV-FM Modern Adult Contemporary Adults 18-34 10 12/1/04
WRTH-AM Adult Standards Adults 35-64 19 2/1/05
WIL-FM Country Adults 25-54 1 2/1/05
KIHT-FM 70s Rock Adults 25-54 13 2/1/05
Kansas City, Missouri ...... 29
KCFX-FM 70s Rock Adults 25-54 3 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 (p) Classical Adults 25-54 14 2/1/05
KUPN-AM (p) Classical Adults 25-54 14 6/1/05
Milwaukee, Wisconsin ....... 33
WEMP-AM Religious Adults 35-64 N/A 12/1/04
WMYX-FM Adult Contemporary Adults 25-54 6 12/1/04
WXSS-FM Contemporary Hit Radio Women 18-49 7 12/1/04
New Orleans, Louisiana ..... 39
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S STATION PRIMARY IN PRIMARY DATE
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED (A) REVENUE (B) FORMAT TARGET (C) TARGET (D) LICENSE
- ------------------------------ ------------- --------------------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
WLMG-FM Adult Contemporary Women 25-54 3 6/1/04
WWL-AM News/Talk/Sports Adults 35-64 1 6/1/04
WSMB-AM Talk/Sports Adults 35-64 18 6/1/04
WEZB-FM (f) Contemporary Hit Radio Women 18-49 7 6/1/04
WLTS-FM (g) Adult Contemporary Women 25-54 4 6/1/04
WTKL-FM (g) Oldies Adults 25-54 5 6/1/04
Memphis, Tennessee ........... 40
WRVR-FM Soft Adult Contemporary Women 25-54 3 8/1/04
WJCE-AM Urban Oldies Women 25-54 14 8/1/04
WOGY-FM Country Adults 25-54 11 8/1/04
Norfolk, Virginia ............ 42
WVKL-FM (h)(i) 60s Oldies Adults 25-54 6 10/1/03
WPTE-FM Modern Adult Contemporary Adults 18-34 3 10/1/03
WWDE-FM Adult Contemporary Women 25-54 2 10/1/03
WNVZ-FM Contemporary Hit Radio Adults 18-34 6 10/1/03
WGH-AM (i) Sports Talk Adults 25-54 15 10/1/03
WGH-FM (i) Country Adults 25-54 4 10/1/03
WFOG-FM (i) Soft Adult Contemporary Women 25-54 9 10/1/03
Buffalo, New York ............ 41
WMJQ-FM Adult Contemporary Women 25-54 4 6/1/06
WKSE-FM Contemporary Hit Radio Women 18-49 1 6/1/06
WBEN-AM News/Talk/Sports Adults 35-64 4 6/1/06
WWKB-AM Sports Adults 35-64 16 6/1/06
WGR-AM News/Talk Adults 25-54 7 6/1/98 (j)
WWWS-AM Urban Oldies Adults 25-54 14 6/1/06
Greensboro/Winston
Salem/High Point, North
Carolina .................... 52
WMQX-FM Oldies Adults 25-54 6 12/1/03
WQMG-FM Urban Adult Contemporary Adults 25-54 1 12/1/03
WJMH-FM Urban Adults 18-34 1 12/1/03
WEAL-AM Gospel Adults 35-64 10 12/1/03
Asheville, North Carolina/
Greenville/Spartanburg,
South Carolina .............. 61
WFBC-FM Contemporary Hit Radio Women 18-49 3 12/1/03
WORD-AM (q) News/Talk Adults 35-64 7 12/1/03
WYRD-AM (q) News/Talk Adults 35-64 7 12/1/03
WSPA-AM Full Service/Talk Adults 35-64 15 12/1/03
WSPA-FM Soft Adult Contemporary Women 25-54 1 12/1/03
WOLI-FM (k) Oldies Adults 25-54 10 12/1/03
WOLT-FM (k) Oldies Adults 25-54 10 12/1/03
Wilkes-Barre/Scranton,
Pennsylvania ................ 68
WGGI-FM (l) Country Adults 25-54 4 8/1/06
WKRZ-FM (m) Contemporary Hit Radio Adults 18-49 1 8/1/06
WGGY-FM (l) Country Adults 25-54 4 8/1/06
WILK-AM (n) News/Talk/Sports Adults 35-64 7 8/1/06
WGBI-AM (n) News/Talk/Sports Adults 35-64 7 8/1/06
WSHG-FM (o) Soft Hits Women 25-54 9 8/1/06
WILP-AM (n) News/Talk/Sports Adults 35-64 7 8/1/06
WWFH-FM (o) Soft Hits Women 25-54 9 8/1/06
WKRF-FM (m) Contemporary Hit Radio Adults 18-49 1 8/1/06
</TABLE>
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(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 1997 aggregate gross radio broadcast revenue according to
Duncan's Radio Market Guide -- 1998 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.
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(d) All information concerning ratings and audience listening information is
derived from the Fall 1998 Arbitron Metro Area Ratings Survey (the "Fall
1998 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, the Company 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 1998 Arbitron.
(e) The Company has entered into an agreement to acquire the assets of the
station from WPNT, Inc. The consummation of the acquisition will occur
following FCC consent.
(f) A petition for reconsideration of the grant of this station's license
renewal is pending.
(g) The Company programs the stations pursuant to an LMA and has an option to
acquire the assets of the stations from Phase II Broadcasting.
(h) EEO reporting conditions were placed on this station's license renewals
for 1997, 1998 and 1999.
(i) These stations are owned by (or in the case of WFOG will be owned by) the
Norfolk Trust, Ralph E. Becker, Trustee. The Company is limited to four
FMs in this market under FCC rules and intends to sell WFOG, WGH (AM)/FM
to a third party and to acquire WVKL from the Trust.
(j) License renewal application pending.
(k) The Company provides sales services pursuant to a JSA and has exercised an
option to acquire WOLI-FM and WOLT-FM.
(l) WGGY-FM and WGGI-FM simulcast their programming.
(m) WKRZ-FM and WKRF-FM simulcast their programming.
(n) WILK-AM, WGBI-AM and WILP-AM simulcast their programming.
(o) WSHG-FM and WWFH-FM simulcast their programming.
(p) KXTR-FM and KUPN-AM simulcast their programming.
(q) WORD-AM and WYRD-AM simulcast their programming.
Radio Operating Strategy
The Company's radio strategy is to operate a cluster of radio stations in
selected geographic markets throughout the country. In each geographic market,
the Company employs broadly diversified programming formats to appeal to key
demographic groups within the market. The Company 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.
The Company 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. The Company 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 the
Company to avoid dependence on any one or any small group of advertisers.
The Company'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 Milwaukee. The group has duopolies in all the markets it
operates in and owns television stations in seven of the ten radio markets.
Depending on the programming format of a particular station, there are a
predetermined number of advertisements broadcast each hour. The Company
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
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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 the Company in
each of its radio markets. The Company's principal goal is to utilize its sales
efforts to develop long-standing customer relationships through frequent direct
contacts, which the Company believes provides it with a competitive advantage.
Additionally, our super-duopolies and cross-ownership of TV and radio stations
permit the Company to offer creative advertising packages to local, regional and
national advertisers. Each radio station owned or programmed by the Company 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 represented the most sweeping overhaul of the
country's telecommunications laws since the Communications Act of 1934, as
amended (the "Communications Act"). The 1996 Act relaxed the broadcast ownership
rules and simplified the process for renewal of broadcast station licenses.
The enactment of the 1996 Act offered the Company a unique opportunity to
build a large and diversified broadcasting company. Additionally, the Company
believes that, as one of the consolidators of the industry it has been able to
gain additional influence with program suppliers, television networks, other
vendors, and alternative delivery media.
In implementing its acquisition strategy, the Company 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, the Company examines opportunities to improve revenue
share, audience share and/or cost control. Additional factors considered by the
Company in a potential acquisition include geographic location, demographic
characteristics and competitive dynamics of the market. The Company also
considers the opportunity for cross-ownership of television and radio stations
and the opportunity it may provide for cross-promotion and cross-selling.
Beginning in the third quarter of 1998, the Company adjusted its
acquisition strategy to reduce its pace of acquisitions and begin to identify
and negotiate the sale of certain stations that may not be consistent with the
Company's strategic plan. The Company adjusted its acquisition strategy for the
following reasons. First, the Company intends to focus on and improve the
performance of its core station operations. By selling non-strategic stations,
management can better concentrate its resources on the core stations. Second,
the Company believes that it is appropriate at this time to reduce the financial
leverage employed in its business. The Company will continue to evaluate the
extent of the reduction in its financial leverage, but any related goals or
targets could be changed at any time.
Since the 1996 Act became effective, the Company has acquired, obtained
options to acquire or has acquired the right to program or provide sales
services to, 46 television and 61 radio stations for an aggregate consideration
of approximately $3.4 billion. The terms of the acquisitions and dispositions
entered into or completed in 1998 are described below.
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1998 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 $630 million (the "Heritage Acquisition"). The
Company completed all of the acquisitions under this agreement by July 1998,
acquiring three radio stations in the New Orleans, Louisiana market and
simultaneously disposing of two of those stations (see the Centennial
Disposition below). Pursuant to the Heritage Acquisition, and after giving
effect to the STC Disposition, Entercom Disposition and Centennial Disposition
the Company has acquired or is providing programming services to three
television stations in two separate markets and 11 radio stations in four
separate markets.
1998 STC Disposition. 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 $70.0 million. During the third quarter
of 1998, the Company sold the license assets of these stations for a sales price
of $2.0 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 $33.0 million.
The Company cannot acquire Montecito unless and until FCC rules permit the
Company 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 KVWB-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
KMWB-TV pursuant to an LMA.
WSYX Acquisition and Sale of WTTE License Assets. 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 and other costs of approximately $228.6 million. In August 1998,
the Company exercised its option to acquire the WSYX License Assets for an
option exercise price of $2.0 million. The Company acquired the options in 1996
in connection with its acquisitions of other assets of River City.
Simultaneously with the WSYX Acquisition, the Company sold the WTTE License
Assets to Glencairn for a sales price of $2.3 million and entered into an LMA
with Glencairn to program WTTE. In connection with the sale of the WTTE License
Assets, the Company recognized a $2.3 million gain.
SFX Disposition. In May 1998, the Company completed the sale of three radio
stations to SFX Broadcasting, Inc. for aggregate consideration of approximately
$35.0 million (the "SFX Disposition"). The radio stations sold are located in
the Nashville, Tennessee market. In connection with the disposition, the Company
recognized a $5.2 million gain on the sale.
Lakeland Acquisition. In May 1998, the Company acquired 100% of the stock
of Lakeland Group Television, Inc. ("Lakeland") for cash payments of
approximately $53.0 million (the "Lakeland Acquisition"). In connection with
the Lakeland Acquisition, the Company now owns television station KMUB-TV in
Minneapolis/St. Paul, Minnesota.
Entercom Disposition. In June 1998, the Company completed the sale of seven
radio stations acquired in the Heritage acquisition. The seven stations are
located in the Portland, Oregon and Rochester, New York markets and were sold
for aggregate consideration of approximately $126.9 million.
Sullivan Acquisition. In July 1998, the Company acquired 100% of the stock
of Sullivan Broadcast Holdings, Inc. and Sullivan Broadcasting Company II, Inc.
for cash payments of approximately $951.1 million (the "Sullivan Acquisition").
The Company financed the acquisition by utilizing indebtedness under the 1998
Bank Credit Agreement. In connection with the acquisition, the Company has
acquired the right to program 12 additional television stations in 10 separate
markets. In a subsequent closing, which is expected to occur during 1999, the
Company will acquire the stock of a company that owns the
10
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license assets of six of the stations. In addition, the Company has entered into
new LMA agreements with respect to six of the stations and will continue to
program two of the television stations pursuant to existing LMA agreements.
Max Media Acquisition. In July 1998, the Company directly or indirectly
acquired all of the equity interests of Max Media Properties LLC, for $252.2
million (the "Max Media Acquisition"). The Company financed the acquisition by
utilizing existing cash balances and indebtedness under the 1998 Bank Credit
Agreement. In connection with the acquisition, the Company now owns or provides
programming services to nine additional television stations in six separate
markets and seven radio stations in two separate markets.
Centennial Disposition. In July 1998, the Company completed the sale of the
assets of radio stations WRNO-FM, KMEZ-FM and WBYU-AM in New Orleans, Louisiana
to Centennial Broadcasting for $16.1 million in cash and recognized a loss on
the sale of $2.9 million. The Company acquired KMEZ-FM in connection with the
River City Acquisition in May of 1996 and acquired WRNO-FM and WBYU-AM in New
Orleans from Heritage Media Group, Inc. ("Heritage") in July 1998. The Company
was required to divest WRNO-FM, KMEZ-FM and WBYU-AM to meet certain regulatory
ownership guidelines.
Greenville Acquisition. In July 1998, the Company acquired three radio
stations in the Greenville/Spartansburg market from Keymarket Radio of South
Carolina, Inc. for a purchase price consideration involving the forgiveness of
approximately $8.0 million of indebtedness to Sinclair. Concurrently with the
acquisition, the Company acquired an additional two radio stations in the same
market from Spartan Broadcasting for a purchase price of approximately $5.2
million.
Radio Unica Disposition. In July 1998, the Company completed the sale of
KBLA-AM in Los Angeles, California to Radio Unica, Corp. for approximately
$21.0 million in cash. In connection with the disposition, the Company
recognized an $8.4 million gain.
PENDING ACQUISITIONS AND DISPOSITIONS
Buffalo Acquisition. In August 1998, the Company entered into an agreement
with Western New York Public Broadcasting Association to acquire the television
station WNEQ in Buffalo, NY for a purchase price of $33 million in cash (the
"Buffalo Acquisition"). The Company expects to close the sale upon FCC approval
and the termination of the applicable waiting period under the HSR Act. In
addition, the sale is contingent upon FCC approval of the change of the station
from a non-commercial channel to a commercial channel.
St. Louis Radio Acquisition. In August 1998, the Company entered into an
agreement to acquire radio station KXOK-FM in St. Louis, Missouri for a purchase
price of $14.1 million in cash. The purchase price is subject to be increased or
decreased, depending upon whether or not closing occurs within 210 days of the
agreement. The Company expects to close the purchase upon FCC approval.
Guy Gannett Acquisition. In September 1998, the Company agreed to acquire
from Guy Gannett Communications its television broadcasting assets for a
purchase price of $317 million in cash (the "Guy Gannett Acquisition"). As a
result of this transaction, the Company will acquire seven television stations
in six markets. The FCC must approve the Guy Gannet Acquisition, which the
Company expects to complete in the second quarter of 1999. The Company expects
to finance the acquisition with a combination of bank borrowings and the use of
cash proceeds resulting from the Company's planned disposition of certain
broadcast assets.
Ackerley Disposition. In September 1998, the Company agreed to sell WOKR-TV
in Rochester, New York to the Ackerley Group, Inc. for a sales price of $125
million (the "Ackerley Disposition"). The Company previously entered into an
agreement to acquire WOKR-TV as part of the Guy Gannett Acquisition. The FCC
must approve the disposition, which the Company expects to close in the second
quarter of 1999.
CCA Disposition. In February 1999, the Company entered into an agreement to
sell to Communications Corporation of America ("CCA") the non-license assets of
KETK-TV and KLSB-TV in Tyler-Longview, Texas for a sales price of $36 million
(the "CCA Disposition"). In addition, CCA has an option to acquire the license
assets of KETK-TV for an option purchase price of $2 million. The Company
expects to close the transaction in the second quarter of 1999.
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1999 STC Disposition. In March 1999, the Company entered into an agreement
to sell to STC the television stations WICS-TV in the Springfield, Illinois
market, WICD-TV in the Champaign, Illinois market and KGAN-TV in the Cedar
Rapids, Iowa market. The stations are being sold to STC for a sales price of
$81.0 million and are being acquired by the Company in connection with the Guy
Gannett Acquisition.
On going Discussions. In furtherance of its acquisition strategy, the
Company routinely reviews, and conducts investigations of potential television
and radio station acquisitions. In addition, the Company has announced that it
intends to enter into agreements to sell non-strategic television and radio
stations. When the Company believes a favorable opportunity exists, the Company
seeks to enter into discussions with the owners of stations or potential buyers
regarding the possibility of an acquisition, disposition or station swap. At any
given time, the Company may be in discussions with one or more parties. The
Company is currently in negotiations with various parties relating to the
disposition of television and radio properties which would be disposed of for
aggregate consideration of approximately $60 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
The Company 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 the Company 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 the Company
as a multi-station broadcaster. The Company seeks to identify such stations in
selected markets and to provide such stations with programming services pursuant
to LMAs. In addition to providing the Company with additional revenue
opportunities, the Company 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 cases where the Company enters into LMA arrangements in connection with
a station whose acquisition by the Company is pending FCC approval, the Company
(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 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 the Company. After FCC approval for transfer of the License Assets is
obtained, the Company 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
The Company 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 the
Company 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 ("HDTV") and to deliver various forms of data,
including data on the Internet, to home and business computers. These additional
capabilities may provide the Company with additional sources of revenue although
the Company may be required to incur significant additional costs in connection
therewith. The Company is currently considering plans to provide HDTV
programming, 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 Company does not believe the adoption of an
HDTV format will provide any significant economic benefits to the Company. The
FCC granted authority for the Company to conduct experimental DTV multicasting
operations in Baltimore, Maryland. In June 1998, the Company successfully linked
the bandwidths of the two Baltimore television stations it owns or programs,
demonstrating the ability to provide multiple channel options. The test
demonstrated that either manufacturers must make improvements in digital
receivers or the DTV frequency standards must be improved to achieve broadcast
parity with the analog signal.
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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
ruled that broadcasters shall be required to pay a fee of 5% of gross revenues
on all subscription services. The Company 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 the
Company's business. DTV technology currently is available in some of the top ten
viewing markets. A successful transition from the current analog broadcast
format to a digital format may take many years. There can be no assurance that
the Company'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 and are subject to renewal upon application to the FCC. During certain
periods when renewal applications are pending, petitions to deny license
renewals can be filed by interested parties, including members of the public.
The FCC will generally grant a renewal application if it 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 (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 the Company currently owns and operates or
provides programming services to pursuant to LMAs, or intends to acquire or
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
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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, appropriate applications 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
13
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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 the 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 a pending 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. The Company cannot predict the outcome
of this proceeding or how it will affect the business. However, if the proposal
were adopted without excluding existing LMAs and JSAs, the proposals could
require the Company to dispose or otherwise alter its LMA and JSA relationships.
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 equity interests combined with an
attributable interest in a 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 Company cannot
predict the outcome of this rulemaking.
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
14
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controlled by any other corporation of which more than 25% of the capital stock
is owned of record or voted by Aliens. The Company 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 the Company by the FCC could
be revoked if, among other restrictions imposed by the FCC, more than 25% of the
Company's stock were directly or indirectly owned or voted by Aliens. The
Company and the Subsidiaries are domestic corporations, and the members of the
Smith family (who together hold over 90% of the common voting rights of the
Company) are all United States citizens. The Amended and Restated Articles of
Incorporation of the Company (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, the Company 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. Pursuant to the 1996 Act 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 national television viewing audience. All but seven of the
stations owned and operated by the Company, or to which the Company provides
programming services, are UHF. Upon completion of all pending acquisitions and
dispositions, the Company 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 TV 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.
The Company cannot predict the outcome of the proceeding in which such changes
are being considered.
Local Marketing Agreements. A number of television stations, including
certain of the Company'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 could 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,
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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 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. If a brokered station is deemed to be
attributable, the presence of a station brokered by the owner of another station
in the market would violate the FCC's duopoly rule.
The TV duopoly rule currently prevents the Company from acquiring the
licenses of television stations with which it has LMAs in those markets where
the Company owns a television station. As a result, if the FCC were to adopt
rules that would make such interests attributable without modifying its current
prohibitions against the ownership of more than one television station in a
market, the Company could be prohibited from entering into such arrangements
with other stations in markets in which it owns television stations and could be
required to terminate existing LMA arrangements. The FCC has proposed that LMAs
in force prior to November 5, 1996 would be permitted to continue until the
original term of the agreement expires. Of the Company's 22 LMAs in markets
where the Company owns or is expected to acquire another station, 15 were
entered into after adoption of the 1996 Act (and two additional LMAs were
assumed by the Company after adoption of the Act) and 12 were entered into after
November 5, 1996 (and the license rights under one additional LMA were assumed
by a third party after November 5, 1996). However, the FCC currently is
reviewing its LMA policy, and while Congress, pursuant to the 1996 Act, stated
that existing LMAs should generally be grandfathered, the Company cannot predict
whether any of its LMAs will be grandfathered. The Company 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. In such an event, the Company could
be required to pay termination penalties under certain of such LMAs. Further, if
the FCC were to find, in connection with any of the Company's LMAs, that the
owners/licensees of the stations with which the Company has LMAs failed to
maintain control over their operations as required by FCC rules and policies,
the licensee of the LMA station and/or the Company 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. The Company is unable to
predict the ultimate outcome of possible changes to these FCC rules and the
impact such FCC rules may have on its broadcasting operations.
RADIO
National Ownership Rule. Pursuant to the 1996 Act, there are no limits on
the number of radio stations a single individual or entity may own nationwide.
Local Ownership Rules. Pursuant to the 1996 Act, the limits on the number
of radio stations one entity may own locally are 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
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Trade Commission have the authority to determine, and in certain recent radio
transactions have determined, that a particular transaction presents antitrust
concerns. Moreover, in certain recent cases the FCC has publicly announced that
it will 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 market), 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 the Company owns a radio station, the Company 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 the Company'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 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, the
Company may be required to terminate any JSA it might have with a radio station
which the Company 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
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<PAGE>
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 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
the implementation of this policy and whether the one to a market rule should be
eliminated altogether. The Company has pending several requests for waivers of
the one to a market rule in connection with (1) its applications to acquire a
television station in the Sullivan Acquisition in a market where the Company
owns radio stations and (2) its application to acquire a radio station from
WPNT, Inc. in a market where the Company owns a television station.
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 financial 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. Waiver requests involving the common ownership of more
than two same service radio stations in the same market generally are granted,
but are temporary and conditioned on the outcome of the rulemaking proceeding.
The Company 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 connection with its acquisition of the Max
Media radio stations in the Norfolk market, and in connection with its
acquisition of Keymarket and Spartan Broadcasting stations in the
Greenville/Spartanburg market.
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 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.
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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.
Expansion of the Company'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 the Company's stations are located, more specifically to
the extent that any of the Company's competitors may have greater resources and
thereby be in a superior position to take advantage of such changes.
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, the Company elected must-carry or
retransmission consent with respect to each of its non-Fox affiliated stations
based on its evaluation of the respective markets and the position of the
Company's owned or programmed station(s) within the market. The Company's
stations continue to be carried on all pertinent cable systems, and the Company
does not believe that its elections have resulted in the shifting of its
stations to less desirable cable channel locations. The Company's stations
affiliated with Fox granted Fox their proxies to negotiate retransmission
consent with the cable systems. The agreements negotiated by Fox extend only
through May of 1999. Therefore, subject to Fox's approval, the Company will need
to negotiate retransmission consent agreements for these Fox-affiliated stations
to attain carriage on those 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.
The FCC has initiated a rulemaking proceeding to consider whether to apply
must-carry rules to require cable companies to carry both the analog and digital
signals of local broadcasters during the DTV transition period between 2002 and
2006 when television stations will be broadcasting both signals. If the FCC does
not require DTV must-carry, cable customers in the Company's broadcast markets
may not receive the station's digital signal, which could have an adverse affect
on the Company.
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 duplicating network programming carried
on distant signals. However, in a number of markets in which the Company 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 the Company'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 the
Company owned or programmed station.
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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 recently examined
legislation proposals which may eliminate or severely restrict the advertising
of beer and wine. Although no prediction can be made as to whether any or all of
the present proposals will be enacted into law, the elimination of all beer and
wine advertising would have an adverse effect upon the revenues of the Company'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 the
Company alleging that the station had exceeded these limitations. The Company
has appealed this fine and the appeal is pending. In granting renewal of the
license for WTTV-TV and WTTK-TV, stations that the Company 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 exceed these limitations.
The Communications Act and FCC rules also place restrictions on 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. The Company 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 identifications, the advertisement of contests and lotteries,
obscene and indecent broadcasts, and technical operations, including limits on
radio frequency radiation. Certain of the FCC's rules that required licensees to
develop and implement affirmative action programs designed to promote equal
employment opportunities and the annual submission of reports to the FCC with
respect to those matters were found unconstitutional by the U.S. Court of
Appeals. The FCC has initiated a rulemaking to revise these rules.
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.
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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 after May 1, 1995 contain summaries of written
comments and suggestions received by the station from the public regarding
violent programming.
Closed Captioning. The FCC has adopted rules that require generally that
(i) 100% 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 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 FCC adopted a
DTV Table of Allotments that provides all authorized television stations with a
second channel on which to broadcast a DTV signal. 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 and further subject to the
requirement that broadcasters pay a fee of 5% of gross revenues on all DTV
subscription services.
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, that affiliates of these networks in markets 11 through 30 begin
digital broadcasting by November 1999 and that all other stations begin digital
broadcasting by May 1, 2002. The majority of the Company's stations are required
to commence digital operations by May 1, 2002. Applications for such facilities
are required to be filed by November 1, 1999. The Company has already filed
these applications for five of its stations and plans to begin broadcasting
digital signals at four of its stations in Baltimore, Sacramento, St. Louis and
Pittsburgh by the end of 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 direct-to-home broadcast satellite television
("DBS")) that carries at least one digital channel from each of the local
stations in that market; or (iii) 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 initiated
separate proceedings to consider the surrender of existing television channels
and how these frequencies will be used after they are eventually recovered from
broadcasters. Additionally, the FCC has initiated a separate proceeding to
consider to what extent the cable must-carry requirements will apply to DTV
signals.
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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. While the 1998 orders
of the FCC present current UHF stations with some options to overcome this
disparity, it is unknown whether the Company will benefit from such options.
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 the Company's television stations will be able to increase
revenue to offset such costs. The Company 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 ruled
that broadcasters are subject to the requirement to pay a fee of 5% of gross
revenues on all subscription services. The FCC is also considering imposing new
public interest requirements on television licensees in exchange for their
receipt of DTV channels. In addition, Congress has held hearings on
broadcasters' plans for the use of their digital spectrum.A governmental
commission was appointed to consider whether additional public service
obligations should be imposed on television broadcasters. The commission issued
its report in December 1998 making several non-binding recommendations,
including that broadcasters voluntarily provide five minutes of free air time
per evening to political candidates for thirty days prior to an election. The
Company cannot predict the impact of such recommendations or what future actions
the FCC 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 the Company'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 the Company's broadcast stations, result in the loss of
audience share and advertising revenues for the Company's broadcast stations,
and affect the ability of the Company 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 the Company'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, the Internet 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 the Company's business and operations.
22
<PAGE>
ENVIRONMENTAL REGULATION
Prior to the Company'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 the Company's facilities may be affected by
the proximity of nearby properties that have generated, used, stored or disposed
of hazardous substances. As a result, it is possible that the Company could
become subject to environmental liabilities in the future in connection with
these facilities under applicable environmental laws and regulations. Although
the Company believes that it is in substantial compliance with such
environmental requirements, and has not in the past been required to incur
significant costs in connection therewith, there can be no assurance that the
Company's costs to comply with such requirements will not increase in the
future. The Company presently believes that none of its properties have any
condition that is likely to have a material adverse effect on the Company's
financial condition or results of operations.
COMPETITION
The Company's television and radio stations compete for audience share and
advertising revenue with other television and radio stations in their respective
DMAs or MSAs, as well as with other advertising media, such as newspapers,
magazines, outdoor advertising, transit advertising, yellow page directories,
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 the Company.
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. The Company's
television stations are located in highly competitive DMAs. In addition, certain
of the Company'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, cable channels, and
cable system operators serving the same market. Traditional network 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 traditional networks'
efforts 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 traditional network
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 the Company believes that the Company's
programming typically achieves a share of television market advertising revenues
greater than its share of the 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 the Company's prime time programming is supplied by Fox and to a
lesser extent WB, UPN, ABC, NBC and CBS. In those periods, the Company'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. The Company believes that its sales and programming
strategies allow it to compete effectively for advertising within its DMAs.
23
<PAGE>
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, the
Company'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, DBS
entertainment services and multichannel multipoint distribution services
("MMDS"). DBS and cable operators in particular are competing more aggressively
than in the past for advertising revenues in our TV stations' markets. This
competition could adversely affect our stations' revenues and performance in the
future. 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 telephone
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. The Company is unable to predict what
other video technologies might be considered in the future, or 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 Company believes that television broadcasting may be enhanced
significantly by the development and increased availability of DTV technology.
This technology has the potential to permit the Company 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 the Company
with additional sources of revenue. The Company 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 Company 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 ruled that
broadcasters are required to pay a fee of 5% of gross revenues in all
subscription services. In addition, Congress has held hearings on broadcasters'
plans for the use of their digital spectrum. The Company 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 the Company's business. While DTV technology is currently available
in some of the top ten viewing markets, a successful transition from the current
analog broadcast format to a digital format may take many years. There can be no
assurance that the Company's efforts to take advantage of the new technology
will be commercially successful.
The Company also competes for programming, which involves negotiating with
national program distributors or syndicators that sell first-run and rerun
packages of programming. The Company'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
24
<PAGE>
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, the Company believes that over the past five years program prices
generally have stabilized.
The Company believes it competes favorably against other television
stations because of its management skill and experience, the ability of the
Company historically to generate revenue share greater than its audience share,
its network affiliations and its local program acceptance. In addition, the
Company 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 the Company 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 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 the Company's radio stations will be able to
maintain or increase its current audience ratings and radio advertising revenue
market share.
The Company attempts to improve each radio station's competitive position
with promotional campaigns designed to enhance and reinforce its identities with
the listening public. Extensive market research is conducted in order to
identify specific demographic groups and design a programming format for those
groups. The Company 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 at specific demographic groups, management believes
that the Company 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. Also, new technology has introduced the broadcast of radio
programming over the Internet. This new capability may provide an additional
source of competition in some of the Company's markets. 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. In addition, the FCC has initiated a rulemaking proceeding
proposing to create a new lower power FM radio service, which may create new
competition in some of our radio markets. 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 December 31, 1998, the Company had approximately 4,200 employees.
With the exception of certain of the employees of KOVR-TV, KDNL-TV, WSYX-TV,
WCHS-TV, and certain employees at radio stations in New Orleans and two radio
stations in St. Louis, none of the employees is represented by labor unions
under any collective bargaining agreement. No significant labor problems have
been experienced by the Company, and the Company considers its overall labor
relations to be good.
25
<PAGE>
ITEM 2. PROPERTIES
Generally, each of the Company's stations has facilities consisting of
offices, studios and tower sites. Transmitter and tower sites are located to
provide maximum signal coverage of the stations' markets. The following table
generally describes the Company's principal owned and leased real property in
each of its markets of operation:
<TABLE>
<CAPTION>
APPROXIMATE
TELEVISION PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) SIZE (SQ. FEET)
- ------------------------ -------------------------------------------------------- ----------------------------- -------------------
<S> <C>
Pittsburgh Market Station Site for WPGH Leased (expires 10/01/2028) 44,000
Space on WPGH Tower Site Leased (expires 02/23/2039) On site of station
Baltimore Market WBFF Studio and Company Offices Leased (expires 12/31/2010) 39,000
WBFF Parking Lot Leased (monthly) N/A
Space on Main WBFF Tower for Antenna Leased (expires 06/01/2007) N/A
Space on Main WBFF Tower for Transmission Disks Leased (expires 04/01/2011) N/A
Space on Main WBFF Tower for Receivers Leased (expires 08/01/2012) N/A
Milwaukee Market WVTV Owned 37,800
Studio Site WVTV Transmitter Leased (expires 01/30/2030) N/A
Site Land WVTV Transmitter Site Building Owned 6,200
WCGV Transmitter Land & Bldg. Leased (expires 12/31/2029) N/A
Raleigh/Durham Market WLFL/ WRDC Studio Site Leased (expires 07/29/2021) 26,600
WLFL Tower Site Land Leased (expires 12/31/2018) 1,800
Columbus Market WTTE Studio Site Leased (expires 12/31/2002) 14,400
WTTE Office Space Leased (expires 06/01/2003) 4,500
WTTE Tower Site Leased (monthly) 1,000
WSYX Studio & Office Site Owned 51,680 (bldg.)/
1.126/1.901 acres
(land
WSYX Main Transmitter (tower & bldg.) Owned 1,344
WSYX Main Transmitter (land) Leased (expires 4/28/2002) 20 acres
WSYX Repeater Site (1) Leased (expires 7/31/1999) N/A
WSYX Repeater Site (2) Leased (Monthly) N/A
Norfolk Market WTVZ Studio Site Leased (expires 07/31/1999) 15,000
Space on WHRD Tower Leased (expires 09/30/1999) N/A
Birmingham Market WTTO Tower and Old WTTO Studio Owned 9,500
WTTO Studio Site Leased (expires 1/31/2016) 9,750
WABM Studio Site Leased (expires 1/31/2016) 9,750
WABM Tower/Lot Owned 35 acres
WDBB Transmitter Site Leased (monthly) 678
WDBB Tower/Lot Owned 160 acres
Flint/Saginaw/Bay City WSMH Studio & Office Site Owned 13,800
Market WSMH Transmitter Site Leased (expires 11/13/2004) N/A
Kansas City Market KSMO Studio & Office Site Leased (expires 02/28/2011) 11,055
KSMO Transmitter Building Leased (expires 12/10/2020) 1,200
Cincinnati Market WSTR Studio & Office Site Owned 14,800
WSTR Transmitter Site Leased (monthly) 6,600
W66AQ Translator Owned N/A
Peoria Market WYZZ Studio & Office Site Owned 6,000
WYZZ Transmitter Site -- real property only Leased (expires 12/01/2001) N/A
WYZZ Transmitter Site -- tower, transmitter, Owned 1,100 (bldg.)
building, and equipment
WYZZ Sales Office Leased (expires 8/31/1999) 1,800
Oklahoma City Market KOCB Studio & Office Site Owned 12,000
<PAGE>
<CAPTION>
APPROXIMATE
TELEVISION PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) SIZE (SQ. FEET)
- ------------------------------ ----------------------------------------- ----------------------------- --------------------------
<S> <C> <C> <C>
KOCB Transmitter Site Owned Included above
KOKH Studio, Office & Transmitter Site Owned 27,000
KOCB/KOKH Relay and Translator Site 4 Leased (expires 12/31/2004) N/A
Lexington Market WDKY Studio & Office Site Leased (expires 12/31/2010) 12,771
WDKY Transmitter Site Owned 2,900
Indianapolis Market WTTV/WTTK Studio & Office Site (bldg.) Owned 19,900
WTTV/WTTK Studio & Office Site (lot) Owned 18.5 acres
WTTV Transmitter Site/lot Owned 2,730/41.25 acres
WTTK Transmitter Site/lot Owned 800/30 acres
Bloomington microwave site (bldg.) Owned 216
Bloomington microwave site (land) Leased (expires 07/05/2077) 216
Sacramento Market KOVR Studio & Office Site Owned 42,600
KOVR Stockton Office Site Leased (expires 03/31/1999) 1,000
KOVR Transmitter Site 50% Ownership N/A
KOVR Back-up Transmitter Site 1/3 Ownership N/A
Mt. Oso Microwave Site Leased (expires 02/28/2001) N/A
Volmer Peak Microwave Site Leased (expires 06/30/2000) N/A
Downtown Sacramento Microwave Site Leased (expires 05/31/1999) N/A
Elverta Microwave Site Leased (expires 07/31/1999) N/A
San Antonio Market KABB/KRRT Studio & Office Site Owned by KABB 22,460
KABB Transmitter bldg/tower/land Owned by KABB 1200/1200/
35.562 acres
KRRT Transmitter land Leased (expires 06/30/2007) 103.854 acres
Asheville/Spartanburg Market WFBC/WLOS Studio & Office Site Owned by WLOS 28,000
WLOS Transmitter tower, bldg, land Leased (expires 12/31/2001) 2,625 (bldg.)/3.5
acres (land)
WFBC Transmitter Site Owned by WFBC 45.6 acres
St. Louis Market KDNL Studio & Office (Lot) Owned 53,550
KDNL Studio & Office (building) Owned 41,372 (TV)
KDNL Transmitter Site (2 buildings) Owned 1,600 & 1,330
Des Moines Market KDSM Studio & Office Site Owned 13,000
KDSM Transmitter bldg/tower Owned 2,000
KDSM Transmitter land Leased (expires 11/08/2034) 40 acres
KDSM Translator tower/shed Leased (expires 12/31/1998) 48
Las Vegas Market KVWB Studio & Office Site Leased (expires 6/26/99) 14,000
KVWB Transmitter Site Owned .04 acres
KVWB Microwave Relay Site (1) Leased (expires 1/31/2002) N/A
KVWB Microwave Relay Site (2) Leased (expires 10/01/2006) N/A
KVWB Microwave Relay Site (3) Leased (expires 10/31/2002) N/A
KVWB Translator Site Leased (expires 6/30/2000) N/A
KFBT Transmitter Site Leased (expires 4/01/2008) N/A
Minneapolis Market KMWB Studio & Office Site Leased (expires 11/30/2002) 21,000
KMWB Transmitter Site Owned 1,984 (bldg.)
Nashville Market WZTV Studio & Office Site Owned 20,000 (bldg.)/2.60
acres (land)
WZTV Transmitter Site Leased (expires 1/12/2003) 2,050 (bldg.)
WUXP Studio & Office Site (same as WZTV)
WUXP Transmitter Site Land Leased (expires 1/12/2003) 45.49 acres
WUXP Transmitter Site Building Owned 900
Buffalo Market WUTV Studio, Office & Transmitter Site Owned 14,750 (bldg.)/
20.40 acres (land)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
TELEVISION PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) SIZE (SQ. FEET)
- ------------------------------ ------------------------------------------ ----------------------------- --------------------------
<S> <C> <C> <C>
WUTV Transmitter Land & Building Owned 25 acres (land)/
1,150 (bldg)
Greensboro/Winston- WXLV/WUPN Studio & Office Site Leased (expires 10/31/2003) 9,700 (bldg.)/
Salem/Highpoint Market .625acres (land)
WXLV/WUPN Business & Sales Offices Leased (expires 10/31/2005) 5,000 (bldg.)/
1.261 acres (land)
WXLV Transmitter Site Building Owned 1,830
WXLV Transmitter Site Land Leased (expires 10/31/2003) 9.4 acres
WXLV Microwave Relay Site Leased (expires 9/30/2000) N/A
WUPN Transmitter Site Leased (expires 4/26/2001) N/A
Dayton Market WKEF Studio, Office and Transmitter Site Owned 2.940/37.970 acres (land)
WRGT Studio, Office & Transmitter Site Owned 20 acres (land)
Charleston/Huntingdon Market WCHS Studio & Office Site Owned 41,892 (bldg.)/
1.25 acres (land)
WCHS Sales Office Leased (expires 6/1999) 2,000
WCHS Transmitter Site Owned 42.5 acres
WVAH Studio & Office Site Owned 8.848 (bldg.)/
3.1546 acres (land)
WVAH Transmitter Site Owned 1,230 (bldg.)/
29.0287 acres (land)
Richmond Market WRLH Studio & Office Site Leased (expires 2/28/2005) 13,798
WRLH Transmitter Site Owned 1,250 (bldg.)/
25acres (land)
Mobile/Pensacola Market WEAR Studio & Office Site Owned 22,000 (bldg.)/
8.41 acres (land)
WEAR Transmitter Site Owned 37 acres
WEAR Microwave Relay Site Owned 12.95 acres
WEAR Sales Office Leased (expires 6/1/1999) 1,164
WFGX Studio, Office & Transmitter Site Leased (expires 4/2000) 5,200
Syracuse Market WSYT/WNYS Studio & Office Site Owned 22,000 (bldg.)/
.86 acres(land)
WSYT/WNYS Transmitter Site (land) Leased (expires 12/31/2004) 1 acre
WSYT/WNYS Transmitter Site (bldg.) Owned 925
Paducah/Cape KBSI/WDKA Studio & Office Site Owned 10,320 (bldg.)/
Girardeau Market 1.26 acres (land)
KBSI Transmitter Site Owned 900 (bldg.)/
60 acres (land)
WDKA Transmitter Site (land) Leased (expires 8/31/2006) 40 acres
WDKA Transmitter Site (bldg.) Leased (expires 12/31/1999) 1,440
KBSI/WDKA Sales Office Owned 1,000
Rochester Market WUHF Studio & Office Site Leased (expires 5/2004) 15,000
WUHF Transmitter Site Leased (expires 12/2029 1,000 (bldg.)
Madison Market WMSN Studio & Office Site Leased (expires 12/31/2000) 12,000
WMSN Transmitter Site Leased (expires 10/15/2015) 1,200
Tri-Cities Market WEMT Studio & Office Site Leased (expires 1/2008) 10,000
WEMT Transmitter Site Owned 750 (bldg.)
WEMT Translator Site Leased (expires 12/31/2001 N/A
Tyler-Longview Market KETK Studio & Office Site Owned 13,000 (bldg.)/
1.261/.52 acres (land)
KETK Transmitter Site (tower) Owned N/A
KETK Transmitter Site (land) Leased (expires 6/01/2001) N/A
KETK Transmission Tower Space (Longview) Leased (expires 7/31/1999) N/A
KLSB Office Site Leased (expires 3/31/2001)0 10,000
KLSB Sales Office (Lufkin) Leased (expires 9/30/1999) N/A
KLSB Transmitter Site Leased (expires 3/31/2001) N/A
Charleston Market WMMP Studio & Office Site Leased (expires 10/31/2002) 10,000
WMMP Transmitter Site Leased (expires 10/31/2002) 1,000 (bldg.)
note: trans. bldg. owned
WTAT Studio & Office Site Leased (expires 6/30/2000) 10,521
WTAT Transmitter Site Leased (expires 6/30/2000) 1,625 (bldg)
note: trans. bldg. owned
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
RADIO PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED SIZE (SQ. FEET)
- ------------------------------ ------------------------------------------ ------------------------------- ----------------
<S> <C> <C> <C>
Buffalo Market WWKB/WKSE/WGR/WWWS Studio & Office Site Leased (expires 10/01/2000) 5,000
WMJQ/WKSE Office Site Leased (expires 09/30/2001) 5,200
WBEN Studio & Office Site Leased (expires 12/31/1998 - 7,750
lease negotiation in progress)
WBEN Transmitter Site Owned 2,000
WGR/WWKB Transmitter Site Owned 3,500
WKSE Transmitter Site Owned 6,722
WWWS Transmitter Site Leased (expires 5/23/2001) 100
WWKB/WGR/WBEN Office Site Leased (expires 6/01/2002) 2,907
Memphis Market WJCE/WRVR/WOGY Studio & Office Site Owned 10,000
WJCE Transmitter Site Leased (expires 03/27/2035) 2,262
WRVR Transmitter Site Leased (expires 12/31/2003) 169
WOGY Transmitter Site (on 4.5 acres) Owned 340
New Orleans Market WWL/WSMB/WTKL Studio & Office Site Leased (expires 08/31/2002) 11,553
WWL Transmitter Site (on 64.62 acres) Owned 2,300
WSMB Transmitter Site (on 3,600 sq. ft) Owned 3,600
WLMG Transmitter Site Leased (expires 10/27/2024) N/A
WEZB Transmitter Site Leased (expires 10/27/2014) N/A
WLMG/WLTS/WEZB Studio & Office Site Leased (expires 9/2004) 9,977
WLTS Transmitter Site Owned 330
WTKL Transmitter Site Leased (expires 10/27/2014) N/A
Wilkes-Barre/Scranton Market WILK/WGBI/WGGY/WKRZ Studio & Office Site Owned 14,000
WILK Transmitter Site Leased (expires 08/31/2000) 1,000
WGBI Transmitter Site Leased (expires 02/28/2007) 1,000
WGGY Transmitter Site Leased (expires 02/28/2007) 300
WKRZ Transmitter Site Owned 4,052 (bldg)
WILT/WKRF Studio & Office Site Leased (expires 2/28/1999) 100
WWSH Transmitter Site Owned 140
WKRF Transmitter Site Leased (expires 5/2000) 4,000
WILP Transmitter Site Owned 3,200 (bldg)
WWFH Transmitter Site Owned 33,000
WGGI Transmitter Site Owned 120 (bldg)/
.2 acres (land)
WGGI/WILP Studio Site Leased (expires 1/2001) 120
WGGI/WILP Parking Lot Leased (open) 7,000
WGGI Booster (bldg) Leased (expires 12/2008) 104
WGGY Booster (roof) Leased (expires 12/2008) 4
St. Louis Market KPNT/WVRV/KXOK Studio & Office Site Owned 6,452
KPNT Transmitter Site Owned 7450
WVRV Transmitter Site Owned 9,757
WVRV back up building Owned 240
KXOK Transmitter Site (Ofallon) Leased (expiration unknown) N/A
WRTH/WIL/KIHT Studio & Office Site Leased (expires 3/14/2011) 10,900
WRTH Transmitter Site Owned 900 (bldg)/
10 acres (land)
WIL Transmitter Site Leased (expires 7/18/2008) 380
KIHT Transmitter Site Leased (expires 9/28/2015) 400
KIHT Auxiliary Transmitter Site Leased (expires 3/14/2011) 1,500
Kansas City Market KUPN Transmitter Land Owned 16.2 acres
KUPN Studio & Office Site Owned 2,772
KCFX/KCIY/KXTR/KARC Studio & Office Site Leased (expires 2/28/2018) 20,514
KCFX Transmitter Site Leased (expires 6/24/2010) 200
KQRC Transmitter Site Leased (expires 1/31/2003) 600
KXTR Transmitter Site Leased (expires 3/1/2012) 600
KCIY Transmitter Site Leased (expires 3/1/2007) 200
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
RADIO PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED SIZE (SQ. FEET)
- ------------------------------ ------------------------------------- ----------------------------- -------------------
<S> <C> <C> <C>
Milwaukee Market WXSS/WEMP/WMYX Studio & Office Owned 9,600
WEMP/WXSS/WMYX Transmitter Site Owned 3,700
WMYX Transmitter Site Leased (expires 9/1999) 100
Norfolk Market WFOG Transmitter Site Owned 1,623
WPTE/WWDE/WNVZ Studio & Office Site Leased (expires 4/30/2007) 14,136
WPTE Transmitter Site Leased (expires 9/30/2012) 620
WWDE Transmitter Site Leased (expires 12/30/2034) 300
WNVZ Transmitter Site Leased (expires 6/30/2005) 1,200
Greensboro/Winston-Salem/High
Point Market
WEAL Transmitter Site Owned 120
WMQX/WJMH/WQMG Studio & Office Site Leased (expires 3/31/2004) 9,000
WQMG Transmitter Site Owned 150
WMQX/WJMH Transmitter Site Leased (expires 11/30/2002) 700
Asheville, NC & Greenville/ WFBC/WORD Studio & Office Site Owned 11,098
Spartanburg, SC
WFBC-FM Transmitter Site Leased expires 2/28/2023) N/A
WYRD Transmitter Site Owned 782 (bldg.)/
20 acres (land)
WORD Transmitter Site Owned 500 (bldg.)/
14.97 acres (land)
WSPA-AM Transmitter Site Owned 1,265 (bldg)/
14.37 acres (land)
WSPA-AM Studio Site -- Spartanburg Leased (expires 6/30/2002) N/A
WOLI Transmitter Site Owned 225 (bldg)/
4.51 acres (land)
WOLT Transmitter Site Leased (expires 10/30/2000) N/A
WSPA-FM Transmitter Site Leased (expires 8/29/2004) N/A
</TABLE>
- ----------
(a) Lease expiration dates assume exercise of all renewal options of the
lessee.
The Company believes that all of its properties, both owned and leased, are
generally in good operating condition, subject to normal wear and tear, and are
suitable and adequate for the Company's current business operations.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1998.
30
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common stock of the Company is listed for trading on the Nasdaq
stock market under the symbol SBGI. The following table sets forth for the
periods indicated the high and low sales prices on the Nasdaq stock market.
1997 HIGH LOW
- -------------------------------- ------------ ------------
First Quarter ........... $ 15.500 $ 11.500
Second Quarter .......... 15.438 11.625
Third Quarter ........... 20.188 14.250
Fourth Quarter .......... 23.313 16.813
1998 HIGH LOW
- -------------------------------- ------------ ------------
First Quarter ........... $ 29.250 $ 21.438
Second Quarter .......... 31.125 23.313
Third Quarter ........... 30.125 15.875
Fourth Quarter .......... 20.000 6.750
As of March 23, 1999, there were approximately 103 stockholders of record
of the common stock of the Company. This number does not include beneficial
owners holding shares through nominee names. Based on information available to
it, the Company believes it has more than 5,000 beneficial owners of its Class A
Common Stock.
The Company generally has not paid a dividend on its common stock and does
not expect to pay dividends on its common stock in the foreseeable future. The
1998 Bank Credit Agreement and certain subordinated debt of the Company
generally prohibit the Company from paying dividends on its common stock. Under
the indentures governing the Company's 10% Senior Subordinated Notes due 2005,
9% Senior Subordinated Notes due 2007 and 8 3/4% Senior Subordinated Notes due
2007, the Company is not permitted to pay dividends on its common stock unless
certain specified conditions are satisfied, including that (i) no event of
default then exists under the indenture or certain other specified agreements
relating to indebtedness of the Company and (ii) the Company, after taking
account of the dividend, is in compliance with certain net cash flow
requirements contained in the indenture. In addition, under certain senior
unsecured debt of the Company, the payment of dividends is not permissible
during a default thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31,
1994, 1995, 1996, 1997 and 1998 have been derived from the Company's audited
Consolidated Financial Statements. The Consolidated Financial Statements for the
years ended December 31, 1996, 1997 and 1998 are included elsewhere in this Form
10-K/A.
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 in this Form 10-K/A.
31
<PAGE>
STATEMENT OF OPERATIONS DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcast revenues(a) ............................. $ 118,611 $ 187,934 $ 346,459 $ 471,228 $ 672,806
Barter revenues ....................................... 10,743 18,200 32,029 45,207 63,998
---------- ---------- ------------ ---------- ------------
Total revenues ........................................ 129,354 206,134 378,488 516,435 736,804
---------- ---------- ------------ ---------- ------------
Operating costs(b) .................................... 41,338 64,326 142,576 198,262 287,141
Expenses from barter arrangements ..................... 9,207 16,120 25,189 38,114 54,067
Depreciation and amortization(c) ...................... 55,587 80,410 121,081 152,170 199,928
Stock-based compensation .............................. -- -- 739 1,636 3,282
Special bonuses paid to executive officers ............ 3,638 -- -- -- --
---------- ---------- ------------ ---------- ------------
Broadcast operating income ............................ 19,584 45,278 88,903 126,253 192,386
Interest expense ...................................... (25,418) (39,253) (84,314) (98,393) (138,952)
Subsidiary trust minority interest expense(d) ......... -- -- -- (18,600) (23,250)
Gain on sale of broadcast assets ...................... -- -- -- -- 12,001
Unrealized loss on derivative instrument .............. -- -- -- -- (9,050)
Interest and other income ............................. 2,447 4,163 3,478 2,228 6,706
---------- ---------- ------------ ---------- ------------
Income (loss) before (provision) benefit for
income taxes and extraordinary items ................. $ (3,387) $ 10,188 $ 8,067 $ 11,488 $ 39,841
========== ========== ============ ========== ============
Net income (loss) ..................................... $ (2,740) $ 76 $ 1,131 $ (10,566) $ (16,880)
========== ========== ============ ========== ============
Net income (loss) available to common
shareholders ......................................... $ (2,740) $ 76 $ 1,131 $ (13,329) $ (27,230)
========== ========== ============ ========== ============
OTHER DATA:
Broadcast cash flow(e) ................................ $ 67,519 $ 111,124 $ 189,216 $ 243,406 $ 350,122
Broadcast cash flow margin(f) ......................... 56.9 % 59.1 % 54.6 % 51.7 % 52.0 %
Adjusted EBITDA(g) .................................... $ 64,547 $ 105,750 $ 180,272 $ 229,000 $ 331,329
Adjusted EBITDA margin(f) ............................. 54.4 % 56.3 % 52.0 % 48.6 % 49.2 %
After tax cash flow(h) ................................ $ 24,948 $ 54,645 $ 77,484 $ 104,884 $ 149,759
Program contract payments ............................. 14,262 19,938 30,451 51,059 64,267
Corporate overhead expense ............................ 2,972 5,374 8,944 14,406 18,793
Capital expenditures .................................. 2,352 1,702 12,609 19,425 19,426
Cash flows from operating activities .................. 20,781 55,986 69,298 96,625 150,480
Cash flows from investing activities .................. (249,781) (119,320) (1,019,853) (218,990) (1,812,682)
Cash flows from financing activities .................. 213,410 173,338 840,446 259,351 1,526,143
PER SHARE DATA:
Basic net income (loss) per share before
extraordinary items .................................. $ (.05) $ .08 $ .02 $ (.10) $ (.17)
Basic net income (loss) per share after
extraordinary items .................................. $ (.05) $ -- $ .02 $ (.19) $ (.29)
Diluted net income (loss) per share before
extraordinary items .................................. $ (.05) $ .08 $ .02 $ (.10) $ (.17)
Diluted net income (loss) per share after
extraordinary items .................................. $ (.05) $ -- $ .02 $ (.19) $ (.29)
BALANCE SHEET DATA:
Cash and cash equivalents ............................. $ 2,446 $ 112,450 $ 2,341 $ 139,327 $ 3,268
Total assets .......................................... 399,328 605,272 1,707,297 2,034,234 3,854,582
Total debt(i) ......................................... 346,270 418,171 1,288,103 1,080,722 2,327,221
HYTOPS(j) ............................................. -- -- -- 200,000 200,000
Total stockholders' equity (deficit) .................. (13,723) 96,374 237,253 543,288 816,043
</TABLE>
32
<PAGE>
- ----------
(a) "Net"Net broadcast revenues" are defined as broadcast revenues 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 (see footnote j).
(e) "Broadcast cash flow" is defined as broadcast operating income plus
corporate expenses, special bonuses paid to executive officers,
stock-based compensation depreciation and amortization (including film
amortization and amortization of deferred compensation), 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. The Company has presented broadcast cash flow data, which
the Company believes is 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, there can be no assurance
that it is comparable. 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. Management believes the presentation of broadcast cash flow
(BCF) is relevant and useful because 1) BCF is a measurement utilized by
lenders to measure the Company's ability to service its debt, 2) BCF is a
measurement utilized by industry analysts to determine a private market
value of the Company's television and radio stations and 3) BCF is a
measurement industry analysts utilize when determining the operating
performance of the Company.
(f) "BCF cash flow margin" is defined as broadcast cash flow divided by net
broadcast revenues. "Adjust 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. The Company has presented Adjusted EBITDA data, which the
Company believes is 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, there can be no assurances
that it is comparable. 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.
Management believes the presentation of Adjusted EBITDA is relevant and
useful because 1) Adjusted EBITDA is a measurement utilized by lenders to
measure the Company's ability to service its debt, 2) Adjusted EBITDA is a
measurement utilized by industry analysts to determine a private market
value of the Company's television and radio stations and 3) Adjusted
EBITDA is a measurement industry analysts utilize when determining the
operating performance of the Company.
(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) plus depreciation and amortization (excluding film
amortization), stock-based compensation, unrealized loss on derivative
instrument, the deferred tax provision (or minus the deferred tax benefit)
and minus the gain on sale of assets. The Company has presented after tax
cash flow data, which the Company believes is 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, there can be no assurances that it is comparable. 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. Management believes the presentation of after tax cash flow
(ATCF) is relevant and useful because ATCF is a measurement utilized by
industry analysts to determine a public market value of the Company's
television and radio stations and ATCF is a measurement analysts utilize
when determining the operating performance of the Company.
(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 the Company'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.
33
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
As of December 31, 1998, the Company owned, operated, or programmed 56
television stations in 36 geographically diverse markets and 51 radio stations
in 10 geographically diverse markets in the United States. As of the date
hereof, the Company owns, or provides programming services pursuant to LMAs to,
57 television stations, has pending acquisitions of four television stations and
has entered into an agreement to sell two television stations. The Company owns,
or programs pursuant to LMAs to, 56 radio stations, two of which the Company has
options to acquire and five of which the Company holds for sale.
The operating revenues of the Company are derived from local and national
advertisers and, to a much lesser extent, from political advertisers and
television network compensation. The Company's revenues from local advertisers
have continued to trend upward and revenues from national advertisers have
continued to trend downward when measured as a percentage of total broadcast
revenue. The Company believes this trend is primarily resulting from an increase
in the number of media outlets providing national advertisers a means by which
to advertise their goods and services. The Company's efforts to mitigate this
trend include continuing its efforts to increase local revenues and the
development of innovative marketing strategies to sell traditional and
non-traditional services to national advertisers.
The Company'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, and news-gathering and station
promotional costs. Amortization and depreciation of costs associated with the
acquisition of the stations and interest carrying charges are significant
factors in determining the Company's overall profitability.
Set forth below are the principal types of broadcast revenues received by
the Company's stations for the periods indicated and the percentage contribution
of each type to the Company's total gross broadcast revenues:
BROADCAST REVENUE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1997 1998
------------------------ ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
Local/regional advertising..... $ 199,029 49.4% $ 287,860 52.7% $ 418,100 53.8%
National advertising .......... 191,449 47.6% 250,445 45.9% 316,547 40.7%
Network compensation .......... 3,907 1.0% 5,479 1.0% 18,536 2.5%
Political advertising ......... 6,972 1.7% 1,189 0.2% 21,279 2.7%
Production .................... 1,142 0.3% 1,239 0.2% 2,617 0.3%
--------- ----- --------- ----- ---------- -----
Broadcast revenues ............ 402,499 100.0% 546,212 100.0% 777,079 100.0%
===== ===== =====
Less: agency commissions....... (56,040) (74,984) (104,273)
--------- --------- ----------
Broadcast revenues, net ....... 346,459 471,228 672,806
Barter revenues ............... 32,029 45,207 63,998
--------- --------- ----------
Total revenues ................ $ 378,488 $ 516,435 $ 736,804
========= ========= ==========
</TABLE>
The Company's primary types of programming and their approximate
percentages of 1998 net broadcast revenues were syndicated programming (64.0%),
network programming (23.2%), direct advertising programming (5.2%), sports
programming (4.0%) and children's programming (3.6%). Similarly, the Company's
four largest categories of advertising and their approximate percentages of 1998
net broadcast revenues were automotive (20.0%), fast food advertising (7.3%),
retail/department stores (6.6%) and professional services (5.9%). No other
advertising category accounted for more than 5% of the Company's net broadcast
revenues in 1998. No individual advertiser accounted for more than 2% of the
Company's consolidated net broadcast revenues in 1998.
34
<PAGE>
The following table sets forth certain operating data of the Company for
the years ended December 31, 1996, 1997 and 1998. For definitions of items, see
footnotes on page 38 of this document.
OPERATING DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
--------------- ------------- ---------------
<S> <C> <C> <C>
Net broadcast revenues ............................ $ 346,459 $ 471,228 $ 672,806
Barter revenues ................................... 32,029 45,207 63,998
Total revenues .................................... 378,488 516,435 736,804
Operating costs ................................... 142,576 198,262 287,141
Expenses from barter arrangements ................. 25,189 38,114 54,067
Depreciation and amortization ..................... 121,081 152,170 199,928
Stock-based compensation .......................... 739 1,636 3,282
Broadcast operating income ........................ $ 88,903 $ 126,253 $ 192,386
Net income (loss) ................................. $ 1,131 $ (10,566) $ (16,880)
Net income (loss) available to common shareholders $ 1,131 $ (13,329) $ (27,230)
BROADCAST CASH FLOW (BCF) DATA:
Television BCF .................................... $ 175,212 $ 221,631 $ 305,305
Radio BCF ......................................... 14,004 21,775 44,817
Consolidated BCF .................................. $ 189,216 $ 243,406 $ 350,122
Television BCF margin ............................. 56.7% 54.4% 54.1%
Radio BCF margin .................................. 37.3% 34.1% 41.5%
Consolidated BCF margin ........................... 54.6% 51.7% 52.0%
OTHER DATA:
Adjusted EBITDA ................................... $ 180,272 $ 229,000 $ 331,329
Adjusted EBITDA margin ............................ 52.0% 48.6% 49.2%
After tax cash flow ............................... $ 77,484 $ 104,884 $ 149,759
Program contract payments ......................... 30,451 51,059 64,267
Corporate expense ................................. 8,944 14,406 18,793
Capital expenditures .............................. 12,609 19,425 19,426
Cash flows from operating activitities ............ 69,298 96,625 150,480
Cash flows from investing activities .............. (1,019,853) (218,990) (1,812,682)
Cash flows from financing activities .............. 840,446 259,351 1,526,143
</TABLE>
35
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997.
Net broadcast revenue increased $201.6 million to $672.8 million for the
year ended December 31, 1998 from $471.2 million for the year ended December 31,
1997, or 42.8%. The increase in net broadcast revenue for the year ended
December 31, 1998 as compared to the year ended December 31, 1997 comprised
$194.3 million related to businesses acquired or disposed of by the Company in
1998 (the "1998 Transactions") and $7.3 million resulted from an increase in net
broadcast revenues on a same station basis, representing a 1.5% increase over
prior year's net broadcast revenue for these stations. On a same station basis,
revenues were negatively impacted by a decrease in revenues in the Baltimore,
Milwaukee, Norfolk and Raleigh markets. The Company's television stations in
these markets experienced a decrease in ratings which resulted in a loss in
revenues and market revenue share. In the Raleigh and Norfolk television
markets, the Company's affiliation agreements with Fox expired on August 31,
1998 which further contributed to a decrease in ratings and revenues. In the
Baltimore market, the addition of a new UPN affiliate competitor contributed to
a loss in ratings and market revenue share. An additional factor which
negatively impacted station revenues for the year was the loss of General Motors
advertising revenues caused by a strike of its employees. These decreases in
revenue on a same station basis were offset by revenue growth at certain of the
Company's other television and radio stations combined with an increase in
network compensation revenue and political advertising revenue.
Total operating costs increased $88.8 million to $287.1 million for the
year ended December 31, 1998 from $198.3 million for the year ended December 31,
1997, or 44.8%. The increase in operating costs for the year ended December 31,
1998 as compared to the year ended December 31, 1997 comprised $81.3 million
related to the 1998 Transactions, $4.4 million related to an increase in
corporate overhead expenses, and $3.1 million related to an increase in
operating costs on a same station basis, representing a 1.8% increase over prior
year's operating costs for those stations. The increase in corporate overhead
expenses for the year ended December 31, 1998 primarily resulted from an
increase in legal fees and an increase in salary costs incurred to manage a
larger base of operations.
Depreciation and amortization increased $47.7 million to $199.9 million for
the year ended December 31, 1998 from $152.2 million for the year ended December
31, 1997. The increase in depreciation and amortization related to fixed asset
and intangible asset additions associated with businesses acquired during 1997
and 1998.
Broadcast operating income increased $66.1 million to $192.4 million for
the year ended December 31, 1998, from $126.3 million for the year ended
December 31, 1997, or 52.3%. The net increase in broadcast operating income for
the year ended December 31, 1998 as compared to the year ended December 31, 1997
was primarily attributable to the 1998 Transactions.
Interest expense increased $40.6 million to $139.0 million for the year
ended December 31, 1998 from $98.4 million for the year ended December 31, 1997,
or 41.3%. The increase in interest expense for the year ended December 31, 1998
primarily related to indebtedness incurred by the Company to finance the
Acquisitions. Subsidiary trust minority interest expense of $23.3 million for
the year ended December 31, 1998 is related to the private placement of the $200
million aggregate liquidation value 11 5/8% High Yield Trust Offered Preferred
Securities (the "HYTOPS") completed March 12, 1997. The increase in subsidiary
trust minority interest expense for the year ended December 31, 1998 as compared
to the year ended December 31, 1997 related to the HYTOPS being outstanding for
a partial period during 1997.
Interest and other income increased to $6.7 million for the year ended
December 31, 1998 from $2.2 million for the year ended December 31, 1997. This
increase was primarily due to higher average cash balances during these periods.
However, cash balances were lower at December 31, 1998 than at December 31,
1997.
Net loss for the year ended December 31, 1998 was $16.9 million or $.29 per
share compared to net loss of $10.6 million or $.19 per share for the year ended
December 31, 1997. Net loss increased for the year ended December 31, 1998 as
compared to the year ended December 31, 1997 due to an increase in operating
expenses, depreciation and amortization, interest expense, subsidiary trust
minority interest
36
<PAGE>
expense, the recognition of an unrealized loss of $9.1 million on a derivative
instrument and the recognition of an extraordinary loss offset by an increase in
total revenues, a gain on the sale of broadcast assets and an increase in
interest and other income. The Company's extraordinary loss of $11.1 million net
of a related tax benefit of $7.4 million resulted from the write-off of debt
acquisition costs associated with indebtedness replaced by the 1998 Bank Credit
Agreement. As noted above, the Company's net loss for the year ended December
31, 1998 included recognition of a loss of $9.1 million on a treasury option
derivative instrument. Upon execution of the treasury option derivative
instrument, the Company received a cash payment of $9.5 million. The treasury
option derivative instrument will require the Company to make five annual
payments equal to the difference between 6.14% minus the interest rate yield on
five-year treasury securities on September 30, 2000 times the $300 million
notional amount of the instrument. If the yield on five-year treasuries is equal
to or greater than 6.14% on September 30, 2000, the Company will not be required
to make any payment under the terms of this instrument. If the rate is below
6.14% on that date, the Company will be required to make payments, as described
above, and the size of the payment will increase as the rate goes down. Each
year, the Company recognizes an expense equal to the change in the projected
liability under this arrangement based on interest rates at the end of the year.
The loss recognized in the year ended December 31, 1998 reflects an adjustment
of the Company's liability under this instrument to the present value of future
payments based on the two-year forward five-year treasury rate as of December
31, 1998. If the yield on five-year treasuries at September 30, 2000 were to
equal the two year forward five year treasury rate on December 31, 1998 (4.6%),
Sinclair would be required to make five annual payments of approximately $4.6
million each. If the yield on five-year treasuries declines further in periods
before September 30, 2000, Sinclair will be required to recognize further
losses. In any event, Sinclair will not be required to make any payments until
September 30, 2000.
Broadcast Cash Flow increased $106.7 million to $350.1 million for the year
ended December 31, 1998 from $243.4 million for the year ended December 31,
1997, or 43.8%. The increase in Broadcast Cash Flow related to the 1998
Transactions and Broadcast Cash Flow on a same station basis remained relatively
unchanged for the periods. The Company's Broadcast Cash Flow Margin increased to
52.0% for the year ended December 31, 1998 from 51.7% for the year ended
December 31, 1997. The increase in Broadcast Cash Flow Margin for the year ended
December 31, 1998 as compared to the year ended December 31, 1997 primarily
resulted from a lag in program contract payments for certain of the television
broadcasting assets acquired during 1998 of approximately $4.3 million and an
increase in radio broadcast cash flow margins. On a same station basis,
Broadcast Cash Flow Margin decreased from 51.8% for the year ended December 31,
1997 to 50.9% for the year ended December 31, 1998. This decrease in Broadcast
Cash Flow Margin primarily resulted from an increase in film payments combined
with a disproportionate increase in net broadcast revenue.
Adjusted EBITDA represents broadcast cash flow less corporate expenses.
Adjusted EBITDA increased $102.3 million to $331.3 million for the year ended
December 31, 1998 from $229.0 million for the year ended December 31, 1997, or
44.7%. The increase in Adjusted EBITDA for the year ended December 31, 1998 as
compared to the year ended December 31, 1997 resulted from the 1998 Transactions
offset by a $4.4 million increase in corporate overhead expenses, as described
above. The Company's Adjusted EBITDA margin increased to 49.2% for the year
ended December 31, 1998 from 48.6% for the year ended December 31, 1997. This
increase in Adjusted EBITDA margin resulted primarily from the circumstances
affecting broadcast cash flow margins as noted above offset by an increase in
corporate expenses.
After Tax Cash Flow increased $44.9 million to $149.8 million for the year
ended December 31, 1998 from $104.9 million for the year ended December 31,
1997, or 42.8%. The increase in After Tax Cash Flow for the year ended December
31, 1998 as compared to the year ended December 31, 1997 primarily resulted from
a net increase in broadcast operating income relating to the 1998 Transactions
offset by an increase in interest expense and subsidiary trust minority interest
expense relating to the HYTOPS.
YEARS ENDED DECEMBER 31, 1997 AND 1996.
Net broadcast revenue increased $124.7 million to $471.2 million for the
year ended December 31, 1997 from $346.5 million for the year ended December 31,
1996 or 36.0%. The increase in net broadcast
37
<PAGE>
revenue for the year ended December 31, 1997 as compared to the year ended
December 31, 1996 comprised $114.5 million related to television and radio
station acquisitions and LMA transactions consummated during 1996 and 1997 (the
"1996 and 1997 Acquisitions") and $10.2 million resulted from an increase in net
broadcast revenues on a same station basis. Also on a same station basis,
revenues 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 to $198.3 million for the
year ended December 31, 1997 from $142.6 million for the year ended December 31,
1996 or 39.1%. The increase in operating costs for the year ended December 31,
1997 as compared to the year ended December 31, 1996 comprised $49.0 million
related to the 1996 and 1997 Acquisitions, $5.4 million resulted from an
increase in corporate overhead expenses, and $1.3 million resulted from an
increase in operating costs on a same station basis. Also on a same station
basis, operating costs increased 1.8%.
Depreciation and amortization increased $31.1 million to $152.2 million for
the year ended December 31, 1997 from $121.1 million for the year ended December
31, 1996. The increase in depreciation and amortization related to fixed asset
and intangible asset additions associated with businesses acquired during 1996
and 1997.
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 1996 and 1997 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 the Company to finance the 1996 and 1997
Acquisitions. Subsidiary trust minority interest expense of $18.6 million for
the year ended December 31, 1997 is related to the HYTOPS offering 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 the Company's 1997 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.
Net loss for the year ended December 31, 1997 was $10.6 million or $.19 per
share compared to net income of $1.1 million or $.02 per share for the year
ended December 31, 1996. Net loss increased for the year ended December 31, 1997
as compared to the year ended December 31, 1996 due to an increase in operating
expenses, depreciation and amortization, interest expense, subsidiary trust
minority interest expense not incurred in 1996 and recognition of an
extraordinary loss offset by an increase in total broadcast revenue. The
Company's extraordinary loss of $6.1 million net of a related tax benefit of
$4.0 million resulted from the write-off of debt acquisition costs resulting
from the redemption of substantially all of the 1993 Notes.
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 comprised $45.0 million
relating to the 1996 and 1997 Acquisitions and $9.2 million resulted from
Broadcast Cash Flow growth on a same station basis, which had Broadcast Cash
Flow growth of 8.2%. The Company'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%. These
increases in Adjusted EBITDA for the year ended December 31,
38
<PAGE>
1997 as compared to the year ended December 31, 1996 resulted from the 1996 and
1997 Acquisitions and to a lesser extent, increases in net broadcast revenues on
a same station basis. The Company'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%. These increases in corporate expenses
primarily result from costs associated with managing a larger base of
operations. During 1996, the Company 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 from the 1996 and 1997
Acquisitions, an increase in revenues 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 1996 and 1997
Acquisitions and subsidiary trust minority interest expense related to the
private placement of the HYTOPS issued during March 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided by operations
and availability under the 1998 Bank Credit Agreement. As of December 31, 1998,
the Company had $3.3 million in cash balances and net working capital of
approximately $55.8 million. The Company's net decrease in cash to $3.3 million
at December 31, 1998 from $139.3 million at December 31, 1997 primarily resulted
from the 1998 Transactions. As of December 31, 1998, the remaining balance
available under the Revolving Credit Facility was $197.0 million. Based on pro
forma trailing cash flow levels for the twelve months ended December 31, 1998,
the Company had approximately $75.2 million available of current borrowing
capacity under the Revolving Credit Facility. The 1998 Bank Credit Agreement
also provides for an incremental term loan commitment in the amount of up to
$400 million which can be utilized upon approval by the Agent bank and the
raising of sufficient commitments from banks to fund the additional loans.
The Company has current acquisition commitments of approximately $122.0
million net of proceeds totaling $242.0 million anticipated from the sale of
television stations related to the Ackerley Disposition, the 1999 STC
Disposition and the CCA Disposition (collectively, the "Pending Transactions").
In order to complete the Pending Transactions during the second quarter of 1999
and also remain in compliance with certain of its debt covenants, the Company
estimates that it would be required to generate proceeds from station
dispositions of approximately $30 million or alternatively raise proceeds from
common or preferred stock securities issuances of approximately $15 million. The
Company announced in the fourth quarter of 1998 that it intended to enter into
agreements to sell selected television and radio stations not central to its
business strategy. As of March 22, 1999, the Company has entered into agreements
to sell stations for aggregate consideration of approximately $140 million and
was actively planning to sell an additional $35 million in properties. The
Company intends to evaluate whether further divestitures are appropriate after
completing these sales. The Company's other primary sources of liquidity are
cash provided by operations and availability under the 1998 Bank Credit
Agreement.
The Company anticipates that funds from operations, existing cash balances,
the availability of the Revolving Credit Facility under the 1998 Bank Credit
Agreement and the proceeds from the sale of certain stations will be sufficient
to meet its working capital, capital expenditure commitments, debt service
requirements and current acquisition commitments.
Net cash flows from operating activities increased to $150.5 million for
the year ended December 31, 1998 from $96.6 million for the year ended December
31, 1997. The Company made income tax payments of $3.6 million for the year
ended December 31, 1998 as compared to $6.5 million for the year ended
39
<PAGE>
December 31, 1997. The Company made interest payments on outstanding
indebtedness and payments for subsidiary minority interest expense totaling
$140.9 million during the year ended December 31, 1998 as compared to $116.2
million for the year ended December 31, 1997. Additional interest payments for
the year ended December 31, 1998 as compared to the year ended December 31, 1997
primarily related to additional interest costs on indebtedness incurred to
finance businesses acquired during 1998. Program rights payments increased to
$64.3 million for the year ended December 31, 1998 from $51.1 million for the
year ended December 31, 1997. This increase in program rights payments comprised
$8.8 million related to the 1998 Transactions and $4.4 million related to an
increase in programming costs on a same station basis, which increased 8.7%.
Net cash flows used in investing activities increased to $1.8 billion for
the year ended December 31, 1998 from $219.0 million for the year ended December
31, 1997. For the year ended December 31, 1998, the Company made cash payments
of approximately $2.1 billion related to the acquisition of television and radio
broadcast assets primarily by utilizing available indebtedness under the 1998
Bank Credit Agreement. These payments included $232.9 million related to the
WSYX Acquisition, $53.0 million related to the Lakeland Acquisition, $571.3
million related to the Heritage Acquisition, $951.0 million related to the
Sullivan Acquisition, $239.4 million related to the Max Media Acquisition and
$10.4 million related to other acquisitions. For the year ended December 31,
1998, the Company received approximately $273.3 million of cash proceeds related
to the sale of certain television and radio broadcast assets which was primarily
utilized to repay indebtedness under the 1998 Bank Credit Agreement. These cash
proceeds included $126.9 million related to the Entercom Disposition, $72.0
million related to the STC Disposition, $35.0 million related to the SFX
Disposition, $21.0 million related to the Radio Unica Disposition, $16.1 million
related to the Centennial Disposition and $2.3 million related to the sale of
other broadcast assets. For the year ended December 31, 1998, the Company made
cash payments related to the Buffalo Acquisition of $3.3 million and made cash
payments of $6.9 million for deposits and other costs related to other future
acquisitions. During 1998, the Company made equity investments in Acrodyne
Communications, Inc. and USA Digital Radio, Inc. of approximately $7.1 million
and $1.5 million, respectively. The Company made payments for property and
equipment of $19.4 million for the year ended December 31, 1998. The Company
expects that expenditures for property and equipment will increase for the year
ended December 31, 1999 as a result of a larger number of stations owned by the
Company. In addition, the Company anticipates that future requirements for
capital expenditures will include capital expenditures incurred during the
ordinary course of business and additional strategic station acquisitions and
equity investments if suitable investments can be identified on acceptable
terms.
Net cash flows provided by financing activities increased to $1.5 billion
for the year ended December 31, 1998 from $259.4 million for the year ended
December 31, 1997. In April 1998, the Company and certain Series B Preferred
stockholders of the Company completed a public offering of 12,000,000 and
4,060,374 shares, respectively of Class A Common Stock. The shares were sold for
an offering price of $29.125 per share and generated proceeds to the Company of
$335.1 million, net of underwriters' discount and other offering costs of
approximately $14.4 million. The Company utilized proceeds to repay indebtedness
under the 1997 Bank Credit Agreement. In May 1998, the Company entered into the
1998 Bank Credit Agreement in order to expand its borrowing capacity for future
acquisitions and obtain more favorable terms with its banks. A portion of the
proceeds of the initial borrowing under the 1998 Bank Credit Agreement was used
to repay all outstanding indebtedness related to the 1997 Bank Credit Agreement.
In addition, during September 1998, the Company repurchased 1,505,000 shares of
its Class A Common Stock for an aggregate purchase price of $26.7 million, an
average share price of $17.72. For the year ended December 31, 1998, the Company
also made option premium payments of $14.0 million related to equity put and
call options entered into during 1998.
INCOME TAXES
The income tax provision increased to $45.7 million for the year ended
December 31, 1998 from a provision of $16.0 million for the year ended December
31, 1997. The Company's effective tax rate decreased to 114.6% for the year
ended December 31, 1998 from 139.1% for the year ended December 31, 1997. The
decrease in the Company's effective tax rate for the year ended December 31,
1998 as compared to the year ended December 31, 1997 primarily resulted from a
decrease in the deferred tax
40
<PAGE>
liability associated with dividends paid on the Company's Series C Preferred
Stock (see Note 8, sub-note (a) to the Company's Consolidated Financial
Statements). Management believes that pre-tax income and "earnings and profits"
will increase in future years which will further result in a lower effective tax
rate and utilization of certain tax deductions related to dividends paid on the
Company's Series C Preferred Stock.
As of December 31, 1998, the Company has a net deferred tax liability of
$165.5 million as compared to a net deferred tax liability of $21.5 million as
of December 31, 1997. During 1998, the Company acquired the stock of Sullivan
Broadcast Holdings, Inc. (Sullivan), Lakeland Group Television, Inc. (Lakeland)
and the direct and indirect interests of Max Media Properties LLC (Max Media).
The Company recorded net deferred tax liabilities resulting from these purchases
of approximately $114.0 million. These net deferred tax liabilities primarily
relate to the permanent differences between financial reporting carrying amounts
and tax basis amounts measured upon the purchase date.
The 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. The Company'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 the Company'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 the Company's
Series C Preferred Stock (see Note 8, sub-note (a) to the Company's Consolidated
Financial Statements), and state franchise taxes which are not based upon
pre-tax income. During the year ended December 31, 1997, the Company carried
back certain Federal NOL's to be applied against prior years Federal taxes paid.
These Federal NOL carry-backs resulted in a Federal income tax refund of $9.3
million during 1998.
SEASONALITY
The Company's results usually are subject to seasonal fluctuations, which
result in fourth quarter broadcast operating income being greater usually than
first, second and third quarter broadcast operating income. This seasonality is
primarily attributable to increased expenditures by advertisers in anticipation
of holiday season spending and an increase in viewership during this period. In
addition, revenues from political advertising tend to be higher in even numbered
years.
YEAR 2000
The Company has commenced a process to assure Year 2000 compliance of all
hardware, software, broadcast equipment and ancillary equipment that are date
dependent. The process involves four phases: Phase I - Inventory and Data
Collection. This phase involves an identification of all items that are date
dependent. Sinclair commenced this phase in the third quarter of 1998, and
Management estimates it has completed approximately 50% of this phase as of the
date hereof. The Company expects to complete this phase by the end of the second
quarter of 1999.
Phase II - Compliance Requests. This phase involves requests to information
technology systems vendors for verification that the systems identified in Phase
I are Year 2000 compliant. Sinclair will identify and begin to replace items
that cannot be updated or certified as compliant. Sinclair has completed the
compliance request phase of its plan as of the date hereof. In addition,
Sinclair has verified that its accounting, traffic, payroll, and local and wide
area network hardware and software systems are compliant. In addition, Sinclair
is currently in the process of ascertaining that all of its personal computers
and PC applications are compliant. Sinclair is currently reviewing its news-room
systems, building control systems, security systems and other miscellaneous
systems. The Company expects to complete this phase by the end of the second
quarter of 1999.
Phase III - Test, Fix and Verify. This phase involves testing all items
that are date dependent and upgrading all non-compliant devices. Sinclair
expects to complete this phase during the first, second and third quarters of
1999.
41
<PAGE>
Phase IV - Final Testing, New Item Compliance. This phase involves review
of all inventories for compliance and retesting as necessary. During this phase,
all new equipment will be tested for compliance. Sinclair expects to complete
this phase by the end of the third quarter of 1999.
The Company has developed a contingency/emergency plan to address Year 2000
worst case scenarios. The contingency plan includes, but is not limited to,
addressing (i) regional power facilities, (ii) interruption of satellite
delivered programming, (iii) replacement or repair of equipment not discovered
or fixed during the year 2000 compliance process and (iv) local security
measures that may become necessary relating to the Company's properties. The
contingency plan involves obtaining alternative sources if existing sources of
these goods and services are not available. Although the contingency plan is
designed to reduce the impact of disruptions from these sources, there is no
assurance that the plan will avoid material disruptions in the event one or more
of these events occurs.
To date, Sinclair believes that its major systems are Year 2000 compliant.
This substantial compliance has been achieved without the need to acquire new
hardware, software or systems other than in the ordinary course of replacing
such systems. Sinclair is not aware of any non-compliance that would be material
to repair or replace or that would have a material effect on Sinclair's business
if compliance were not achieved. Sinclair does not believe that non-compliance
in any systems that have not yet been reviewed would result in material costs or
disruption. Neither is Sinclair aware of any non-compliance by its customers or
suppliers that would have a material impact on Sinclair's business.
Nevertheless, there can be no assurance that unanticipated non-compliance will
not occur, and such non-compliance could require material costs to repair or
could cause material disruptions if not repaired.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. To
manage its exposure to changes in interest rates, the Company enters into
interest rate derivative hedging agreements. The Company has entered into an
additional derivative instrument to monetize the benefit of a call option on a
portion of its outstanding indebtedness at interest rates prevailing at the time
the Company entered into the instrument. This derivative instrument (the
"Treasury Option Derivative Instrument") exposes the Company to market risk from
a further decrease in interest rates, but the Company believes that this risk is
offset by the benefit to the Company from reduced interest rate expense on a
portion of its floating rate debt and the ability to call some of its
indebtedness and replace it with debt at the lower prevailing interest rates.
Finally, the Company has entered put and call option derivative instruments
relating to the Company's Class A Common Stock in order to hedge against the
possible dilutive effects of employees exercising stock options pursuant to the
Company's stock option plans.
The Company does not enter into derivative instruments for speculative
trading purposes. With the exception of the Company's Treasury Option Derivative
Instrument (described below), the Company does not reflect the changes in fair
market value related to derivative instruments in the accompanying financial
statements.
INTEREST RATE RISKS
The Company is exposed to market risk from changes in interest rates, which
arises from its floating rate debt. As of December 31, 1998, the Company was
obligated on $1.6 billion of indebtedness carrying a floating interest rate. The
Company enters into interest rate derivative agreements to reduce the impact of
changing interest rates on its floating rate debt. The 1998 Bank Credit
Agreement, as amended and restated, requires the Company to enter into Interest
Rate Protection Agreements at rates not to exceed 10% per annum as to a notional
principal amount at least equal to 60% of the Term Loan, Revolving Credit
Facility and Senior Subordinated Notes scheduled to be outstanding from time to
time.
As of December 31, 1998, the Company had several interest rate swap
agreements which expire from July 7, 1999 to July 15, 2007. The swap agreements
effectively set fixed rates on the Company's floating rate debt in the range of
5.5% to 8.1%. Floating interest rates are based upon the three month London
Interbank Offered Rate (LIBOR) rate, and the measurement and settlement is
performed quarterly.
42
<PAGE>
Settlements of these agreements are recorded as adjustments to interest expense
in the relevant periods. The notional amounts related to these agreements were
$1.1 billion at December 31, 1998, and decrease to $200 million through the
expiration dates. In addition, the Company entered into floating rate
derivatives with notional amounts totaling $200 million. Based on the Company's
currently hedged position, $1.7 billion or 73% of the Company's outstanding
indebtedness is hedged.
Based on the Company's debt levels and the amount of floating rate debt not
hedged as of December 31, 1998, a 1% increase in the LIBOR rate would result in
an increase in annualized interest expense of approximately $10.5 million.
TREASURY OPTION DERIVATIVE INSTRUMENT
In August 1998, the Company entered into a treasury option derivative
contract (the "Option Derivative"). The Option Derivative contract provides for
1) an option exercise date of September 30, 2000, 2) a notional amount of $300
million and 3) a five-year treasury strike rate of 6.14%. If the interest rate
yield on five year treasury securities is less than the strike rate on the
option exercise date, the Company would be obligated to pay five consecutive
annual payments in an amount equal to the strike rate less the five year
treasury rate multiplied by the notional amount beginning September 30, 2001
through September 30, 2006. If the interest rate yield on five year treasury
securities is greater than the strike rate on the option exercise date, the
Company would not be obligated to make any payments.
Upon the execution of the Option Derivative contract, the Company received
a cash payment representing an option premium of $9.5 million which was recorded
in "Other long-term liabilities" in the accompanying balance sheets. The Company
is required to periodically adjust its liability to the present value of the
future payments of the settlement amounts based on the forward five year
treasury rate at the end of an accounting period. The fair market value
adjustment for 1998 resulted in an income statement charge (unrealized loss) of
$9.1 million for the year ended December 31, 1998. If the yield on five year
treasuries at September 30, 2000 were to equal the two year forward five year
treasury rate on December 31, 1998 (4.6%), Sinclair would be required to make
five annual payments of approximately $4.6 million each. If the yield on
five-year treasuries at September 30, 2000 decreased by 1% from the two-year
forward five-year rate of December 31, 1998 (i.e., to 3.6%) then Sinclair would
be required to make five annual payments of approximately $7.6 million each.
The Company has the ability to call the 1995 Notes on September 15, 2000.
The value of this call is determined by new issuance yields for senior
subordinated debt at that time. The value of this call rises when yields fall
and falls when yields rise. New issuance yields are based on a spread over
treasury yields. If the yield on five-year treasuries remains below 6.14% until
September 30, 2000, the Company expects to be able to call the 1995 Notes and
refinance at the lower prevailing rates, thus offsetting the effect of the
payments required under the Treasury Option Derivative. There can be no
assurance, however, that the Company would be able to refinance the 1995 Notes
at such time at favorable interest rates.
Senior Subordinated Notes The Company is also exposed to risk from a change
in interest rates to the extent it is required to refinance existing fixed rate
indebtedness at rates higher than those prevailing at the time the existing
indebtedness was incurred. As of December 31, 1998, the Company has Senior
Subordinated Notes totaling $1.9 million, $300 million and $450 million expiring
in the years 2003, 2005 and 2007, respectively. Based upon the quoted market
price, the fair value of the Notes was $781.4 million as of December 31, 1998.
Generally, the fair market value of the Notes will decrease as interest rates
rise and increase as interest rates fall. The Company estimates that a 1%
increase from prevailing interest rates would result in a decrease in fair value
of the Notes by approximately $43.6 million as of December 31, 1998.
EQUITY PUT OPTION DERIVATIVES
The Company is exposed to market risk relating to its equity put option
derivative instruments (the "Equity Puts"). The contract terms relating to these
instruments provide for settlement on the expiration date. The Equity Puts
require the Company to make a settlement payment to the counterparties to these
contracts (payable in either cash or shares of the Company's Class A Common
stock) in an amount that
43
<PAGE>
is approximately equal to the put strike price minus the price of the Company's
Class A Common Stock as of the termination date. If the put strike price is less
than the price of the Company's Class A Common Stock as of the termination date,
the Company would not be obligated to make a settlement payment. In addition,
certain of these contracts include terms allowing the put option to become
immediately exercisable upon the Company's Class A Common Stock trading at
certain levels. The following table summarizes the Company's position relating
to the Equity Puts and illustrates the market risk associated with these
instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
EQUITY PUT PUT TERMINATION TRIGGER SETTLEMENT SENSITIVITY-SETTLEMENT
OPTIONS OUTSTANDING STRIKE PRICE DATE PRICE (A) ASSUMING TERMINATION (B) ASSUMING TERMINATION (C)
- ----------------------- -------------- ------------------- ----------- -------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
641,200 $ 13.94 May 31, 1999 -- -- $ 606,703
700,000 16.0625 September 9, 1999 $ 5.00 $1,137,500 2,148,090
1,100,000 (d) 12.892 January 13, 2000 9.00 (850,190) (55,990)
2,700,000 (e) 28.931 July 2, 2001 5.00 7,811,370 7,811,370
---------- -----------
$8,098,680 $10,510,173
========== ===========
</TABLE>
- ----------
(a) If the Company's Class A Common Stock reaches a market price equal to
"Trigger Price," the equity put options will become immediately
exercisable.
(b) This column represents the settlement costs that would be incurred
(payable in either cash or shares of the Company's Class A Common Stock)
if equity put options were terminated on December 31, 1998 and assuming a
market price of $14.4375 (the closing price on March 18, 1999).
(c) This column represents the settlement costs that would be incurred
(payable in either cash or shares of the Company's Class A Common Stock)
if equity put options were terminated on December 31, 1998 and assuming a
market price of $12.9938 (the closing price on March 18, 1999 minus 10%).
(d) The Company has entered into offsetting equity call options related to
these equity put options that would provide proceeds to the Company of
$850,190 and $55,990, respectively, in scenario (b) and (c) described
above.
(e) The settlement of these equity put options is limited to a maximum of
$2.8931 per option outstanding, or $7,811,370.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14(a)(1) and (2),
and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None
44
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Company's
Proxy Statement for the 1999 Annual Meeting of Shareholders under the caption
"Directors and Executive Officers" which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1998, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's
Proxy Statement for the 1999 Annual Meeting of Shareholders under the caption
"Executive Compensation" which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year ended
December 31, 1998, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Company's
Proxy Statement for the 1999 Annual Meeting of Shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended December 31, 1998, and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's
Proxy Statement for the 1999 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended December 31, 1998, and is incorporated herein by reference.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Public Accountants ....................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1997 and 1998 ................................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1996, 1997 and 1998 ....................................................... F-5, F-6, F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998 ................................................................. F-8, F-9
Notes to Consolidated Financial Statements ..................................... F-10
</TABLE>
(a) (2) Financial Statements Schedules
The following financial statements schedules required by this item are submitted
on pages S-1 through S-3 of this Report.
PAGE
-----
Index to Schedules ...................................... S-1
Report of Independent Public Accountants ................ S-2
Schedule II -- Valuation and Qualifying Account ......... S-3
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements of the notes
thereto.
(a) (3) Exhibits
The Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998.
(c) Exhibits
The exhibits required by this Item are listed in the Index of Exhibits.
(d) Financial Statements Schedules
The financial statement schedules required by this Item are listed under Item
14 (a) (2).
46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 14 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized on
March 31, 1999.
SINCLAIR BROADCAST GROUP, INC.
By: *
---------------------------------
David D. Smith
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------- ------------------------------ ---------------
<S> <C> <C>
* Chairman of the Board Chief March 31, 1999
- ------------------------------- and Executive Officer
David D. Smith (principal executive officer)
/s/ DAVID B. AMY Vice President and Chief March 31, 1999
- ------------------------------- Financial Officer (principal
David B. Amy financial and accounting
officer)
* Director March 31, 1999
- -------------------------------
Frederick G. Smith
* Director March 31, 1999
- -------------------------------
J. Duncan Smith
* Director March 31, 1999
- -------------------------------
Robert E. Smith
* Director March 31, 1999
- -------------------------------
Basil A. Thomas
* Director March 31, 1999
- -------------------------------
Lawrence E. McCanna
* /s/ DAVID B. AMY
- -------------------------------
David B. Amy
Power of Attorney
</TABLE>
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ..................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997
and 1998 ....................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1997 and 1998 ............................................................ F-5, F-6, F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997
and 1998 ....................................................................... F-8, F-9
Notes to Consolidated Financial Statements ....................................... F-10
</TABLE>
F-1
<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, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 9, 1999, except
for Note 17, as to which
the date is March 16, 1999
F-2
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1997 1998
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................................................... $ 139,327 $ 3,268
Accounts receivable, net of allowance for doubtful accounts of
$2,920 and $5,169 respectively ......................................................... 123,018 196,880
Current portion of program contract costs ............................................... 46,876 60,795
Prepaid expenses and other current assets ............................................... 4,673 5,542
Deferred barter costs ................................................................... 3,727 5,282
Refundable income taxes ................................................................. 10,581 --
Broadcast assets held for sale .......................................................... -- 33,747
Deferred tax assets ..................................................................... 2,550 19,209
---------- ----------
Total current assets .................................................................. 330,752 324,723
PROGRAM CONTRACT COSTS, less current portion ............................................. 40,609 45,608
LOANS TO OFFICERS AND AFFILIATES ......................................................... 11,088 10,041
PROPERTY AND EQUIPMENT, net .............................................................. 161,714 280,391
OTHER ASSETS ............................................................................. 168,095 93,404
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net of accumulated
amortization of $138,061 and $231,821, respectively ..................................... 1,321,976 3,100,415
---------- ----------
Total Assets .......................................................................... $2,034,234 $3,854,582
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................................ $ 5,207 $ 18,065
Accrued liabilities ..................................................................... 40,532 96,350
Current portion of long-term liabilities--
Notes payable and commercial bank financing ............................................ 35,215 50,007
Notes and capital leases payable to affiliates ......................................... 3,073 4,063
Program contracts payable .............................................................. 66,404 94,780
Deferred barter revenues ................................................................ 4,273 5,625
---------- ----------
Total current liabilities ............................................................. 154,704 268,890
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ............................................. 1,022,934 2,254,108
Notes and capital leases payable to affiliates .......................................... 19,500 19,043
Program contracts payable ............................................................... 62,408 74,802
Deferred tax liability .................................................................. 24,092 184,736
Other long-term liabilities ............................................................. 3,611 33,361
---------- ----------
Total liabilities ..................................................................... 1,287,249 2,834,940
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ........................................... 3,697 3,599
---------- ----------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES .................................. 200,000 200,000
---------- ----------
STOCKHOLDERS' EQUITY:
Series B Preferred stock, $.01 par value, 10,000,000 shares authorized and
1,071,381 and 39,581 issued and outstanding ............................................ 11 --
Series D Preferred stock, $.01 par value, 3,450,000 shares authorized and
3,450,000 shares issued and outstanding ................................................ 35 35
Class A Common stock, $.01 par value, 200,000,000 and 500,000,000 shares authorized and
27,466,860 and 47,445,731 shares issued and outstanding, respectively .................. 274 474
Class B Common stock, $.01 par value, 70,000,000 and 140,000,000 shares authorized
and 50,872,864 and 49,075,428 shares issued and outstanding ............................ 509 491
Additional paid-in capital .............................................................. 552,557 768,648
Additional paid-in capital -- equity put options ........................................ 23,117 113,502
Additional paid-in capital -- deferred compensation ..................................... (954) (7,616)
Accumulated deficit ..................................................................... (32,261) (59,491)
---------- ----------
Total stockholders' equity ............................................................ 543,288 816,043
---------- ----------
Total Liabilities and Stockholders' Equity ............................................ $2,034,234 $3,854,582
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------- -------------
<S> <C> <C> <C>
REVENUE:
Station broadcast revenues, net of agency commissions of
$56,040, $74,984 and $104,273, respectively ..................... $ 346,459 $ 471,228 $ 672,806
Revenues realized from station barter arrangements ................ 32,029 45,207 63,998
--------- --------- ----------
Total revenues .................................................. 378,488 516,435 736,804
--------- --------- ----------
OPERATING EXPENSES:
Program and production ............................................ 66,652 92,178 139,143
Selling, general and administrative ............................... 75,924 106,084 147,998
Expenses realized from station barter arrangements ................ 25,189 38,114 54,067
Amortization of program contract costs and net
realizable value adjustments .................................... 47,797 66,290 72,403
Stock-based compensation .......................................... 739 1,636 3,282
Depreciation and amortization of property and equipment ........... 11,711 18,040 29,153
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets .......... 58,530 67,840 98,372
Amortization of excess syndicated programming ..................... 3,043 -- --
--------- --------- ----------
Total operating expenses ........................................ 289,585 390,182 544,418
Broadcast operating income ...................................... 88,903 126,253 192,386
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense ................ (84,314) (98,393) (138,952)
Subsidiary trust minority interest expense ........................ -- (18,600) (23,250)
Net gain on sale of broadcast assets .............................. -- -- 12,001
Unrealized loss on derivative instrument .......................... -- -- (9,050)
Interest income ................................................... 3,136 2,174 5,672
Other income ...................................................... 342 54 1,034
--------- --------- ----------
Income before provision benefit for income
taxes and extraordinary item ................................... 8,067 11,488 39,841
PROVISION FOR INCOME TAXES. ........................................ 6,936 15,984 45,658
--------- --------- ----------
Net income (loss) before extraordinary item ..................... 1,131 (4,496) (5,817)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of related income tax
benefit of $4,045 and $7,370, respectively. ..................... -- (6,070) (11,063)
--------- --------- ----------
NET INCOME (LOSS) .................................................. $ 1,131 $ (10,566) $ (16,880)
========= ========= ==========
NET INCOME (LOSS) AVAILABLE TO COMMON SHARE-
HOLDERS ........................................................... $ 1,131 $ (13,329) $ (27,230)
========= ========= ==========
BASIC EARNINGS PER SHARE:
Income (loss) per share before extraordinary item ................. $ .02 $ (.10) $ (.17)
========= ========= ==========
Net income (loss) per share ....................................... $ .02 $ (.19) $ (.29)
========= ========= ==========
Average shares outstanding ........................................ 69,496 71,902 94,321
========= ========= ==========
DILUTED EARNINGS PER SHARE:
Income (loss) per share before extraordinary item ................. $ .02 $ (.10) $ (.17)
========= ========= ==========
Net income (loss) per share ....................................... $ .02 $ (.19) $ (.29)
========= ========= ==========
Average shares outstanding ........................................ 74,762 80,156 95,692
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
PAGE 1 OF 3
-----------
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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, 1995 .................. $ -- $-- $ 59 $ 290
Two-for-one stock split .................... -- -- 59 289
------ --- ---- -----
BALANCE, December 31, 1995, as adjusted...... -- -- 118 579
Class B Common Stock converted into Class
A Common Stock ............................ -- -- 22 (22)
Issuance of Series A Preferred Stock ....... 12 -- -- --
Series A Preferred Stock converted into
Series B Preferred Stock .................. (12) 12 -- --
Repurchase and retirement of 30,000 shares
of Class A Common Stock ................... -- -- -- --
Stock option grants ........................ -- -- -- --
Equity put options ......................... -- -- -- --
Amortization of deferred compensation. ..... -- -- -- --
Income tax benefit related to deferred
compensation .............................. -- -- -- --
Net income ................................. -- -- -- --
------ --- ---- -----
BALANCE, December 31, 1996 .................. $ -- $12 $140 $ 557
------ --- ---- -----
<CAPTION>
ADDITIONAL
ADDITIONAL PAID-IN CAPITAL - TOTAL
PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT EQUITY
------------ ------------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 .................. $116,088 $ -- $ (20,063) $ 96,374
Two-for-one stock split .................... (348) -- -- --
-------- -------- --------- --------
BALANCE, December 31, 1995, as adjusted...... 115,740 -- (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 .................. -- -- -- --
Repurchase and retirement of 30,000 shares
of Class A Common Stock ................... (748) -- -- (748)
Stock option grants ........................ 25,784 (1,868) -- 23,916
Equity put options ......................... (8,938) -- -- (8,938)
Amortization of deferred compensation. ..... -- 739 -- 739
Income tax benefit related to deferred
compensation .............................. (300) -- -- (300)
Net income ................................. -- -- 1,131 1,131
-------- -------- --------- --------
BALANCE, December 31, 1996 .................. $256,605 $ (1,129) $ (18,932) $237,253
-------- -------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
PAGE 2 OF 3
-----------
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES D CLASS A CLASS B ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
----------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996, as adjusted ......... $12 $-- $140 $ 557 $256,605
Repurchase and retirement of
186,000 shares of Class A Common Stock -- -- (4) -- (4,595)
Class B Common Stock converted into Class
A Common Stock ................................ -- -- 48 (48) --
Series B Preferred Stock converted into
Class A Common Stock .......................... (1) -- 4 -- (3)
Issuance of Class A Common Stock, net of
related issuance costs of $7,572 .............. -- -- 86 -- 150,935
Issuance of Series D Preferred Stock, net of
related issuance costs of $5,601 .............. -- 35 -- -- 166,864
Dividends payable on Series D Preferred
Stock ......................................... -- -- -- -- --
Equity put options ............................. -- -- -- -- (14,179)
Equity put options premium ..................... -- -- -- -- (3,365)
Stock option grants ............................ -- -- -- -- 430
Stock option grants exercised .................. -- -- -- -- 105
Amortization of deferred compensation .......... -- -- -- -- --
Income tax benefit related to deferred
compensation .................................. -- -- -- -- (240)
Net loss ....................................... -- -- -- -- --
----- --- ----- ----- ----------
BALANCE, December 31, 1997 ...................... $11 $35 $274 $ 509 $552,557
----- --- ----- ----- ----------
<CAPTION>
ADDITIONAL
PAID-IN ADDITIONAL
CAPITAL- PAID-IN CAPITAL - TOTAL
EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDERS'
OPTIONS COMPENSATION DEFICIT EQUITY
------------ ------------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996, as adjusted ......... $ -- $ (1,129) $ (18,932) $ 237,253
Repurchase and retirement of
186,000 shares of Class A Common Stock -- -- -- (4,599)
Class B Common Stock converted into Class
A Common Stock ................................ -- -- -- --
Series B Preferred Stock converted into
Class A Common Stock .......................... -- -- -- --
Issuance of Class A Common Stock, net of
related issuance costs of $7,572 .............. -- -- -- 151,021
Issuance of Series D Preferred Stock, net of
related issuance costs of $5,601 .............. -- -- -- 166,899
Dividends payable on Series D Preferred
Stock ......................................... -- -- (2,763) (2,763)
Equity put options ............................. 23,117 -- -- 8,938
Equity put options premium ..................... -- -- -- (3,365)
Stock option grants ............................ -- (430) -- --
Stock option grants exercised .................. -- -- -- 105
Amortization of deferred compensation .......... -- 605 -- 605
Income tax benefit related to deferred
compensation .................................. -- -- -- (240)
Net loss ....................................... -- -- (10,566) (10,566)
------- -------- --------- ---------
BALANCE, December 31, 1997 ...................... $23,117 $ (954) $ (32,261) $ 543,288
------- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
PAGE 3 OF 3
-----------
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES D CLASS A CLASS B ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997, as adjusted .... $ 11 $35 $ 274 $ 509 $ 552,557
Class B Common Stock converted into Class
A Common Stock ........................... -- -- 18 (18) --
Series B Preferred Stock converted into
Class A Common Stock ..................... (11) -- 75 -- (64)
Dividends payable on Series D Preferred
Stock .................................... -- -- -- -- --
Stock option grants ....................... -- -- -- -- 8,383
Stock option grants exercised ............. -- -- 1 -- 1,143
Class A Common Stock shares issued
pursuant to employee benefit plans ....... -- -- 1 -- 1,989
Equity put options ........................ -- -- -- -- (90,385)
Repurchase and retirement of 1,505,000
shares of Class A Common Stock ........... -- -- (15) -- (26,650)
Equity put option premiums ................ -- -- -- -- (12,938)
Issuance of Class A Common Stock .......... -- -- 120 -- 335,003
Amortization of deferred compensation ..... -- -- -- -- --
Income tax benefit related to deferred
compensation ............................. -- -- -- -- (390)
Net loss .................................. -- -- -- -- --
------ --- ----- ----- ---------
BALANCE, December 31, 1998 ................. $ -- $35 $ 474 $ 491 $ 768,648
------ --- ----- ----- ---------
<CAPTION>
ADDITIONAL ADDITIONAL
PAID-IN CAPITAL- PAID-IN CAPITAL - TOTAL
EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDERS'
OPTIONS COMPENSATION DEFICIT EQUITY
------------------ ------------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997, as adjusted .... $ 23,117 $ (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 .................................... -- -- (10,350) (10,350)
Stock option grants ....................... -- (8,383) -- --
Stock option grants exercised ............. -- -- -- 1,144
Class A Common Stock shares issued
pursuant to employee benefit plans ....... -- -- 1,990
Equity put options ........................ 90,385 -- -- --
Repurchase and retirement of 1,505,000
shares of Class A Common Stock ........... -- -- -- (26,665)
Equity put option premiums ................ -- -- (12,938)
Issuance of Class A Common Stock .......... -- -- -- 335,123
Amortization of deferred compensation ..... -- 1,721 -- 1,721
Income tax benefit related to deferred
compensation ............................. -- -- -- (390)
Net loss .................................. -- -- (16,880) (16,880)
--------- -------- ---------- ---------
BALANCE, December 31, 1998 ................. $ 113,502 $ (7,616) $ (59,491) $ 816,043
--------- -------- ---------- ---------
</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, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ 1,131 $ (10,566) $ (16,880)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities--
Extraordinary loss ................................................. -- 10,115 18,433
(Gain) loss on sale of broadcast assets ............................ -- 226 (12,001)
Loss on derivative instrument ...................................... -- -- 9,050
Amortization of debt discount ...................................... -- 4 98
Depreciation and amortization of property and equipment ............ 11,711 18,040 29,153
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other
assets ............................................................ 58,530 67,840 98,372
Amortization of program contract costs and net realizable
value adjustments ................................................. 50,840 66,290 72,403
Amortization of deferred compensation .............................. 739 1,636 1,721
Deferred tax provision (benefit) ................................... 2,330 20,582 30,700
Net effect of change in deferred barter revenues
and deferred barter costs ......................................... (908) 591 (624)
Decrease in minority interest ...................................... (121) (183) (98)
Changes in assets and liabilities, net of effects of acquisitions
and dispositions--
Increase in accounts receivable, net ............................... (41,310) (9,468) (68,207)
Increase in prepaid expenses and other
current assets .................................................... (217) (591) (2,475)
(Increase) decrease in refundable income taxes ..................... -- (10,581) 10,581
Increase (decrease) in accounts payable and accrued liabilities..... 16,727 (5,330) 44,038
Increase (decrease) in other long-term liabilities ................. 297 (921) 483
Payments on program contracts payable ................................ (30,451) (51,059) (64,267)
--------- --------- ---------
Net cash flows from operating activities ........................... $ 69,298 $ 96,625 $ 150,480
--------- --------- ---------
</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, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ------------ ---------------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES .......................... $ 69,298 $ 96,625 $ 150,480
------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ............................ (12,609) (19,425) (19,426)
Payments for acquisitions of television and radio stations ....... (1,007,572) (202,910) (2,058,015)
Deposits and other costs related to future acquisitions .......... -- -- (10,243)
Proceeds from assignment of FCC purchase option .................. -- 2,000 --
Distributions from (investments in) joint ventures ............... (380) 380 665
Proceeds from sale of broadcast assets ........................... -- 470 273,290
Loans to officers and affiliates ................................. (854) (1,199) (2,073)
Repayments of loans to officers and affiliates ................... 1,562 1,694 3,120
------------ ---------- ------------
Net cash flows used in investing activities.. .................. (1,019,853) (218,990) (1,812,682)
------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and commercial bank
financing ...................................................... 982,500 126,500 1,822,677
Repayments of notes payable, commercial bank
financing and capital leases ................................... (110,657) (693,519) (578,285)
Repayments of notes and capital leases to affiliates ............. (1,867) (2,313) (1,798)
Payments of costs related to bank financings ..................... (21,294) (5,181) (11,138)
Prepayments of excess syndicated program contract liabilities..... (7,488) (1,373) --
Repurchases of the Company's Class A Common Stock ................ (748) (4,599) (26,665)
Payments relating to redemption of 1993 Notes .................... -- (106,508) --
Dividends paid on Series D Preferred Stock ....................... -- (2,357) (10,350)
Proceeds from exercise of stock options .......................... -- 105 1,144
Payment received upon execution of derivative instrument ......... -- -- 9,450
Payment of equity put option premiums ............................ -- (507) (14,015)
Net proceeds from issuances of Senior Subordinated Notes ......... -- 438,427 --
Net proceeds from issuances of Class A Common Stock .............. -- 151,021 335,123
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 ....................... 840,446 259,351 1,526,143
------------ ---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...................................................... (110,109) 136,986 (136,059)
CASH AND CASH EQUIVALENTS, beginning of period .................... 112,450 2,341 139,327
------------ ---------- ------------
CASH AND CASH EQUIVALENTS, end of period .......................... $ 2,341 $ 139,327 $ 3,268
============ ========== ============
</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, 1996, 1997 AND 1998
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.
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
at an amount equal to its gross contractual commitment when the license period
begins and the program is available for its first showing. The portion of
program contracts which become 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.
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.
F-10
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
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, 1997 and 1998 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Unamortized costs relating to securities issuances ................ $ 43,011 $30,854
Equity interest investments ....................................... 2,850 4,003
Notes and accrued interest receivable ............................. 11,102 44,893
Purchase option ................................................... 27,826 2,000
Deposits and other costs relating to future acquisitions .......... 82,275 11,283
Other ............................................................. 1,031 371
-------- -------
$168,095 $93,404
======== =======
</TABLE>
ACQUIRED INTANGIBLE BROADCASTING ASSETS
- ---------------------------------------
Acquired intangible broadcasting assets are being amortized on a straight-line
basis over periods of 1 to 40 years. These amounts result from the acquisition
of certain television and radio station license and non-license 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. As of December 31, 1998,
Management believes that the carrying amounts of the Company's tangible and
intangible assets have not been impaired.
Intangible assets as of December 31, 1997 and 1998, consist of the following (in
thousands):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1997 1998
--------------- ------------- -------------
<S> <C> <C> <C>
Goodwill ................................ 40 years $ 755,858 $1,475,666
Intangibles related to LMAs ............. 15 years 128,080 454,181
Decaying advertiser base ................ 15 years 95,657 113,854
FCC licenses ............................ 25 years 400,073 760,482
Network affiliations .................... 25 years 55,966 477,732
Other ................................... 1 -- 40 years 24,403 50,321
---------- ----------
1,460,037 3,332,236
Less-- Accumulated amortization ......... (138,061) (231,821)
---------- ----------
$1,321,976 $3,100,415
========== ==========
</TABLE>
ACCRUED LIABILITIES
- -------------------
Accrued liabilities consist of the following as of December 31, 1997 and 1998
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Compensation ........................................... $10,608 $19,108
Accrued taxes payable .................................. -- 10,788
Interest ............................................... 18,359 44,761
Other accruals relating to operating expenses .......... 11,565 21,693
------- -------
$40,532 $96,350
======= =======
</TABLE>
F-11
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
SUPPLEMENTAL INFORMATION -- STATEMENT OF CASH FLOWS
- ---------------------------------------------------
During 1996, 1997 and 1998 the Company incurred the following transactions (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
- - Purchase accounting adjustments related to deferred taxes $ 18,051 $ -- $113,950
======== ======= ========
- - Capital lease obligations incurred ...................... $ -- $10,927 $ 3,807
======== ======= ========
- - Issuance of Series A Preferred Stock .................... $125,079 $ -- $ --
======== ======= ========
- - Income taxes paid ....................................... $ 6,837 $ 6,502 $ 3,588
======== ======= ========
- - Subsidiary trust minority interest payments ............. $ -- $17,631 $ 23,250
======== ======= ========
- - Interest paid ........................................... $ 82,814 $98,521 $117,658
======== ======= ========
</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 broadcast time. Nevertheless, as the
holder of the Federal Communications Commission (FCC) license, the
owner-operator retains control and responsibility for the operation of the
station, including responsibility over all programming broadcast on the station.
Included in the accompanying consolidated statements of operations for the years
ended December 31, 1996, 1997 and 1998, are net revenues of $153.0 million,
$135.0 million and $207.8 million, respectively, that relate to LMAs and JSAs.
BROADCAST ASSETS HELD FOR SALE
- ------------------------------
Broadcast assets held for sale primarily comprise four radio stations in the
Norfolk, Virginia market acquired in connection with the Heritage Acquisition
and Max Media Acquisition (see Note 11). The Company is required to divest of
certain of these radio stations due to FCC ownership guidelines. The Company is
currently engaged in discussions with potential buyers with respect to three of
these stations and expects to complete the sale of these stations during 1999.
The Company capitalized interest relating to the carrying cost associated with
these radio stations of $1.6 million for the year ended December 31, 1998.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
F-12
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
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, 1997 and
1998 (in thousands):
1997 1998
------------ ------------
Land and improvements ........................... $ 10,225 $ 14,365
Buildings and improvements ...................... 41,436 58,415
Station equipment ............................... 130,586 230,221
Office furniture and equipment .................. 14,037 26,083
Leasehold improvements .......................... 8,457 11,516
Automotive equipment ............................ 4,090 9,122
--------- ---------
208,831 349,722
Less-- Accumulated depreciation and amortization (47,117) (69,331)
--------- ---------
$ 161,714 $ 280,391
========= =========
3. DERIVATIVE INSTRUMENTS:
The Company enters into derivative instruments primarily for the purpose of
reducing the impact of changing interest rates and to monitize the benefits
associated with a historically low interest rate environment. In addition, the
Company has entered into put and call option derivative instruments relating to
the Company's Class A Common Stock in order to hedge the possible dilutive
effect of employees exercising stock options pursuant to the Company's stock
option plans. The Company does not enter into derivative instruments for
speculative trading purposes. With the exception of the Company's Treasury
Option Derivative Instrument (described below), the Company does not reflect the
changes in fair market value related to derivative instruments in the
accompanying financial statements.
During 1998, FASB issued SFAS 133 "Accounting for Derivative Instruments and for
Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative investments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. SFAS 133 is
effective for the Company beginning January 1, 2000. The Company is evaluating
its eventual impact on its financial statements.
INTEREST RATE HEDGING DERIVATIVE INSTRUMENTS
- --------------------------------------------
The Company enters into interest rate derivativeinterest rate hedging agreements
to reduce the impact of changing interest rates on its floating rate debt. The
1998 Bank Credit Agreement, as amended and
F-13
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
restated, requires the Company to enter into Interest Rate Protection Agreements
at rates not to exceed 10% per annum as to a notional principal amount at least
equal to 60% of the Term Loan, Revolving Credit Facility and Senior Subordinated
Notes scheduled to be outstanding from time to time.
As of December 31, 1998, the Company had several interest rate swap agreements
which expire from July 7, 1999 to July 15, 2007. The swap agreements set rates
in the range of 5.5% to 8.1%. 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 notional amounts
related to these agreements was were $1.1 billion at December 31, 1998, and
decrease to $200 million through the expiration dates. In addition, the Company
has entered into floating rate derivatives with notional amounts totaling $200
million. Based on the Company's currently hedged position, $1.7 billion or 73%
of the Company's outstanding indebtedness is hedged.
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
counter parties to these agreements are international financial institutions.
The Company estimates the fair value of these instruments at December 31, 1997
and 1998 to be $0.7 million and $3.0 million, respectively. The fair value of
the interest rate hedging derivative instruments is estimated by obtaining
quotations from the financial institutions which are a party to the Company's
derivative contracts (the "Banks"). The fair value is an estimate of the net
amount that the Company would pay at December 31, 1998 if the contracts were
transferred to other parties or canceled by the Banks.
TREASURY OPTION DERIVATIVE INSTRUMENT
- -------------------------------------
In August 1998, the Company entered into a treasury option derivative contract
(the "Option Derivative"). The Option Derivative contract provides for 1) an
option exercise date of September 30, 2000, 2) a notional amount of $300 million
and 3) a five-year treasury strike rate of 6.14%. If the interest rate yield on
five year treasury securities is less than the strike rate on the option
exercise date, the Company would be obligated to pay five consecutive annual
payments in an amount equal to the strike rate less the five year treasury rate
multiplied by the notional amount beginning September 30, 2001 through September
30, 2006. If the interest rate yield on five year treasury securities is greater
than the strike rate on the option exercise date, the Company would not be
obligated to make any payments.
Upon the execution of the Option Derivative contract, the Company received a
cash payment representing an option premium of $9.5 million which was recorded
in "Other long-term liabilities" in the accompanying balance sheets. The Company
is required to periodically adjust its liability to the present value of the
future payments of the settlement amounts based on the forward five year
treasury rate at the end of an accounting period. The fair market value
adjustment for 1998 resulted in an income statement charge (unrealized loss) of
$9.1 million for the year ended December 31, 1998.
EQUITY PUT AND CALL OPTION DERIVATIVE INSTRUMENTS
- -------------------------------------------------
1996 OPTIONS
During December 1996, the Company entered into 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 and can either be physically settled in cash
or net physically settled in shares, at the election of the Company. The Company
entered into 500,000 call options for common stock and 641,200 put options for
common stock, with a strike price of $18.875 and $13.94 per common share,
respectively.
F-14
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
1997 OPTIONS
In April 1997, the Company entered into additional 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 1,100,000 European style (that is, exercisable on the expiration date only)
put options for common stock with a strike price of $12.89 per share which
provide for settlement in cash or in shares, at the election of the Company. The
Company entered into 1,100,000 American style (that is, exercisable any time on
or before the expiration date) call options for common stock with a strike price
of $12.89 per share which provide for settlement in cash or in shares, at the
election of the Company.
1998 OPTIONS
In July 1998, the Company entered into put and call option contracts related to
the Company's common stock (the "July Options"). In September 1998, the Company
entered into additional put and call option contracts related to the Company's
common stock (the "September Options"). These option contracts allow for
settlement in cash or net physically in shares, at the election of the Company.
The Company entered into these option contracts for the purpose of hedging the
dilution of the Company's common stock upon the exercise of stock options
granted. The July Options included 2,700,000 call options for common stock and
2,700,000 put options for common stock, with a strike price of $33.27 and $28.93
per common share, respectively. The September Options included 467,000 call
options for common stock and 700,000 put options for common stock, with a strike
price of $28.00 and $16.0625 per common share, respectively. For the year ended
December 31, 1998, option premium payments of $12.2 million and $0.7 million
were made relating to the July and September Options, respectively. The Company
recorded these premium payments as a reduction of additional paid-in capital. To
the extent that the Company entered into put options related to its common
stock, the additional paid-in capital amounts were reclassified accordingly and
reflected as Equity Put Options in the accompanying balance sheet as of December
31, 1998.
4. NOTES PAYABLE AND COMMERCIAL BANK FINANCING:
1996 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 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 alternative 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
F-15
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
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.
1997 BANK CREDIT AGREEMENT
- --------------------------
In order to expand its capacity and obtain more favorable terms with its
syndicate of banks, the Company amended and restated the 1996 Bank Credit
Agreement in May 1997 (the "1997 Bank Credit Agreement"). Contemporaneously with
the 1997 Preferred Stock Offering and the 1997 Common Stock Offering (see Note
12) consummated in September 1997, the Company amended its 1997 Bank Credit
Agreement. The 1997 Bank Credit Agreement, as amended, consisted of two classes:
Tranche A Term Loan and a Revolving Credit Commitment.
The Tranche A Term Loan was a term loan in a principal amount not to exceed $325
million and was scheduled to be paid in quarterly installments through December
31, 2004. The Revolving Credit Commitment was a revolving credit facility in a
principal amount not to exceed $675 million and was 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 was either LIBOR plus 0.5% to 1.875% or the alternative base
rate plus zero to 0.625%. The applicable interest rate for the Tranche A Term
Loan and the Revolving Credit Commitment was to be 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 7.4% 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 replaced the 1997 Bank Credit
Agreement with the 1998 Bank Credit Agreement in May 1998 as discussed below.
1998 BANK CREDIT AGREEMENT
- --------------------------
In order to expand its borrowing capacity to fund future acquisitions and obtain
more favorable terms with its syndicate of banks, the Company obtained a new
$1.75 billion senior secured credit facility (the "1998 Bank Credit Agreement").
The 1998 Bank Credit Agreement was executed in May of 1998 and includes (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. Not more than $350.0 million of the Revolving
Credit Facility will be available for issuances of letters of credit. The 1998
Bank Credit Agreement also includes a standby uncommitted multiple draw term
loan facility of $400.0 million. The Company is 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, to the extent not used to acquire
new assets; and (iii) 50% of excess cash flow (as defined) if the Company's
ratio of debt to EBITDA (as defined) exceeds a certain threshold. The 1998 Bank
Credit Agreement contains representations and warranties, and affirmative and
negative covenants, including among other restrictions, limitations on
additional indebtedness, customary for credit facilities of this type. The 1998
Bank Credit Agreement is secured only by a pledge of the stock of each
subsidiary of the Company other than KDSM, Inc., KDSM Licensee, Inc., Cresap
Enterprises, Inc. and Sinclair Capital. The Company is required to maintain
certain debt covenants in connection with the 1998 Bank Credit Agreement. As of
December 31, 1998, the Company is in compliance with all debt covenants.
F-16
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
The applicable interest rate for the Term Loan Facility and the Revolving Credit
Facility is either LIBOR plus 0.5% to 1.875% or the alternative base rate plus
zero to 0.625%. The applicable interest rate for the Term Loan Facility and the
Revolving Credit Facility is adjusted based on the ratio of total debt to four
quarters' trailing earnings before interest, taxes, depreciation and
amortization. As of December 31, 1998, the Company's applicable interest rate
for borrowings under the 1998 Bank Credit Agreement is either LIBOR plus 1.5% or
the alternative base rate plus .25%.
As a result of entering into the Company's 1998 Bank Credit Agreement, the
Company incurred debt acquisition costs of $11.1 million and recognized an
extraordinary loss of $11.1 million net of a tax benefit of $7.4 million. The
extraordinary loss represents the write-off of debt acquisition costs associated
with indebtedness replaced by the new facility. The weighted average interest
rates for outstanding indebtedness relating to the 1998 Bank Credit Agreement
during 1998 and as of December 31, 1998 were 6.8% and 6.3%, respectively.
Combined interest expense relating to the 1997 and 1998 Bank Credit Agreements
was $66.1 million for year ended December 31, 1998.
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 a shelf registration statement 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 and 1998 was $0.9 million and $21.9 million, respectively. 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 and 1998 was $250.6 million and $254.4 million, respectively.
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
Company utilized $162.5 million of the approximately $195.6 million net proceeds
of the issuance to repay outstanding revolving credit indebtedness under the
1997 Bank Credit Agreement and utilized the remainder to fund acquisitions.
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 years ended
December 31, 1997 and 1998 was $9.0 million and $18.0 million, respectively. 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 and 1998 was $206.4 million and $205.3 million, respectively.
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.
F-17
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
Interest on the Notes is payable semiannually on notes is due March 30 and
September 30 of each year, commencing March 30, 1996. Interest expense was $30.0
million for each of the three years ended December 31, 1996, 1997 and 1998. 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 1995 Notes as of
December 31, 1997 and 1998 was $322.2 million and $319.8 million, respectively.
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.
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,
1996, 1997 and 1998, was $10.0 million, $9.6 million and $0.2 million,
respectively. The Notes are issued under an Indenture among SBG, its
subsidiaries (the guarantors) and the trustee.
Based upon the quoted market price, the fair value of the 1993 Notes as of
December 31, 1998 is $2.0 million.
SUMMARY
- -------
Notes payable and commercial bank financing consisted of the following as of
December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Bank Credit Agreement, Term Loan ...................................... $ 307,125 $ 750,000
Bank Credit Agreement, Revolving Credit Facility ...................... -- 803,000
8 3/4% Senior Subordinated Notes, due 2007 ............................ 250,000 250,000
9% Senior Subordinated Notes, due 2007 ................................ 200,000 200,000
10% Senior Subordinated Notes, due 2003 ............................... 1,899 1,899
10% Senior Subordinated Notes, due 2005 ............................... 300,000 300,000
Installment note for certain real estate interest at 8.0% ............. 101 94
---------- ----------
1,059,125 2,304,993
Less: Discount on 8 3/4% Senior Subordinated Notes, due 2007 .......... (976) (878)
Less:Current portion .................................................. (35,215) (50,007)
---------- ----------
$1,022,934 $2,254,108
========== ==========
</TABLE>
F-18
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
Indebtedness under the 1998 Bank Credit Agreement and notes payable as of
December 31, 1998, mature as follows (in thousands):
<TABLE>
<S> <C>
1999 ................................................................ $ 50,007
2000 ................................................................ 75,008
2001 ................................................................ 100,009
2002 ................................................................ 203,009
2003 ................................................................ 276,909
2004 and thereafter ................................................. 1,600,051
----------
2,304,993
Less: Discount on 8 3/4% Senior Subordinated Notes, due 2007 ........ (878)
----------
$2,304,115
==========
</TABLE>
Substantially all of the Company's stock in its wholly owned subsidiaries has
been pledged as security for notes payable and commercial bank financing.
5. NOTES AND CAPITAL LEASES PAYABLE TO AFFILIATES:
Notes and capital leases payable to affiliates consisted of the following as of
December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Subordinated installment notes payable to former majority owners,
interest at 8.75%, principal payments in varying amounts due annually
beginning October 1991, with a balloon payment due at maturity in
May 2005 ............................................................... $ 9,574 $ 8,636
Capital lease for building, interest at 17.5% ............................ 1,198 972
Capital leases for broadcasting tower facilities, interest rates
averaging 10% ........................................................... 3,720 3,566
Capitalization of time brokerage agreements, interest at 6.73% to 8.25% . 6,611 8,943
Capital leases for building and tower, interest at 8.25% ................. 1,470 989
-------- --------
22,573 23,106
Less:Current portion ..................................................... (3,073) (4,063)
-------- --------
$ 19,500 $ 19,043
======== ========
</TABLE>
Notes and capital leases payable to affiliates, as of December 31, 1998, mature
as follows (in thousands):
<TABLE>
<S> <C>
1999 ............................................................. $ 5,868
2000 ............................................................. 5,811
2001 ............................................................. 5,262
2002 ............................................................. 4,091
2003 ............................................................. 2,782
2004 and thereafter .............................................. 5,967
--------
Total minimum payments due ....................................... 29,781
Less: Amount representing interest ............................... (6,675)
--------
Present value of future notes and capital lease payments ......... $ 23,106
========
</TABLE>
F-19
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
6. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
1998, are as follows (in thousands):
1999 ................................................... $ 94,780
2000 ................................................... 44,805
2001 ................................................... 22,364
2002 ................................................... 5,679
2003 ................................................... 1,246
2004 and thereafter .................................... 708
---------
169,582
Less: Current portion .................................. (94,780)
---------
Long-term portion of program contracts payable ......... $ 74,802
=========
Included in the current portion amounts are payments due in arrears of $20.7
million. In addition, the Companies have entered into noncancelable commitments
for future program rights aggregating $153.0 million as of December 31, 1998.
The Company has estimated the fair value of its program contract payables and
noncancelable commitments at approximately $118.9 million and $46.7 million,
respectively, as of December 31, 1997, and $148.9 million and $126.3 million,
respectively, at December 31, 1998. These estimates are based on future cash
flows discounted at the Company's current borrowing rate.
7. 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, 1997 and 1998, the balance
outstanding was approximately $1.3 and $0.7 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, 1997
and 1998, the balance outstanding was approximately $1.9 million and $1.8
million, respectively.
Concurrently with the Company's initial public offering, the Company acquired
options from certain stockholders of Glencairn, LTD (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 option
exercise price is based on a formula that provides a 10% annual return to
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 Kerrville, WFBC in Asheville/Greenville/Spartanburg and WTTE in Columbus. The
Company has entered into five-year LMA agreements (with five-year renewal terms
at the Company's option) with Glencairn pursuant to which the Company provides
programming to Glencairn for airing on WNUV, WVTV, WRDC, WABM, KRRT, WFBC and
WTTE. During the years ended December 31, 1996, 1997 and 1998, the Company made
payments of $7.3 million, $8.4 million and $9.8 million, respectively, to
Glencairn under these LMA agreements.
F-20
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
During the years ended December 31, 1996, 1997 and 1998, the Company from time
to time entered into charter arrangements to lease aircraft owned by certain
Class B stockholders. During the years ended December 31, 1996, 1997 and 1998,
the Company incurred expenses of approximately $0.3 million, $0.7 million and
$0.6 million 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 are
direct or indirect beneficial owners of equity interests in River City are
affiliates of the Company. During the years ended December 31, 1996, 1997 and
1998, the Company incurred LMA expenses relating to River City of $1.4 million,
$.9 million and $.2 million, 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 exercised
its option to acquire the assets of KSC for consideration of forgiveness of
approximately $8.0 million of KSC debt. During 1997, 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.
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, $1.4 million, and $1.5
million for the years ended December 31, 1996, 1997 and 1998, respectively.
8. 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, 1996, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- ------------- ----------
<S> <C> <C> <C>
Provision for income taxes before extraordinary item .......... $6,936 $ 15,984 $ 45,658
Income tax effect of extraordinary item ....................... -- (4,045) (7,370)
------ --------- --------
$6,936 $ 11,939 $ 38,288
====== ========= ========
Current:
Federal ...................................................... $ 127 $ (10,581) $ 3,953
State ........................................................ 4,479 1,938 3,635
------ --------- --------
4,606 (8,643) 7,588
------ --------- --------
Deferred:
Federal ...................................................... 2,065 18,177 26,012
State ........................................................ 265 2,405 4,688
------ --------- --------
2,330 20,582 30,700
------ --------- --------
$6,936 $ 11,939 $ 38,288
====== ========= ========
</TABLE>
F-21
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income taxes ............................................ 35.0% 35.0% 35.0%
Adjustments--
State income and franchise taxes, net of federal effect .................. 16.7 6.3 9.5
Goodwill amortization .................................................... 24.3 17.0 17.2
Non-deductible expense items ............................................. 6.1 8.5 3.2
Tax liability related to dividends on Parent Preferred Stock (a) ......... -- 70.3 43.8
Other .................................................................... 3.9 2.0 5.9
---- ----- -----
Provision for income taxes ................................................ 86.0% 139.1% 114.6%
==== ===== =====
</TABLE>
- ----------
(a) In March 1997, the Company issued the HYTOPS securities. 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
years ended December 31, 1997 and 1998, the Parent did not generate
"earnings and profits" in an amount greater than or equal to dividends paid
on the Parent Preferred Stock. This resulted in a reduction in basis of the
Parent's Series C Preferred Stock and generated a related deferred tax
liability.
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 liability of $21.5 million and $165.5 million as of December
31, 1997 and 1998, 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 $58.5 million as
of December 31, 1998, which expire during various years from 2001 to 2012. These
NOL's are recorded in the deferred tax accounts in the accompanying Consolidated
Balance Sheet as of December 31, 1998. Of these NOL's, $49.1 million are limited
to use within a specific entity and 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, 1997
and 1998, 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):
1997 1998
--------- ---------
Deferred Tax Assets:
Accruals and reserves .................... $ 3,015 $ 7,238
Loss on disposal of fixed assets ......... 148 1,551
Net operating losses ..................... 10,435 28,809
Program contracts ........................ 3,410 1,283
Tax credits .............................. -- 3,110
Treasury option derivative ............... -- 3,601
Other .................................... 903 2,433
------- -------
$17,911 $48,025
======= =======
F-22
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Deferred Tax Liabilities:
FCC license ........................................................... $ 5,346 $ 23,394
Parent Preferred Stock deferred tax liability [see (a) above] ......... 8,388 25,833
Fixed assets and intangibles .......................................... 23,572 160,759
Capital lease accounting .............................................. 1,647 1,998
Investment in partnerships ............................................ 420 734
Other ................................................................. 80 834
------- --------
$39,453 $213,552
======= ========
</TABLE>
During 1998, the Company acquired the stock of Sullivan Broadcast Holdings, Inc.
(Sullivan), Lakeland Group Television, Inc. (Lakeland) and the direct and
indirect interests of Max Media Properties LLC (Max Media). The Company recorded
net deferred tax liabilities resulting from these purchases of approximately
$114.0 million under the purchase accounting guidelines of APB 16 and in
accordance with SFAS 109. These net deferred tax liabilities primarily relate to
the permanent differences between financial reporting carrying amounts and tax
basis amounts measured upon the purchase date.
9. 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, 1996,
1997 and 1998, was $0.7 million, $1.0 million and $1.6 million, respectively.
There were no discretionary contributions during these periods. During December
1997, the Company registered 800,000 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.
10. 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, results of operations or cash flows.
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, 1996, 1997 and 1998, aggregated approximately $3.1
million, $3.9 million and $6.8 million, respectively.
F-23
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
Future minimum payments under the leases are as follows (in thousands):
1999 ........................ $ 7,211
2000 ........................ 5,312
2001 ........................ 4,340
2002 ........................ 3,611
2003 ........................ 2,662
2004 and thereafter ......... 13,023
-------
$36,159
=======
11. ACQUISITIONS:
1996 ACQUISITIONS
- -----------------
RIVER CITY ACQUISITION
In May 1996, the Company acquired certain non-license assets of River City 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.
In May 1996, the Company also entered into option agreements to purchase certain
license assets for an aggregate option exercise price of $20 million. During
1996 and 1997, the Company exercised its options to acquire the FCC licenses for
option exercise prices totaling $18.2 million and now owns all of the license
assets 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. In addition, the Company entered into an option agreement
to purchase the license and non-license assets of WSYX-TV in Columbus, Ohio.
During 1998, the Company exercised its option to acquire the non-license assets
of WSYX (see discussion below).
In connection with the River City acquisition, the Company consummated the
following transactions concurrent with or subsequent to the closing:
1. 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 in an amount equal to its
fair market value on the date the River City acquisition was announced.
2. 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 7.27 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
F-24
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
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 7.27 votes on all matters with respect to which Class A Common
Stock has a vote.
3. The Baker Agreement -- In connection with the acquisition of River City, the
Company entered into a five year agreement (the "Baker Agreement") with Barry
Baker (the Chief Executive Officer of River City) pursuant to which Mr. Baker
served as a consultant to the Company until terminating such services
effective March 8, 1999 (the "Termination Date"). Under the terms of the
Baker Agreement, until such time as Mr. Baker was able to become an officer
of the Company, he was to serve as a consultant to the Company and receive
compensation that he would be entitled to as an officer under the Baker
Agreement. Additionally, if the Company terminated the Baker Agreement other
than for cause (as defined) or Mr. Baker terminated the Baker Agreement for
good cause (constituting certain occurrences specified in the agreement), Mr.
Baker would be entitled to certain termination payments primarily
representing consulting fees which would have been paid under the remaining
term of the Baker Agreement.
As of February 8, 1999, the conditions to Mr. Baker becoming an officer of the
Company had not been satisfied, and on that date Mr. Baker and the Company
entered into a termination agreement with effect on March 8, 1999. Mr. Baker
has certain rights as a consequence of the termination of the Baker Agreement.
These rights included entitlement to the termination payments described above
and the right to purchase at fair market value the television and radio
stations owned by the Company serving the St. Louis, Missouri market or the
Greenville/Spartanburg/Ashville, South Carolina market (the "Broadcast
Option"). Mr. Baker has 180 days from the Termination Date to exercise the
Broadcast Option. Additional rights under the Baker Agreement also include
allowing Mr. Baker to convert his Class A Common Stock into a class of
preferred stock. Mr. Baker's Class A Common Stock would be convertible into
preferred stock at a liquidation value conversion rate of $13.75 per share and
would begin accruing a dividend beginning 180 days from the Termination Date.
Mr. Baker has 160 days from the Termination Date to elect conversion of his
Class A Common Stock.
Also, 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.
OTHER 1996 ACQUISITIONS
- -----------------------
WSMH ACQUISITION. 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 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.
SUPERIOR ACQUISITION. 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
F-25
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
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.
WYZZ ACQUISITION. 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.
KSMO ACQUISITION. 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.
WSTR ACQUISITION. 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 ACQUISITION
- ----------------
KUPN ACQUISITION. 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 combined with indebtedness under the 1997 Bank
Credit Agreement.
1998 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 $630 million (the "Heritage Acquisition"). Pursuant
to the Heritage Acquisition, and after giving effect to the STC Disposition,
Entercom Disposition and Centennial Disposition 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. In July
1998, the Company acquired three radio stations in the New Orleans, Louisiana
market and simultaneously disposed of two of those stations (see the Centennial
Disposition below). The acquisition was accounted for under the purchase method
of accounting whereby the net purchase price for stations not sold was allocated
to property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $22.6 million, $222.8 million and $102.6 million,
respectively, based on an independent appraisal.
F-26
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
1998 STC DISPOSITION. 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 $70.0 million. During the third quarter of 1998,
the Company sold the license assets for a sales price of $2.0 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 $33.0 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 KVWB-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.
WSYX ACQUISITION AND SALE OF WTTE LICENSE ASSETS. 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 and other costs of approximately $228.6 million. In August 1998, the
Company exercised its option to acquire the WSYX License Assets for an option
exercise price of $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, acquired intangible broadcasting assets and
other intangible assets for $14.6 million, $179.3 million and $61.4 million,
respectively based on an independent appraisal. Simultaneously with the WSYX
Acquisition, the Company sold the WTTE license assets to Glencairn for a sales
price of $2.3 million. In connection with the sale of the WTTE license assets,
the Company recognized a $2.3 million gain.
SFX DISPOSITION. In May 1998, the Company completed the sale of three radio
stations to SFX Broadcasting, Inc. for aggregate consideration of approximately
$35.0 million (the "SFX Disposition"). The radio stations sold are located in
the Nashville, Tennessee market. In connection with the disposition, the Company
recognized a $5.2 million gain on the sale.
LAKELAND ACQUISITION. In May 1998, the Company acquired 100% of the stock of
Lakeland Group Television, Inc. ("Lakeland") for cash payments of approximately
$53.0 million (the "Lakeland Acquisition"). In connection with the Lakeland
Acquisition, the Company now owns television station KLGT-TV in Minneapolis/St.
Paul, Minnesota. 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
$5.1 million, $35.1 million and $29.4 million, respectively, based on an
independent appraisal.
ENTERCOM DISPOSITION. In June 1998, the Company completed the sale of seven
radio stations acquired in the Heritage acquisition. The seven stations are
located in the Portland, Oregon and Rochester, New York markets and were sold
for aggregate consideration of approximately $126.9 million.
SULLIVAN ACQUISITION. In July 1998, the Company acquired 100% of the stock of
Sullivan Broadcast Holdings, Inc. for cash payments of approximately $951.0
million (the "Sullivan Acquisition"). The Company financed the acquisition by
utilizing indebtedness under the 1998 Bank Credit Agreement. In connection with
the acquisition, the Company has acquired the right to program 12 additional
television stations in 10 separate markets. In a subsequent closing, which is
expected to occur during 1999, the Company will acquire the stock of a company
that owns the license assets of six of the stations. In
F-27
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
addition, the Company expects to enter into new LMA agreements with respect to
four of the stations and will continue to program two of the television stations
pursuant to existing LMA agreements. 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 $58.2 million, $336.8 million and $637.6 million,
respectively, based on an independent appraisal.
MAX MEDIA ACQUISITION. In July 1998, the Company directly or indirectly acquired
all of the equity interests of Max Media Properties LLC, for $252.2 million (the
"Max Media Acquisition"). The Company financed the acquisition by utilizing
existing cash balances and indebtedness under the 1998 Bank Credit Agreement. In
connection with the acquisition, the Company now owns or provides programming
services to nine additional television stations in six separate markets and
eight radio stations in two separate markets. 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 $37.1 million, $144.3 million and $89.6 million,
respectively, based on an independent appraisal.
CENTENNIAL DISPOSITION. In July 1998, the Company completed the sale of the
assets of radio stations WRNO-FM, KMEZ-FM and WBYU-AM in New Orleans, Louisiana
to Centennial Broadcasting for $16.1 million in cash and recognized a loss on
the sale of $2.9 million. The Company acquired KMEZ-FM in connection with the
River City Acquisition in May of 1996 and acquired WRNO-FM and WBYU-AM in New
Orleans from Heritage Media Group, Inc. ("Heritage") in July 1998. The Company
was required to divest WRNO-FM, KMEZ-FM and WBYU-AM to meet certain regulatory
ownership guidelines.
GREENVILLE ACQUISITION. In July 1998, the Company acquired three radio stations
in the Greenville/Spartansburg market from Keymarket Radio of South Carolina,
Inc. for a purchase price consideration involving the forgiveness of
approximately $8.0 million of indebtedness to Sinclair. Concurrently with the
acquisition, the Company acquired an additional two radio stations in the same
market from Spartan Broadcasting for a purchase price of approximately $5.2
million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and acquired
intangible broadcasting assets for $5.0 million and $10.1 million, respectively,
based on an independent appraisal.
RADIO UNICA DISPOSITION. In July 1998, the Company completed the sale of
KBLA-AM in Los Angeles, California to Radio Unica, Corp. for approximately
$21.0 million in cash. In connection with the disposition, the Company
recognized a $8.4 million gain.
PENDING ACQUISITIONS AND DISPOSITIONS
- -------------------------------------
BUFFALO ACQUISITION. In August 1998, the Company entered into an agreement with
Western New York Public Broadcasting Association to acquire the television
station WNEQ in Buffalo, NY for a purchase price of $33 million in cash (the
"Buffalo Acquisition"). The Company expects to close the sale upon FCC approval
and the termination of the applicable waiting period under the HSR Act. In
addition, the sale is contingent upon FCC de-reservation of the station for
commercial use.
ST. LOUIS RADIO ACQUISITION. In August 1998, the Company entered into an
agreement to acquire radio station KXOK-FM in St. Louis, Missouri for a purchase
price of $14.1 million in cash. The purchase price is subject to be increased or
decreased, depending upon whether or not closing occurs within 210 days of the
agreement. The Company expects to close the purchase upon FCC approval.
GUY GANNETT ACQUISITION. In September 1998, the Company agreed to acquire from
Guy Gannett Communications its television broadcasting assets for a purchase
price of $317 million in cash (the "Guy Gannett Acquisition"). As a result of
this transaction, the Company will acquire seven television stations
F-28
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
in six markets. The FCC must approve the Guy Gannet Acquisition, which the
Company expects to complete in the first quarter of 1999. The Company expects to
finance the acquisition with a combination of bank borrowings and the use of
cash proceeds resulting from the Company's planned disposition of certain
broadcast assets.
ACKERLEY DISPOSITION. In September 1998, the Company agreed to sell WOKR-TV in
Rochester, New York to The Ackerley Group, Inc. for a sales price of $125
million (the "Ackerley Disposition"). The Company previously entered into an
agreement to acquire WOKR-TV as part of the Guy Gannett Acquisition. The FCC
must approve the disposition, which the Company expects to close in the second
quarter of 1999.
12. SECURITIES ISSUANCES AND COMMON STOCK SPLIT:
COMMON STOCK SPLIT
- ------------------
On April 30, 1998, the Company's Board of Directors approved a two-for-one stock
split of its Class A and Class B Common Stock to be distributed in the form of a
stock dividend. As a result of this action, 23,963,013 and 24,984,432 shares of
Class A and Class B Common Stock, respectively, were issued to shareholders of
record as of May 14, 1998. The stock split has been retroactively reflected in
the accompanying consolidated financial statements and related notes thereto.
1997 COMMON STOCK OFFERING
- --------------------------
In September 1997, the Company and certain stockholders of the Company completed
a public offering of 8,690,000 and 3,500,000 shares, respectively of Class A
Common Stock (the "1997 Common Stock Offering"). The shares were sold pursuant
to the Shelf Registration for an offering price of $18.25 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 1997 Common Stock Offering proceeds to repay
indebtedness under the 1997 Bank Credit Agreement.
1997 PREFERRED STOCK OFFERING
- -----------------------------
Concurrent with the 1997 Common Stock Offering, the Company completed a public
offering of 3,450,000 shares of Series D Convertible Exchangeable Preferred
Stock (the "1997 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 have 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 $22.813 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.
The Company received total net proceeds of $317.9 million from the 1997
Preferred Stock Offering and the 1997 Common Stock Offering. The Company
utilized $285.7 million of the net proceeds from the 1997 Preferred Stock
Offering and the 1997 Common 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.
F-29
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
1997 OFFERING OF 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 and $23.3 million for the years ended December 31, 1997 and 1998,
respectively.
1998 COMMON STOCK OFFERING
- --------------------------
On April 14, 1998, the Company and certain stockholders of the Company completed
a public offering of 12,000,000 and 4,060,374 shares, respectively, of Class A
Common Stock (the "1998 Common Stock Offering"). The shares were sold for an
offering price of $29.125 per share and generated proceeds to the Company of
$335.1 million, net of underwriters' discount and other offering costs of
approximately $14.4 million. The Company utilized the proceeds to repay
indebtedness under the 1997 Bank Credit Agreement.
13. STOCK-BASED COMPENSATION PLANS:
-------------------------------
STOCK OPTION PLANS
- ------------------
DESIGNATED PARTICIPANTS STOCK OPTION PLAN -- In connection with the Company's
initial public offering in June 1995 (the "IPO"), 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 were granted to certain key employees of the Company.
The Designated Participants Stock Option Plan provides that the number of shares
of Class A Common Stock reserved for issuance under the Designated Participants
Stock Option Plan is 136,000. Options granted pursuant to the Designated
Participants Stock Option Plan must be exercised within 10 years following the
grant date. As of December 31, 1998, all 136,000 available options have been
granted.
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
F-30
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
and its subsidiaries and to attract and retain the services of qualified and
capable employees. Options granted pursuant to the LTIP must be exercised within
10 years following the grant date. A total of 14,000,000 shares of Class A
Common Stock are reserved for awards under the plan. As of December 31, 1998,
8,754,370 shares have been granted under the LTIP and 5,879,880 shares are
available for future grants.
INCENTIVE STOCK OPTION PLAN -- In June 1996, the Board of Directors adopted,
upon approval of the stockholders by proxy, an amendment to the Company's
Incentive Stock Option Plan (the "ISOP"). The purpose of the amendment was (i)
to increase the number of shares of Class A Common Stock approved for issuance
under the plan from 800,000 to 1,000,000, (ii) to lengthen the period after date
of grant before options become exercisable from two years to three and (iii) to
provide immediate termination and three-year ratable vesting of options in
certain circumstances. Options granted pursuant to the ISOP must be exercised
within 10 years following the grant date. As of December 31, 1998, 714,200
shares have been granted under the ISOP and 464,834 shares are available for
future grants.
A summary of changes in outstanding stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Outstanding at end of 1995 ......... 136,000 $ 10.50 -- --
1996 Activity:
Granted ........................... 3,809,570 15.75 -- --
Exercised ......................... -- -- -- --
Forfeited ......................... (7,500) 10.50 -- --
--------- -------- -- --
Outstanding at end of 1996 ......... 3,938,070 15.58 1,472,436 $ 15.06
--------- -------- --------- --------
1997 Activity:
Granted ........................... 548,900 16.87 -- --
Exercised ......................... (10,000) 10.50 -- --
Forfeited ......................... (252,400) 17.85 -- --
--------- -------- --------- --------
Outstanding at end of 1997 ......... 4,224,570 17.10 2,428,152 14.91
--------- -------- --------- --------
1998 Activity:
Granted ........................... 5,352,500 25.08
Exercised ......................... (86,666) 12.96
Forfeited ......................... (820,284) 23.19
--------- --------
Outstanding at end of 1998 ......... 8,670,120 $ 20.76 3,245,120 $ 15.01
========= ======== ========= ========
</TABLE>
F-31
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
Additional information regarding stock options outstanding at December 31, 1998,
is as 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>
58,500 $ 10.50 -- 6.44 58,500 $ 10.50
3,387,870 15.06 0.24 7.49 3,173,620 15.06
527,500 17.81-18.88 1.44 7.94 -- --
37,000 20.94 1.96 8.97 -- --
18,000 22.88-24.18 3.77 9.61 -- --
3,268,750 24.20 3.64 9.13 13,000 24.20
352,500 24.25-27.73 3.76 9.41 -- --
1,020,000 28.08-28.42 4.18 9.69 -- --
---------- ------------ ---- ---- --------- --------
8,670,120 $ 20.76 2.21 8.48 3,245,120 $ 15.01
========== ============ ==== ==== ========= ========
</TABLE>
PRO FORMA INFORMATION RELATED TO STOCK-BASED COMPENSATION
- ---------------------------------------------------------
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.
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>
1996 1997 1998
------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before
extraordinary item ................... $ 1,131 $ (1,639) $ (4,496) $ (5,871) $ (5,817) $ (13,629)
======= ======== ========= ========= ========= =========
Net income (loss)...................... $ 1,131 $ (1,639) $ (10,566) $ (11,941) $ (16,880) $ (24,692)
======= ======== ========= ========= ========= =========
Net income (loss) available to
common shareholders .................. $ 1,131 $ (1,639) $ (13,329) $ (14,704) $ (27,230) $ (35,042)
======= ======== ========= ========= ========= =========
Basic net income per share before
extraordinary items .................. $ .02 $ (.02) $ (.10) $ (.12) $ (.17) $ (.25)
======= ======== ========= ========= ========= =========
Basic net income per share after
extraordinary items .................. $ .02 $ (.02) $ (.19) $ (.20) $ (.29) $ (.37)
======= ======== ========= ========= ========= =========
Diluted net income per share before
extraordinary items .................. $ .02 $ (.02) $ (.10) $ (.12) $ (.17) $ (.25)
======= ======== ========= ========= ========= =========
Diluted net income per share after
extraordinary items .................. $ .02 $ (.02) $ (.19) $ (.20) $ (.29) $ (.37)
======= ======== ========= ========= ========= =========
</TABLE>
F-32
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
The Company has computed for pro forma disclosure purposes the value of all
options granted during 1996, 1997, and 1998 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
---------- -------------- -------------
Risk-free interest rate 6.66% 5.66 - 6.35% 4.54 - 5.68%
Expected lives 5 years 5 years 6 years
Expected volatility 35% 35% 41%
Adjustments are made for options forfeited prior to vesting.
14. 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
-----------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Weighted-average number of common shares ........................... 69,496 71,902 94,321
Dilutive effect of outstanding stock options ....................... 340 238 1,083
Dilutive effect of conversion of preferred shares .................. 4,926 8,016 288
------ ------ ------
Weighted-average number of common equivalent shares
outstanding ....................................................... 74,762 80,156 95,692
====== ====== ======
Net income (loss) before extraordinary item ........................ $ 1,131 $ (4,496) $ (5,817)
======== ========= =========
Net income (loss) .................................................. $ 1,131 $ (10,566) $ (16,880)
Preferred stock dividends payable .................................. -- (2,763) (10,350)
-------- --------- ---------
Net income (loss) available to common shareholders ................. $ 1,131 $ (13,329) $ (27,230)
======== ========= =========
Basic net income (loss) per share before extraordinary items ....... $ .02 $ (.10) $ (.17)
======== ========= =========
Basic net income (loss) per share after extraordinary items ........ $ .02 $ (.19) $ (.29)
======== ========= =========
Diluted net income (loss) per share before extraordinary items ..... $ .02 $ (.10) $ (.17)
======== ========= =========
Diluted net income (loss) per share after extraordinary items ...... $ .02 $ (.19) $ (.29)
======== ========= =========
</TABLE>
F-33
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
15. FINANCIAL INFORMATION BY SEGMENT:
The Company consists of two principal business segments - television
broadcasting and radio broadcasting. As of December 31, 1998 the Company owns or
provides programming services pursuant to LMAs to 56 television stations located
in 36 geographically diverse markets in the continental United States. The
Company owns 51 radio stations in ten geographically diverse markets.
Substantially all revenues represent income from unaffiliated companies.
<TABLE>
<CAPTION>
TELEVISION
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Net broadcast revenues .......................................... $ 407,410 $ 564,727
Barter revenues ................................................. 42,468 59,697
---------- ----------
Total revenues .................................................. 449,878 624,424
---------- ----------
Station operating expenses ...................................... 153,935 220,537
Expenses from barter arrangements ............................... 38,114 54,067
Depreciation, program amortization and stock-based compensation . 80,799 97,578
Amortization of intangibles and other assets .................... 57,897 82,555
---------- ----------
Station broadcast operating income .............................. $ 119,133 $ 169,687
========== ==========
Total assets .................................................... $1,736,149 $3,293,809
========== ==========
Capital expenditures ............................................ $ 16,613 $ 15,694
========== ==========
Payments of program contracts payable ........................... $ 48,609 $ 61,107
========== ==========
</TABLE>
<TABLE>
<CAPTION>
RADIO
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
---------- -----------
<S> <C> <C>
Net broadcast revenues .......................................... $ 63,818 $108,079
Barter revenues ................................................. 2,739 4,301
-------- --------
Total revenues .................................................. 66,557 112,380
-------- --------
Station operating expenses ...................................... 44,327 66,604
Depreciation, program amortization and stock-based compensation . 5,167 7,260
Amortization of intangibles and other assets .................... 9,943 15,817
-------- --------
Station broadcast operating income .............................. $ 7,120 $ 22,699
======== ========
Total assets .................................................... $298,085 $560,773
======== ========
Capital expenditures ............................................ $ 2,812 $ 3,732
======== ========
Payments of program contracts payable ........................... $ 2,450 $ 3,160
======== ========
</TABLE>
F-34
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED )
16. UNAUDITED PRO FORMA SUMMARY RESULTS OF OPERATIONS:
The following unaudited pro forma summary presents the consolidated results of
operations for the years ended December 31, 1997 and 1998 as if significant
acquisitions and dispositions completed through December 31, 1998 had occurred
at the beginning of 1997. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had significant acquisitions and dispositions been made as of that date
or of results which may occur in the future.
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
1997 1998
------------- --------------
<S> <C> <C>
Net revenues ............................................... $ 715,086 $ 761,977
========== ==========
Net income before extraordinary item ....................... $ 2,544 $ (11,431)
========== ==========
Net loss ................................................... $ (3,595) $ (22,494)
========== ==========
Basic and diluted loss per common share before extraordinary
item ...................................................... $ (0.09) $ (0.22)
========== ==========
Net loss available to common shareholders .................. $ (13,945) $ (32,844)
========== ==========
Basic and diluted loss per common share .................... $ (0.15) $ (0.34)
========== ==========
</TABLE>
17. SUBSEQUENT EVENTS:
In February 1999, the Company entered into an agreement to sell to
Communications Corporation of America ("CCA") the non-license assets of KETK-TV
and KLSB-TV in Tyler-Longview, Texas for a sales price of $34 million (the "CCA
Disposition"). In addition, the Company sold a purchase option for the License
Assets of KETK-TV for $2 million and CCA can exercise its option for an option
exercise price of $2 million. The Company expects to close the transaction in
the second quarter of 1999 and closing is subject to Department of Justice
approval.
In March 1999, the Company entered into an agreement to sell to STC the
television stations WICS-TV in the Springfield, Illinois market and KGAN-TV in
the Cedar Rapids, Iowa market. In addition, the Company agreed to sell the
Non-License Assets and rights to program WICD in the Springfield, Illinois
market. The stations are being sold to STC for a sales price of $81.0 million
and are being acquired by the Company in connection with the Guy Gannett
Acquisition.
F-35
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
Report of Independent Public Accountants ................. S - 2
Schedule II -- Valuation and Qualifying Accounts ......... S - 3
All schedules except those listed above are omitted as not applicable or not
required or the required information is included in the consolidated financial
statements or in the notes thereto.
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements balance sheets, statements of operations, changes in
stockholders' equity and cash flows of Sinclair Broadcast Group, Inc. and
Subsidiaries included in this Form 10-K and have issued our report thereon dated
February 9, 1999. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedules listed in the accompanying
index is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Baltimore, Maryland, February 9, 1999, except for Note 17, as to which the date
is March 16, 1999
S-2
<PAGE>
SCHEDULE II
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGES BALANCE
BEGINNING COSTS AND TO OTHERS AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------- ------------ ------------ --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful accounts .. $1,066 $1,563 $ 575 (1) $ 732 $2,472
1997
Allowance for doubtful accounts .. 2,472 2,655 - 2,207 2,920
1998
Allowance for doubtful accounts .. 2,920 3,234 1,279 (1) 2,264 5,169
</TABLE>
- ----------
(1) Amount represents allowance for doubtful account balances related to the
acquisition of certain television stations during 1996 and 1998.
S-3
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws (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 Subordinated Indenture, dated as of December 17, 1997 among Sinclair
Broadcast Group, Inc. and First Union National Bank, as trustee. (3)
4.4 First Supplemental Indenture, dated as of December 17,1997 among Sinclair
Broadcast Group, Inc. the Guarantors named therein and First Union
National Bank, as trustee, including Form of Note. (3)
10.4 Stock Option Agreement, dated April 10, 1996 by and between Sinclair
Broadcast Group, Inc. and Barry Baker. (4)
10.5 Employment Agreement, dated as of April 10, 1996, with Barry Baker. (5)
10.6 Indemnification Agreement, dated as of April 10, 1996, with Barry Baker.
(5)
10.7 Time Brokerage Agreement, dated as of May 31, 1996, by and among Sinclair
Communications, Inc., River City Broadcasting, L.P. and River City License
Partnership and Sinclair Broadcast Group, Inc. (5)
10.8 Registration Rights Agreement, dated as of May 31, 1996, by and between
Sinclair Broadcast Group, Inc. and River City Broadcasting, L.P. (5)
10.9 Time Brokerage Agreement, dated as of August 3, 1995, by and between River
City Broadcasting, 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 Assignee of Sinclair Broadcast
Group, Inc.). (5)
10.10 Letter Agreement, dated August 20, 1996, between Sinclair Broadcast Group,
Inc., River City Broadcasting, L.P. and Fox Broadcasting Company. (6)
10.11 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). (7)
10.12 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). (8)
10.13 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)
10.14 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) (7)
10.15 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) (7)
10.16 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) (7)
</TABLE>
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
10.17 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) (7)
10.18 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) (7)
10.19 Restatement of Stock Redemption Agreement by and among Sinclair Broadcast
Group, Inc. and Chesapeake Television, Inc., et al., dated June 19, 1990
(7)
10.20 Corporate Guaranty Agreement, dated as of September 30, 1990 by Chesapeake
Television, Inc., Commercial Radio, Inc., Channel 63, Inc. and WTTE,
Channel 28, Inc. (as guarantors) to Julian S. Smith and Carolyn C. Smith
(as lenders) (7)
10.21 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) (7)
10.22 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) (7)
10.23 Credit Agreement, dated as of May 28, 1998, by and among Sinclair
Broadcast Group, Inc., Certain Subsidiary Guarantors, Certain Lenders, the
Chase Manhattan Bank as Administrative Agent, Nations Bank of Texas, N.A.
as Documentation Agent and Chase Securities Inc. as Arranger. (1)
10.24 Incentive Stock Option Plan for Designated Participants. (2)
10.25 Incentive Stock Option Plan of Sinclair Broadcast Group, Inc. (2)
10.26 First Amendment to Incentive Stock Option Plan of Sinclair Broadcast
Group, Inc., adopted April 10, 1996. (4)
10.27 Second Amendment to Incentive Stock Option Plan of Sinclair Broadcast
Group, Inc., adopted May 31, 1996. (4)
10.28 1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc. (4)
10.29 First Amendment to 1996 Long Term Incentive Plan of Sinclair Broadcast
Group, Inc. (9)
10.30 Amended and Restated Asset Purchase Agreement by and between River City
Broadcasting, L.P. and Sinclair Broadcast Group, Inc., dated as of April
10, 1996 and amended and restated as of May 31, 1996 (10)
10.31 Group I Option Agreement by and among River City Broadcasting, L.P. and
Sinclair Broadcast Group, Inc., dated as of May 31, 1996 (10)
10.32 Asset Purchase Agreement, dated April 10, 1996 by and between KRRT, Inc.
and SBGI, Inc. (11)
10.33 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 Irrevocable 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 (8)
10.34 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. (12)
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EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
10.35 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. (12)
10.36 Assets Purchase Agreement by and among Entertainment Communications, Inc.,
Tuscaloosa Broadcasting, Inc., Sinclair Radio of Portland Licensee, Inc.
and Sinclair Radio of Rochester Licensee, Inc., dated as of January 26,
1998. (12)
10.37 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. (12)
10.38 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. (12)
10.39 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 (12)
10.40 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max
Management LLC and Max Media Properties LLC., dated as of December 2,
1997. (12)
10.41 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. (12)
10.42 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. (12)
10.43 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. (12)
10.44 Stock Purchase Agreement by and among Sinclair Communications, Inc. and
the stockholders of Lakeland Group Television, Inc., dated as of November
14, 1997. (12)
10.45 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. (12)
10.46 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. (12)
10.47 Agreement and Plan of Merger among Sullivan Broadcast Holdings, Inc.,
Sinclair Broadcast Group, Inc., and ABRY Partners, Inc. Effective as of
February 23, 1998. (12)
10.48 Employment Agreement by and between Sinclair Broadcast Group, Inc. and
Frederick G. Smith, dated June 12, 1998. (13)
10.49 Employment Agreement by and between Sinclair Broadcast Group, Inc. and J.
Duncan Smith, dated June 12, 1998. (13)
10.50 Employment Agreement by and between Sinclair Broadcast Group, Inc. and
David B. Amy, dated September 15, 1998. (13)
10.51 Employment Agreement by and between Sinclair Communications, Inc. and
Kerby Confer, dated December 10, 1998.*
10.52 Employment Agreement by and between Sinclair Communications, Inc. and
Barry Drake, dated February 21, 1997.*
10.53 First Amendment to Employment Agreement, by and between Sinclair Broadcast
Group, Inc. and Barry Baker, dated May, 1998.*
</TABLE>
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
10.54 Termination Agreement by and between Sinclair Broadcast Group, Inc. and
Barry Baker, dated February 8, 1999.*
10.55 Purchase Agreement by and between Sinclair Communications, Inc. and STC
Broadcasting, Inc. dated as of March 5, 1999.*
10.56 Purchase Agreement by and between Guy Gannett Communications and Sinclair
Communications, Inc., dated as of September 4, 1998. (13)
10.57 Purchase Agreement by and between Sinclair Communications, Inc., and the
Ackerly Group, Inc., dated as of September 25, 1998. (13)
11 Statement re computation of per share earnings (included in financial
statements)
12 Computation of Ratio of Earnings to Fixed Charges*
21 Subsidiaries of the Registrant*
23 Consent of Independent Public Accountants
25 Power of attorney (included in signature page)
27 Financial Data Schedule*
</TABLE>
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* Previously filed.
(1) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended June 30, 1998
(2) Incorporated by reference from the Company's Registration Statement on
Form S-1, No. 33-90682
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
dated as of December 16, 1997.
(4) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1996.
(5) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended June 30, 1996.
(6) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended September 30, 1996.
(7) Incorporated by reference from the Company's Registration Statement on
Form S-1, No. 33-69482
(8) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1995.
(9) Incorporated by reference from the Company Proxy Statement for the 1998
Annual Meeting filed on Schedule 14A.
(10) Incorporated by reference from the Company's Amended Current Report on
Form 8-K/A, filed May 9, 1996.
(11) Incorporated by reference from the Company's Current Report on Form 8-K,
filed May 17, 1996.
(12) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1997.
(13) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended September 30, 1998.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference into Registration Statement File Nos. 333-12255, 333-58135, 033-93348
and 333-43047 of our report dated February 9, 1999, except for Note 17, as to
which the date is March 16, 1999, of Sinclair Broadcast Group, Inc. It should be
noted that we have not audited any financial statements of the Company
subsequent to December 31, 1998, or performed any audit procedures subsequent to
the date of our report.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
March 25, 1999
