UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______.
Commission File Number: 000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------------
MARYLAND 52-1494660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MD 21030
(Address of principal executive offices)
(410) 568-1500
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year-if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
As of May 8, 2000, there were 45,246,675 shares of Class A Common Stock, $.01
par value; 47,400,768 shares of Class B Common Stock, $.01 par value; 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
11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., are issued and outstanding.
1
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SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<S> <C>
PAGE
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000........................................................... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 2000............................................ 4
Consolidated Statement of Stockholders' Equity for the Three Months
Ended March 31, 2000..................................................... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 2000........................................... 6
Notes to Unaudited Consolidated Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................. 17
Signature.............................................................................. 18
</TABLE>
2
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SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1999 2000
--------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash...................... $ 16,408 $ 8,565
Accounts receivable, net of allowance for doubtful accounts..................... 210,343 156,437
Current portion of program contract costs....................................... 74,138 57,312
Prepaid expenses and other current assets....................................... 7,418 5,961
Deferred barter costs........................................................... 1,823 4,208
Broadcast assets related to discontinued operations, net of liabilities radio
KC & St. Louis................................................................ 172,983 168,207
Broadcast assets held for sale, current......................................... 77,962 --
Deferred tax asset.............................................................. 5,215 24,780
------------- ------------
Total current assets..................................................... 566,290 425,470
PROGRAM CONTRACT COSTS, less current portion........................................ 53,002 44,621
LOANS TO OFFICERS AND AFFILIATES.................................................... 8,772 9,385
PROPERTY AND EQUIPMENT, net......................................................... 251,783 268,171
BROADCAST ASSETS HELD FOR SALE, less current portion KDNL & licensee................ 144,316 144,289
OTHER ASSETS........................................................................ 108,383 111,390
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net........................................ 2,486,964 2,528,141
------------- ------------
Total Assets...................................................................... $ 3,619,510 $ 3,531,467
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 7,600 $ 7,203
Accrued liabilities............................................................. 67,078 61,290
Income taxes payable............................................................ 116,821 21,787
Notes payable and commercial bank financing..................................... 75,008 81,258
Notes and capital leases payable to affiliates.................................. 5,890 5,405
Current portion of program contracts payable.................................... 111,992 101,651
Deferred barter revenues........................................................ 3,244 5,744
------------- ------------
Total current liabilities................................................... 387,633 284,338
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing..................................... 1,677,299 1,734,324
Notes and capital leases payable to affiliates.................................. 34,142 32,977
Program contracts payable, less current portion................................. 87,220 76,675
Deferred tax liability.......................................................... 233,927 234,458
Other long-term liabilities..................................................... 20,444 27,300
------------- ------------
Total liabilities............................................................. 2,440,665 2,390,072
------------- ------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES...................................... 3,928 3,899
------------- ------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES..................................... 200,000 200,000
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series D Preferred Stock, $0.01 par value, 3,450,000 shares authorized, issued
and outstanding.............................................................. 35 35
Class A Common Stock, $0.01 par value, 500,000,000 shares authorized
and 49,142,513, 42,713,360 shares issued and outstanding, respectively....... 491 457
Class B Common Stock, $0.01 par value, 70,000,000 shares authorized
and 47,608,347 and 47,570,886 shares issued and outstanding, respectively.... 476 476
Additional paid-in capital...................................................... 764,091 735,584
Additional paid-in capital - equity put options................................. 116,370 111,666
Additional paid-in capital - deferred compensation.............................. (4,489) (4,257)
Accumulated deficit............................................................. 97,943 93,535
------------- ------------
Total stockholders' equity............................................... 974,917 937,496
------------- ------------
Total Liabilities and Stockholders' Equity............................... $ 3,619,510 $ 3,531,467
============= ============
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated statements.
3
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SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 2000
---------------------------
<S> <C> <C>
REVENUES:
Station broadcast revenues, net of agency commissions....................... $ 148,094 $ 160,802
Revenues realized from station barter arrangements.......................... 14,264 15,046
----------- -----------
Total revenues........................................................... 162,358 175,848
----------- -----------
OPERATING EXPENSES:
Program and production...................................................... 32,976 38,065
Selling, general and administrative......................................... 32,419 39,920
Expenses realized from station barter arrangements.......................... 13,105 13,438
Amortization of program contract costs and net
realizable value adjustments............................................. 21,491 25,077
Stock-based compensation.................................................... 826 676
Depreciation of property and equipment...................................... 7,973 8,511
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets................... 26,651 26,939
Cumulative adjustment for change in assets held for sale.................... -- 619
----------- -----------
Total operating expenses............................................. 135,441 153,245
------------ -----------
Broadcast operating income........................................... 26,917 22,603
----------- -----------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense.......................... (43,190) (36,872)
Subsidiary trust minority interest expense.................................. (5,813) (5,813)
Interest income............................................................. 809 580
Unrealized gain on derivative instrument.................................... 7,100 699
Loss from equity investments................................................ -- (535)
Other income (expense)...................................................... 148 (192)
----------- ------------
Loss before income tax benefit....................................... (14,029) (19,530)
INCOME TAX BENEFIT.......................................................... 10,967 16,907
----------- -----------
Net loss from continuing operations......................................... (3,062) (2,623)
Net income from discontinued operations, net of taxes....................... 1,447 803
----------- -----------
NET LOSS........................................................................ $ (1,615) $ (1,820)
============ ============
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS....................................... $ (4,203) $ (4,408)
============ ============
BASIC EARNINGS PER SHARE:
Loss per common share from continuing operations............................ $ (0.06) $ (0.05)
============ ============
Income per share from discontinued operations............................... $ 0.01 $ 0.01
=========== ===========
Loss per common share....................................................... $ (0.04) $ (0.05)
============ ============
Weighted average common shares outstanding.................................. 96,582 95,237
=========== ===========
DILUTED EARNINGS PER SHARE:
Loss per common share from continuing operations............................ $ (0.06) $ (0.05)
============ ============
Income per share from discontinued operations............................... $ 0.01 $ 0.01
=========== ===========
Loss per common share....................................................... $ (0.04) $ (0.05)
============ ============
Weighted average common and common equivalent shares outstanding............ 97,003 95,237
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated statements.
4
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES D CLASS A CLASS B ADDITIONAL
PREFERRED COMMON COMMON PAID-IN
STOCK STOCK STOCK CAPITAL
- --------------------------------------------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1999.............. $ 35 $ 491 $ 476 $ 764,091
Repurchase and retirement of 3,670,066
shares of Class A Common Stock.. -- (37) -- (35,023)
Dividends payable on Series D
Preferred Stock................. -- -- -- --
Stock option grants................. -- -- -- 60
Class A Common Stock issued
pursant to employee benefit plans -- 3 -- 1,752
Equity put options.................. -- -- -- 4,704
Amortization of deferred
compensation.................... -- -- -- --
Net loss............................ -- -- -- --
---------- ---------- --------- ------------
BALANCE, March 31, 2000................. $ 35 $ 457 $ 476 $ 735,584
========= ========= ========= ===========
<CAPTION>
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
CAPITAL - CAPITAL - TOTAL
EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDERS'
OPTIONS COMPENSATION DEFICIT EQUITY
- --------------------------------------------- -------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1999.............. $ 116,370 $ (4,489) $ 97,943 $ 974,917
Repurchase and retirement of 3,670,066
shares of Class A Common Stock.. -- -- -- (35,060)
Dividends payable on Series D
Preferred Stock................. -- -- (2,588) (2,588)
Stock option grants................. -- (60) -- --
Class A Common Stock issued
pursant to employee benefit plans -- -- -- 1,755
Equity put options.................. (4,704) -- -- --
Amortization of deferred
compensation.................... -- 292 -- 292
Net loss............................ -- -- (1,820) (1,820)
----------- ----------- ---------- ------------
BALANCE, March 31, 2000................. $ 111,666 $ (4,257) $ 93,535 $ 937,496
=========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated statements.
5
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 2000
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net loss........................................................................ $ (1,615) $ (1,820)
Adjustments to reconcile net loss to net cash flows from (used in) operating
activities-
Amortization of debt discount............................................... 25 25
Depreciation of property and equipment...................................... 9,030 9,998
Gain on derivative instrument............................................... (7,100) (699)
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets................... 31,036 30,178
Amortization of program contract costs and net realizable value adjustments. 21,491 25,375
Stock-based compensation.................................................... 486 292
Cumulative adjustment for change in assets held for sale.................... -- (1,237)
Deferred tax benefit related to operations.................................. (12,700) (19,034)
Loss from equity investments................................................ -- 535
Net effect of change in deferred barter revenues
and deferred barter costs................................................ 1,780 115
Increase (decrease) in minority interest.................................... 13 (29)
Changes in assets and liabilities, net of effects of acquisitions and dispositions-
Decrease in accounts receivable, net........................................ 41,455 53,060
(Increase) decrease in prepaid expenses and other current assets............ (1,198) 1,457
Decrease in accounts payable and accrued liabilities........................ (15,624) (7,077)
Decrease in other long-term liabilities..................................... (562) (661)
Income tax payments related to the sale of broadcasting assets.............. -- (87,035)
Payments on program contracts payable....................................... (20,727) (24,675)
-------------- -------------
Net cash flows from (used in) operating activities....................... 45,790 (21,232)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment........................................... (4,103) (6,378)
Payments relating to the acquisition of television and radio stations........... (6,724) (972)
Distributions from equity investments........................................... 315 333
Equity investments.............................................................. (9,148) (3,917)
Proceeds from sale of broadcasting assets....................................... -- 984
Loans to officers and affiliates................................................ (198) (813)
Repayments of loans to officers and affiliates.................................. 629 200
-------------- -------------
Net cash flows used in investing activities.............................. (19,229) (10,563)
------------- ------------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Proceeds from commercial bank financing......................................... 49,500 82,000
Repayments of notes payable, commercial bank financing and capital leases....... (69,500) (18,750)
Repurchases of Class A Common Stock............................................. -- (35,060)
Dividends paid on Series D Convertible Preferred Stock.......................... (2,588) (2,588)
Repayments of notes and capital leases to affiliates............................ (1,328) (1,650)
-------------- -------------
Net cash flows (used in) from financing activities....................... (23,916) 23,952
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 2,645 (7,843)
CASH AND CASH EQUIVALENTS, beginning of period...................................... 3,268 16,408
-------------- -------------
CASH AND CASH EQUIVALENTS, end of period............................................ $ 5,913 $ 8,565
============= =============
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated statements.
6
<PAGE>
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sinclair Broadcast Group, Inc., Sinclair Communications, Inc. and all other
consolidated subsidiaries, which are collectively referred to hereafter as "the
Company, Companies, Sinclair, or SBG." The Company owns and operates television
and radio stations throughout the United States. Additionally, included in the
accompanying consolidated financial statements are the results of operations of
certain television stations programmed pursuant to local marketing agreements
(LMAs).
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the three months ended March 31, 1999
and 2000 are unaudited, but in the opinion of management, such financial
statements have been presented on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations, and cash flows for these periods.
As permitted under the applicable rules and regulations of the Securities and
Exchange Commission, these financial statements do not include all disclosures
normally included with audited consolidated financial statements, and,
accordingly, should be read in conjunction with the consolidated financial
statements and notes thereto as of December 31, 1998 and 1999 and for the years
then ended. The results of operations presented in the accompanying financial
statements are not necessarily representative of operations for an entire year.
DISCONTINUED OPERATIONS
In July 1999, the Company entered into an agreement to sell 46 of its radio
stations in nine markets to Entercom Communications Corporation (Entercom) for
$824.5 million in cash. In December 1999, the Company completed the sale of 41
of its radio stations in eight markets to Entercom for $700.4 million in cash
recognizing a gain net of tax of $192.4 million. The sale of the remaining five
stations is expected to close in 2000 for a purchase price of $124.1 million. In
addition, the Company intends to sell its remaining radio stations serving the
St. Louis market.
Based on the Company's strategy to divest of its radio broadcasting segment,
"Discontinued Operations" accounting has been adopted for the periods presented
in the accompanying financial statements and the notes thereto. As such, the
results from operations of the radio broadcast segment, net of related income
taxes, has been reclassified from income from operations and reflected as income
from discontinued operations in the accompanying consolidated statements of
operations for all periods presented. In addition, assets and liabilities
relating to the radio broadcast segment are reflected in "Broadcast assets
related to discontinued operations, net of liabilities" in the accompanying
consolidated balance sheets for all periods presented.
Discontinued operations have not been segregated in the Consolidated Statements
of Cash Flows and, therefore, amounts for certain captions will not agree with
the accompanying consolidated statements of operations.
BROADCAST ASSETS HELD FOR SALE
In March 1999, the Company entered into an agreement to sell to Sunrise
Television Corporation (STC) the television stations WICS/WICD-TV in the
Springfield, Illinois market and KGAN-TV in the Cedar Rapids, Iowa market (the
STC Disposition). In April 1999, the Justice Department requested additional
information in response to STC's filing under the Hart-Scott-Rodino Antitrust
Improvements Act. Pursuant to the agreement, if the transaction did not close by
March 16, 2000 either STC or the Company had the option to terminate the
7
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agreement at that time. On March 15, 2000, the Company entered into an agreement
to terminate the STC transaction. As a result of its termination, the Company
recorded a cumulative accounting adjustment during the first quarter of 2000.
As of March 31, 2000, broadcast assets held for sale were comprised of KDNL-TV
in the St. Louis market in connection with the pending St. Louis Purchase Option
(see note 5).
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
2. CONTINGENCIES:
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. The
Company is currently involved in litigation related to the St. Louis Purchase
Option (see note 5).
3. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
During the three months ended March 31, 1999 and 2000, the Company made certain
cash payments of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 2000
---- ----
<S> <C> <C>
Interest payments........................................................ $ 46,843 $ 35,867
=========== ==========
Subsidiary trust minority interest payments.............................. $ 5,813 $ 5,813
=========== ==========
Income tax payments. $ 2,884 $ 88,271
=========== ==========
Income tax refunds received.............................................. $ 785 $ 901
=========== ==========
</TABLE>
8
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4. EARNINGS PER SHARE:
The Company adopted SFAS 128 "Earnings per Share" which requires the disclosure
of basic and diluted earnings per share and related computations as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
---- ----
<S> <C> <C>
Weighted-average number of common shares...................................... 96,582 95,237
Diluted effect of outstanding stock options .................................. 136 --
Diluted effect of conversion of preferred shares.............................. 285 --
----------- -----------
Weighted-average number of common and common
equivalent shares outstanding............................................. 97,003 95,237
=========== ===========
Net loss from continuing operations........................................... $ (3,062) $ (2,623)
============ ============
Net income from discontinued operations....................................... $ 1,447 $ 803
=========== ===========
Net loss...................................................................... $ (1,615) $ (1,820)
Preferred stock dividends payable............................................. (2,588) (2,588)
------------ ------------
Net loss available to common stockholders..................................... $ (4,203) $ (4,408)
============ ============
BASIC EARNINGS PER SHARE:
Net loss per common share from continuing operations................... $ (0.06) $ (0.05)
============ ============
Net income per share from discontinued operations...................... $ 0.01 $ 0.01
=========== ===========
Net loss per common share.............................................. $ (0.04) $ (0.05)
============ ============
DILUTED EARNINGS PER SHARE:
Net loss per common share from continuing operations................... $ (0.06) $ (0.05)
============ ============
Net income per share from discontinued operations...................... $ 0.01 $ 0.01
=========== ===========
Net loss per common share.............................................. $ (0.04) $ (0.05)
============ ============
</TABLE>
5. PENDING ACQUISITIONS AND DISPOSITIONS:
St. Louis Purchase Option. In connection with the 1996 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 Broadcasting, L.P.,
pursuant to which Mr. Baker served as a consultant to the Company. As of
February 8, 1999, the conditions to Mr. Baker becoming an officer of Sinclair
had not been satisfied, and on that date the Company entered into an amendment
to the Baker Agreement which terminated Mr. Baker's services effective March 8,
1999. Mr. Baker had certain rights as a consequence of termination of the Baker
Agreement, including, according to Mr. Baker, a right to negotiate for the
purchase, at fair market value, of the Company's television and radio stations
that serve the St. Louis, Missouri market (the St. Louis Purchase Option).
In June 1999, the Company received a letter from Mr. Baker stating that he
elected to exercise his St. Louis Purchase Option. In his letter, Mr. Baker
named Emmis Communications Corporation (Emmis) as his designee under the St.
Louis Purchase Option. Notwithstanding the Company's belief that Emmis was not
an appropriate designee of Mr. Baker, the Company negotiated in good faith with
Emmis regarding a potential sale of the St. Louis properties. Following
unsuccessful negotiations, the Company filed suit on January 18, 2000 in the
Circuit Court of Baltimore County, Maryland against Mr. Baker and Emmis
claiming, alternatively, that Mr. Baker's designation of Emmis was invalid, that
the St. Louis Purchase Option is void for vagueness, and/or that Emmis breached
a duty that it owed to the Company by refusing to negotiate an acquisition in
good faith. The Company has requested that the court grant declaratory relief
and/or monetary damages.
On March 17, 2000, Emmis and Mr. Baker filed a joint answer and counterclaim
generally denying the allegations made by Sinclair in its lawsuit and claiming
that Sinclair has acted in bad faith in failing to fulfill
9
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its contractual obligations, has mismanaged the St. Louis properties and has
interfered with the contract between Mr. Baker and Emmis in which Mr. Baker
agreed to designate Emmis to buy the properties. The counterclaim seeks
compensatory and punitive damages, the appointment of a special receiver to
manage the St. Louis broadcast properties and a declaratory judgment requiring
Sinclair to complete the sale of those properties to Emmis. The Company believes
it has valid defenses to the Emmis counterclaims and intends to vigorously
contest the claims, although there can be no assurances regarding the outcome of
this litigation.
In light of this ongoing lawsuit, the Company does not expect the transaction
contemplated by the St. Louis Purchase Option to be consummated. The Company
does intend, however, to sell its remaining six radio stations serving the St.
Louis market which were, in part, the subject of the St. Louis Purchase Option.
6. INTEREST RATE DERIVATIVE AGREEMENTS:
The Company estimates the approximate fair value to retire its interest rate
derivative instruments at March 31, 2000 to be $6.7 million. The approximate
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 March 31, 2000 if the contracts were
transferred to other parties or canceled by the Banks. Based on the Company's
currently hedged position at March 31, 2000, $1.8 billion or 96% of the
Company's outstanding indebtedness is hedged.
7. 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 in 1998, 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. As of March 31, 2000, the
Company's option derivative liability recorded in "other long-term liabilities"
in the accompanying consolidated balance sheet is $2.0 million. The fair market
value adjustment for the three months ended March 31, 2000 resulted in an
unrealized gain of $0.7 million. If the yield on five year treasuries at
September 30, 2000 were to equal the forward five-year treasury rate on March
31, 2000 (6.37%), Sinclair would not be obligated to make any payments.
8. SUBSEQUENT EVENT:
Montecito Acquisition. In February 1998, the Company entered into a Stock
Purchase Agreement with Montecito Broadcasting Corporation (Montecito) and its
stockholders to acquire all of the outstanding stock of Montecito which owns the
FCC License for television broadcast station KFBT-TV. The FCC granted approval
of the transaction and the Company completed the purchase of the outstanding
stock of Montecito on April 18, 2000 for a purchase price of $33.0 million.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in this Quarterly
Report and the audited financial statements and Management's Discussion and
Analysis contained in the Company's Form 10-K for the fiscal year ended December
31, 1999.
This report includes or incorporates forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, among other things:
o the impact of changes in national and regional economies,
o our ability to service our outstanding debt,
o successful integration of acquired television stations, including
achievement of synergies and cost reductions,
o pricing fluctuations in local and national advertising,
o volatility in programming costs, and
o the effects of governmental regulation of broadcasting.
Other matters set forth in this report, including the risk factors set forth in
our Form 10-K filed with the Securities and Exchange Commission on March 30,
2000, may also cause actual results in the future to differ materially from
those described in the forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this report might not
occur.
11
<PAGE>
The following table sets forth certain operating data for comparison of the
three months ended March 31, 1999 and 2000:
OPERATING DATA (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Net broadcast revenues (a).............................................. $148,094 $160,802
Barter revenues......................................................... 14,264 15,046
-------- --------
Total revenues.......................................................... 162,358 175,848
-------- --------
Operating costs (b)..................................................... 65,395 77,985
Expenses from barter arrangements....................................... 13,105 13,438
Depreciation, amortization and stock-based compensation(c).............. 56,941 61,203
Cumulative adjustment for change in assets held for sale................ -- 619
-------- --------
Broadcast operating income.............................................. 26,917 22,603
Interest expense........................................................ (43,190) (36,872)
Subsidiary trust minority interest expense (d).......................... (5,813) (5,813)
Interest and other income............................................... 957 388
Loss from equity investments............................................ -- (535)
Unrealized gain on derivative instrument................................ 7,100 699
-------- --------
Loss before income tax benefit.......................................... (14,029) (19,530)
Income tax benefit...................................................... 10,967 16,907
-------- --------
Net loss from continuing operations..................................... (3,062) (2,623)
Net income from discontinued operations, net of taxes................... 1,447 803
-------- --------
Net loss................................................................ $ (1,615) $ (1,820)
======== ========
Net loss available to common stockholders............................... $ (4,203) $ (4,408)
======== ========
OTHER DATA:
Broadcast Cash Flow (e).......................................... $ 67,351 $ 65,594
Broadcast Cash Flow Margin (f)................................... 45.5% 40.8%
Adjusted EBITDA (g).............................................. $ 63,131 $ 59,750
Adjusted EBITDA margin (f)....................................... 42.6% 37.2%
After tax cash flow (h).......................................... $ 16,999 $ 15,061
Program contract payments........................................ 20,727 24,675
Corporate expenses............................................... 4,220 5,844
Capital expenditures............................................. 4,103 6,378
Cash flows from (used in) operating activities................... 45,790 (21,232)
Cash flows used in investing activities.......................... (19,229) (10,563)
Cash flows (used in) from financing activities................... (23,916) 23,952
</TABLE>
- ---------
a) "Net broadcast revenue" is defined as broadcast revenue net of agency
commissions.
b) "Operating costs" include program and production expenses and selling,
general and administrative expenses.
c) Depreciation, amortization and stock-based compensation includes
amortization of program contract costs and net realizable value
adjustments, depreciation of property and equipment, stock-based
compensation, and amortization of acquired intangible broadcasting assets
and other assets including amortization of deferred financing costs.
d) "Subsidiary trust minority interest expense" represents distributions on
the HYTOPS.
e) "Broadcast cash flow" (BCF) is defined as broadcast operating income plus
corporate overhead expense, depreciation and amortization (including film
amortization and amortization of deferred compensation), stock-based
compensation, cumulative adjustment for change in assets held for sale and
minus cash payments for program rights. Cash program payments represent
cash payments made for current programs payable and do not necessarily
correspond to program usage. We have presented BCF data, which we believe
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
12
<PAGE>
companies. However, BCF does not purport to represent cash provided by
operating activities as reflected in our 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 BCF is relevant and useful because 1) BCF is a measurement
utilized by lenders to measure our ability to service our debt, 2) BCF is a
measurement utilized by industry analysts to determine a private market
value of our television and radio stations and 3) BCF is a measurement
industry analysts utilize when determining the operating performance.
f) "Broadcast cash flow margin" is defined as broadcast cash flow divided by
net broadcast revenues. "Adjusted EBITDA margin" is defined as Adjusted
EBITDA divided by net broadcast revenues.
g) "Adjusted EBITDA" is defined as broadcast cash flow less corporate expenses
and is a commonly used measure of performance for broadcast companies.
Adjusted EBITDA does not purport to represent cash provided by operating
activities as reflected in our 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 our ability to service our debt, 2) Adjusted
EBITDA is a measurement utilized by industry analysts to determine a
private market value of our television and radio stations and 3) Adjusted
EBITDA is a measurement industry analysts utilize when determining our
operating performance.
h) "After tax cash flow" is defined as net income (loss) available to common
shareholders plus depreciation and amortization (excluding film
amortization), stock-based compensation, the loss from equity investments,
the cumulative adjustment for change in assets held for sale, and the
deferred tax provision (or minus the deferred tax benefit) and minus the
unrealized gain on derivative instrument. 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 1) ATCF is a measurement utilized by
lenders to measure our ability to service our debt, 2) ATCF is a
measurement utilized by industry analysts to determine a private market
value of our television and radio stations and 3) ATCF is a measurement
analysts utilize when determining our operating performance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net broadcast revenues increased to $160.8 million for the three months ended
March 31, 2000 from $148.1 million for the three months ended March 31, 1999, or
8.6%. The increase in net broadcast revenues for the three months ended March
31, 2000 as compared to the three months ended March 31, 1999 comprised of $5.0
million related to the acquisition of television stations consummated by us in
1999 (collectively the 1999 Acquisitions) and $7.7 million related to an
increase in revenue on a same station basis, or a 5.3% increase over the prior
year's first quarter.
Total operating costs increased to $78.0 million for the three months ended
March 31, 2000 from $65.4 million for the three months ended March 31, 1999, or
19.3%. The increase in operating costs for the three months ended March 31, 2000
as compared to the three months ended March 31, 1999 was comprised of $4.0
million related to the 1999 Acquisitions, $1.6 million related to an increase in
corporate overhead expenses, and $7.0 million related to an increase in
operating costs on a same station basis, or a 12.0% increase. Corporate overhead
expenses increased for the three months ended March 31, 2000 as compared to the
three months ended March 31, 1999 due to an increase in costs to manage a larger
base of operations combined with costs related to our internet business
development and digital television technology investments which were not
incurred during the same period in 1999. The increase in operating costs on a
same station basis primarily resulted from costs incurred during the three
months ended March 31, 2000 related to our agreements with the Fox and WB
networks which were not incurred in the same periods in 1999. Our payments to
the Fox network related to the purchase of additional prime time inventory and
our payments to the WB network related to our agreement with the network which
requires us to make compensation payments as ratings increase. We expect to
incur these costs in future periods. In addition, we experienced an increase in
commissions due to an increase in the number of local account executives during
the quarter. The increased number of account executives is part of our strategy
to increase the percentage of our revenues derived from local advertising and we
expect this to increase further in future periods as we add additional account
executives.
Depreciation and amortization increased $4.3 million to $61.2 million for the
three months ended March 31, 2000 from $56.9 million for the three months
March 31, 1999. The increase in depreciation and amortization was
13
<PAGE>
related to fixed asset, intangible asset and program contract additions
associated with businesses acquired during 1999.
Broadcast operating income decreased $4.3 million to $22.6 million for the three
months ended March 31, 2000, from $26.9 million for the three months ended March
31, 1999, or 16.0%. The net decrease in broadcast operating income for the three
months ended March 31, 2000 as compared to the three months ended March 31, 1999
was primarily attributable to an increase in operating costs and depreciation
and amortization offset by an increase in net broadcast revenues as noted above.
Interest expense decreased to $36.9 million for the three months ended March 31,
2000 from $43.2 million for the three months ended March 31, 1999, or 14.6%. The
decrease in interest expense resulted from the reduction of our indebtedness
using the proceeds received from the disposition of our radio broadcast assets
in December 1999.
Income tax benefit increased to $16.9 million for the three months ended March
31, 2000 from $11.0 million for the three months ended March 31, 1999. The
increase in income tax benefit for the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999 primarily related to the
increase in pre-tax loss for the three months ended March 31, 2000. The
Company's effective tax rate increased to 86.6% for the three months ended March
31, 2000 from 78.2% for the three months ended March 31, 1999. The Company's
increase in its effective tax rate during the period primarily resulted from an
increase in permanent differences between taxable income and book income
projected for 2000, as compared to 1999.
Net income from discontinued operations, net of taxes decreased to $0.8 million
for the three months ended March 31, 2000 from $1.4 million for the three months
ended March 31, 1999. The decrease in net income from discontinued operations,
net of taxes for the three months ended March 31, 2000 as compared to the three
months ended March 31, 1999 primarily resulted from the disposition of the
majority of our radio broadcast assets in December 1999.
Net loss for the three months ended March 31, 2000 was $1.8 million or $0.05 per
share compared to net loss of $1.6 million or $0.04 per share for the three
months ended March 31, 1999. Net loss increased for the three months ended March
31, 2000 as compared to the three months ended March 31, 1999 due to an increase
in operating expenses, depreciation, amortization, a decrease in the unrealized
gain on the treasury option derivative and a decrease in net income from
discontinued operations, offset by an increase in total revenues, a reduction of
interest expense, and an increase in the income tax benefit.
The net deferred tax liability decreased to $209.7 million as of March 31, 2000
from $228.7 million at December 31, 1999. Accordingly, the increase in our
current net deferred tax asset as of March 31, 2000 as compared to December 31,
1999 primarily resulted from the anticipation that the pre-tax loss and related
current deferred tax asset recorded for the first quarter of 2000 will be used
to offset future taxable income during the current year.
Broadcast cash flow decreased to $65.6 million for the three months ended March
31, 2000 from $67.4 million for the three months ended March 31, 1999, or 2.7%.
The decrease in broadcast cash flow for the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999 primarily resulted from the
increase in program contract payments related to our investment to upgrade our
television programming. Our investment in television programming caused our
Broadcast Cash Flow Margin to decrease to 40.8% for the three months ended March
31, 2000 from 45.5% for the three months ended March 31, 1999.
Adjusted EBITDA decreased to $59.8 million for the three months ended March 31,
2000 from $63.1 million for the three months ended March 31, 1999, or 5.2%. The
decrease in Adjusted EBITDA for the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999 primarily resulted from the
increase in program contract payments combined with an increase in corporate
overhead expenses. For reasons noted above, our Adjusted EBITDA Margin decreased
to 37.2% for the three months ended March 31, 2000 from 42.6% for the three
months ended March 31, 1999.
After Tax Cash Flow decreased to $15.1 million for the three months ended March
31, 2000 from $17.0 million for the three months ended March 31, 1999, or 11.2%.
The decrease in After Tax Cash Flow for the
14
<PAGE>
three months ended March 31, 2000 as compared to the three months ended March
31, 1999 primarily resulted from an increase in amortization of program contract
costs related to our investment to upgrade our television programming and a
decrease in earnings from discontinued operations resulting from the disposition
of 41 radio stations in December 1999, offset by a decrease in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash provided by operations and
availability under the 1998 Bank Credit Agreement. As of March 31, 2000, we had
$8.6 million in cash balances and working capital of approximately $141.1
million. As of March 31, 2000, the remaining balance available under the
Revolving Credit Facility was $615.0 million. Based on pro forma trailing cash
flow levels for the twelve months ended March 31, 2000, the Company had
approximately $187.2 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.
We expect to close in the sale of four radio stations in Kansas City, Missouri
and our radio station in Wilkes-Barre, Pennsylvania during the third quarter
2000 for an aggregate purchase price of $124.1 million. This transaction is
expected to generate net after-tax proceeds of approximately $100 million. The
completion of the Kansas City transaction is subject to FCC and Department of
Justice approval. The completion of the Wilkes-Barre transaction is subject to
FCC approval and the outcome of pending litigation in which a former licensee is
seeking the return of the Wilkes-Barre station's license based on a fraudulent
conveyance claim.
Net cash flows used in operating activities was $21.2 million for the three
months ended March 31, 2000 as compared to net cash flows from operating
activities of $45.8 million for the three months ended March 31, 1999. We made
income tax payments of $88.3 million for the three months ended March 31, 2000
as compared to $2.9 million for the three months ended March 31, 1999. This
increase in income tax payments was primarily due to income tax payments of
$87.0 million made in connection with the sale of our radio broadcast assets in
December 1999. We made interest payments on outstanding indebtedness and
payments for subsidiary minority interest expense totaling $41.7 million during
the three months ended March 31, 2000 as compared to $52.7 million for the three
months ended March 31, 1999. The reduction of interest payments for the three
months ended March 31, 2000 as compared to the three months ended March 31, 1999
primarily related to the reduction of our indebtedness as a result of the
disposition of our radio broadcast assets in December 1999. Program rights
payments increased to $24.7 million for the three months ended March 31, 2000
from $20.7 million for the three months ended March 31, 1999. This increase in
program rights payments was comprised of $0.5 million related to the 1999
Acquisitions and $3.5 million related to an increase in programming costs on a
same station basis, which increased 16.9%. This increase in program rights
payments resulted from our investment to upgrade our television programming.
Net cash flows used in investing activities decreased to $10.6 million for the
three months ended March 31, 2000 from $19.2 million for the three months ended
March 31, 1999. For the three months ended March 31, 2000, we made cash payments
of approximately $1.0 million related to the acquisition of television and radio
broadcast assets. During the three months ended March 31, 2000, we made equity
investments of approximately $3.9 million. The Company made payments for
property and equipment of $6.4 million for the three months ended March 31,
2000. In addition, we anticipate 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. We
expect to fund such capital expenditures with cash generated from operating
activities and funding from our Revolving Credit Facility.
Net cash flows from financing activities was $24.0 million for the three months
ended March 31, 2000 compared to net cash flows used in financing activities of
$23.9 million for the three months ended March 31, 1999. During the three months
ended March 31, 2000, we repaid $18.8 million under the Term Loan Facility and
utilized borrowings under the Revolving Credit Facility of $82.0 million. In
addition, we repurchased 3.7 million shares of our Class A Common Stock for
$35.1 million during the quarter.
15
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CHANGE IN MARKET RISK
As noted above, our net loss for the three months ended March 31, 2000 included
recognition of a gain of $0.7 million on a treasury option derivative
instrument. Upon execution of the treasury option derivative instrument during
1998, we received a cash payment of $9.5 million. The treasury option derivative
instrument will require us 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, we will not be required to make any payment under the terms of this
instrument. If the rate is below 6.14% on that date, we will be required to make
payments, as described above, and the size of the payment will increase as the
rate goes down. For each accounting period, we recognize an unrealized gain or
loss equal to the change in the projected liability under this arrangement based
on interest rates at the end of the accounting period. The gain recognized in
the three months ended March 31, 2000 reflects an adjustment of our liability
under this instrument to the present value of future payments based on the
two-year forward five-year treasury rate as of March 31, 2000. If the yield on
five-year treasuries at September 30, 2000 were to equal the forward five year
treasury rate on March 31, 2000 (6.37%), we would not be obligated to make any
payments.
16
<PAGE>
PART II
ITEM 5. OTHER INFORMATION
Our proxy statement dated April 14, 2000 included disclosure regarding our Chief
Executive Officer's compensation which should have read as follows:
Chief Executive Officer's Compensation. As one of our largest stockholders,
David D. Smith's financial well-being is directly tied to the overall
performance of Sinclair as reflected in the price per share of common stock. For
his services as our president and chief executive officer, David D Smith's
compensation for 1999 was determined in accordance with the compensation
policies established by the compensation committee. The committee awarded Mr.
Smith a bonus of $100,000 for the fiscal year ended December 31, 1999 (pursuant
to the compensation formula established for 1999). For the year ending December
31, 2000, his base compensation has been set at $1,000,000.
Accordingly we note that, contrary to prior disclosure, we do not expect to pay
our CEO, David D. Smith, any performanced-based bonuses for the year ended
December 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
27 Financial Data Schedule
B) REPORTS ON FORM 8-K
None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 11 day of May, 2000.
SINCLAIR BROADCAST GROUP, INC.
by: /s/ Thomas E. Severson
----------------------
Thomas E. Severson
Vice President, Chief Accounting Officer and
Duly Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 8,565
<SECURITIES> 0
<RECEIVABLES> 160,690
<ALLOWANCES> 4,253
<INVENTORY> 0
<CURRENT-ASSETS> 425,470
<PP&E> 366,431
<DEPRECIATION> 98,260
<TOTAL-ASSETS> 3,531,467
<CURRENT-LIABILITIES> 284,338
<BONDS> 750,000
200,000
35
<COMMON> 933
<OTHER-SE> 936,528
<TOTAL-LIABILITY-AND-EQUITY> 3,531,467
<SALES> 0
<TOTAL-REVENUES> 175,848
<CGS> 0
<TOTAL-COSTS> 153,245
<OTHER-EXPENSES> 552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,685
<INCOME-PRETAX> (19,530)
<INCOME-TAX> 16,907
<INCOME-CONTINUING> (2,623)
<DISCONTINUED> 803
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,820)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
