<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
-------------------------------
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 33-98436
33-98434
SULLIVAN BROADCASTING COMPANY, INC.
-----------------------------------
and
---
SULLIVAN BROADCAST HOLDINGS, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
58-1719496
Delaware 04-3289279
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
18 Newbury Street, Boston, MA 02116
- ----------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (617) 369-7755
--------------
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 March 31, 1997, Sullivan Broadcasting Company, Inc. had 520,105 shares of
Common Stock outstanding, all of which is owned by Sullivan Broadcast Holdings,
Inc. Sullivan Broadcasting Company, Inc.'s Common Stock is not publicly traded
and does not have a quantifiable market value.
As of March 31, 1997, Sullivan Broadcast Holdings, Inc. had the following
outstanding shares of common stock: 1,201,577 shares of Class B-1 Common Stock,
6,158,211 shares of Class B-2 Common Stock, and 848,854 shares of Class C Common
Stock. Sullivan Broadcast Holdings, Inc.'s Common Stock is not publicly traded
and does not have a quantifiable market value.
IMPORTANT EXPLANATORY NOTE
This integrated Form 10-Q is filed pursuant to the Securities Exchange Act of
1934, as amended, for each of Sullivan Broadcast Holdings, Inc., a Delaware
corporation, and its wholly owned subsidiary, Sullivan Broadcasting Company,
Inc., a Delaware corporation. Unless the context requires otherwise, references
to the "Company" refer to both Sullivan Broadcast Holdings, Inc. and Sullivan
Broadcasting Company, Inc. Sullivan Broadcast Holdings, Inc. is a holding
company with minimal separate operations from its operating subsidiary, Sullivan
Broadcasting Company, Inc. Separate financial information has been provided for
each entity, and, where appropriate, separate disclosures.
Page 1 of 15 pages
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (SEE NOTE 1)
SULLIVAN BROADCAST HOLDINGS, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
-------------------------------- ------------------------------
Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
--------------- --------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,443 $ 6,469 $ 8,406 $ 8,416
Accounts receivable, net of
allowance for doubtful
accounts of $1,297 and
$1,435 31,686 31,686 24,427 24,427
Current portion of
programming rights 23,360 23,360 23,350 23,350
Current deferred tax asset 3,968 4,535 3,968 4,535
Prepaid expenses and other
current assets 733 733 1,026 1,083
-------- -------- -------- --------
Total current assets 66,190 66,783 61,177 61,811
Property and equipment, net 44,454 44,454 43,373 43,373
Programming rights, net of
current portion 21,319 21,319 17,062 17,062
Deferred loan costs, net of
accumulated amortization of
$793, $1,238, $1,009
and $1,616 12,292 14,016 12,077 13,638
Intangible assets, net 591,085 590,972 584,879 584,766
-------- -------- -------- --------
Total assets $735,340 $737,544 $718,568 $720,650
======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
2
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
-------------------------------- ---------------------------------
Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
-------------- ----------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of program-
ming contracts payable $ 24,281 $ 24,281 $ 24,641 $ 24,641
Current portion of senior
debt 18,583 18,583 20,440 20,440
Current income taxes
payable 2,910 2,865 2,383 2,338
Interest payable 4,362 9,304 5,527 11,785
Due to related parties 7,080 -- 6,857 --
Accounts payable 1,925 1,925 2,099 2,099
Accrued expenses 3,650 3,771 3,043 3,145
-------- -------- -------- --------
Total current liabilities 62,791 60,729 64,990 64,448
Senior debt, net of current
portion 195,917 195,917 190,810 190,810
Borrowings under revolving
line of credit 56,500 56,500 56,500 56,500
Subordinated debt 125,185 155,326 125,185 155,455
Programming contracts
payable, net of current
portion 20,392 20,392 16,325 16,325
Deferred taxes and other liabilities 86,705 84,124 83,477 80,209
-------- -------- -------- --------
Total liabilities 547,490 572,988 537,287 563,747
15% Cumulative redeemable
preferred stock, non-voting,
$.001 par value - authorized
10,000,000 shares; 1,150,000
shares issued and outstanding -- 111,483 -- 117,365
-------- -------- -------- --------
Commitments and
contingencies
Shareholders' equity (deficit):
Common stock, $.01 par
value; 800,000 shares
authorized; 520,105
shares issued and
outstanding 5 -- 5 --
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Class B-1 common stock,
$.001 par value; 25,000,000
shares authorized; 1,204,077
and 1,201,577 shares issued
and outstanding at
December 31, 1996 and
March 31, 1997, respectively -- 1 -- 1
Class B-2 common stock,
$.001 par value; 25,000,000
shares authorized; 6,158,211
shares issued and outstanding -- 6 -- 6
Class C common stock, $.001
par value; 5,000,000 shares
authorized; 896,229 and
848,854 shares issued and
outstanding at December 31,
1996 and March 31, 1997,
respectively -- 1 -- 1
Additional paid-in capital 206,797 76,861 206,797 70,927
Accumulated deficit (18,952) (23,796) (25,521) (31,397)
-------- -------- -------- --------
Total shareholders'
equity 187,850 53,073 181,281 39,538
-------- -------- -------- --------
Total liabilities and
shareholders' equity $735,340 $737,544 $718,568 $720,650
======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
4
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------
1996 1997
------------------------------- ---------------------------------
Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
-------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues (excluding barter) $ 26,042 $ 26,042 $30,397 $ 30,397
Less - commissions (4,329) (4,329) (5,126) (5,126)
-------- -------- ------- --------
Net revenues (excluding barter) 21,713 21,713 25,271 25,271
Barter revenues 2,546 2,546 4,162 4,162
-------- -------- ------- --------
Total net revenues 24,259 24,259 29,433 29,433
-------- -------- ------- --------
Expenses
Operating expenses 3,765 3,765 4,668 4,668
Selling, general and administrative 5,544 5,618 6,395 6,507
Amortization of programming rights 5,429 5,429 7,008 7,008
Depreciation and amortization 11,588 11,742 12,255 12,255
-------- -------- ------- --------
26,326 26,554 30,326 30,438
-------- -------- ------- --------
Operating loss (2,067) (2,295) (893) (1,005)
Interest expense, including
amortization of debt discount
and deferred loan costs 8,130 9,280 8,868 10,475
Other expense (income) 12 12 (39) (39)
-------- -------- ------- --------
Loss before benefit
for income taxes (10,209) (11,587) (9,722) (11,441)
Benefit for income taxes 3,642 3,642 3,153 3,840
-------- -------- ------- --------
Net loss $(6,567) $(7,945) $(6,569) $ (7,601)
======== ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
5
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited - dollars in thousands)
<TABLE>
<CAPTION>
Class B-1 Class B-2 Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Additional Total
Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
--------- ------ --------- ------ ------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sullivan Broadcasting
Company, Inc.
Balance at
December 31, 1996 -- $ -- 520,105 $ 5 -- $ -- $ 206,797 $ (18,952) $ 187,850
Net loss (Unaudited) -- -- -- -- -- -- -- (6,569) (6,569)
--------- ------ --------- ------ ------- ------ --------- ---------- -----------
Balance at
March 31, 1997 -- -- 520,105 $ 5 -- $ $ 206,797 $ (25,521) $ 181,281
========= ====== ========= ====== ======= ====== ========= ========== =========
Sullivan Broadcast
Holdings, Inc.
Balance at
December 31, 1996 1,204,077 $ 1 6,158,211 $ 6 896,229 $ 1 $ 76,861 $ (23,796) $ 53,073
Repurchase of Class
B-1 Common Stock (2,500) -- -- -- -- -- (25) -- (25)
Repurchase of Class
C Common Stock -- -- -- -- (47,375) -- (27) -- (27)
Accretion of Preferred
Stock -- -- -- -- -- -- (5,882) -- (5,882)
Net loss (Unaudited) -- -- -- -- -- -- -- (7,601) (7,601)
--------- ------ --------- ------ ------- ------ --------- ---------- ---------
Balance at
March 31, 1997 1,201,577 $ 1 6,158,211 $ 6 848,854 $ 1 $ 70,927 $ (31,397) $ 39,538
========= ====== ========== ====== ======= ====== ========= ========== =========
</TABLE>
The accompanying notes to Consolidated Financial Statements are an integral part
of these financial statements.
6
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------------
1996 1997
---------------------------------- ------------------------------
Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,567) $ (7,945) $ (6,569) $ (7,601)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Deferred income taxes (3,642) (3,642) (3,153) (3,840)
Depreciation of property, plant
and equipment 1,780 1,780 2,133 2,133
Amortization of intangible assets 9,306 9,306 10,122 10,122
Amortization of programming rights 3,010 3,010 3,339 3,339
Payments for programming rights (2,208) (2,208) (2,779) (2,779)
Amortization of debt discount and
deferred loan costs 502 656 215 507
Changes in assets and liabilities:
Decrease in accounts receivable 7,555 7,555 7,515 7,515
Decrease in prepaid expenses
and other assets (697) (749) (216) (273)
Increase (decrease) in due to related parties 6,204 (2,847) (223) --
Decrease in income taxes payable (962) (962) (527) (527)
Increase in interest payable 8,095 9,254 1,165 2,481
Decrease in accounts payable, accrued
expenses and other liabilities (3,179) (4,693) (508) (527)
--------------- -------------- ------------- --------------
Net cash provided by operating activities 19,197 8,515 10,514 10,550
--------------- -------------- ------------- --------------
Cash flows from investing activities:
Decrease in restricted cash 126,916 162,599 -- --
Acquisition of Cascom stock -- -- (4,642) (4,642)
Acquisition of Act III Broadcasting, Inc.,
net of cash acquired (549,259) (549,259) -- --
Payment for purchase options (2,800) (2,800) -- --
Acquisition of WFXV assets (400) (400) -- --
Capital expenditures (280) (280) (970) (970)
--------------- -------------- ------------- --------------
Net cash used for investing activities (425,823) (390,140) (5,301) (5,301)
--------------- -------------- ------------- --------------
Cash flows from financing activities:
Payment of principal amounts -- -- (3,250) (3,250)
Proceeds from term debt 220,000 220,000 -- --
Proceeds from revolver borrowings 15,000 15,000 -- --
Proceeds from stockholder contribution 201,601 -- -- --
Proceeds from issuance of common stock -- 61,600 -- --
Repurchase of common stock -- -- -- (52)
Proceeds from issuance of preferred
stock, net -- 115,000 -- --
Advance buydown of programming rights (4,396) (4,396) -- --
Payment of debt issuance costs (5,395) (5,395) -- --
--------------- -------------- ------------- --------------
Net cash provided by (used for) financing
activities 426,810 401,809 (3,250) (3,302)
Net increase in cash
and cash equivalents 20,184 20,184 1,963 1,947
Cash and cash equivalents, beginning
of period -- -- 6,443 6,469
--------------- -------------- ------------- --------------
Cash and cash equivalents, end of period $ 20,184 $ 20,184 $ 8,406 $ 8,416
=============== ============== ============= ==============
</TABLE>
For supplemental disclosures of cash flow information see Note 5 to Consolidated
Financial Statements (unaudited).
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
7
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
On January 4, 1996, all of the outstanding capital stock of Act III
Broadcasting, Inc. ("Act III" or the "Predecessor") was purchased by and Act III
was merged with and into A-3 Acquisition, Inc. ("A-3"), with Act III surviving
such merger (the "Acquisition"). Act III then changed its name to Sullivan
Broadcasting Company, Inc. The Acquisition was accounted for by the purchase
method of accounting. The results of operations of Act III for the period from
January 1, 1996 through January 4, 1996 have been included in the results of
operations of the Company for the three months ended March 31, 1996 due to the
immateriality of such results in relation to the Company's financial statements
taken as a whole.
The accompanying consolidated financial statements as of and for the three
months ended March 31, 1997 have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures herein are adequate and that the information
presented is not misleading. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Companys' latest annual reports on Form 10-K for the
year ended December 31, 1996. The information furnished reflects all
adjustments (consisting only of normal, recurring adjustments) which are, in the
opinion of management, necessary to make a fair statement of the results for the
interim period. The results for these interim periods are not necessarily
indicative of results to be expected for the full fiscal year, due to seasonal
factors, among others.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------------ ---------
(in thousands)
<S> <C> <C>
Land $ 1,385 $ 1,385
Broadcasting equipment 39,978 40,711
Buildings and improvements 6,262 6,283
Furniture and other equipment 3,070 3,076
Construction in progress 1,624 1,827
------- -------
52,319 53,282
Less: Accumulated depreciation
and amortization (7,865) (9,909)
------- -------
$44,454 $43,373
======= =======
</TABLE>
8
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
Amortization December 31, March 31,
Period 1996 1997
------------ -------------------------------- ------------------------------
(in thousands)
Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Goodwill 40 Years $231,607 $231,494 $232,974 $232,861
Affiliation agreements 10 Years 98,445 98,445 98,445 98,445
Canadian cable rights 10 Years 59,000 59,000 59,000 59,000
Commercial advertising
contracts 15 years 148,986 148,986 150,750 150,750
FCC licenses 15 years 81,297 81,297 81,297 81,297
Other intangible assets 5 - 15 years 11,936 11,936 12,721 12,721
-------- -------- -------- --------
631,271 631,158 635,187 635,074
Less: Accumulated amortization (40,186 ) (40,186) (50,308) (50,308)
-------- -------- -------- --------
$591,085 $590,972 $584,879 $584,766
======== ======== ======== ========
</TABLE>
4. LONG TERM DEBT
On January 4, 1996, concurrent with the Acquisition, the Company borrowed
$220,000,000 under a term loan and $4,000,000 under a revolving credit facility
to finance the Acquisition. Both the term loan and the revolving credit
facility bear interest at LIBOR plus an applicable margin determined quarterly
based upon the Company's leverage ratio for the preceding quarter.
The revolving credit facility provides for borrowings up to $30,000,000 for
working capital purposes, and is due on December 31, 2003 or upon repayment of
the term loan.
In connection with the term loan and the revolving credit facility, the Company
also has a $75,000,000 line of credit available for future acquisitions
(collectively, the "Senior Credit Facility"). At March 31, 1997, $26,500,000 in
borrowings were outstanding on the acquisition line of credit.
The term loan is payable in varying quarterly installments beginning December
31, 1997 through 2003. The repayments of the term loan are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1997 $ 15,333
1998 20,428
1999 32,086
2000 42,781
2001 43,744
Thereafter 113,378
</TABLE>
In addition, certain mandatory prepayments of the term loan are required if the
Company achieves certain financial results at the end of the fiscal year.
Mandatory prepayments payable at March 31, 1997 are included in the above
repayment schedule.
9
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
In January 1996, the Company entered into various interest rate protection
agreements based upon LIBOR rates and a notional value equal to the anticipated
outstanding term debt levels through the year 2000.
The Senior Credit Facility requires the Company to comply with certain
covenants. At March 31, 1997, the Company was in compliance with all covenants.
5. INCOME TAXES
The provisions for taxes for the interim periods were based on projections of
total year pre-tax income.
As discussed in Note 1, the Acquisition was accounted for by the purchase method
of accounting which requires that all assets acquired and liabilities assumed be
recorded at their fair value. For tax purposes, the assets acquired and
liabilities assumed retain their historical basis resulting in a basis
differential. The resulting basis differential and acquired net operating loss
carryforwards together with changes in deferred tax assets and liabilities for
the period give rise to the net deferred tax asset and liability recorded at
March 31, 1997.
At December 31, 1996, Sullivan Broadcasting Company, Inc. and Sullivan
Broadcast Holdings, Inc. had net operating loss carryforwards of
approximately $93,977,000 and $99,700,000, respectively, for federal income tax
purposes, available to reduce future taxable income. To the extent not used,
federal net operating loss carryforwards expire in varying amounts beginning in
2003. In addition, at December 31, 1996 Sullivan Broadcasting Company, Inc. and
Sullivan Broadcast Holdings, Inc. had net operating loss carryforwards of
approximately $85,810,000 and $91,533,000, respectively, for state and local
income tax purposes in various jurisdictions.
An entity that undergoes a "change in ownership" pursuant to Section 382 of the
Internal Revenue Code is subject to limitations on the amount of its net
operating loss carryforwards which may be used in the future. The Acquisition
resulted in a change in ownership pursuant to Section 382. Management has
estimated that the limitation on the net operating loss carryforwards will not
have a material adverse impact on the Company's consolidated financial position
or results of operation.
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid no interest during the period ended March 31, 1996 and paid
interest of $ 7,371,000 during the period ended March 31, 1997.
During the periods ended March 31, 1996 and March 31, 1997, programming rights
increased $859,000 and $411,000, respectively, due to the assumption of cash
programming liabilities.
During the periods ended March 31, 1996 and March 31, 1997, the Company paid
approximately $962,000 and $527,000, respectively, for state and local income
taxes.
7. COMMITMENTS AND CONTINGENCIES
The Company has executed contracts for programming rights totaling approximately
$18,004,000 and $17,580,000 at December 31, 1996 and March 31, 1997,
respectively, for which the broadcast period has not begun. Accordingly, the
asset and related liability are not recorded at such dates.
The Company has operating lease agreements for land, office space, office
equipment and other property which expire on various dates through 2005. Rental
expense was $90,000 and $189,000 for the periods ending March 31, 1996 and March
31, 1997, respectively.
The Company has no postretirement or postemployment benefit plans at March 31,
1997.
10
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Company reimburses ABRY Partners, Inc. ("ABRY"), an entity related through
common ownership, approximately $6,100 per month, representing the Company's
allocated share of rent paid by ABRY under its lease and other general expenses
including utilities, property insurance and supplies. In addition, the Company
has a management agreement with ABRY whereby the Company pays ABRY a management
fee of $250,000 annually. Such amounts have been included in "Selling, general
and administrative" expenses in the Company's consolidated statements of
operations. In addition, certain liabilities assumed in the Acquisition were
paid during the first quarter of 1996 by Sullivan Broadcast Holdings, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's revenues are derived principally from local and national
advertisers. Additional revenues are derived from commercial production and
rental of broadcast towers. Increased ratings and strong advertiser demand have
contributed to the Company's successful revenue growth. Also, the Company has
developed sales marketing programs, implemented to enhance the image of the
Company's television stations (the "Stations"), conducts local "Kids Expos" and
live remote broadcasts, publishes promotional advertising print supplements and
participates in joint marketing events with local businesses and radio stations.
The Company's operating revenues are generally highest in the fourth
quarter of each year. This seasonality is primarily attributable to increased
expenditures by advertisers in anticipation of holiday retail spending and an
increase in viewership during the Fall/Winter season. Accordingly, accounts
receivable balances as of the end of each of the first three calendar quarters
are generally substantially less than the balances as of the end of the year.
Each of the Company's Stations generates positive Broadcast Cash Flow, defined
as operating income plus depreciation, amortization, barter expenses and
corporate expenses less payments for programming rights and barter revenue.
The Company's principal costs of operations are employee salaries and
commissions, programming, production, promotion and other expenses (such as
maintenance, supplies, insurance, rent and utilities). The Company has
historically experienced net losses primarily as a result of non-cash charges
attributable to amortization of intangibles that were recorded at the time of
the purchase of the Stations. The Company's amortization of programming rights
has historically exceeded the Company's payments for programming rights due to
the write-up of programming assets which occurred upon the respective
acquisitions of the Stations. This historic trend will continue with the write-
up of such assets in conjunction with the January 4, 1996 Acquisition. In
addition, the Company has paid in advance of scheduled programming liabilities
certain excess programming rights acquired as a result of the aforementioned
Acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 (THE "1996 THREE MONTHS") COMPARED TO THREE
MONTHS ENDED MARCH 31, 1997 OF THE COMPANY (THE "1997 THREE MONTHS")
Set forth below are selected consolidated financial data for the three months
ended March 31, 1996 of the Company and March 31, 1997 of the Company and the
percentage changes between the periods.
11
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------
1996 1997 Percentage Change
----------------------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sullivan Sullivan Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
------------- -------------- ------------- -------------- ------------- --------------
(in thousands)
Net revenues (excluding barter) $21,713 $21,713 $25,271 $25,271 16.4% 16.4%
Barter revenues 2,546 2,546 4,162 4,162 63.5 63.5
Total net revenues 24,259 24,259 29,433 29,433 21.3 21.3
Operating expenses 3,765 3,765 4,668 4,668 24.0 24.0
Selling, general
and administrative expenses 5,544 5,618 6,395 6,507 15.3 15.8
Depreciation and amortization 17,017 17,171 19,263 19,263 13.2 12.2
Operating loss 2,067 2,295 893 1,005 (56.8) (56.2)
Interest expense 8,130 9,280 8,868 10,475 9.1 12.9
Net loss 6,567 7,945 6,569 7,601 -- (4.3)
Payments for programming rights 2,208 2,208 2,779 2,779 25.9 25.9
Broadcast Cash Flow 11,026 11,026 12,634 12,634 14.6 14.6
</TABLE>
Net revenues (excluding barter) are net of commissions and primarily include
local/Canadian and national spot advertising sales. Net revenues (excluding
barter) increased to $25,271,000 in the 1997 Three Months from $21,713,000 in
the 1996 Three Months, an increase of $3,558,000 or 16.4%. This increase is
partially due to additional net revenues from the WMSN station acquisition along
with the operation of the WUXP LMA and WFXV station for a full quarter in 1997
compared to a partial quarter in 1996. Additionally, net revenues were further
increased by higher advertising spot rates which were positively impacted by the
improving economy, resulting in greater advertising spending, along with higher
key demographic ratings from additional Fox programming and other syndicated and
first run programming. Advertising revenues for the 1997 Three Months were
comprised of 58.2% from local/Canadian advertising sales and 41.8% from national
advertising sales.
Local revenues include gross revenues before commissions from local or
regional advertisers or their representative agencies. Local and regional areas
encompass a station's designated market area and its outlying areas. Local
revenues increased to $17,205,000 in the 1997 Three Months from $13,729,000 in
the 1996 Three Months, an increase of $3,476,000, or 25.3%. The increase was
primarily due to increased ratings as well as strong advertising demand along
with additional revenues from the WMSN station acquisition and the operation of
the WUXP LMA and WFXV station for a full quarter in 1997 compared to a partial
quarter in 1996.
National revenues include gross revenues before commissions from national
advertisers or their representative agencies. National advertisers are
advertisers outside of a station's local market or region. National revenues
increased to $12,334,000 in the 1997 Three Months from $11,735,000 in the 1996
Three Months, an increase of $599,000, or 5.1%. As with local revenues,
national revenues increased primarily due to improved ratings and strong
advertising demand along with additional revenues from the WMSN station
acquisition and the operation of the WUXP LMA and WFXV station for a full
quarter in 1997 compared to a partial quarter in 1996.
Barter revenues increased to $4,162,000 in the 1997 Three Months from
$2,546,000 in the 1996 Three Months, an increase of $1,616,000, or 63.5%. This
increase was primarily due to increase barter revenue relating to the WMSN
station acquisition along with additional barter revenues generated from the
operation of the WUXP LMA and WFXV station for a full quarter in 1997 compared
to a partial quarter in 1996.
Operating expenses include engineering, promotion, production and programming
operations. Operating expenses increased to $4,668,000 in the 1997 Three Months
from $3,765,000 in the 1996 Three Months, an increase of $903,000. This increase
is the result of additional expenses associated with the WMSN station and
operating the WUXP LMA and WFXV station for a full quarter in 1997 compared to a
partial quarter in 1996.
12
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Selling, general and administrative expenses include sales, salaries,
commissions, insurance, supplies and general management salaries. Selling,
general and administrative expenses increased to $6,395,000 and $6,507,000 in
the 1997 Three Months from $5,544,000 and $5,618,000 in the 1996 Three Months,
increases of $851,000, and $889,000 or 15.3% and 15.8% for Sullivan Broadcasting
Company, Inc. and Sullivan Broadcast Holdings, Inc., respectively. These
increases are primarily the result of higher salary costs associated with wage
increases and an overall headcount increase due to the WUXP LMA and station
acquisitions.
Depreciation and amortization includes depreciation of property and
equipment, amortization of programming rights and amortization of intangibles.
Depreciation and amortization increased to $19,263,000 in the 1997 Three Months
from $17,017,000 and $17,171,000 in the 1996 Three Months, increases of
$2,246,000, and $2,092,000 or 13.2% and 12.2% for Sullivan Broadcasting Company,
Inc. and Sullivan Broadcast Holdings, Inc., respectively. These increases are
due to the addition of fixed assets, programming rights and intangible assets in
conjunction with the WMSN and Cascom acquisitions made during 1996 and 1997,
respectively.
Operating loss decreased to $893,000 and $1,005,000 in the 1997 Three Months
from $2,067,000 and $2,295,000 in the 1996 Three Months, decreases of
$1,174,000, and $1,290,000 or 58.6% and 56.2% for Sullivan Broadcasting Company,
Inc. and Sullivan Broadcast Holdings, Inc., respectively. These decreases are
the result of stronger revenues offset somewhat by increases in operating,
depreciation, amortization and selling, general and administrative expenses in
the 1997 Three Months from the 1996 Three Months.
Interest expense includes interest charged on all outstanding debt and the
amortization of debt issuance costs over the life of the underlying debt. The
increases of $738,000 and $1,195,000 or 9.1% and 12.9% for the 1997 Three Months
as compared to the 1996 Three Months for Sullivan Broadcasting Company, Inc. and
Sullivan Broadcast Holdings, Inc., respectively, are the result of interest
costs incurred on the additional borrowings utilized to fund the WUXP LMA and
the WFXV, WMSN and Cascom acquisitions, further increased by the compounding of
interest related to the Sullivan Broadcast Holdings, Inc. debt.
Net loss increased to $6,569,000 and decreased to $7,601,000 in the 1997
Three Months from $6,567,000 and $7,945,000 in the 1996 Three Months, an
increase of $2,000 and a decrease of $344,000 for Sullivan Broadcasting Company,
Inc. and Sullivan Broadcast Holdings, Inc., respectively, due to the reasons
discussed above.
Payments for programming rights increased to $2,779,000 in the 1997 Three
Months from $2,208,000 in the 1996 Three Months, an increase of $571,000, or
25.9%. This increase is attributable to increased programming requirements
related to the programming of the WMSN station. Programming rights were further
increased as a result of programming the WUXP LMA and WFXV station for a full
quarter in 1997 compared to a partial quarter in 1996.
Broadcast Cash Flow increased to $12,634,000 in the 1997 Three Months from
$11,026,000 in the 1996 Three Months, an increase of $1,608,000, primarily due
to the aforementioned increases in revenue with a smaller proportional increase
in operating and selling, general and administrative expenses. Barter expense
was $459,000 and $201,000 for the 1997 Three Months and the 1996 Three Months,
respectively. Corporate expense was $746,000 and $628,000 for the 1997 Three
Months and the 1996 Three Months, respectively. The Company believes that
Broadcast Cash Flow is important in measuring the Company's financial results
and its ability to pay principal and interest on its debt because broadcasting
companies traditionally have large amounts of non-cash expense attributable to
amortization of programming rights and other intangibles. Broadcast Cash Flow
does not purport to represent cash provided by operating activities as reflected
in the Company's consolidated financial statements, is not a measure of
financial performance under generally accepted accounting principles, and should
not be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
13
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash provided by operations.
Cash provided by operations during the 1997 Three Months was $10,514,000 and
$10,550,000 compared to $19,197,000 and $8,515,000 for Sullivan Broadcasting
Company, Inc. and Sullivan Broadcast Holdings, Inc., respectively, in the 1996
Three Months. The decrease in Sullivan Broadcasting Company, Inc.'s cash flow
and the increase in Sullivan Broadcast Holdings, Inc.'s cash flow is primarily
the result of the timing of cash interest payments and the non-recurrence of a
one-time cash payment associated with the Acquisition made by Sullivan Broadcast
Holdings, Inc. for the benefit of its wholly owned subsidiary.
Cash provided by operations is after payments for programming rights, which
amounted to $2,779,000 and $2,208,000, respectively, for the 1997 Three Months
and the 1996 Three Months. The Company has program payment commitments
(including contracts not yet recordable as assets) of $41,314,000, which are
payable in installments of $12,193,000 in 1997, $11,358,000 in 1998, $8,939,000
in 1999, $5,431,000 in 2000, $2,220,000 in 2001 and $1,173,000 thereafter.
The Company's primary capital requirements have been for capital
expenditures and acquisitions. Capital expenditures totaled $970,000 for the
1997 Three Months compared to $280,000 for the 1996 Three Months.
As of March 31, 1997, the Company had outstanding a $211,250,000 senior
debt facility (the "Senior Credit Agreement"), with a $30,000,000 revolving
credit facility (the "Revolving Credit Facility"), of which $30,000,000 was
outstanding at March 31, 1997, and a $75,000,000 acquisition credit facility
(the "Acquisition Credit Facility") (collectively, the "Senior Credit
Facility"), of which $26,500,000 was outstanding at March 31, 1997. The
interest rate on all borrowings under the Senior Credit Agreement vary depending
upon either LIBOR or Prime rates, as selected by the Company, with a margin
ranging between 0.0% and 1.5% for Prime borrowings and 1.25% and 2.75% for LIBOR
borrowings added based upon the Company's leverage ratio for the past quarter.
The Company has entered into various interest rate protection agreements based
upon LIBOR rates and a notional amount equal to the full value of the senior
debt facility to protect against significant fluctuations in interest rates
through 2000. The Company also has outstanding $125,000,000 of 10-1/4% senior
subordinated notes due December 2005, and Sullivan Broadcast Holdings, Inc. has
outstanding $35,000,000 of 13-1/4% senior accrual debentures due 2006.
The Company believes that it will be able to meet its required principal
payments in the future through funds generated from its operations. If the
funds generated from the Company's operations are insufficient to meet its
required principal payments, the Company will explore other financing
alternatives.
The indenture to the senior subordinated notes and the Senior Credit
Facility of the Company contain covenants which, among other restrictions,
require the maintenance of certain financial ratios (including cash flow
ratios), restrict asset purchases and the encumbrances of existing assets,
require lender approval for proposed acquisitions, and limit the incurrence of
additional indebtedness and the payment of dividends.
Based upon current operations, the Company anticipates the cash flow from
operations combined with the cash on hand will be adequate to meet its
requirements for current and foreseeable levels of operation. There can,
however, be no assurance that future developments or economic trends will not
adversely affect the Company's operations.
14
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits
None
(b) No reports on Form 8-K were filed during the period.
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.
SULLIVAN BROADCASTING COMPANY, INC.
(Registrant)
May 2, 1997 By: /S/ Patrick Bratton
-------------------------
Patrick Bratton
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
15
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