<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, 1998
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------------
COMMISSION FILE NUMBER 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, 1998, 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, 1998, 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 1,021,872 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, 1997 March 31, 1998
------------------------------- -----------------------------
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 $ 3,837 $ 3,840 $ 4,341 $ 4,346
Accounts receivable, net of
allowance for doubtful
accounts of $1,325 and $917 34,990 34,990 26,201 26,201
Current portion of
programming rights 22,850 22,850 19,345 19,345
Current deferred tax asset 3,588 4,310 3,589 4,309
Prepaid expenses and other
current assets 941 941 1,869 1,897
-------- -------- -------- --------
Total current assets 66,206 66,931 55,345 56,098
Property and equipment, net 39,723 39,723 47,845 47,845
Programming rights, net of
current portion 23,432 23,432 20,546 20,546
Deferred loan costs, net of
accumulated amortization of
$1,655, $2,120, $1,894
and $2,398 11,430 13,134 11,191 12,856
Intangible assets, net 567,209 567,096 578,527 578,414
-------- -------- -------- --------
Total assets $708,000 $710,316 $713,454 $715,759
======== ======== ======== ========
</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, 1997 March 31, 1998
------------------------------- -----------------------------
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 $ 24,944 $ 24,944 $ 22,282 $ 22,282
Current portion of senior
debt 23,562 23,562 26,333 26,333
Current income taxes
payable 194 195 -- --
Interest payable 3,882 3,882 7,009 7,009
Due to related parties 6,036 -- 6,460 --
Accounts payable 2,262 2,262 2,172 2,172
Accrued expenses 4,297 4,367 2,609 2,702
-------- -------- -------- --------
Total current liabilities 65,177 59,212 66,865 60,498
Senior debt, net of current
portion 171,820 171,820 163,942 163,942
Borrowings under revolving
line of credit 59,500 59,500 82,500 82,500
Subordinated debt 125,185 155,508 125,185 155,578
Interest payable -- 10,394 -- 11,882
Programming contracts
payable, net of current
portion 22,710 22,710 19,129 19,129
Deferred taxes and other liabilities 87,676 82,132 85,604 79,216
-------- -------- -------- --------
Total liabilities 532,068 561,276 543,225 572,745
15% Cumulative redeemable
preferred stock, non-voting,
$.001 par value - authorized
1,500,000 shares; 1,150,000
shares issued and outstanding -- 133,185 -- 139,447
-------- -------- -------- --------
Commitments and
contingencies
Shareholders' equity (deficit):
Common stock, $.01 par
value; 800,000 shares
authorized; 520,105
shares issued and
outstanding 5 -- 5 --
Class B-1 common stock,
$.001 par value; 5,000,000
shares authorized; 1,201,577
shares issued and outstanding -- 1 -- 1
Class B-2 common stock,
$.001 par value; 7,000,000
shares authorized; 6,158,211
shares issued and outstanding -- 6 -- 6
Class C common stock, $.001
par value; 2,000,000 shares
authorized; 853,854 and
1,021,872 shares issued and
outstanding at December 31,
1997 and March 31, 1998,
respectively -- 1 -- 1
Additional paid-in capital 206,797 55,117 206,797 54,549
Accumulated deficit (30,870) (39,270) (36,573) (50,990)
-------- -------- -------- --------
Total shareholders'
equity 175,932 15,855 170,229 3,567
-------- -------- -------- --------
Total liabilities and
shareholders' equity $708,000 $710,316 $713,454 $715,759
======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
3
<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,
----------------------------------------------------------------
1997 1998
------------------------------- ------------------------------
Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues (excluding barter) $30,397 $ 30,397 $33,309 $ 33,309
Less - commissions (5,126) (5,126) (5,309) (5,309)
------- -------- ------- --------
Net revenues (excluding barter) 25,271 25,271 28,000 28,000
Barter revenues 4,162 4,162 4,497 4,497
------- -------- ------- --------
Total net revenues 29,433 29,433 32,497 32,497
------- -------- ------- --------
Expenses
Operating expenses 4,668 4,668 5,184 5,184
Selling, general and administrative 6,395 6,507 6,859 11,919
Amortization of programming rights 7,008 7,008 7,912 7,912
Depreciation and amortization 12,255 12,255 11,382 11,382
------- -------- ------- --------
30,326 30,438 31,337 36,397
------- -------- ------- --------
Operating income (loss) (893) (1,005) 1,160 (3,900)
Interest expense, including
amortization of debt discount
and deferred loan costs 8,868 10,475 8,509 10,106
Other expense (income) (39) (39) 136 137
------- -------- ------- --------
Loss before benefit
for income taxes (9,722) (11,441) (7,485) (14,143)
Benefit for income taxes 3,153 3,840 1,782 2,423
------- -------- ------- --------
Net loss $(6,569) $ (7,601) $(5,703) $(11,720)
======= ======== ======= ========
</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 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, 1997 -- $ -- 520,105 $ 5 -- $ -- $206,797 $(30,870) $175,932
Net loss (Unaudited) -- -- -- -- -- -- -- (5,703) (5,703)
---------- ---- --------- ---- --------- ----- -------- -------- --------
Balance at
March 31, 1998 -- $ -- 520,105 $ 5 -- $ -- $206,797 $(36,573) $170,229
========== ==== ========= ==== ========= ===== ======== ======== ========
Sullivan Broadcast
Holdings, Inc.
Balance at
December 31, 1997 1,201,577 $ 1 6,158,211 $ 6 853,854 $ 1 $ 55,117 $(39,270) $ 15,855
Issuance of Class
C Common Stock -- -- -- -- 168,018 -- 5,694 -- 5,694
Accretion of Preferred Stock -- -- -- -- -- -- (6,262) -- (6,262)
Net loss (Unaudited) -- -- -- -- -- -- -- (11,720) (11,720)
---------- ---- --------- ---- --------- ----- -------- -------- --------
Balance at
March 31, 1998 1,201,577 $ 1 6,158,211 $ 6 1,021,872 $ 1 $ 54,549 $(50,990) $ 3,567
========= ==== ========= ==== ========= ===== ======== ======== ========
</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 CASH FLOWS
(Unaudited - dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------
1997 1998
------------------------------ ------------------------------
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 $(6,569) $(7,601) $ (5,703) $(11,720)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Compensation of stock issuance -- -- -- 4,878
Deferred income taxes (3,153) (3,840) (1,782) (2,423)
Depreciation of property, plant
and equipment 2,133 2,133 2,736 2,736
Amortization of intangible assets 10,122 10,122 8,646 8,646
Amortization of programming rights 3,339 3,339 3,645 3,645
Payments for programming rights (2,779) (2,779) (3,252) (3,252)
Amortization of debt discount and
deferred loan costs 215 507 239 348
Changes in assets and liabilities:
Decrease in accounts receivable 7,515 7,515 8,820 8,820
Increase in prepaid expenses
and other assets (216) (273) (928) (928)
Increase (decrease) in due to related parties (223) -- 424 --
Decrease in income taxes payable (527) (527) (194) (195)
Increase in interest payable 1,165 2,481 3,127 4,615
Decrease in accounts payable, accrued
expenses and other liabilities (508) (527) (2,052) (2,258)
------- ------- -------- --------
Net cash provided by operating activities 10,514 10,550 13,726 12,912
------- ------- -------- --------
Cash flows from investing activities:
Acquisition of Cascom stock (4,331) (4,331) -- --
Acquisition of KOKH -- -- (15,067) (15,067)
Payment for purchase option -- -- (15,000) (15,000)
Capital expenditures (970) (970) (803) (803)
------- ------- -------- --------
Net cash used for investing activities (5,301) (5,301) (30,870) (30,870)
------- ------- -------- --------
Cash flows from financing activities:
Payment of principal amounts (3,250) (3,250) (5,107) (5,107)
Proceeds from revolver borrowings -- -- 23,000 23,000
Proceeds from issuance of common stock -- -- -- 816
Programming buydowns -- -- (245) (245)
Repurchase of common stock -- (52) -- --
------- ------- -------- --------
Net cash provided by (used for) financing
activities (3,250) (3,302) 17,648 18,464
Net increase in cash
and cash equivalents 1,963 1,947 504 506
Cash and cash equivalents, beginning
of period 6,443 6,469 3,837 3,840
------- ------- -------- --------
Cash and cash equivalents, end of period $ 8,406 $ 8,416 $ 4,341 $ 4,346
======= ======= ======== ========
</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.
6
<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 accompanying consolidated financial statements as of and for the three
months ended March 31, 1998 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, 1997. 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,
1997 1998
------------ ---------
(in thousands)
<S> <C> <C>
Land $ 1,426 $ 1,691
Broadcasting equipment 43,845 47,785
Buildings and improvements 6,556 9,486
Furniture and other equipment 3,724 7,320
Construction in progress 1,288 899
-------- --------
56,839 67,181
Less: Accumulated depreciation
and amortization (17,116) (19,336)
-------- --------
$ 39,723 $ 47,845
======== ========
</TABLE>
7
<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 1997 1998
------------ ------------------------------- -------------------------------
(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 $238,621 $238,508 $238,621 $238,508
Affiliation agreements 10 Years 98,445 98,445 101,153 101,153
Canadian cable rights 10 Years 59,000 59,000 59,000 59,000
Commercial advertising
contracts 15 years 148,986 148,986 149,101 149,101
FCC licenses 15 years 81,297 81,297 83,215 83,215
Purchase option 15 years -- -- 15,000 15,000
Other intangible assets 5 - 15 years 14,015 14,015 14,238 14,238
-------- -------- -------- --------
640,364 640,251 660,328 660,215
Less: Accumulated amortization (73,155) (73,155) (81,801) (81,801)
-------- -------- -------- --------
$567,209 $567,096 $578,527 $578,414
======== ======== ======== ========
</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 $40,000,000 for
working capital purposes, and is due on December 31, 2003 or upon repayment of
the term loan. At March 31, 1998, the Company had $29,000,000 outstanding under
the revolving credit facility.
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, 1998, $53,500,000 in
borrowings were outstanding on the acquisition line of credit.
The term loan is payable in varying quarterly installments beginning April 1,
1998 through 2003. The repayments of the term loan are as follows:
(in thousands)
1998 $18,426
1999 31,518
2000 42,024
2001 42,970
2002 42,970
Thereafter 12,367
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, 1998 are included in the above
repayment schedule.
8
<PAGE>
SULLIVAN BROADCAST HOLDINGS, INC. AND
SULLIVAN BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
The Senior Credit Facility requires the Company to comply with certain
covenants. At March 31, 1998, 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, 1998.
At December 31, 1997, Sullivan Broadcasting Company, Inc. and Sullivan Broadcast
Holdings, Inc. had net operating loss carryforwards of approximately $99,863,000
and $109,857,000, 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, 1997 Sullivan Broadcasting Company, Inc. and Sullivan Broadcast
Holdings, Inc. had net operating loss carryforwards of approximately $31,590,000
and $38,604,000, 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 interest of $7,371,000 and $4,993,000 during the periods ended
March 31, 1997 and March 31, 1998, respectively.
During the periods ended March 31, 1997 and March 31, 1998, programming rights
increased $411,000 and $1,392,000, respectively, due to the assumption of cash
programming liabilities.
During the periods ended March 31, 1997 and March 31, 1998, the Company paid
approximately $527,000 and $847,000, respectively, for state and local income
taxes.
7. COMMITMENTS AND CONTINGENCIES
The Company has executed contracts for programming rights totaling approximately
$17,580,000 and $17,020,000 at December 31, 1997 and March 31, 1998,
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 $189,000 and $205,000 for the periods ending March 31, 1997 and
March 31, 1998, respectively.
9
<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 $6,300 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 $262,000 annually. Such amounts have been included in "Selling, general
and administrative" expenses in the Company's consolidated statements of
operations.
9. ACQUISITION OF KOKH
On January 6, 1998, the Company executed a definitive purchase agreement to
acquire certain assets of Channel 25 ("KOKH") in Oklahoma City, Oklahoma for a
total purchase price of $60,000,000. Subsequent to FCC approval, this
acquisition was consummated on February 1, 1998. Contemporaneously, the Company
sold an option to acquire certain assets of KOKH to the seller for $45,000,000
and acquired an option to acquire certain assets of another television station
for $15,000,000.
10. SIGNIFICANT EVENTS
On February 23, 1998, Holdings entered into a Plan of Merger with Sinclair
Broadcast Group, Inc. Under the terms of the Sinclair Merger, 100% of the
issued and outstanding common stock of Holdings will be acquired by means of a
merger. The Sinclair Merger is subject to approval of the FCC and is expected
to close prior to August 1998.
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
10
<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)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 (THE "1997 THREE MONTHS") COMPARED TO THREE
MONTHS ENDED MARCH 31, 1998 OF THE COMPANY (THE "1998 THREE MONTHS")
Set forth below are selected unaudited consolidated financial data for the three
months ended March 31, 1997 of the Company and March 31, 1998 of the Company and
the percentage changes between the periods.
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------
1997 1998 Percentage Change
------------------------------ ----------------------------- ------------------------------
Sullivan Sullivan Sullivan Sullivan Sullivan Sullivan
Broadcasting Broadcast Broadcasting Broadcast Broadcasting Broadcast
Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc. Company, Inc. Holdings, Inc.
------------- -------------- ------------- -------------- ------------- --------------
(unaudited in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues (excluding trade
and barter) $25,271 $25,271 $28,000 $28,000 10.8% 10.8%
Trade and barter revenues 4,162 4,162 4,497 4,497 8.0 8.0
Total net revenues 29,433 29,433 32,497 32,497 10.4 10.4
Operating expenses 4,668 4,668 5,184 5,184 11.1 11.1
Selling, general
and administrative expenses 6,395 6,507 6,859 11,919 7.3 83.2
Depreciation and amortization 19,263 19,263 19,294 19,294 0.2 0.2
Operating income (loss) (893) (1,005) 1,160 (3,900) 229.9 (228.1)
Interest expense 8,868 10,475 8,509 10,106 (4.0) (3.5)
Net loss 6,569 7,601 5,703 11,720 (13.2) 54.2
Payments for programming rights 2,779 2,779 3,252 3,252 17.0 17.0
Broadcast Cash Flow 12,634 12,634 13,757 13,757 8.9 8.9
</TABLE>
Net revenues (excluding trade and barter) are net of commissions and
primarily include local/Canadian and national spot advertising sales. Net
revenues (excluding trade and barter) increased to $28,000,000 in the 1998 Three
Months from $25,271,000 in the 1997 Three Months, an increase of $2,729,000 or
10.8%. This increase is partially due to additional net revenues from the KOKH
station acquisition in February of 1998. 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 1998
Three Months were comprised of 60.7% from local/Canadian advertising sales and
39.3% 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 $19,598,000 in the 1998 Three Months from $17,205,000 in
the 1997 Three Months, an increase of $2,393,000, or 13.9%. The increase was
due to the KOKH station acquisition in February of 1998 along with increased
rating and stronger advertising demand resulting from the Company's emphasis on
expanding local sales.
National revenues include gross revenues before commissions from national
advertisers or their representative agencies. National advertisers are
advertisers outside of a station's local market or region. National revenues
increased to $12,688,000 in the 1998 Three Months from $12,334,000 in the 1997
Three Months, an increase of $354,000, or 2.9%. As with local revenues,
national revenues increased as a result of the KOKH station acquisition as well
as improved ratings and stronger advertising demand in the 1998 Three Months
compared to the 1997 Three Months.
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)
Trade and barter revenues increased to $4,497,000 in the 1998 Three Months
from $4,162,000 in the 1997 Three Months, an increase of $335,000, or 8.0%.
This increase was primarily due to increase barter revenue relating to the KOKH
station acquisition further increased by higher advertising spot rates in the
1998 Three Months compared to the 1997 Three Months.
Operating expenses include engineering, promotion, production, programming
operations and trade expenses. Operating expenses increased to $5,184,000 in
the 1998 Three Months from $4,668,000 in the 1997 Three Months, an increase of
$516,000, or 11.1%. This increase was primarily the result of additional
expenses associated with the KOKH station acquired in February of 1998.
Selling, general and administrative expenses include sales, salaries,
commissions, insurance, supplies and general management salaries. Selling,
general and administrative expenses increased to $6,859,000 and $11,919,000 in
the 1998 Three Months from $6,395,000 and $6,507,000 in the 1997 Three Months,
increases of $464,000, and $5,412,000 or 7.3% and 83.2% for Sullivan
Broadcasting Company, Inc. and Sullivan Broadcast Holdings, Inc., respectively.
These increases were primarily the result of additional costs associated with
the KOKH station acquisition along with a one-time compensation charge related
to the issuance of common stock of Sullivan Broadcast Holdings, Inc. in the 1998
Three Months compared to the 1997 Three Months.
Depreciation and amortization includes depreciation of property and
equipment, amortization of programming rights and amortization of intangibles.
Depreciation and amortization increased to $19,294,000 in the 1998 Three Months
from $19,263,000 in the 1997 Three Months, an increase of $31,000, or 0.2%.
This increase was due to the addition of fixed assets, programming rights and
intangible assets in conjunction with the KOKH station acquisition made during
February of 1998.
Operating income increased to $1,160,000 and decreased to an operating loss
of $3,900,000 in the 1998 Three Months from operating losses $893,000 and
$1,005,000 in the 1997 Three Months, for Sullivan Broadcasting Company, Inc. and
Sullivan Broadcast Holdings, Inc., respectively. The increase in operating
income for Sullivan Broadcasting Company, Inc. of $2,053,000, or 229.9% was the
result of stronger revenues offset somewhat by increases in operating,
depreciation, amortization and selling, general and administrative expenses in
the 1998 Three Months from the 1997 Three Months. The decrease in operating
income for Sullivan Broadcast Holdings, Inc. of $2,895,000, or 288.1% was the
result of a one-time compensation charge related to the issue of common stock,
slightly offset by the stronger operating results discussed above.
Interest expense includes interest charged on all outstanding debt and the
amortization of debt issuance costs over the life of the underlying debt.
Interest expense decreased to $8,509,000 and $10,106,000 in the 1998 Three
Months from the 1997 The Months, decreases of $359,000 and $369,000 or 4.0% and
3.5% for Sullivan Broadcasting Company, Inc. and Sullivan Broadcast Holdings,
Inc., respectively. These decreases are primarily the result of a lower
principal balance on the Company's term loan in the 1998 Three Months compared
to the 1997 Three Months.
Net loss decreased to $5,703,000 and increased to $11,720,000 in the 1998
Three Months from $6,569,000 and $7,601,000 in the 1997 Three Months, a decrease
of $866,000 and an increase of $4,119,000 for Sullivan Broadcasting Company,
Inc. and Sullivan Broadcast Holdings, Inc., respectively, due to the reasons
discussed above.
Payments for programming rights increased to $3,252,000 in the 1998 Three
Months from $2,779,000 in the 1997 Three Months, an increase of $473,000, or
17.0%. This increase is attributable to the increased cost of programming
required to program the stations.
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)
Broadcast Cash Flow increased to $13,757,000 in the 1998 Three Months from
$12,634,000 in the 1996 Three Months, an increase of $1,123,000, primarily due
to the aforementioned increases in revenue with a smaller proportional increase
in operating and selling, general and administrative expenses. Barter expense
was $208,000 and $459,000 for the 1998 Three Months and the 1997 Three Months,
respectively. Corporate expense was $844,000 and $5,904,000 in the 1998 Three
Months and $746,000 for the 1997 Three Months for Sullivan Broadcasting Company,
Inc. and Sullivan Broadcast Holdings, Inc., 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash provided by operations.
Cash provided by operations during the 1998 Three Months was $13,726,000 and
$12,912,000 compared to $10,514,000 and $10,550,000 for Sullivan Broadcasting
Company, Inc. and Sullivan Broadcast Holdings, Inc., respectively, in the 1997
Three Months. These increases were primarily the result of the timing of cash
interest payments along with higher revenues in the 1998 Three Months compared
to the 1997 Three Months.
Cash provided by operations is after payments for programming rights, which
amounted to $3,252,000 and $2,779,000, respectively, for the 1998 Three Months
and the 1997 Three Months. The Company has program payment commitments
(including contracts not yet recordable as assets) of $43,348,000, which are
payable in installments of $11,547,000 in 1998, $12,230,000 in 1999, $9,513,000
in 2000, $5,980,000 in 2001, $3,364,000 in 2002 and $714,000 thereafter.
The Company's primary capital requirements have been for capital
expenditures and acquisitions. Capital expenditures totaled $803,000 for the
1998 Three Months compared to $970,000 for the 1997 Three Months.
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)
As of March 31, 1998, the Company had outstanding a $211,250,000 senior
debt facility (the "Senior Credit Agreement"), with a $40,000,000 revolving
credit facility (the "Revolving Credit Facility"), of which $29,000,000 was
outstanding at March 31, 1998, and a $75,000,000 acquisition credit facility
(the "Acquisition Credit Facility") (collectively, the "Senior Credit
Facility"), of which $53,500,000 was outstanding at March 31, 1998. 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 13, 1998 By: /s/ Patrick Bratton
--------------------------
Patrick Bratton
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
15
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
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<NAME> SULLIVAN BROADCASTING CO INC
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