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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
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MARYLAND 52-1494660
(State of incorporation) (I.R.S. Employer Identification No.)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MD 21030
(Address of principal executive offices)
(410) 568-1500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Class A common stock, par value $.01 per share
Series D preferred stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be files by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Based on the closing sale price of $9.375 per share as of March 24, 2000,
the aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $429.1 million.
As of March 24, 2000, there were 45,765,811 shares of class A common stock,
$.01 par value; 47,570,886 shares of class B common stock, and 3,450,000 shares
of series D preferred stock, $.01 par value, convertible into 7,561,644 shares
of class A common stock of the registrant issued and outstanding.
In addition, 2,000,000 shares of $200 million aggregate liquidation value
of 11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., are issued and outstanding.
Documents Incorporated by Reference
Portions of the definitive proxy statement to be delivered to shareholders
in connection with the 2000 annual meeting of shareholders are incorporated by
reference into Part III.
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PART I
FORWARD-LOOKING STATEMENTS
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 Item 7 of this report, or in the documents incorporated by reference
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.
ITEM 1. BUSINESS
We are a diversified broadcasting company that owns or provides programming
services pursuant to local marketing agreements (LMAs) to more television
stations than any other commercial broadcasting group in the United States. We
currently own, or provide programming services pursuant to LMAs to, 61
television stations and 11 radio stations. During 1999, we sold the majority of
our radio stations and we have entered into agreements to sell, or intend to
sell in the future, our remaining radio stations. In addition, we own equity
interests in three Internet-related companies.
The 61 television stations that we own or program pursuant to LMAs are
located in 40 geographically diverse markets, with 33 of the stations in the top
47 television designated market areas (DMAs) in the United States. Our
television station group is diverse in network affiliation with 20 stations
affiliated with Fox Broadcasting Company (Fox), 18 with The WB Television
Network (WB), eight with United Paramount Television Network Partnership (UPN),
seven with ABC, four with NBC and three with CBS. One station operates as an
independent.
Through our wholly owned subsidiary, Sinclair Ventures, Inc., we own or
have options to acquire equity interests in three Internet-related companies,
namely NetFanatics, Inc., a web developer offering e-business solutions and
applications; Synergy Brands, Inc., an incubator of on-line consumer product
companies; and BeautyBuys.com, Inc., an e-tailer of brand name health and beauty
products and also a majority-owned subsidiary of Synergy Brands.
In July 1999, we entered into an agreement to sell 46 of our 52 radio
stations in nine of our ten markets to Entercom Communications Corporation
(Entercom). In December 1999, we completed the sale of 41 of our radio stations
in eight markets to Entercom. The sale of the remaining five stations is
expected to close in the third quarter of 2000. We are currently engaged in
litigation relating to the sale of the six radio properties and one television
station in the St. Louis market.
We underwent rapid and significant growth from 1991 to 1999. Since 1991, we
have increased the number of stations we own or provide services to from three
television stations to 61 television stations. From 1991 to 1999, net broadcast
revenues and Adjusted EBITDA [as defined in Item 6, Statement of Operations
Data, note (g)], increased from $39.7 million to $670.3 million, and from $15.5
million to $313.3 million, respectively.
2
During 1999, we modified our business strategy by:
o departing from our historical television broadcast asset acquisition
strategy,
o refocusing on the consolidation of operations of television broadcast
assets acquired in previous years by reinvesting in these businesses,
o developing our Internet division as it complements our television
broadcast platform, and
o divesting our radio broadcast division.
We believe that our new business strategy will allow us to focus on
maximizing the potential of the broadcast assets we currently operate while
exploring Internet opportunities provided by our platform.
We are a Maryland corporation formed in 1986. Our principal offices are
located at 10706 Beaver Dam Road, Cockeysville, MD 21030, and our telephone
number is (410) 568-1500.
TELEVISION BROADCASTING
We own and operate, provide programming services to, or have agreed to
acquire the following television stations:
MARKET
MARKET RANK (A) STATIONS STATUS (B) CHANNEL
- ------------------------------------- ---------- ---------- ------------ ---------
Tampa, Florida ...................... 13 WTTA LMA 38
Minneapolis/St. Paul, Minnesota ..... 14 KMWB O&O 23
Sacramento, California .............. 19 KOVR O&O 13
Pittsburgh, Pennsylvania ............ 20 WPGH O&O 53
WCWB LMA (e) 22
St. Louis, Missouri ................. 21 KDNL O&O 30
Baltimore, Maryland ................. 24 WBFF O&O 45
WNUV LMA 54
Indianapolis, Indiana ............... 26 WTTV O&O 4
WTTK O&O 29
Raleigh-Durham, North Carolina ...... 29 WLFL O&O 22
WRDC LMA (g) 28
Nashville, Tennessee ................ 30 WZTV LMA (h) 17
WUXP LMA (i) 30
Kansas City, Missouri ............... 31 KSMO O&O 62
Cincinnati, Ohio .................... 32 WSTR O&O 64
Milwaukee, Wisconsin ................ 33 WCGV O&O 24
WVTV LMA (g) 18
Columbus, Ohio ...................... 34 WSYX O&O 6
WTTE LMA 28
Asheville, North Carolina and
Greenville/Spartanburg/
Anderson, South Carolina ........... 35 WBSC LMA (g) 40
WLOS O&O 13
San Antonio, Texas .................. 37 KABB O&O 29
KRRT LMA (g) 35
Birmingham, Alabama ................. 39 WTTO O&O 21
WABM LMA (g) 68
WDBB LMA (k) 17
Norfolk, Virginia ................... 42 WTVZ O&O 33
Buffalo, New York ................... 44 WUTV LMA (h) 29
Oklahoma City, Oklahoma ............. 45 KOCB O&O 34
KOKH LMA (l) 25
Greensboro/Winston-Salem,
Salem/Highpoint,
North Carolina ..................... 47 WXLV LMA (h) 45
WUPN LMA (m) 48
Las Vegas, Nevada ................... 53 KVWB O&O 21
KFBT LMA (n) 33
Dayton, Ohio ........................ 56 WKEF O&O 22
WRGT LMA 45
NUMBER OF
COMMERCIAL EXPIRATION
STATIONS IN STATION DATE OF
MARKET AFFILIATION THE MARKET (C) RANK (D) FCC LICENSE
- ------------------------------------- ------------- ---------------- ---------- ------------
Tampa, Florida ...................... WB 7 7 2/1/05
Minneapolis/St. Paul, Minnesota ..... WB 6 5 4/1/06
Sacramento, California .............. CBS 6 3 12/1/06
Pittsburgh, Pennsylvania ............ FOX 6 4 8/1/07
WB 5 8/1/07
St. Louis, Missouri ................. ABC 6 5 2/1/06
Baltimore, Maryland ................. FOX 6 5 10/1/04
WB 4 10/1/04
Indianapolis, Indiana ............... WB 9 4 8/1/05
WB 4 (f) 8/1/05
Raleigh-Durham, North Carolina ...... WB 7 3 12/1/04
UPN 3 12/1/04
Nashville, Tennessee ................ FOX 7 4 8/1/05
UPN 5 8/1/05
Kansas City, Missouri ............... WB 8 5 2/1/06
Cincinnati, Ohio .................... WB 5 5 10/1/05
Milwaukee, Wisconsin ................ UPN 7 6 12/1/05
WB 5 12/1/05
Columbus, Ohio ...................... ABC 5 3 10/1/05
FOX 4 10/1/05
Asheville, North Carolina and
Greenville/Spartanburg/
Anderson, South Carolina ........... WB 5 5 12/1/04
ABC 6 3 12/1/04
San Antonio, Texas .................. FOX 5 3 8/1/98 (j)
WB 4 8/1/98 (j)
Birmingham, Alabama ................. WB 8 4 4/1/05
UPN 6 4/1/05
WB 2 6 4/1/05
Norfolk, Virginia ................... WB 6 4 10/1/04
Buffalo, New York ................... FOX 5 4 6/1/07
Oklahoma City, Oklahoma ............. WB 6 4 6/1/06
FOX 4 6/1/06
Greensboro/Winston-Salem,
Salem/Highpoint,
North Carolina ..................... ABC 8 4 12/1/04
UPN 5 5 12/1/04
Las Vegas, Nevada ................... WB 6 5 10/1/06
IND (o) 6 10/1/06
Dayton, Ohio ........................ NBC 4 3 10/1/05
FOX 4 10/1/05
3
NUMBER OF
COMMERCIAL EXPIRATION
MARKET STATIONS IN STATION DATE OF
MARKET RANK (A) STATIONS STATUS (B) CHANNEL AFFILIATION THE MARKET (C) RANK (D) FCC LICENSE
- -------------------------------------- -------- ---------- ----------- ------- ----------- ---------------- ---------- ------------
Charleston and Huntington,
West Virginia ...................... 59 WCHS O&O 8 ABC 4 3 10/1/04
WVAH LMA 11 FOX 4 10/1/04
Richmond, Virginia .................. 60 WRLH LMA (h) 35 FOX 5 4 10/1/04
Mobile, Alabama and
Pensacola, Florida ................. 62 WEAR O&O 3 ABC 6 2 2/1/05
WFGX LMA 35 WB 6 2/1/05
Flint/Saginaw/Bay City,
Michigan ........................... 64 WSMH O&O 66 FOX 4 4 10/1/05
Lexington, Kentucky ................. 66 WDKY O&O 56 FOX 5 4 8/1/05
Des Moines, Iowa .................... 70 KDSM O&O 17 FOX 4 4 2/1/06
Paducah, Kentucky/
Cape Girardeau, Missouri ........... 74 KBSI O&O 23 FOX 5 4 2/1/06
WDKA LMA 49 UPN 5 8/1/05
Syracuse, New York .................. 76 WSYT O&O 68 FOX 5 4 6/1/07
WNYS LMA 43 UPN 5 6/1/07
Rochester, New York ................. 77 WUHF LMA 31 FOX 4 4 6/1/07
Portland, Maine ..................... 80 WGME O&O 13 CBS 5 2 4/1/07
Springfield/Champaign, Illinois ..... 83 WICS O&O 20 NBC 4 2 12/1/05
WICD O&O 15 NBC 2 12/1/05
Madison, Wisconsin .................. 85 WMSN LMA (h) 47 FOX 4 4 12/1/05
Cedar Rapids, Iowa .................. 90 KGAN O&O 2 CBS 5 3 2/1/06
Tri-Cities, Tennessee ............... 92 WEMT O&O 39 FOX 5 4 8/1/05
Charleston, South Carolina .......... 104 WMMP O&O 36 UPN 5 5 12/1/04
WTAT LMA 24 FOX 4 12/1/04
Springfield, Massachusetts .......... 105 WGGB O&O 40 ABC 4 2 4/1/07
Tyler-Longview, Texas ............... 107 KETK O&O(p) 56 NBC 3 2 8/1/06
Tallahassee, Florida ................ 109 WTWC O&O 40 NBC 4 3 12/1/05
Peoria/Bloomington, Illinois ........ 110 WYZZ O&O 43 FOX 4 4 12/1/05
- ----------
(a) Rankings are based on the relative size of a station's DMA among the 211
generally recognized DMAs in the United States as estimated by Nielsen.
(b) "O&O" refers to stations that we own and operate. "LMA" refers to stations
to which we provide programming services pursuant to a local marketing
agreement.
(c) Represents the number of television stations designated by Nielsen as
"local" to the DMA, excluding public television stations and stations that
do not meet the minimum Nielsen reporting standards (weekly cumulative
audience of at least 2.5%) for the Sunday-Saturday, 6:00 a.m. to 2:00 a.m.
time period.
(d) The rank of each station in its market is based upon the November 1999
Nielsen estimates of the percentage of persons tuned to each station in the
market from 6:00 a.m. to 2:00 a.m., Sunday-Saturday.
(e) The License Assets for this station are currently owned by WPTT, Inc., and
we intend to acquire these assets upon FCC approval.
(f) WTTK, a satellite of WTTV under the Federal Communications Commission (FCC)
rules, simulcasts all of the programming aired on WTTV and the station rank
applies to the combined viewership of these stations.
(g) The License Assets for these stations are currently owned by Glencairn,
Ltd. or one of its subsidiaries and we intend to acquire these assets upon
FCC approval.
(h) The License Assets for these stations are currently owned by Sullivan
Broadcasting Company II, Inc. and we intend to acquire these assets upon
FCC approval.
(i) The License Assets for this station are currently owned by Mission
Broadcasting I, Inc., and we intend to acquire these assets upon FCC
approval.
(j) License renewal application pending.
(k) WDBB simulcasts the programming broadcast on WTTO pursuant to a local
marketing agreement.
(l) The License Assets for this station are currently owned by Sullivan
Broadcasting Company III, Inc., and we intend to acquire these assets upon
FCC approval.
(m) The License Assets for this station are currently owned by Mission
Broadcasting II, Inc., and we intend to acquire this asset upon FCC
approval.
(n) The License Assets for these stations are currently owned by Channel 33,
Inc., and we intend to acquire these assets when FCC approval has become
final.
(o) "IND" or "Independent" refers to a station that is not affiliated with any
of ABC, CBS, NBC, Fox, WB or UPN.
(p) Although Sinclair has sold all of the Non-License Assets of this station,
Sinclair still owns its License Assets. See "--1999 Acquisition and
Dispositions."
4
OPERATING STRATEGY
Our television operating strategy includes the following key elements:
ATTRACTING VIEWERSHIP
We seek to attract viewership and expand our audience share through
selective, high-quality programming.
Popular Programming. We seek to obtain, at attractive prices, popular
syndicated programming that is complementary to the station's network
affiliation. We also believe that an important factor in attracting viewership
to our stations is their network affiliations with Fox, WB, ABC, CBS, NBC and
UPN. These affiliations enable us to attract viewers by virtue of the quality
first-run original programming provided by these networks and the networks'
promotion of such programming. We focus on obtaining popular syndicated
programming for key programming periods (generally 6:00 p.m. to 8:00 p.m.) for
broadcast on our Fox, WB and UPN affiliates. Examples of this programming
include "Friends," "Frasier," "3rd Rock From the Sun," "The Simpsons," "Drew
Carey" and "Seinfeld." In addition to network programming, our network
affiliates broadcast news magazine, talk show, and game show programming such as
"Hard Copy," "Entertainment Tonight," "Regis and Kathie Lee," "Rosie O'Donnell,"
"Wheel of Fortune" and "Jeopardy."
Local News. We believe that the production and broadcasting of local news
is an important link to the community and an aid to the station's efforts to
expand its viewership. In addition, local news programming can provide access to
advertising sources targeted specifically to local news viewers. We carefully
assess the anticipated benefits and costs of producing local news prior to
introduction at one of our stations because a significant investment in capital
equipment is required and substantial operating expenses are incurred in
introducing, developing and producing local news programming. We currently
provide local news programming at 31 of the television stations we own or
program located in 26 separate markets. The possible introduction of local news
at our other stations is reviewed periodically and we have recently expanded our
news programming in some of the markets in which we program a second station
pursuant to an LMA. We can produce news programming in these markets at
relatively low cost per hour of programming and the programming serves the local
community by providing additional news outlets in these markets, some of which
are broadcast at different times. Our policy is to institute local news
programming at a specific station only if the expected benefits of local news
programming at the station are believed to exceed the associated costs after an
appropriate start-up period.
Popular Sporting Events. Our WB and UPN affiliated and independent stations
generally face fewer restrictions on broadcasting live local sporting events
than do their competitors that are affiliates of Fox, ABC, NBC and CBS which are
subject to certain prohibitions against preemptions of network programming. We
have been able to acquire the local television broadcast rights for certain
sporting events, including NBA basketball, Major League Baseball, NFL football,
NHL hockey, ACC basketball, Big Ten football and basketball, and SEC football.
We seek to expand our sports broadcasting in DMAs as profitable opportunities
arise. In addition, our stations that are affiliated with FOX, ABC, NBC and CBS
broadcast certain Major League Baseball games, NFL football games and NHL hockey
games as well as other popular sporting events.
Counter-Programming. Our programming strategy on our Fox, WB, UPN and
independent stations also includes "counter-programming," which consists of
broadcasting programs that are alternatives to the types of programs being shown
concurrently on competing stations. This strategy is designed to attract
additional audience share in demographic groups not served by concurrent
programming on competing stations. We believe that implementation of this
strategy enables our stations to achieve competitive rankings in households in
the 18-49 and 25-54 demographics and to offer greater diversity of programming
in each of our DMAs.
5
CONTROL OF OPERATING AND PROGRAMMING COSTS
By employing a disciplined approach to managing programming acquisition and
other costs, we have been able to achieve operating margins that we believe are
among the highest in the television broadcast industry. We have sought and will
continue to seek to acquire quality programming for prices at or below prices
paid in the past. As an owner or provider of programming services to 61 stations
in 40 DMAs reaching approximately 25% of U.S. television households, we believe
that we are able to negotiate favorable terms for the acquisition of
programming. Moreover, we emphasize control of each of our stations' programming
and operating costs through program-specific profit analysis, detailed
budgeting, tight control over staffing levels and detailed long-term planning
models.
ATTRACT AND RETAIN HIGH QUALITY MANAGEMENT
We believe that much of our success is due to our ability to attract and
retain highly skilled and motivated managers at both the corporate and local
station levels. A portion of the compensation provided to general managers,
sales managers and other station managers is based on their achieving certain
operating results. We also provide our corporate and station managers with
deferred compensation plans offering options to acquire class A common stock.
COMMUNITY INVOLVEMENT
Each of our stations actively participates in various community activities
and offers many community services. Our activities include broadcasting
programming of local interest and sponsorship of community and charitable
events. We also encourage our station employees to become active members of
their communities and to promote involvement in community and charitable
affairs. We believe that active community involvement by our stations provides
our stations with increased exposure in their respective DMAs and ultimately
increases viewership and advertising support.
LOCAL MARKETING AGREEMENTS AND DUOPOLIES
In the past, we have sought to increase our revenues and improve our
margins by providing programming services pursuant to an LMA to a second station
in selected DMAs where we already own one station. In certain instances, single
station operators and stations operated by smaller ownership groups do not have
the management expertise or the operating efficiencies available to us as a
multi-station broadcaster. In addition to providing additional revenue
opportunities, we believe that these arrangements assist stations whose
operations may have been marginally profitable to continue to air popular
programming and contribute to diversity of programming in their respective DMAs.
As a result of the FCC's recent revision of its duopoly rules to permit the
ownership of up to two television stations in a market in certain instances, we
have entered into agreements to acquire several stations we have been
programming pursuant to LMA's in markets where duopolies are permitted by the
FCC's rules.
We also enter into LMA arrangements in connection with a station whose
acquisition by us is pending FCC approval. In these transactions, we first
obtain an option to acquire the station assets essential for broadcasting a
television or radio signal in compliance with regulatory guidelines, generally
consisting of the FCC license, transmitter, transmission lines, technical
equipment, call letters and trademarks, and certain furniture, fixtures and
equipment (the License Assets) and then acquire the remaining assets (the
Non-License Assets) at the time we enter into the option. Following acquisition
of the Non-License Assets, the License Assets continue to be owned by the
owner-operator and holder of the FCC license, which enters into an LMA with us.
After FCC approval for transfer of the License Assets is obtained, we acquire
the License Assets and the LMA arrangement is terminated.
ESTABLISHING DUOPOLIES
We believe that we can attain significant growth in operating cash flow
through the utilization of duopolies. By expanding our presence in certain of
our markets in which we already own a station, we can improve our competitive
position with respect to a demographic sector. In addition, by programming
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two stations, we are able to realize significant economies of scale in
marketing, programming, overhead and capital expenditures. Upon the completion
of all pending acquisitions, we will own duopolies in 12 markets and operate a
second station pursuant to an LMA in eight markets. We currently are permitted
under FCC guidelines to establish new duopolies in the Minneapolis, Tampa,
Indianapolis and Sacramento markets, if suitable acquisitions can be identified
and negotiated under acceptable terms.
INNOVATIVE LOCAL SALES AND MARKETING
We recognize that the national market for advertising has softened due to
increased competition from other forms of media, such as cable and the Internet.
We believe that we can ultimately grow faster by concentrating our sales efforts
on enhancing local customer relationships for the long-term. Our goal is to
shift our revenue mix so that 75% of our time sales are derived in the local
markets by 2006. For 1999, 54% of time sales were local. Increasing our local
market penetration requires increasing the number of account executives calling
on customers. We believe that we need to add one to two additional salespersons
at each station, approximately 100 new account executives company-wide.
Currently, we have filled over half those positions. Achieving our goal also
requires training and providing a forum to exchange best practices. For our
sales managers, we have added programs to facilitate cross-pollinization of
ideas. We are also providing organizational training programs to our sales
managers and increasing the number of sales training programs for our account
executives. We believe our efforts will afford the stations the resources and
methodology to attract new advertisers and retain them for the long term by
developing a sense of partnership and offering new marketing ideas and
promotional campaigns.
PROGRAMMING AND AFFILIATIONS
We continually review our existing programming inventory and seek to
purchase the most profitable and cost-effective syndicated programs available
for each time period. In developing our selection of syndicated programming, we
balance the cost of available syndicated programs with their potential to
increase advertising revenue and the risk of their reduced popularity during the
term of the program contract. We seek to purchase programs with contractual
periods that permit programming flexibility and which complement a station's
overall programming and counter-programming strategy. Programs that can perform
successfully in more than one time period are more attractive due to the long
lead time and multi-year commitments inherent in program purchasing.
Sixty of the 61 television stations that we own or to which we provide
programming services currently operate as affiliates of Fox (20 stations), WB
(18 stations), ABC (seven stations), NBC (four stations), UPN (eight stations),
or CBS (three stations). The networks produce and distribute programming in
exchange for each station's commitment to air the programming at specified times
and for commercial announcement time during the programming. In addition,
networks other than Fox, WB and UPN pay each affiliated station a fee for each
network-sponsored program broadcast by the station.
On August 21, 1996, we entered into an agreement with Fox (the Fox
Agreement) which, among other things, provides that the affiliation agreements
between Fox and eight stations then owned or provided programming services by us
would be amended to have new five-year terms commencing on the date of the Fox
Agreement. The eight affected stations are: WPGH-TV in Pittsburgh, Pennsylvania,
WBFF-TV in Baltimore, Maryland, KABB-TV in San Antonio, Texas, WTTE-TV in
Columbus, Ohio (which has been sold to a subsidiary of Glencairn, Ltd. and is
programmed by Sinclair pursuant to an LMA), WSMH-TV in Flint, Michigan, KDSM-TV
in Des Moines, Iowa, WDKY-TV in Lexington, Kentucky and WYZZ-TV in Peoria,
Illinois. Fox has the option to extend the affiliation agreements for additional
five-year terms and must extend all of the affiliation agreements if it extends
any, except that Fox may selectively renew affiliation agreements if any station
has breached its affiliation agreement. The Fox Agreement also provides that,
during the term of the affiliation agreements, we will have the right to
purchase and operate as a Fox affiliate, for fair market value, any station Fox
acquires in any of the foregoing markets if Fox determines to terminate the
affiliation agreement with our station in that market and operate the station
being acquired by Fox as a Fox affiliate.
The Fox-affiliated stations acquired, to be acquired or being programmed by
us as a result of the Sullivan Acquisition and Max Media Acquisition continue to
carry Fox programming notwithstanding the fact that their affiliation agreements
have expired. Although we are not currently negotiating with Fox
7
to secure long term affiliation agreements, we do not believe that Fox has any
current plans to terminate the affiliation of any of these stations. In
addition, the affiliation agreements of three ABC stations (WEAR-TV, in
Pensacola, Florida, WCHS-TV, in Charleston, West Virginia and WXLV-TV, in
Greensboro/Winston-Salem, North Carolina) have expired. Sinclair and ABC have
discussed long term extensions of these agreements.
On July 4, 1997, we entered into an agreement with WB (the WB Agreement),
pursuant to which we agreed to affiliate certain of our stations with WB for a
ten-year term expiring January 15, 2008. Under the terms of the WB Agreement, as
modified by the subsequent letter agreement entered into between WB and us on
May 18, 1998, WB agreed to pay us $64 million in aggregate amount in monthly
installments during the first eight years commencing on January 16, 1998 in
consideration for entering into affiliation agreements with WB.
USE OF DIGITAL TELEVISION TECHNOLOGY
We believe that television broadcasting may be enhanced significantly by
the development and increased availability of digital broadcasting service
technology. This technology has the potential to permit us to provide viewers
multiple channels of digital television over each of our existing standard
channels, to provide certain programming in a high definition television format
(HDTV) and to deliver various forms of data, including data on the Internet, to
home and business computers. These additional capabilities may provide us with
additional sources of revenue although we may incur significant additional costs
to do so.
Implementation of digital television can improve the technical quality of
television signals received by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference.
Testing in Baltimore and Philadelphia, using the FCC-mandated 8-vestigial
sideband (8-VSB) standard, indicated that reception with simple antennas was
highly problematic. These reception problems prompted us to explore an
alternative transmission standard. In June 1999, we conducted a study of the
comparative ability of Coded Orthogonal Frequency Division Multiplexing (COFDM)
and 8-VSB systems to deliver HDTV service to simple consumer grade antennas both
indoors and outdoors under real-world conditions. This study demonstrated to us
that while an 8-VSB signal cannot be received reliably today with a simple
indoor antenna, use of COFDM technology eliminates interference from moving
objects and permits robust reception with simple antennas even in highly dynamic
environments. In October 1999, we filed a Petition for Rulemaking with the FCC
urging it to permit broadcasters the flexibility to use COFDM modulation as an
alternative to the current 8-VSB standard. Although the FCC dismissed the
Petition, it is considering the current status of the 8-VSB standard as part of
its biennial review of the digital television transition process. Absent
improvement in DTV receivers, continued reliance on the 8-VSB standard may not
allow us to provide the same reception coverage with our digital signals as we
can with our current analog signals.
We cannot predict what future actions the FCC or Congress might take with
respect to DTV, nor can we predict the effect of the FCC's present DTV
implementation plan or such future actions on our business. DTV technology
currently is available in some of the top thirty viewing markets. A successful
transition from the current analog broadcast format to a digital format may take
many years. There can be no assurance that our efforts to take advantage of the
new technology will be commercially successful.
8
RADIO BROADCASTING
We own the following radio stations:
RANKING OF STATION RANK EXPIRATION
STATION'S STATION PRIMARY IN PRIMARY DATE
GEOGRAPHIC MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED (A) REVENUE (B) FORMAT TARGET (C) TARGET (D) LICENSE
- --------------------------- ------------- --------------------------- -------------- -------------- -----------
St. Louis, Missouri (e) 18
KPNT-FM Alternative Rock Adults 18-34 4 2/1/05
KXOK-FM Classic Rock Adults 25-54 13 2/1/05
WVRV-FM Modern Adult Contemporary Adults 18-34 11 12/1/04
WRTH-AM Adult Standards Adults 35-64 20 2/1/05
WIL-FM Country Adults 25-54 3 2/1/05
KIHT-FM 70s Rock Adults 25-54 7 2/1/05
Kansas City, Missouri 29
KCFX-FM (f) 70s Rock Adults 25-54 3 2/1/05
KQRC-FM (f) Active Rock Adults 18-34 1 6/1/05
KCIY-FM (f) Smooth Jazz Adults 25-54 11 2/1/05
KXTR-FM (f) Classical Adults 25-54 15 2/1/05
Wilkes-Barre/Scranton, 69
Pennsylvania WKRF-FM (g) Contemporary Hit Radio Adults 18-49 n/a 8/1/06
- ----------
(a) Actual city of license may differ from the geographic market served.
(b) Ranking of the principal radio market served by the station among all U.S.
radio markets by 1998 aggregate gross radio broadcast revenue according to
Duncan's Radio Market Guide -- 1999 Edition.
(c) Due to variations that may exist within programming formats, the primary
demographic target of stations with the same programming format may be
different.
(d) All information concerning ratings and audience listening information is
derived from the Fall 1999 Arbitron Metro Area Ratings Survey (the Fall
1999 Arbitron). Arbitron is the generally accepted industry source for
statistical information concerning audience ratings. Due to the nature of
listener surveys, other radio ratings services may report different
rankings; however, we do not believe that any radio ratings service other
than Arbitron is accorded significant weight in the radio broadcast
industry. "Station Rank in Primary Demographic Target" is the ranking of
the station among all radio stations in its market that are ranked in its
target demographic group and is based on the station's average person's
share in the primary demographic target in the applicable Metro Survey
Area. Source: Average Quarter Hour Estimates, Monday through Sunday, 6:00
a.m. to midnight, Fall 1999 Arbitron.
(e) See "--Pending Dispositions" for a discussion of the St. Louis purchase
option.
(f) We have entered into an agreement to sell substantially all the assets of
the Kansas City radio stations to Entercom Communications Inc. and the
consummation of the sale will occur following FCC approval.
(g) We have entered into an agreement to sell substantially all the assets of
this station to Entercom Communications Inc. Entercom currently is
providing programming, sales and marketing services to this station
pursuant to an LMA.
INTERNET INVESTMENT STRATEGY
We believe that there are substantial opportunities for television
broadcasters to work with Internet related businesses to increase the
profitability of Internet-related businesses and to use the resources of the
Internet to enhance the offerings and value of broadcast stations. Accordingly,
in 1999, we began to
9
invest in Internet related businesses. Our strategy includes expanding this
involvement and working with the businesses in which we invest to enhance their
value and to develop combined broadcast and Internet products.
During 1999, we acquired equity interests in three Internet-related
companies. Through our wholly owned subsidiary, Sinclair Ventures, Inc., we own
or have options to acquire equity interests in the following Internet-related
companies: NetFanatics, Inc., a web developer offering e-business solutions and
applications; Synergy Brands, Inc., an incubator of on-line consumer product
companies; and BeautyBuys.com, Inc., an e-tailer of brand name health and beauty
products and also a majority owned subsidiary of Synergy Brands. We acquired
these interests for a combination of cash and the award of advertising time on
our stations to the Internet businesses.
In furtherance of our Internet strategy, we routinely review and conduct
investigations of potential Internet-related acquisitions. When we believe a
favorable opportunity exists, we seek to enter into discussions with the owners
of Internet-related businesses regarding the possibility of an acquisition,
equity investment or barter transaction. At any given time, we may be in
discussions with one or more parties. We cannot assure you that any of these or
other negotiations will lead to definitive agreements or if agreements are
reached that any transactions would be consummated.
1999 ACQUISITIONS AND DISPOSITIONS
Guy Gannett Acquisition. In September 1998, we agreed to acquire from Guy
Gannett Communications its television broadcasting assets for a purchase price
of $317 million in cash (the Guy Gannett Acquisition). In April, 1999, we
acquired from Guy Gannett Communications WGME-TV in Portland, Maine, WGGB-TV in
Springfield, Massachusetts, WTWC-TV in Tallahassee, Florida and WOKR-TV in
Rochester, New York. In July, 1999, we completed the acquisition of the Guy
Gannett stations by acquiring WICD-TV in Champaign, Illinois, WICS-TV in
Springfield, Illinois and KGAN-TV in Cedar Rapids, Iowa. We financed the
acquisition with a combination of bank borrowings and the use of cash proceeds
resulting from our disposition of certain broadcast assets.
Ackerley Disposition. In April 1999, we completed the sale of WOKR-TV in
Rochester, New York to Central NY News, Inc. for a sales price of $125 million
(the Ackerley Disposition). We acquired WOKR-TV as part of the Guy Gannett
Acquisition.
CCA Disposition. In April 1999, we sold to Communications Corporation of
America (CCA) the Non-License Assets of KETK-TV and KLSB-TV in Tyler-Longview,
Texas for a sales price of $36 million (the CCA Disposition). In addition, CCA
has an option to acquire the License Assets of KETK-TV for an option purchase
price of $2 million.
St. Louis Radio Acquisition. In August 1999, we completed the purchase of
radio station KXOK-FM in St. Louis, Missouri from WPNT, Inc. for a purchase
price of $14.1 million in cash.
Barnstable Disposition. In August 1999, we completed the sale of radio
stations WFOG-FM and WGH-AM/FM serving the Norfolk, Virginia market to
Barnstable Broadcasting, Inc. (the Barnstable Disposition) for a sales price of
$23.7 million.
Entercom Disposition. In August 1999, we entered into an agreement to sell
46 radio stations in nine markets to Entercom Communications Corporation
(Entercom) for $824.5 million in cash. The transaction does not include our
radio stations in the St. Louis market which were subject to the St. Louis
Purchase Option described in "--Pending Dispositions" below. In December 1999,
we closed on the sale of 41 radio stations in eight markets for a purchase price
of $700.4 million. We expect to close on the remaining $124.1 million during
2000 which represents the Kansas City radio stations and the License Assets of
WKRF-FM in Wilkes-Barre. The Entercom transaction contemplated our sale to
Entercom of shares of stock we held in a company called USA Digital Radio, Inc.
(USADR). The exercise of preemptive rights to buy stock by USADR shareholders
precluded our completing the sale of the shares to Entercom in its entirety,
leading Entercom to assert a claim against us of approximately $1 million.
Although we cannot predict the outcome of this claim, we believe we have certain
defenses available to us which may eliminate or reduce any potential liability.
10
PENDING ACQUISITIONS AND DISPOSITIONS
Glencairn/WPTT, Inc. Acquisitions. On November 15, 1999, we entered into an
agreement to purchase substantially all of the assets of television station
WCWB-TV, Channel 22, Pittsburgh, Pennsylvania, with the owner of that television
station WPTT, Inc. for a purchase price of $17.8 million. The waiting period
under the Hart-Scott-Rodino Antitrust Act of 1976 has expired and closing on
this transaction is subject to FCC approval. A petition to deny was filed with
the FCC against the application. We have filed an opposition to the petition to
deny, which remains pending at the FCC.
On November 15, 1999, we entered into five separate plans and agreements of
merger, pursuant to which we would acquire through merger with subsidiaries of
Glencairn, Ltd., television broadcast stations WABM-TV, Birmingham, Alabama,
KRRT-TV, San Antonio, Texas, WVTV-TV, Milwaukee, Wisconsin, WRDC-TV, Raleigh,
North Carolina, and WBSC-TV (formerly WFBC-TV), Andersen, South Carolina. The
consideration for these mergers is the issuance to Glencairn shares of class A
common voting stock of the Company. The total value of the shares to be issued
in consideration for all the mergers is $8.0 million. A petition to deny was
filed with the FCC against these applications. We have filed an opposition to
the petition to deny, which remains pending at the FCC.
We currently program each of the stations we have agreed to acquire from
WPTT, Inc. and Glencairn Ltd. pursuant to local market agreements. As described
more fully in the material incorporated by reference in Item 13, officers,
directors and shareholders of Sinclair (or their families) have interests in
WPTT, Inc. and Glencairn Ltd.
Sullivan IV Acquisition. In November 1999, we filed an application to
acquire the stock of Sullivan Broadcasting Company IV, Inc. which has obtained
FCC approval to acquire KOKH-TV, Oklahoma City, Oklahoma from Sullivan
Broadcasting Company III, Inc. A petition to deny was filed with the FCC against
our application. We have filed an opposition to the petition to deny, which
remains pending at the FCC.
Montecito Acquisition. In February 1998, we entered into a Stock Purchase
Agreement with Montecito Broadcasting Corporation (Montecito) and its
stockholders to acquire all of the issued and outstanding stock of Montecito
which owns the FCC License for television broadcast station KFBT-TV. The FCC has
granted initial approval to the transaction, which shall become final in April
2000. We anticipate acquiring the stock of Montecito in the second quarter of
2000.
Mission Option. Pursuant to our merger with Sullivan Broadcast Holdings,
Inc., which was effective July 1, 1998, we acquired options to acquire
television broadcast station WUXP-TV in Nashville, Tennessee from Mission
Broadcasting I, Inc. and television broadcast station WUPN-TV in Greensboro,
North Carolina from Mission Broadcasting II, Inc. On November 15, 1999, we
exercised our option to acquire both of the foregoing stations. This acquisition
is subject to FCC approval.
St. Louis Purchase Option. In connection with our 1996 acquisition of the
broadcasting assets of River City Broadcasting, L.P. (River City), we entered
into a five year agreement (the Baker Agreement) with Barry Baker, the Chief
Executive Officer of River City pursuant to which Mr. Baker served as a
consultant to us and would have become an officer of Sinclair if certain
conditions were satisfied. As of February 8, 1999, the conditions to Mr. Baker
becoming an officer of Sinclair had not been satisfied, and on that date we
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 the right to purchase at fair
market value our television and radio stations that serve the St. Louis,
Missouri market (the St. Louis purchase option).
In June 1999, we 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 to exercise the St. Louis
purchase option. Notwithstanding our belief that Emmis was not an appropriate
designee of Mr. Baker, we negotiated in good faith with Emmis regarding the
potential sale of the St. Louis properties. Following unsuccessful negotiations,
however, on January 18, 2000, we filed suit 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 us by
refusing to negotiate the acquisition agreement in good faith. We have requested
that the court grant us declaratory relief and/or monetary damages.
11
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 its
contractual obligations, has mismanaged the St. Louis properties and has
interfered with the contract between Mr. Baker and Emmis in which Mr. Baker
purportedly designated Emmis as the transferee of 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.
We believe we have valid defenses to the Emmis counterclaims and intend to
vigorously contest the claims, although there can be no assurances regarding the
outcome of this litigation.
In light of this ongoing lawsuit, we do not expect the transaction
contemplated by the St. Louis purchase option to be consummated. We do intend,
however, to sell our remaining six radio stations serving the St. Louis market
which were, in part, the subject of the St. Louis purchase option.
Entercom Disposition. In August 1999, we entered into an agreement to sell
46 radio stations in nine markets to Entercom for $824.5 million in cash. The
transaction does not include our radio stations in the St. Louis markets which
were subject to the St. Louis purchase option. In December 1999, we closed on
the sale of 41 radio stations in eight markets for a purchase price of $700.4
million. We expect to close on the remaining $124.1 million during 2000 which
represents the Kansas City radio stations and the License Assets of WKRF-FM in
Wilkes-Barre. The completion of the Kansas City transaction is subject to FCC
and Department of Justice approval. The completion of the sale of WKRF-FM is
subject only to FCC approval and the outcome of pending litigation in which a
former licensee is seeking the return of the WKRF-FM license based on a
fraudulent conveyance claim; pending the receipt of these approvals Entercom is
providing programming, sales and marketing services to WKRF-FM pursuant to an
LMA. The Entercom transaction contemplated our sale to Entercom of shares of
stock we held in USADR. The exercise of preemptive rights to buy stock by USADR
shareholders precluded our completing the sale of the shares to Entercom in its
entirety, leading Entercom to assert a claim against us of approximately $1
million. Although we cannot predict the outcome of this claim, we believe we
have certain defenses available to us which may eliminate or reduce any
potential liability.
FEDERAL REGULATION OF TELEVISION AND RADIO BROADCASTING
The ownership, operation and sale of television and radio stations are
subject to the jurisdiction of the FCC, which acts under authority granted by
the Communications Act of 1934, as amended (Communications Act). Among other
things, the FCC; assigns frequency bands for broadcasting; determines the
particular frequencies, locations and operating power of stations; issues,
renews, revokes and modifies station licenses; regulates equipment used by
stations; adopts and implements regulations and policies that directly or
indirectly affect the ownership, operation and employment practices of stations;
and has the power to impose penalties for violations of its rules or the
Communications Act.
The following is a brief summary of certain provisions of the
Communications Act, the Telecommunications Act of 1996 (the 1996 Act) and
specific FCC regulations and policies. Reference should be made to the
Communications Act, the 1996 Act, FCC rules and the public notices and rulings
of the FCC for further information concerning the nature and extent of federal
regulation of broadcast stations.
GENERAL
License Grant and Renewal. Television and radio stations operate pursuant
to broadcasting licenses that are granted by the FCC for maximum terms of eight
years and are subject to renewal upon application to the FCC. During certain
periods when renewal applications are pending, petitions to deny license
renewals can be filed by interested parties, including members of the public.
The FCC will generally grant a renewal application if it finds:
o that the station has served the public interest, convenience and
necessity;
o that there have been no serious violations by the licensee of the
Communications Act or the rules and regulations of the FCC; and
o that there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when
taken together, would constitute a pattern of abuse.
12
All of the stations that we currently own and operate or provide
programming services to pursuant to LMAs, or intend to acquire or provide
programming services pursuant to LMAs in connection with pending acquisitions,
are presently operating under regular licenses, which expire as to each station
on the dates set forth under "--Television Broadcasting" and "--Radio
Broadcasting" above. Although renewal of a license is granted in the vast
majority of cases even when petitions to deny are filed, there can be no
assurance that the licenses of a station will be renewed.
General Ownership Matters. The Communications Act prohibits the assignment
of a broadcast license or the transfer of control of a broadcast licensee
without the prior approval of the FCC. In determining whether to permit the
assignment or transfer of control of, or the grant or renewal of, a broadcast
license, the FCC considers a number of factors pertaining to the licensee,
including compliance with various rules limiting common ownership of media
properties, the "character" of the licensee and those persons holding
"attributable" interests in that licensee, and compliance with the
Communications Act's limitations on alien ownership.
To obtain the FCC's prior consent to assign a broadcast license or transfer
control of a broadcast licensee, appropriate applications must be filed with the
FCC. If the application involves a "substantial change" in ownership or control,
the application must be placed on public notice for a period of approximately 30
days during which petitions to deny the application may be filed by interested
parties, including members of the public. If the application does not involve a
"substantial change" in ownership or control, it is a "pro forma" application.
The "pro forma" application is not subject to petitions to deny or a mandatory
waiting period, but is nevertheless subject to having informal objections filed
against it. If the FCC grants an assignment or transfer application, interested
parties have approximately 30 days from public notice of the grant to seek
reconsideration or review of the grant. Generally, parties that do not file
initial petitions to deny or informal objections against the application face
difficulty in seeking reconsideration or review of the grant. The FCC normally
has approximately an additional 10 days to set aside such grant on its own
motion. When passing on an assignment or transfer application, the FCC is
prohibited from considering whether the public interest might be served by an
assignment or transfer to any party other than the assignee or transferee
specified in the application.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding, or through subsidiaries controlling, broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or 20%
or more of such stock in the case of insurance companies, investment companies
and bank trust departments that are passive investors) are generally
attributable, except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. In August, 1999, the FCC revised its
attribution and multiple ownership rules, and adopted the equity-debt-plus rule
that causes certain creditors or investors to be attributable owners of a
station, regardless of whether there is a single majority stockholder or other
applicable exception to the FCC's attribution rules. Under this new rule, a
major programming supplier (any programming supplier that provides more than 15%
of the station's weekly programming hours) or same-market media entity will be
an attributable owner of a station if the supplier or same-market media entity
holds debt or equity, or both, in the station that is greater than 33% of the
value of the station's total debt plus equity. For purposes of this rule, equity
includes all stock, whether voting or non-voting, and equity held by insulated
limited partners in partnerships. Debt includes all liabilities whether
long-term or short-term.
The Communications Act prohibits the issuance of broadcast licenses to, or
the holding of a broadcast license by, any corporation of which more than 20% of
the capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country (collectively,
aliens). The Communications Act also authorizes the FCC, if the FCC determines
that it would be in the public interest, to prohibit the issuance of a broadcast
license to, or the holding of a broadcast license by, any corporation directly
or indirectly controlled by any other corporation of which more than 25% of the
capital stock is owned of record or voted by aliens. The FCC has issued
interpretations of existing law under which these restrictions in modified form
apply to other forms of business organizations, including partnerships.
13
As a result of these provisions, the licenses granted to our subsidiaries
by the FCC could be revoked if, among other restrictions imposed by the FCC,
more than 25% of our stock were directly or indirectly owned or voted by aliens.
Sinclair and its subsidiaries are domestic corporations, and the members of the
Smith family (who together hold over 90% of the common voting rights of
Sinclair) are all United States citizens. The amended and restated articles of
incorporation of Sinclair (the amended certificate) contain limitations on alien
ownership and control that are substantially similar to those contained in the
Communications Act. Pursuant to the amended certificate, Sinclair has the right
to repurchase alien-owned shares at their fair market value to the extent
necessary, in the judgment of its board of directors, to comply with the alien
ownership restrictions.
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally permits a party to
own a combination of up to two television stations and six radio stations
depending on the number of independent media voices in the market.
Local Television/Cable Cross-Ownership Rule. While the 1996 Act eliminates
a previous statutory prohibition against the common ownership of a television
broadcast station and a cable system that serve the same local market, the 1996
Act leaves the current FCC rule in place. The legislative history of the Act
indicates that the repeal of the statutory ban should not prejudge the outcome
of any FCC review of the rule.
Broadcast Network/Cable Cross-Ownership Rule. The 1996 Act directs the FCC
to eliminate its rules which formerly prohibited the common ownership of a
broadcast network and a cable system, subject to the provision that the FCC
revise its rules as necessary to ensure carriage, channel positioning, and
non-discriminatory treatment of non-affiliated broadcast stations by cable
systems affiliated with a broadcast network. In March 1996, the FCC issued an
order implementing this legislative change.
Broadcast/Daily Newspaper Cross-Ownership Rule. The FCC's rules prohibit
the common ownership of a radio or television broadcast station and a daily
newspaper in the same market. In October 1996, the FCC initiated a rulemaking
proceeding to determine whether it should liberalize its waiver policy with
respect to cross-ownership of a daily newspaper and one or more radio stations
in the same market.
Dual Network Rule. A network entity is permitted to operate more than one
television network, provided, however, that ABC, CBS, NBC, and/or Fox are
currently prohibited from merging with each other or with another network
television entity such as WB or UPN.
Antitrust Regulation. The DOJ and the Federal Trade Commission have
increased their scrutiny of the television and radio industry since the adoption
of the 1996 Act, and have reviewed matters related to the concentration of
ownership within markets (including LMAs and JSAs) even when the ownership or
LMA or JSA in question is permitted under the laws administered by the FCC or by
FCC rules and regulations. For instance, the DOJ has for some time taken the
position that an LMA entered into in anticipation of a station's acquisition
with the proposed buyer of the station constitutes a change in beneficial
ownership of the station which, if subject to filing under the HSR Act, cannot
be implemented until the waiting period required by that statute has ended or
been terminated.
Expansion of our broadcast operations on both a local and national level
will continue to be subject to the FCC's ownership rules and any changes the FCC
or Congress may adopt. Concomitantly, any further relaxation of the FCC's
ownership rules may increase the level of competition in one or more of the
markets in which our stations are located, more specifically to the extent that
any of our competitors may have greater resources and thereby be in a superior
position to take advantage of such changes.
TELEVISION
National Ownership Rule. No individual or entity may have an attributable
interest in television stations reaching more than 35% of the national
television viewing audience. Historically, VHF stations have shared a larger
portion of the market than UHF stations. Therefore, only half of the households
in the market area of any UHF station are included when calculating whether an
entity or individual owns television stations reaching more than 35% of the
national television viewing audience. All but seven of
14
the stations owned and operated by us, or to which we provide programming
services, are UHF. Upon completion of all pending acquisitions and dispositions,
we will reach approximately 25% of U.S. television households or 15% taking into
account the FCC's UHF discount.
Duopoly Rule. Under the FCC's new local television ownership rules, a
party may own two television stations in the same market:
o if there is no Grade B overlap between the stations;
o if the stations are in two different Nielsen Designated Market Areas;
or
o if the market containing both the stations contains at least eight
separately-owned full-power television stations and not more than one
station is among the top-four rated stations in the market.
In addition, a party may request a waiver of the rule to acquire a second
station in the market if the station to be acquired is economically distressed
or unbuilt and there is no party who does not own a local television station who
would purchase the station for a reasonable price.
Local Marketing Agreements. A number of television stations, including
certain of our stations, have entered into what have commonly been referred to
as local marketing agreements or LMAs. While these agreements may take varying
forms, one typical type of LMA is a programming agreement between two separately
owned television stations serving a common service area, whereby the licensee of
one station programs substantial portions of the broadcast day and sells
advertising time during such program segments on the other licensee's station
subject to ultimate editorial and other controls being exercised by the latter
licensee. The licensee of the station which is being substantially programmed by
another entity must maintain complete responsibility for and control over the
programming, financing, personnel and operations of its broadcast station and is
responsible for compliance with applicable FCC rules and policies. If the FCC
were to find that the owners/licensees of the stations with which we have LMAs
failed to maintain control over their operations as required by FCC rules and
policies, the licensee of the LMA station and/or Sinclair could be fined or set
for hearing, the outcome of which could be a monetary forfeiture or, under
certain circumstances, loss of the applicable FCC license.
15
In the past, a licensee could own one station and program another station
pursuant to an LMA in the same market because LMAs were not considered
attributable interests. However, under the new ownership rules, LMAs are now
attributable where a licensee owns a television station and programs a
television station in the same market. The new rules provide that LMAs entered
into on or after November 5, 1996 have until August 5, 2001 to come into
compliance with the new ownership rules, otherwise such LMAs will terminate.
LMAs entered into before November 5, 1996 will be grandfathered until the
conclusion of the FCC's 2004 biennial review. In certain cases, parties with
grandfathered LMAs, may be able to rely on the circumstances at the time the LMA
was entered into in advancing any proposal for co-ownership of the station. We
currently program 26 television stations pursuant to LMAs. We have entered into
agreements to acquire 16 of the stations that we program pursuant to an LMA. See
"-- 1999 Acquisitions and Dispositions" and "-- Pending Acquisitions and
Dispositions". Once we acquire these stations, the LMAs will terminate. Of the
remaining 10 stations, 5 LMAs were entered into before November 5, 1996, and 5
LMAs were entered into on or after November 5, 1996. Petitions for
reconsideration of the new rules, including a petition submitted by us, are
currently pending before the FCC. We cannot predict the outcome of these
petitions.
The Satellite Home Viewer Act (SHVA). In 1988, Congress enacted SHVA which
enabled satellite carriers to provide broadcast programming to those satellite
subscribers who were unable to obtain broadcast network programming
over-the-air. SHVA did not permit satellite carriers to retransmit local
broadcast television signals directly to their subscribers. The Satellite Home
Viewer Improvement Act of 1999 (SHVIA) revised SHVA to reflect changes in the
satellite and broadcasting industry. This new legislation allows satellite
carriers to provide local television signals by satellite within a station
market, but does not require satellite carriers to carry all local signals in a
market until 2002. Satellite carriers now are permitted to carry these local
television station signals without the express consent of broadcasters for a
six-month period until the end of May 2000. During that six-month period,
broadcasters are required to participate in good faith in retransmission consent
negotiations with satellite carriers and other multichannel video programming
distributors. If an agreement has not been reached by the end of the six-month
period, the television station signal may not be carried without the express
consent of the broadcaster. We cannot predict the impact of SHVIA or any
modifications of the FCC's regulations as a result of those changes.
Must-Carry/Retransmission Consent. Pursuant to the Cable Act of 1992,
television broadcasters are required to make triennial elections to exercise
either certain "must-carry" or "retransmission consent" rights in connection
with their carriage by cable systems in each broadcaster's local market. By
electing the must-carry rights, a broadcaster demands carriage on a specified
channel on cable systems within its Designated Market Area, in general as
defined by the Nielsen DMA Market and Demographic Rank Report of the prior year.
These must-carry rights are not absolute, and their exercise is dependent on
variables such as
o the number of activated channels on a cable system,
o the location and size of a cable system, and
o the amount of programming on a broadcast station that duplicates the
programming of another broadcast station carried by the cable system.
Therefore, under certain circumstances, a cable system may decline to carry
a given station. Alternatively, if a broadcaster chooses to exercise
retransmission consent rights, it can prohibit cable systems from carrying its
signal or grant the appropriate cable system the authority to retransmit the
broadcast signal for a fee or other consideration. In October 1999, we elected
must-carry or retransmission consent with respect to each of the non-Fox
affiliated stations based on our evaluation of the respective markets and the
position of our owned or programmed station(s) within the market. Our stations
continue to be carried on all pertinent cable systems, and we do not believe
that our elections have resulted in the shifting of our stations to less
desirable cable channel locations. Many of the agreements we have negotiated for
cable carriage are short term, subject to month-to-month extensions.
Accordingly, we may need to negotiate new long term retransmission consent
agreements for our stations to ensure carriage on those relevant cable systems
for the balance of this triennial period (i.e., through December 31, 2002).
16
The FCC has initiated a rulemaking proceeding to consider whether to apply
must-carry rules to require cable companies to carry both the analog and digital
signals of local broadcasters during the DTV transition period between 2002 and
2006 when television stations will be broadcasting both signals. If the FCC does
not require DTV must-carry, cable customers in our broadcast markets may not
receive the station's digital signal.
Syndicated Exclusivity/Territorial Exclusivity. The FCC's syndicated
exclusivity rules allow local broadcast television stations to demand that cable
operators black out syndicated non-network programming carried on "distant
signals" (i.e., signals of broadcast stations, including so-called
"superstations," which serve areas substantially removed from the cable system's
local community). The FCC's network non-duplication rules allow local broadcast
network television affiliates to require that cable operators black out
duplicating network programming carried on distant signals. However, in a number
of markets in which we own or program stations affiliated with a network, a
station that is affiliated with the same network in a nearby market is carried
on cable systems in our market. This is not in violation of the FCC's network
non-duplication rules. However, the carriage of two network stations on the same
cable system could result in a decline of viewership adversely affecting the
revenues of our owned or programmed station.
DIGITAL TELEVISION
The FCC has taken a number of steps to implement digital television (DTV)
broadcasting services. The FCC has adopted an allotment table that provides all
authorized television stations with a second channel on which to broadcast a DTV
signal. The FCC has attempted to provide DTV coverage areas that are comparable
to stations' existing service areas. The FCC has ruled that television broadcast
licensees may use their digital channels for a wide variety of services such as
high-definition television, multiple standard definition television programming,
audio, data, and other types of communications, subject to the requirement that
each broadcaster provide at least one free video channel equal in quality to the
current technical standard and further subject to the requirement that
broadcasters pay a fee of 5% of gross revenues on all DTV subscription services.
DTV channels are generally located in the range of channels from channel 2
through channel 51. The FCC required that affiliates of ABC, CBS, Fox and NBC in
the top 10 television markets begin digital broadcasting by May 1, 1999 and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999. All other commercial stations are required to begin digital
broadcasting by May 1, 2002. The majority of our stations are required to
commence digital operations by May 1, 2002. Applications for digital facilities
for all of our stations were filed by November 1, 1999. The FCC's plan calls for
the DTV transition period to end in the year 2006, at which time the FCC expects
that television broadcasters will cease non-digital broadcasting and return one
of their two channels to the government, allowing that spectrum to be recovered
for other uses. The FCC has been authorized by Congress to extend the December
31, 2006 deadline for reclamation of a television station's non-digital channel
if, in any given case:
o one or more television stations affiliated with ABC, CBS, NBC or Fox
in a market is not broadcasting digitally, and the FCC determines that
such stations have "exercised due diligence" in attempting to convert
to digital broadcasting, or
o less than 85% of the television households in the station's market
subscribe to a multichannel video service (cable, wireless cable or
direct-to-home broadcast satellite television ("DBS")) that carries at
least one digital channel from each of the local stations in that
market, or
o less than 85% of the television households in the market can receive
digital signals off the air using either a set-top converter box for
an analog television set or a new DTV television set.
Congress directed the FCC to auction channels 60-69 for commercial and
public safety services no sooner than January 1, 2001. However, Congress
recently amended this directive to allow for the auction of these channels this
year. Five of our television stations currently operate their analog facilities
on
17
channels between 60-69. Although not required to return these channels until the
end of the DTV transition period (December 31 2006), the FCC is encouraging
broadcasters to consider surrendering these analog channels sooner. We cannot
predict the outcome of these changes.
Congress directed the FCC to auction the remaining non-digital channels by
September 30, 2002 even though they are not to be reclaimed by the government
until at least December 31, 2006. Broadcasters are permitted to bid on the
non-digital channels in cities with populations greater than 400,000, provided
the channels are used for DTV. The FCC has initiated separate proceedings to
consider the surrender of existing television channels and how these frequencies
will be used after they are eventually recovered from broadcasters.
Implementation of digital television will also impose substantial
additional costs on television stations because of the need to replace equipment
and because some stations will need to operate at higher utility costs and there
can be no assurance that our television stations will be able to increase
revenue to offset such costs. The FCC has proposed imposing new public interest
requirements on television licensees in exchange for their receipt of DTV
channels. In addition, Congress has held hearings on broadcasters' plans for the
use of their digital spectrum. As part of its first biennial review of the DTV
transition process, the FCC has issued a rulemaking seeking comments on a number
of issues effecting the transition, including a review of the digital
transmission standard.
RADIO
National Ownership Rule. There are no limits on the number of radio
stations a single individual or entity may own nationwide.
Local Ownership Rules. The limits on the number of radio stations one
entity may own locally are as follows:
o in a market with 45 or more commercial radio stations, an entity may
own up to eight commercial radio stations, not more than five of which
are in the same service (AM or FM);
o in a market with between 30 and 44 (inclusive) commercial radio
stations, an entity may own up to seven commercial radio stations, not
more than four of which are in the same service;
o in a market with between 15 and 29 (inclusive) commercial radio
stations, an entity may own up to six commercial radio stations, not
more than four of which are in the same service; and
o in a market with 14 or fewer commercial radio stations, an entity may
own up to five commercial radio stations, not more than three of which
are in the same service, except that an entity may not own more than
50% of the stations in such market.
These numerical limits apply regardless of the aggregate audience share of
the stations sought to be commonly owned. FCC ownership rules continue to permit
an entity to own one FM and one AM station in a local market regardless of
market size. Irrespective of FCC rules governing radio ownership, however, the
Department of Justice and the Federal Trade Commission have the authority to
determine, and in certain radio transactions have determined, that a particular
transaction presents antitrust concerns. Moreover, in certain cases the FCC
examined issues of market concentration notwithstanding a transaction's
compliance with the numerical station limits. The FCC has also indicated that it
may propose further revisions to its radio multiple ownership rules.
Local Marketing Agreements. As in television, a number of radio stations
have entered into LMAs. The FCC's multiple ownership rules specifically permit
radio station LMAs to be entered into and implemented, so long as the licensee
of the station which is being programmed under the LMA maintains ultimate
responsibility for and control over programming and operations of its broadcast
station and assures compliance with applicable FCC rules and policies. For the
purposes of the multiple ownership rules, in general, a radio station being
programmed pursuant to an LMA by an entity is not considered an attributable
ownership interest of that entity unless that entity already owns a radio
station in the same market. However, a licensee that owns a radio station in a
market, and brokers more than 15% of the time on another station serving the
same market (i.e. a station whose principal community contour
18
overlaps that of the owned market), is considered to have an attributable
ownership interest in the brokered station for purposes of the FCC's multiple
ownership rules. As a result, in a market in which we own a radio station, we
would not be permitted to enter into an LMA with another local radio station
which we could not own under the local ownership rules, unless our programming
constituted 15% or less of the other local station's programming time on a
weekly basis.
Joint Sales Agreements. A number of radio (and television) stations have
entered into cooperative arrangements commonly known as joint sales agreements,
or JSAs. While these agreements may take varying forms, under the typical JSA, a
station licensee obtains, for a fee, the right to sell substantially all of the
commercial advertising on a separately-owned and licensed station in the same
market. The typical JSA also customarily involves the provision by the selling
licensee of certain sales, accounting, and "back office" services to the station
whose advertising is being sold. The typical JSA is distinct from an LMA in that
a JSA (unlike an LMA) normally does not involve programming.
The FCC has determined that issues of joint advertising sales should be
left to enforcement by antitrust authorities, and therefore does not generally
regulate joint sales practices between stations. Stations for which a licensee
sells time under a JSA are not deemed by the FCC to be attributable interests of
that licensee.
RESTRICTIONS ON BROADCAST ADVERTISING
Advertising of cigarettes and certain other tobacco products on broadcast
stations has been banned for many years. Various states also restrict the
advertising of alcoholic beverages.
The Communications Act and FCC rules also place restrictions on the
broadcasting of advertisements by legally qualified candidates for elective
office. Among other things,
o stations must provide "reasonable access" for the purchase of time by
legally qualified candidates for federal office,
o stations must provide "equal opportunities" for the purchase of
equivalent amounts of comparable broadcast time by opposing candidates
for the same elective office, and
o during the 45 days preceding a primary or primary run-off election and
during the 60 days preceding a general or special election, legally
qualified candidates for elective office may be charged no more than
the station's "lowest unit charge" for the same class of
advertisement, length of advertisement, and daypart.
Both the President of the United States and the Chairman of the FCC have called
for rules that would require broadcast stations to provide free airtime to
political candidates. We cannot predict the effect of such a requirement on our
stations' advertising revenues.
PROGRAMMING AND OPERATION
General. The Communications Act requires broadcasters to serve the "public
interest." The FCC has relaxed or eliminated many of the more formalized
procedures it had developed in the past to promote the broadcast of certain
types of programming responsive to the needs of a station's community of
license. FCC licensees continue to be required, however, to present programming
that is responsive to their communities' issues, and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming may be considered by the FCC when it evaluates renewal
applications of a licensee, although such complaints may be filed at any time
and generally may be considered by the FCC at any time. Stations also must pay
regulatory and application fees, and follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisement of contests and lotteries,
obscene and indecent broadcasts, and technical operations, including limits on
radio frequency radiation. The FCC recently adopted rules reaffirming its
authority to have an Equal Employment Opportunity (EEO) nondiscrimination rule
and policies and to require broadcast licensees to create equal employment
outreach programs and maintain records and make filings with the FCC evidencing
such efforts.
19
Children's Television Programming. Television stations are required to
broadcast a minimum of three hours per week of "core" children's educational
programming, which the FCC defines as programming that
o services the educational and informational needs of children 16 years
of age and under as a significant purpose;
o is regularly scheduled, weekly and at least 30 minutes in duration;
and
o is aired between the hours of 7:00 a.m. and 10:00 p.m. Furthermore,
"core" children's educational programs, in order to qualify as such,
are required to be identified as educational and informational
programs over the air at the time they are broadcast, and are required
to be identified in the children's programming reports required to be
placed quarterly in stations' public inspection files and filed
annually with the FCC.
Additionally, television stations are required to identify and provide
information concerning "core" children's programming to publishers of program
guides and listings.
Television Violence. The television industry has developed a ratings system
that has been approved by the FCC. Furthermore, the FCC requires certain
television sets to include the so-called "V-chip," a computer chip that allows
blocking of rated programming.
PENDING MATTERS
The Congress and the FCC have under consideration, and in the future may
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation, ownership
and profitability of our broadcast stations, result in the loss of audience
share and advertising revenues for our broadcast stations, and affect our
ability to acquire additional broadcast stations or finance such acquisitions.
In addition to the changes and proposed changes noted above, such matters may
include, for example, the license renewal process, spectrum use fees, political
advertising rates, potential restrictions on the advertising of certain products
(beer, wine and hard liquor, for example), and the rules and policies to be
applied in enforcing the FCC's equal employment opportunity regulations.
Other matters that could affect our broadcast properties include
technological innovations and developments generally affecting competition in
the mass communications industry, such as direct radio and television broadcast
satellite service, creation of low power radio and class A television services,
the continued establishment of wireless cable systems and low power television
stations, digital television and radio technologies, the Internet and the advent
of telephone company participation in the provision of video programming
service.
OTHER CONSIDERATIONS
The foregoing summary does not purport to be a complete discussion of all
provisions of the Communications Act or other congressional acts or of the
regulations and policies of the FCC. For further information, reference should
be made to the Communications Act, other congressional acts, and regulations and
public notices promulgated from time to time by the FCC. There are additional
regulations and policies of the FCC and other federal agencies that govern
political broadcasts, advertising, equal employment opportunity, and other
matters affecting our business and operations.
ENVIRONMENTAL REGULATION
Prior to our ownership or operation of our facilities, substances or waste
that are or might be considered hazardous under applicable environmental laws
may have been generated, used, stored or disposed of at certain of those
facilities. In addition, environmental conditions relating to the soil and
groundwater at or under our facilities may be affected by the proximity of
nearby properties that have generated, used, stored or disposed of hazardous
substances. As a result, it is possible that we could become subject to
environmental liabilities in the future in connection with these facilities
under
20
applicable environmental laws and regulations. Although we believe that we are
in substantial compliance with such environmental requirements, and have not in
the past been required to incur significant costs in connection therewith, there
can be no assurance that our costs to comply with such requirements will not
increase in the future. We presently believe that none of our properties have
any condition that is likely to have a material adverse effect on our financial
condition or results of operations.
COMPETITION
Our television and radio stations compete for audience share and
advertising revenue with other television and radio stations in their respective
DMAs or MSAs, as well as with other advertising media, such as newspapers,
magazines, outdoor advertising, transit advertising, yellow page directories,
direct mail, satellite and local cable and wireless cable systems. Some
competitors are part of larger organizations with substantially greater
financial, technical and other resources than we have.
Television Competition. Competition in the television broadcasting industry
occurs primarily in individual DMAs. Generally, a television broadcasting
station in one DMA does not compete with stations in other DMAs. Our television
stations are located in highly competitive DMAs. In addition, certain of our
DMAs are overlapped by both over-the-air and cable carriage of stations in
adjacent DMAs, which tends to spread viewership and advertising expenditures
over a larger number of television stations.
Broadcast television stations compete for advertising revenues primarily
with other broadcast television stations, radio stations, cable channels and
cable system operators serving the same market. Traditional network programming
generally achieves higher household audience levels than Fox, WB and UPN
programming and syndicated programming aired by independent stations. This can
be attributed to a combination of factors, including the traditional networks'
efforts to reach a broader audience, generally better signal carriage available
when broadcasting over VHF channels 2 through 13 versus broadcasting over UHF
channels 14 through 69 and the higher number of hours of traditional network
programming being broadcast weekly. However, greater amounts of advertising time
are available for sale during Fox, UPN and WB programming and non-network
syndicated programming, and as a result we believe that our programming
typically achieves a share of television market advertising revenues greater
than its share of the market's audience.
Television stations compete for audience share primarily on the basis of
program popularity, which has a direct effect on advertising rates. A large
amount of a station's prime time programming is supplied by Fox, ABC, NBC and
CBS, and to a lesser extent WB and UPN. In those periods, our affiliated
stations are totally dependent upon the performance of the networks' programs in
attracting viewers. Non-network time periods are programmed by the station
primarily with syndicated programs purchased for cash, cash and barter, or
barter-only, and also through self-produced news, public affairs and other
entertainment programming.
Television advertising rates are based upon factors which include the size
of the DMA in which the station operates, a program's popularity among the
viewers that an advertiser wishes to attract, the number of advertisers
competing for the available time, the demographic makeup of the DMA served by
the station, the availability of alternative advertising media in the DMA
including radio and cable, the aggressiveness and knowledge of sales forces in
the DMA and development of projects, features and programs that tie advertiser
messages to programming. We believe that our sales and programming strategies
allow us to compete effectively for advertising within our DMAs.
Other factors that are material to a television station's competitive
position include signal coverage, local program acceptance, network affiliation,
audience characteristics and assigned broadcast frequency. Historically, our UHF
broadcast stations have suffered a competitive disadvantage in comparison to
stations with VHF broadcast frequencies. This historic disadvantage has
gradually declined through
o carriage on cable systems,
o improvement in television receivers,
o improvement in television transmitters,
21
o wider use of all channel antennae,
o increased availability of programming, and
o the development of new networks such as Fox, WB and UPN.
The broadcasting industry is continuously faced with technical changes and
innovations, the popularity of competing entertainment and communications media,
changes in labor conditions, and governmental restrictions or actions of federal
regulatory bodies, including the FCC, any of which could possibly have a
material effect on a television station's operations and profits. For instance,
the FCC currently is conducting a rule making concerning the implementation of a
Class A television service for qualifying low power television stations. A low
power television station that qualifies for Class A status would have certain
rights currently accorded to full-power television stations, which may allow
them to compete more effectively with full power stations. We cannot predict the
outcome of this proceeding or the effect of Class A television stations in
markets where have full-power television stations.
There are sources of video service other than conventional television
stations, the most common being cable television, which can increase competition
for a broadcast television station by bringing into its market distant
broadcasting signals not otherwise available to the station's audience, serving
as a distribution system for national satellite-delivered programming and other
non-broadcast programming originated on a cable system and selling advertising
time to local advertisers. Other principal sources of competition include home
video exhibition and Direct Broadcast Satellite services and multichannel
multipoint distribution services (MMDS). DBS and cable operators in particular
are competing more aggressively than in the past for advertising revenues in our
TV stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
In addition, SHVIA could also have an adverse effect on our broadcast
stations' audience share and advertising revenue because it may allow satellite
carriers to provide the signal of distant stations with the same network
affiliation as our stations to more television viewers in our markets than would
have been permitted under previous law. The legislation also allows satellite
carriers to provide local television signals by satellite within a station
market, but does not require satellite carriers to carry all local stations in a
market until 2002. Satellite carriers could decide to carry other stations in
our markets, but not our stations, which could adversely affect our stations'
audience share.
Moreover, technology advances and regulatory changes affecting programming
delivery through fiber optic telephone lines and video compression could lower
entry barriers for new video channels and encourage the development of
increasingly specialized "niche" programming. Telephone companies are permitted
to provide video distribution services via radio communication, on a common
carrier basis, as "cable systems" or as "open video systems," each pursuant to
different regulatory schemes. We are unable to predict what other video
technologies might be considered in the future, or the effect that technological
and regulatory changes will have on the broadcast television industry and on the
future profitability and value of a particular broadcast television station.
We believe that television broadcasting may be enhanced significantly by
the development and increased availability of DTV technology. This technology
has the potential to permit us to provide viewers multiple channels of digital
television over each of our existing standard channels, to provide certain
programming in a high definition television format and to deliver various forms
of data, including data on the Internet, to PCs and handheld devices. These
additional capabilities may provide us with additional sources of revenue as
well as additional competition.
While DTV technology is currently available in the top thirty viewing
markets, a successful transition from the current analog broadcast format to a
digital format may take many years. We cannot assure you that our efforts to
take advantage of the new technology will be commercially successful.
We also compete for programming, which involves negotiating with national
program distributors or syndicators that sell first-run and rerun packages of
programming. Our stations compete for exclusive access to those programs against
in-market broadcast station competitors for syndicated products. Cable systems
generally do not compete with local stations for programming, although various
national cable
22
networks from time to time have acquired programs that would have otherwise been
offered to local television stations. Public broadcasting stations generally
compete with commercial broadcasters for viewers but not for advertising
dollars.
Historically, the cost of programming has increased because of an increase
in the number of new independent stations and a shortage of quality programming.
However, we believe that over the past five years program prices generally have
stabilized or fallen on a per station basis, but aggregate programming costs
have risen as we have attempted to improve the quality of our stations'
programming line-ups.
We believe we compete favorably against other television stations because
of our management skill and experience, our ability historically to generate
revenue share greater than our audience share, our network affiliations and our
local program acceptance. In addition, we believe that we benefit from the
operation of multiple broadcast properties, affording us certain
non-quantifiable economies of scale and competitive advantages in the purchase
of programming.
Radio Competition. Radio broadcasting is a highly competitive business, and
each of the radio stations operated by us competes for audience share and
advertising revenue directly with other radio stations in our geographic market,
as well as with other media, including television, cable television, newspapers,
magazines, direct mail and billboard advertising. The audience ratings and
advertising revenue of each of such stations are subject to change, and any
adverse change in a particular market could have a material adverse effect on
the revenue of such radio stations located in that market. We cannot assure you
that any one of our radio stations will be able to maintain or increase its
current audience ratings and radio advertising revenue market share.
The radio broadcasting industry is also subject to competition from new
media technologies that are being developed or introduced, such as the delivery
of audio programming by cable television systems and by digital audio
broadcasting (DAB). DAB may provide a medium for the delivery by satellite or
terrestrial means of multiple new audio programming formats to local and
national audiences. Also, new technology has introduced the broadcast of radio
programming over the Internet. This new capability may provide an additional
source of competition in some of our markets. In addition, the FCC has created a
new low-power FM radio service, which may create new competition in some of our
radio markets.
EMPLOYEES
As of December 31, 1999, we had approximately 3,700 employees. With the
exception of certain employees of KOVR-TV, KDNL-TV, WSYX-TV, WCHS-TV, WGGB-TV,
WGME-TV, KGAN-TV, WICS-TV and certain employees at two radio stations in St.
Louis (totaling approximately 280 employees), none of our employees is
represented by labor unions under any collective bargaining agreement. We have
not experienced any significant labor problems and consider our overall labor
relations to be good.
ITEM 2. PROPERTIES
Generally, each of our stations has facilities consisting of offices,
studios and tower sites. Transmitter and tower sites are located to provide
maximum signal coverage of our stations' markets. The following is a summary of
our principal owned and leased real properties as we believe that no one
property represents a material amount of the total properties owned or leased.
OWNED LEASED
----------------- ----------------
Office and Studio Building .................... 481,000 sq. ft. 323,000 sq. ft.
Office and Studio Land ........................ 60 acres --
Transmitter Building Site ..................... 58,000 sq. ft. 22,000 sq. ft.
Transmitter and Tower Land .................... 805 acres 265 acres
We believe that all of our properties, both owned and leased, are generally
in good operating condition, subject to normal wear and tear, and are suitable
and adequate for our current business operations.
23
ITEM 3. LEGAL PROCEEDINGS
Lawsuits and claims are filed against us 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. We do not
believe that these actions, individually or in the aggregate, will have a
material adverse affect on our financial condition or results of operations. In
addition to certain actions arising in the ordinary course, two actions relating
to disposition of assets have been asserted as described more fully in "Item 1
- -- Business--Pending Dispositions."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1999.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our class A common stock is listed for trading on the Nasdaq stock market
under the symbol SBGI. The following table sets forth for the periods indicated
the high and low sales prices on the Nasdaq stock market.
1998 HIGH LOW
--------------------------------------- ------------- -------------
First Quarter ......................... $ 29.250 $ 21.438
Second Quarter ........................ 31.125 23.313
Third Quarter ......................... 30.125 15.875
Fourth Quarter ........................ 20.000 6.750
1999 HIGH LOW
--------------------------------------- ------------- -------------
First Quarter ......................... $ 20.125 $ 13.250
Second Quarter ........................ 17.000 9.250
Third Quarter ......................... 21.500 9.000
Fourth Quarter ........................ 12.875 7.938
As of March 24, 2000, there were approximately 101 stockholders of record
of our common stock. This number does not include beneficial owners holding
shares through nominee names. Based on information available to us, we believe
we have more than 5,000 beneficial owners of our class A common stock.
We generally have not paid a dividend on our common stock and do not expect
to pay dividends on our common stock in the foreseeable future. Our 1998 bank
credit agreement and certain of our subordinated debt generally prohibits us
from paying dividends on our common stock. Under the indentures governing our
10% senior subordinated notes due 2005, 9% senior subordinated notes due 2007
and 8 3/4% senior subordinated notes due 2007, we are not permitted to pay
dividends on our common stock unless certain specified conditions are satisfied,
including that
o no event of default then exists under the indenture or certain other
specified agreements relating to our indebtedness and
o we, after taking account of the dividend, are in compliance with
certain net cash flow requirements contained in the indenture. In
addition, under certain of our senior unsecured debt, the payment of
dividends is not permissible during a default thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31,
1995, 1996, 1997, 1998, and 1999 have been derived from our audited consolidated
financial statements. The consolidated financial statements for the years ended
December 31, 1997, 1998 and 1999 are included elsewhere in this report.
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this report.
25
STATEMENT OF OPERATIONS DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ --------------- ------------- --------------- -------------
STATEMENT OF OPERATIONS DATA:
Net broadcast revenues(a) ................... $ 187,934 $ 308,888 $ 407,410 $ 564,727 $ 670,252
Barter revenues ............................. 18,200 29,707 42,468 59,697 63,387
---------- ------------ ---------- ------------ ----------
Total revenues .............................. 206,134 338,595 449,878 624,424 733,639
---------- ------------ ---------- ------------ ----------
Operating costs(b) .......................... 64,326 117,129 153,935 220,538 283,334
Expenses from barter arrangements ........... 16,120 25,189 38,114 54,067 57,561
Depreciation and amortization(c) ............ 80,410 113,848 137,286 177,224 224,553
Stock-based compensation .................... -- 739 1,410 2,908 2,494
---------- ------------ ---------- ------------ ----------
Broadcast operating income .................. 45,278 81,690 119,133 169,687 165,697
Interest expense ............................ (39,253) (84,314) (98,393) (138,952) (178,281)
Subsidiary trust minority interest
expense(d) ................................ -- -- (18,600) (23,250) (23,250)
Gain (loss) on sale of broadcast assets ..... -- -- -- 1,232 (418)
Unrealized (loss) gain on derivative
instrument ................................ -- -- -- (9,050) 15,747
Interest and other income ................... 4,163 3,478 2,231 6,694 3,486
---------- ------------ ---------- ------------ ----------
Income (loss) before income taxes ........... 10,188 854 4,371 6,361 (17,019)
Provision for income taxes .................. (5,200) (4,130) (13,201) (32,562) (25,107)
---------- ------------ ---------- ------------ ----------
Net income (loss) from continuing
operations ................................ 4,988 (3,276) (8,830) (26,201) (42,126)
Discontinued operations:
Net income from discontinued
operations, net of related income
taxes ..................................... -- 4,407 4,466 14,102 17,538
Gain (loss) on sale of broadcast assets,
net of related income taxes ............... -- -- (132) 6,282 192,372
Extraordinary item:
Loss on early extinguishment of debt,
net of related income tax benefit ......... (4,912) (6,070) (11,063) --
---------- ------------ ---------- ------------ ----------
Net income (loss) ........................... $ 76 $ 1,131 $ (10,566) $ (16,880) $ 167,784
========== ============ ========== ============ ==========
Net income (loss) available to common
shareholders .............................. $ 76 $ 1,131 $ (13,329) $ (27,230) $ 157,434
========== ============ ========== ============ ==========
OTHER DATA:
Broadcast cash flow(e) ...................... $ 111,124 $ 175,211 $ 221,631 $ 305,304 $ 332,307
Broadcast cash flow margin(f) ............... 59.1% 56.7% 54.4% 54.1% 49.6%
Adjusted EBITDA(g) .......................... $ 105,750 $ 167,441 $ 209,220 $ 288,712 $ 313,271
Adjusted EBITDA margin(f) ................... 56.3% 54.2% 51.4% 51.1% 46.7%
After tax cash flow(h) ...................... $ 54,645 $ 77,484 $ 104,884 $ 149,759 $ 137,245
Program contract payments ................... 19,938 28,836 48,609 61,107 79,473
Corporate overhead expense .................. 5,374 7,770 12,411 16,592 19,036
Capital expenditures ........................ 1,702 12,609 19,425 19,426 30,861
Cash flows from operating activities ........ 55,986 69,298 96,625 150,480 130,161
Cash flows from investing activities ........ (119,320) (1,019,853) (218,990) (1,812,682) 453,003
Cash flows from financing activities ........ 173,338 840,446 259,351 1,526,143 (570,024)
26
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------------ ------------ ------------ ------------
PER SHARE DATA:
Basic net income (loss) per share from
continuing operations ................... $ 0.08 $ (0.05) $ (0.16) $ (0.39) $ (0.54)
Basic earnings per share from
discontinued operations ................. $ -- $ 0.06 $ 0.06 $ 0.22 $ 2.17
Basic loss per share from extraordinary
item .................................... $ -- $ -- $ (0.08) $ (0.12) $ --
Basic net income (loss) per share ......... $ -- $ 0.02 $ (0.19) $ (0.29) $ 1.63
Diluted net income (loss) per share
from continuing operations .............. $ 0.08 $ (0.05) $ (0.16) $ (0.39) $ (0.54)
Diluted earnings per share from
discontinued operations ................. $ -- $ 0.06 $ 0.06 $ 0.22 $ 2.17
Diluted loss per share from
extraordinary item ...................... $ -- $ -- $ (0.08) $ (0.12) $ --
Diluted net income (loss) per share ....... $ -- $ 0.02 $ (0.19) $ (0.29) $ 1.63
BALANCE SHEET DATA:
Cash and cash equivalents ................. $112,450 $ 2,341 $ 139,327 $ 3,268 $ 16,408
Total assets .............................. 605,272 1,707,297 2,034,234 3,852,752 3,619,510
Total debt(i) ............................. 418,171 1,288,103 1,080,722 2,327,221 1,792,339
HYTOPS(j) ................................. -- -- 200,000 200,000 200,000
Total stockholders' equity ................ 96,374 237,253 543,288 816,043 974,917
- ----------
(a) "Net broadcast revenues" are defined as broadcast revenues net of agency
commissions.
(b) Operating costs include program and production expenses and selling,
general and administrative expenses.
(c) Depreciation and amortization includes amortization of program contract
costs and net realizable value adjustments, depreciation and amortization
of property and equipment, and amortization of acquired intangible
broadcasting assets and other assets including amortization of deferred
financing costs and costs related to excess syndicated programming.
(d) Subsidiary trust minority interest expense represents the distributions on
the HYTOPS. See footnote j.
(e) "Broadcast cash flow" (BCF) is defined as broadcast operating income plus
corporate expenses, special bonuses paid to executive officers, stock-based
compensation, depreciation and amortization (including film amortization
and amortization of deferred compensation), less cash payments for program
rights. Cash program payments represent cash payments made for current
programs payable and do not necessarily correspond to program usage. 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 companies; however, there
can be no assurance that it is comparable. However, BCF does not purport to
represent cash provided by operating activities as reflected in our
consolidated statements of cash flows and is not a measure of financial
performance under generally accepted accounting principles. In addition,
BCF 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) it is a measurement utilized by lenders to measure our
ability to service its debt, 2) it is a measurement utilized by industry
analysts to determine a private market value of our television and radio
stations and 3) it is a measurement industry analysts utilize when
determining our operating performance.
(f) "Broadcast cash flow margin" is defined as broadcast cash flow divided by
net broadcast revenues. "Adjust EBITDA margin" is defined as Adjusted
EBITDA divided by net broadcast revenues.
(g) "Adjusted EBITDA" is defined as broadcast cash flow less corporate expenses
and is a commonly used measure of performance for broadcast companies. We
have presented Adjusted EBITDA 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 companies; however,
there can be no assurances that it is comparable. Adjusted EBITDA does not
purport to represent cash provided by operating activities as reflected in
our consolidated statements of cash flows and is not a measure of financial
performance under generally accepted accounting principles. In addition,
Adjusted EBITDA 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) it is a measurement utilized by
lenders to measure our ability to service our debt, 2) it is a measurement
utilized by industry analysts to determine a private market value of our
television and radio stations and 3) it is a measurement industry analysts
utilize when determining our operating performance.
27
(h) "After tax cash flow" (ATCF) is defined as net income (loss) available to
common shareholders, plus extraordinary items (before the effect of related
tax benefits) plus depreciation and amortization (excluding film
amortization), stock-based compensation, unrealized loss on derivative
instrument (or minus the gain), the deferred tax provision related to
operations or minus the deferred tax benefit) and minus the gain on sale of
assets and deferred NOL carry backs. We have presented after tax cash flow
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 companies; however, there can be no assurances
that it is comparable. ATCF is presented here not as a measure of operating
results and does not purport to represent cash provided by operating
activities. ATCF 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 ATCF is
relevant and useful because ATCF is a measurement utilized by industry
analysts to determine a public market value of our television and radio
stations and ATCF is a measurement analysts utilize when determining our
operating performance.
(i) "Total debt" is defined as long-term debt, net of unamortized discount, and
capital lease obligations, including current portion thereof. Total debt
does not include the HYTOPS or our preferred stock.
(j) HYTOPS represents our Obligated Mandatorily Redeemable Security of
Subsidiary Trust Holding Solely KDSM Senior Debentures representing $200
million aggregate liquidation value.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are a diversified broadcasting company that owns or provides programming
services pursuant to LMAs to more television stations than any other commercial
broadcasting group the United States. We currently own, or provide programming
services pursuant to LMAs to, 61 television stations and 11 radio stations.
During 1999, we sold the majority of our radio stations and we have entered into
agreements to sell or intend to enter into to sell in the future our remaining
radio stations. In addition, we own equity interests in three Internet-related
companies.
Our operating revenues are derived from local and national advertisers and,
to a much lesser extent, from political advertisers and television network
compensation. Our revenues from local advertisers have continued to trend upward
and revenues from national advertisers have continued to trend downward when
measured as a percentage of local broadcast revenue. We believe this trend is
primarily resulting from an increase in the number of media outlets providing
national advertisers a means by which to advertise their goods or services. Our
efforts to mitigate this trend include continuing our efforts to increase local
revenues and the development of innovative marketing strategies to sell
traditional and non-traditional services to national advertisers.
Our primary operating expenses involved in owning, operating or programming
the television and radio stations are syndicated program rights fees,
commissions on revenues, employee salaries, and news-gathering and station
promotional costs. Amortization and depreciation of costs associated with the
acquisition of the stations and interest carrying charges are significant
factors in determining our overall profitability.
28
Set forth below are the principal types of broadcast revenues received by
our stations for the periods indicated and the percentage contribution of each
type to our total gross broadcast revenues:
BROADCAST REVENUE
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ --------------------------
Local/regional advertising..... $ 226,136 47.6% $ 317,285 48.4% $ 397,047 51.1%
National advertising .......... 241,320 50.8% 296,864 45.3% 354,257 45.6%
Network compensation .......... 5,136 1.1% 18,203 2.8% 19,186 2.5%
Political advertising ......... 934 0.2% 20,422 3.1% 3,157 0.4%
Production .................... 1,239 0.3% 2,617 0.4% 3,530 0.4%
--------- ----- --------- ----- ---------- -----
Broadcast revenues ............ 474,765 100.0% 655,391 100.0% 777,177 100.0%
===== ===== =====
Less: agency commissions....... (67,355) (90,664) (106,925)
--------- --------- ----------
Broadcast revenues, net ....... 407,410 564,727 670,252
Barter revenues ............... 42,468 59,697 63,387
--------- --------- ----------
Total revenues ................ $ 449,878 $ 624,424 $ 733,639
========= ========= ==========
Our primary types of programming and their approximate percentages of 1999
net broadcast revenues were syndicated programming (64.1%), network programming
(24.2%), direct advertising programming (5.8%), sports programming (4.0%) and
children's programming (1.9%). Similarly, our four largest categories of
advertising and their approximate percentages of 1999 net broadcast revenues
were automotive (22.0%), fast food advertising (8.0%), retail/department stores
(7.0%) and professional services (5.6%). No other advertising category accounted
for more than 5% of our net broadcast revenues in 1999. No individual advertiser
accounted for more than 2% of our consolidated net broadcast revenues in 1999.
The following table sets forth certain of our operating data for the years
ended December 31, 1997, 1998 and 1999. For definitions of items, see footnotes
on pages 27 and 28 of this report.
29
OPERATING DATA
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
-------------- --------------- --------------
Net broadcast revenues ..................................... $ 407,410 $ 564,727 $ 670,252
Barter revenues ............................................ 42,468 59,697 63,387
---------- ------------ -----------
Total revenues ............................................. 449,878 624,424 733,639
---------- ------------ -----------
Operating costs ............................................ 153,935 220,538 283,334
Expenses from barter arrangements .......................... 38,114 54,067 57,561
Depreciation and amortization .............................. 137,286 177,224 224,553
Stock-based compensation ................................... 1,410 2,908 2,494
---------- ------------ -----------
Broadcast operating income ................................. $ 119,133 $ 169,687 $ 165,697
========== ============ ===========
Net income (loss) .......................................... $ (10,566) $ (16,880) $ 167,784
========== ============ ===========
Net income (loss) available to common shareholders ......... $ (13,329) $ (27,230) $ 157,434
========== ============ ===========
OTHER DATA:
Broadcast cash flow ........................................ $ 221,631 $ 305,304 $ 332,307
BCF margin ................................................. 54.4% 54.1% 49.6%
Adjusted EBITDA ............................................ $ 209,220 $ 288,712 $ 313,271
Adjusted EBITDA margin ..................................... 51.4% 51.1% 46.7%
After tax cash flow ........................................ $ 104,884 $ 149,759 $ 137,245
Program contract payments .................................. 48,609 61,107 79,473
Corporate expense .......................................... 12,411 16,592 19,036
Capital expenditures ....................................... 19,425 19,426 30,861
Cash flows from operating activities ....................... 96,625 150,480 130,161
Cash flows from investing activities ....................... (218,990) (1,812,682) 453,003
Cash flows from financing activities ....................... 259,351 1,526,143 (570,024)
30
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net broadcast revenues increased $105.6 million to $670.3 million for the
year ended December 31, 1999 from $564.7 million for the year ended December 31,
1998, or 18.7%. The increase in net broadcast revenue for the year ended
December 31, 1999 as compared to the year ended December 31, 1998 comprised of
$106.9 million related to businesses acquired or disposed of by us in 1998 and
1999 (collectively the 1998 and 1999 Transactions) offset by a $1.3 million
decrease in net broadcast revenues on a same station basis, representing a 0.3%
decrease over prior year's net broadcast revenue for these stations. On a same
station basis, revenues were negatively impacted by a decrease in revenues in
the Raleigh, Norfolk and Sacramento markets. Our television stations in the
Raleigh and Norfolk markets experienced a decrease in ratings which resulted in
a loss in revenues and market revenue share primarily due to the loss of their
affiliation agreements with Fox, which expired on August 31, 1998. In the
Sacramento market, revenues decreased for the year ended December 31, 1999 as
compared to the same period in 1998 due to the absence of political and olympic
revenues experienced during 1998.
On a same station basis, our national revenues decreased approximately 4.0%
and our local revenues increased approximately 4.2%. Our revenues from local
advertisers have continued to trend upward and revenues from national
advertisers have continued to trend downward when measured as a percentage of
local broadcast revenue. We believe this trend is primarily resulting from an
increase in the number of media outlets providing national advertisers a means
by which to advertise their goods or services.
Total operating costs increased $62.8 million to $283.3 million for the
year ended December 31, 1999 from $220.5 million for the year ended December 31,
1998, or 28.5%. The increase in operating costs for the year ended December 31,
1999 as compared to the year ended December 31, 1998 comprised of $55.4 million
related to the 1998 and 1999 Transactions, $2.4 million related to an increase
in corporate overhead expenses, and $5.0 million related to an increase in
operating costs on a same station basis, representing a 3.5% increase over prior
year's operating costs for those stations. The increase in corporate overhead
expenses for the year ended December 31, 1999 primarily resulted from an
increase in legal fees and an increase in salary costs incurred to manage a
larger base of operations. The increase in operating costs on a same station
basis primarily resulted from costs incurred during 1999 related to our
agreements with the Fox and WB networks which were not incurred in 1998. 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 payments as ratings increase. We expect to
incur these costs in future periods. In addition, we experienced an increase in
commissions due to a larger number of local account executives. 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 2000 as we add additional account executives. See "Item 1. Business
- -- Television Broadcasting (Innovative Local Sales and Marketing)".
Depreciation and amortization increased $47.4 million to $224.6 million for
the year ended December 31, 1999 from $177.2 million for the year ended December
31, 1998. The increase in depreciation and amortization related to fixed asset,
intangible asset, and program contract additions associated with businesses
acquired during 1998 and 1999.
Interest expense increased $39.3 million to $178.3 million for the year
ended December 31, 1999 from $139.0 million for the year ended December 31,
1998, or 28.3%. The increase in interest expense for the year ended December 31,
1999 as compared to the year ended December 31, 1998 primarily resulted from
higher interest expense related to acquisitions closed in the second half of
1998 and a high applicable interest rate margin for borrowing under our bank
credit agreement. Subsidiary trust minority interest expense of $23.3 million
for the year ended December 31, 1999 is related to the private placement of the
$200 million aggregate liquidation value 11 5/8 % high yield trust offered
preferred securities (the HYTOPS) completed March 12, 1997.
Interest and other income decreased to $3.5 million for the year ended
December 31, 1999 from $6.7 million for the year ended December 31, 1998. This
decrease was primarily due to the decrease in the average cash balance during
the 1999 fiscal year as compared to the same period in 1998.
31
Net income for the year ended December 31, 1999 was $167.8 million or $1.63
per share compared to a net loss of $16.9 million or $0.29 per share for the
year ended December 31, 1998. The change in net income for the year ended
December 31, 1999 as compared to the net loss for the year ended December 31,
1998 was primarily due to the gain on the sale of radio broadcast assets related
to discontinued operations. In addition, the change in net income for the year
ended December 31, 1999 as compared to the net loss for the year ended December
31, 1998 was also attributable to the recognition of an unrealized gain on a
treasury option derivative instrument, offset by an increase in interest
expense.
As noted above, our net income for the year ended December 31, 1999
included recognition of an unrealized gain of $15.7 million on a treasury option
derivative instrument. Upon execution of the treasury option derivative
instrument, 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. Each year, we recognize income or expense
equal to the change in the projected liability under this arrangement based on
interest rates at the end of the year. If the yield on five-year treasuries at
September 30, 2000 were to equal the two year forward five year treasury rate on
December 31, 1999 for treasuries settled on September 30, 2000, we would not be
required to make payments.
Broadcast cash flow increased $27.0 million to $332.3 million for the year
ended December 31, 1999 from $305.3 million for the year ended December 31,
1998, or 8.8%. The increase in broadcast cash flow for the year ended December
31, 1999 as compared to the year ended December 31, 1998 was comprised of $36.0
million related to the 1998 and 1999 Transactions offset by a $9.0 million
decrease in broadcast cash flow on a same station basis, representing a 4.1%
decrease over prior year's broadcast cash flow for those stations. This decrease
in broadcast cash flow on a same station basis primarily resulted from an
increase in operating expenses and film payments combined with a slight decrease
in net broadcast revenues. Our broadcast cash flow margin decreased to 49.6% for
the year ended December 31, 1999 from 54.1% for the year ended December 31,
1998. On a same station basis, broadcast cash flow margin decreased from 52.9%
for the year ended December 31, 1998 to 50.9% for the year ended December 31,
1999. The decrease in broadcast cash flow margin for the year ended December 31,
1999 as compared to the year ended December 31, 1998 primarily resulted from an
increase in operating expenses and film payments combined with a slight decrease
in net broadcast revenues.
Adjusted EBITDA represents broadcast cash flow less corporate expenses.
Adjusted EBITDA increased $24.6 million to $313.3 million for the year ended
December 31, 1999 from $288.7 million for the year ended December 31, 1998, or
8.5%. The increase in adjusted EBITDA for the year ended December 31, 1999 as
compared to the year ended December 31, 1998 resulted from the 1998 and 1999
Transactions offset by a $2.4 million increase in corporate overhead expenses,
as described above. Our adjusted EBITDA margin decreased to 46.7% for the year
ended December 31, 1999 from 51.1% for the year ended December 31, 1998. This
decrease in adjusted EBITDA margin resulted primarily from the circumstances
affecting broadcast cash flow margins as noted above combined with an increase
in corporate expenses.
After tax cash flow decreased $12.6 million to $137.2 million for the year
ended December 31, 1999 from $149.8 million for the year ended December 31,
1998, or 8.4%. The decrease in after tax cash flow for the year ended December
31, 1999 as compared to the year ended December 31, 1998 primarily resulted from
an increase in interest expense offset by a net increase in broadcast operating
income relating to the 1998 and 1999 Transactions.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net broadcast revenue increased $157.3 million to $564.7 million for the
year ended December 31, 1998 from $407.4 million for the year ended December 31,
1997, or 38.6%. The increase in net broadcast revenue for the year ended
December 31, 1998 as compared to the year ended December 31, 1997
32
comprised of $152.6 million related to businesses acquired or disposed of by us
in 1998 (the 1998 Transactions) and $4.7 million resulted from an increase in
net broadcast revenues on a same station basis, representing a 1.2% increase
over prior year's net broadcast revenue for these stations. On a same station
basis, revenues were negatively impacted by a decrease in revenues in the
Baltimore, Milwaukee, Norfolk and Raleigh markets. Our television stations in
these markets experienced a decrease in ratings which resulted in a loss in
revenues and market revenue share. In the Raleigh and Norfolk television
markets, our affiliation agreements with Fox expired on August 31, 1998 which
further contributed to a decrease in ratings and revenues. In the Baltimore
market, the addition of a new UPN affiliate competitor contributed to a loss in
ratings and market revenue share. An additional factor which negatively impacted
station revenues for the year was the loss of General Motors advertising
revenues caused by a strike of its employees. These decreases in revenue on a
same station basis were offset by revenue growth at certain of our other
television stations combined with an increase in network compensation revenue
and political advertising revenue.
Total operating costs increased $66.6 million to $220.5 million for the
year ended December 31, 1998 from $153.9 million for the year ended December 31,
1997, or 43.3%. The increase in operating costs for the year ended December 31,
1998 as compared to the year ended December 31, 1997 comprised of $64.3 million
related to the 1998 Transactions, $4.2 million related to an increase in
corporate overhead expenses, and $2.3 million related to an increase in
operating costs on a same station basis, representing a 1.7% increase over prior
year's operating costs for those stations. The increase in corporate overhead
expenses for the year ended December 31, 1998 primarily resulted from an
increase in legal fees and an increase in salary costs incurred to manage a
larger base of operations.
Depreciation and amortization increased $39.9 million to $177.2 million for
the year ended December 31, 1998 from $137.3 million for the year ended December
31, 1997, or 29.1%. The increase in depreciation and amortization related to
fixed asset and intangible asset additions associated with businesses acquired
during 1997 and 1998.
Broadcast operating income increased $50.6 million to $169.7 million for
the year ended December 31, 1998, from $119.1 million for the year ended
December 31, 1997, or 42.5%. The net increase in broadcast operating income for
the year ended December 31, 1998 as compared to the year ended December 31, 1997
was primarily attributable to the 1998 Transactions.
Interest expense increased $40.6 million to $139.0 million for the year
ended December 31, 1998 from $98.4 million for the year ended December 31, 1997,
or 41.3%. The increase in interest expense for the year ended December 31, 1998
primarily related to indebtedness incurred by us to finance the Acquisitions.
Subsidiary trust minority interest expense of $23.3 million for the year ended
December 31, 1998 is related to the private placement of the $200 million
aggregate liquidation value 115/8% high yield trust offered preferred securities
(HYTOPS) completed March 12, 1997. The increase in subsidiary trust minority
interest expense for the year ended December 31, 1998 as compared to the year
ended December 31, 1997 related to the HYTOPS being outstanding for a partial
period during 1997.
Interest and other income increased to $6.7 million for the year ended
December 31, 1998 from $2.2 million for the year ended December 31, 1997. This
increase was primarily due to higher average cash balances during these periods.
However, cash balances were lower at December 31, 1998 than at December 31,
1997.
Net loss for the year ended December 31, 1998 was $16.9 million or $0.29
per share compared to net loss of $10.6 million or $0.19 per share for the year
ended December 31, 1997. Net loss increased for the year ended December 31, 1998
as compared to the year ended December 31, 1997 due to an increase in operating
expenses, depreciation and amortization, interest expense, subsidiary trust
minority interest expense, the recognition of an unrealized loss of $9.1 million
on a derivative instrument and the recognition of an extraordinary loss offset
by an increase in total revenues, a gain on the sale of broadcast assets and an
increase in interest and other income. Our extraordinary loss of $11.1 million
net of a related tax benefit of $7.4 million resulted from the write-off of debt
acquisition costs associated with indebtedness replaced by the 1998 bank credit
agreement.
33
As noted above, our net loss for the year ended December 31, 1998 included
recognition of a loss of $9.1 million on a treasury option derivative
instrument. Upon execution of the treasury option derivative instrument, 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. Each year, we recognize an expense equal to the change in the
projected liability under this arrangement based on interest rates at the end of
the year. The loss recognized in the year ended December 31, 1998 reflects an
adjustment of our liability under this instrument to the present value of future
payments based on the two-year forward five-year treasury rate as of December
31, 1998. If the yield on five-year treasuries at September 30, 2000 were to
equal the two year forward five year treasury rate on December 31, 1998 (4.6%),
we would be required to make five annual payments of approximately $4.6 million
each. If the yield on five-year treasuries declines further in periods before
September 30, 2000, we will be required to recognize further losses. In any
event, we will not be required to make any payments until September 30, 2000.
Broadcast cash flow increased $83.7 million to $305.3 million for the year
ended December 31, 1998 from $221.6 million for the year ended December 31,
1997, or 37.8%. The increase in broadcast cash flow for the year ended December
31, 1998 as compared to the year ended December 31, 1997 comprised of $86.7
million related to the 1998 Transactions offset by a $3.0 million decrease in
broadcast cash flow on a same station basis, representing a 1.4% decrease over
prior year's broadcast cash flow for those stations. The decrease in broadcast
cash flow primarily related to an increase in film payments. Our broadcast cash
flow margin decreased to 54.1% for the year ended December 31, 1998 from 54.4%
for the year ended December 31, 1997. The decrease in broadcast cash flow margin
for the year ended December 31, 1998 as compared to the year ended December 31,
1998 primarily resulted from an increase in film payments combined with a
disproportionate increase in net broadcast revenue. On a same station basis,
broadcast cash flow margin decreased from 54.4% for the year ended December 31,
1997 to 53.0% for the year ended December 31, 1998.
Adjusted EBITDA represents broadcast cash flow less corporate expenses.
Adjusted EBITDA increased $79.5 million to $288.7 million for the year ended
December 31, 1998 from $209.2 million for the year ended December 31, 1997, or
38.0%. The increase in adjusted EBITDA for the year ended December 31, 1998 as
compared to the year ended December 31, 1997 resulted from the 1998 Transactions
offset by a $4.2 million increase in corporate overhead expenses, as described
above. Our adjusted EBITDA margin decreased to 51.1% for the year ended December
31, 1998 from 51.4% for the year ended December 31, 1997. This decrease in
adjusted EBITDA margin resulted primarily from the circumstances affecting
broadcast cash flow margins as noted above combined with an increase in
corporate expenses.
After tax cash flow increased $44.9 million to $149.8 million for the year
ended December 31, 1998 from $104.9 million for the year ended December 31,
1997, or 42.8%. The increase in after tax cash Flow for the year ended December
31, 1998 as compared to the year ended December 31, 1997 primarily resulted from
a net increase in broadcast operating income relating to the 1998 Transactions
offset by an increase in interest expense and subsidiary trust minority interest
expense relating to the HYTOPS.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash provided by operations and
availability under our 1998 bank credit agreement. As of December 31, 1999, we
had $16.4 million in cash balances and excluding the effect of assets held for
sale, broadcast assets related to discontinued operations and income taxes
payable, working capital of approximately $44.5 million. As of March 15, 2000,
the remaining balance available under the revolving credit facility was $650.0
million. Based on pro forma trailing cash flow levels for the twelve months
ended December 31, 1999, we had approximately $224.2 million available of
34
current borrowing capacity under our revolving credit facility. Our 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.
In July 1999, we entered into an agreement to sell 46 radio stations in
nine markets to Entercom Communications Corporation (Entercom) for $824.5
million in cash. The transaction does not include our radio stations in the St.
Louis market which are subject to the St. Louis purchase option. In December
1999, we closed on the sale of 41 radio stations in eight markets for a purchase
price of $700.4 million. We expect to close on the remaining $124.1 million
during 2000 which represents the Kansas City radio stations and WKRF-FM in
Wilkes-Barre. 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 only to FCC approval and the outcome of pending
litigation in which a former licensee is seeking the return of the WKRF-FM
license based on a fraudulent conveyance claim.
On April 19, 1999, we entered into an agreement (the ATC Agreement) with
American Tower Corporation, an independent owner, operator and developer of
broadcast and wireless communication sites in the United States. Under the
agreement, we would provide American Tower access to tower sites in a number of
our markets including Nashville, TN, Dayton, OH, Richmond, VA, Mobile, AL,
Pensacola, FL, San Antonio, TX, and Syracuse, NY. American Tower would construct
new towers in each of these markets and would lease space on the towers to us.
This is expected to provide us the additional tower capacity required to develop
its digital television transmission needs in these markets at an initial capital
outlay lower than would be required if we constructed these towers ourselves.
The form of the master lease has been completed and agreed to; however, each
market is subject to individual negotiations on terms specific to that market,
which are still being negotiated with American Tower Corporation. If we cannot
agree with American Tower on the terms and conditions of the individual market
leases, neither party will have any obligation to the other under the ATC
Agreement, which will then become a nullity.
Net cash flows from operating activities decreased to $130.2 million for
the year ended December 31, 1999 from $150.5 million for the year ended December
31, 1998 primarily as a result of the increase in program contract payments. We
made payments of interest on outstanding indebtedness and subsidiary trust
minority interest expense totaling $227.2 million during the year ended December
31, 1999 as compared to $140.9 million for the year ended December 31, 1998.
Program rights payments for the year ended December 31, 1999 increased $18.4
million or 30.1%. This increase in program rights payments was comprised of
$15.7 million related to the 1998 and 1999 Transactions and $2.7 million related
to an increase in programming costs on a same station basis which increased
4.9%.
Net cash flows from investing activities was $453.0 million for the year
ended December 31, 1999 compared to net cash flows used in investing activities
of $1.8 billion for the year ended December 31, 1998. For the year ended
December 31, 1999, we made cash payments of approximately $237.3 million related
to the acquisition of television and radio broadcast assets primarily by
utilizing available indebtedness under our 1998 bank credit agreement. These
payments included $118.6 million related to the April 1999 Guy Gannett
acquisition, $83.6 million related to the July 1999 Guy Gannett acquisition,
$14.1 million related to the St. Louis Radio acquisition, and $21.0 million
related to other acquisitions. For the year ended December 31, 1999, we received
approximately $733.9 million of cash proceeds related to the sale of certain
television and radio broadcast assets which was primarily utilized to repay
indebtedness under the 1998 bank credit agreement. These cash proceeds included
$674.1 million related to the Entercom disposition, $23.7 million related to the
Barnstable disposition, $35.9 million related to the CCA disposition, and $0.2
million related to other dispositions. During the year ended December 31, 1999,
we made equity interest investments of approximately $14.2 million, including
$7.6 million related to an investment in Acrodyne, $2.4 million related to an
investment in Allegiance Capital Limited Partnership, $2.2 million related to an
investment in BeautyBuys.com, and $2.0 million related to an investment in
Tuscaloosa Tower. We made payments for property and equipment of $30.9 million
for the year ended December 31, 1999. In addition, we anticipate that future
requirements for capital
35
expenditures will include capital expenditures incurred during the ordinary
course of business and additional strategic station acquisitions and equity
investments if suitable investments can be identified on acceptable terms.
Net cash flows used in financing activities was $570.0 million for the year
ended December 31, 1999 compared to net cash flows from financing activities of
$1.5 billion for the year ended December 31, 1998. During the year ended
December 31, 1999, we repaid $857.5 million and $50.0 million under the
revolving credit facility and term loan facility components of the 1998 bank
credit agreement, respectively, primarily from proceeds of the sale of radio
stations. In addition, we utilized borrowings under the revolving credit
facility of $357.5 million primarily to fund acquisition activity including the
Guy Gannett acquisition. During 1999 and as of December 31, 1999, we repurchased
and retired 320,000 shares of our class A common stock for approximately $3.5
million. During 2000 and as of March 24, 2000, we repurchased and retired
3,460,066 shares of our class A common stock for aproximately $32.7 million.
36
INCOME TAXES
The income tax provision increased to $174.9 million for the year ended
December 31, 1999 from a provision of $45.7 million for the year ended December
31, 1998. For the year ended December 31, 1999, the provision for continuing
operations and discontinued operations is $25.1 million and $149.8 million
respectively. For the year ended December 31, 1998, the provision for continuing
operations and discontinuing operations is $32.6 and $13.1 million respectively.
For 1999, our pre-tax book loss from continuing operations was $17.0 million and
we recorded a tax expense of $25.1 million. We recognized this provision on a
pre-tax loss because our non-deductible tax items were in excess of the pre-tax
loss and these items caused continuing operations to have taxable income. These
non-deductible tax items primarily consisted of non-deductible goodwill
associated with stock acquisitions.
As of December 31, 1999, we have a net deferred tax liability of $228.7
million as compared to a net deferred tax liability of $165.5 million as of
December 31, 1998. The increase in net deferred tax liability from the year
ended December 31, 1998 to the year ended December 31, 1999 is due to the use of
federal and state net operating losses and alternative minimum tax credits as a
result of the sale of radio assets. Additionally, accelerated tax depreciation
and amortization of fixed and intangible assets contributed to an increase in
deferred tax liabilities.
The income tax provision increased to $45.7 million for the year ended
December 31, 1998 from a provision of $16.0 million for the year ended December
31, 1997. Our effective tax rate increased to 511.9% for the year ended December
31, 1998 from 302.0% for the year ended December 31, 1997. The increase in the
effective tax rate for the year ended December 31, 1998 as compared to the year
ended December 31, 1997 primarily resulted from an increase in non-deductible
tax items including the deferred tax liability related to the HYTOPS transaction
and non-deductible goodwill related to stock acquisitions.
SEASONALITY
Our results usually are subject to seasonal fluctuations, which result in
fourth quarter broadcast operating income being greater usually than first,
second and third quarter broadcast operating income. This seasonality is
primarily attributable to increased expenditures by advertisers in anticipation
of holiday season spending and an increase in viewership during this period. In
addition, revenues from political advertising tend to be higher in even numbered
years.
YEAR 2000
We spent approximately $2.5 million over the past two years updating
hardware and software systems to ensure Year 2000 compliance. The four phases of
our Year 2000 plan consisted of: inventory and data collection; compliance
requests; test fix and verify; final testing and new item compliance. Each of
the four phases of our Year 2000 process have been successfully completed and no
disruptions to operations occurred as a result of Year 2000.
Although we have completed all phases of our Year 2000 compliance project
and currently believe all of our systems to be Year 2000 compliant, we cannot
assure you that any of our systems will be Year 2000 compliant in future dates.
In addition, we cannot assure you that outside systems indirectly related to our
operations are Year 2000 compliant or will be Year 2000 compliant in future
dates.
RISK FACTORS
We believe that our future operating results and funds generated from
operations and available under our credit facility will be sufficient to meet
general corporate requirements and planned capital expenditures for the
foreseeable future. However, we cannot identify nor can we control all
circumstances that could occur in the future that may adversely affect our
business and results of operations. Some of the circumstances that may occur and
may impair our business are described below. If any of the following
circumstances were to occur, our business could be materially adversely
affected.
37
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR OPERATIONS AND OUR
ABILITY TO FULFILL OUR OBLIGATIONS TO YOU.
We have a high level of debt and other obligations compared to
stockholders' equity. Our obligations include the following:
Indebtedness under the bank credit agreement. As of December 31, 1999, we
owed $1,003 million under our bank credit agreement and had a $650.0
million remaining balance available. Based on pro forma trailing cash flow
levels for the twelve months ended December 31, 1999, we had approximately
$224.2 million available of current borrowing capacity under our bank
credit agreement.
Indebtedness under notes. We have issued and outstanding three series of
senior subordinated notes. The total amount outstanding under these notes
as of December 31, 1999 was $750.0 million.
Obligations under High Yield Trust Offered Preferred Securities (HYTOPS).
Sinclair Capital, a subsidiary trust of Sinclair, has issued $200 million
aggregate liquidation amount of HYTOPS. "Aggregate liquidation amount"
means the amount Sinclair Capital must pay to the holders when it redeems
the HYTOPS or upon liquidation. Sinclair Capital must redeem the HYTOPS in
2009. We are indirectly liable for the HYTOPS obligations because we issued
$206.2 million liquidation amount of series C preferred stock to KDSM,
Inc., our wholly owned subsidiary, to support $200 million aggregate
principal amount of 11 5/8% notes that KDSM, Inc. issued to Sinclair
Capital to support the HYTOPS.
Series D Convertible Exchangeable Preferred Stock. We have issued 3,450,000
shares of series D convertible exchangeable preferred stock with an
aggregate liquidation preference of approximately $172.5 million. The
liquidation preference means we would be required to pay the holder of
series D convertible exchangeable preferred stock $172.5 million before we
paid holders of common stock (or any other stock that is junior to the
series D convertible exchangeable preferred stock) in any liquidation of
Sinclair. We are not obligated to buy back or retire the series D
convertible exchangeable preferred stock, but may do so at our option
beginning in 2000 at a conversion rate of $22.8125 per share. In some
circumstances, we may also exchange the series D convertible exchangeable
preferred stock for 6% subordinated debentures due 2012 with an aggregate
principal amount of $172.5 million.
Program Contracts Payable and Programming Commitments. We enter into
contracts to purchase future programming. Under these contracts, we were
obligated on December 31, 1999 to make future payments totaling $176.1
million.
Our relatively high level of debt poses the following risks to you and to
Sinclair:
o We use a significant portion of our cash flow to pay principal and
interest on our outstanding debt and to pay dividends on preferred
stock. This will limit the amount available for other purposes. For
the year ended December 31, 1999, we would have been required to pay
$159.7 million in interest and preferred dividends (including dividend
payments on the HYTOPS) if all of our material securities and
acquisition and divestiture transactions during 1999 had been
completed as of January 1, 1999.
o Our lenders may not be as willing to lend additional amounts to us for
future working capital needs, additional acquisitions, or other
purposes.
o The interest rate under our bank credit agreement is a floating rate,
and will increase if general interest rates increase. This will
increase the portion of our cash flow that must be spent on interest
payments.
o We may be more vulnerable to adverse economic conditions than less
leveraged competitors and thus less able to withstand competitive
pressures.
38
o If our cash flow were inadequate to make interest and principal
payments, we might have to refinance our indebtedness or sell one or
more of our stations to reduce debt service obligations.
Any of these effects could reduce the trading value of our securities.
OUR FLEXIBILITY IS LIMITED BY PROMISES WE HAVE MADE TO OUR LENDERS.
Our existing financing agreements prevent us from taking certain actions
and require us to meet certain tests. These restrictions and tests include the
following:
o Restrictions on additional debt,
o Restrictions on our ability to pledge our assets as security for
our indebtedness,
o Restrictions on payment of dividends, the repurchase of stock and
other payments relating to capital stock,
o Restrictions on some sales of assets and the use of proceeds of
asset sales,
o Restrictions on mergers and other acquisitions, satisfaction of
conditions for acquisitions, and a limit on the total amount of
acquisitions without consent of bank lenders,
o Restrictions on the type of businesses we and our subsidiaries
may be in,
o Restrictions on type and amounts of investments we and our
subsidiaries may make, and
o Financial ratio and condition tests including the ratio of
earnings before interest, taxes, depreciation and amortization
(EBITDA) to total interest expense, the ratio of EBITDA to
certain of our fixed expenses, and the ratio of indebtedness to
EBITDA.
Future financing arrangements may contain additional restrictions and
tests. These restrictions and tests may prevent us from taking action that could
increase the value of our securities, or may require actions that decrease the
value of securities. In addition, we may fail to meet the tests and thereby
default on one or more of our obligations. If we default on our obligations,
creditors could require immediate payment of the obligations or foreclose on
collateral. If this happened, we could be forced to sell assets or take other
action that would reduce the value of our securities.
KEY OFFICERS AND DIRECTORS HAVE FINANCIAL INTERESTS THAT ARE DIFFERENT AND
SOMETIMES OPPOSITE TO THOSE OF SINCLAIR.
Some of our officers and directors own stock or partnership interests in
businesses that engage in television broadcasting, do business with us, or
otherwise do business that conflicts with our interests. David D. Smith,
Frederick G. Smith, and J. Duncan Smith are each an officer and director of
Sinclair, and Robert E. Smith is a director. Together, the Smiths hold shares of
our stock that have a majority of the voting power. The Smiths own a business
that operates a television station in St. Petersburg, Florida. The Smiths also
own businesses that lease real property and tower space to us, buy advertising
time from us, and engage in other transactions with us. In addition, relatives
of the Smiths hold a majority of the equity, but not the voting control, of
Glencairn, Ltd. Glencairn holds the licenses for television stations that we
program under local marketing agreements with Glencairn.
Maryland law and our financing agreements limit the extent to which our
officers, directors and majority stockholders may transact business with us and
pursue business opportunities that Sinclair might pursue. These limitations do
not, however, prohibit all such transactions. Officers, directors and majority
stockholders may therefore transact some business with us even when there is a
conflict of interest.
39
THE SMITHS EXERCISE CONTROL OVER ALL MATTERS SUBMITTED TO A STOCKHOLDER VOTE,
AND MAY HAVE INTERESTS THAT DIFFER FROM YOURS.
David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith
control the outcome of all matters submitted to a vote of stockholders. The
Smiths hold class B common stock, which generally has 10 votes per share. Our
class A common stock has only one vote per share. Our other series of preferred
stock generally do not have voting rights. We describe in detail the voting
rights of shares of our capital stock in portions of Sinclair's proxy statement
for the 2000 annual meeting of shareholders under the heading "Security
Ownership of Certain Beneficial Owners", which we have incorporated by reference
in this report. As of December 31, 1999, the Smiths held shares representing 90%
of the vote on most matters and representing 50% of the vote on the few matters
for which class B shares have only one vote per share. The Smiths have agreed
with each other that until 2005 they will vote for each other as director.
CERTAIN FEATURES OF OUR CAPITAL STRUCTURE MAY DETER OTHERS FROM ATTEMPTING TO
ACQUIRE SINCLAIR.
The control the Smiths have over stockholder votes may discourage other
companies from trying to acquire us. In addition, our board of directors can
issue additional shares of preferred stock with rights that might further
discourage other companies from trying to acquire us. Anyone trying to acquire
us would likely offer to pay more for shares of class A common stock than the
amount those shares were trading for in market trades at the time of the offer.
If the voting rights of the Smiths or the right to issue preferred stock
discourage such takeover attempts, stockholders may be denied the opportunity to
receive such a premium. The general level of prices for class A common stock
might also be lower than it would be if these deterrents to takeovers did not
exist.
WE DEPEND ON ADVERTISING REVENUE, WHICH MAY DECREASE DEPENDING ON A NUMBER OF
CONDITIONS.
Our main source of revenue is sales of advertising time. Our ability to
sell advertising time depends on:
o the health of the economy in the areas where our stations are
located and in the nation as a whole;
o the popularity of our programming;
o changes in the makeup of the population in the areas where our
stations are located;
o the activities of our competitors; and
o other factors that may be beyond our control.
For example, a labor dispute or other disruption at a major national
advertiser, or a recession in a particular market, would make it more difficult
to sell advertising time and could reduce our revenue.
WE MUST PURCHASE TELEVISION PROGRAMMING IN ADVANCE, BUT CANNOT PREDICT IF A
PARTICULAR SHOW WILL BE POPULAR ENOUGH TO COVER ITS COST.
One of our most significant costs is television programming. If a
particular program is not popular, we may not be able to sell enough advertising
time to cover the costs of the program. Since we purchase programming content
from others, we also have little control over the costs of programming. We
usually must purchase programming several years in advance, and may have to
commit to purchase more than one year's worth of programming. Finally, we may
replace programs that are doing poorly before we have recaptured any significant
portion of the costs we incurred, or accounted fully for the costs on our books
for financial reporting purposes. Any of these factors could reduce our revenues
or otherwise cause our costs to escalate relative to revenues.
WE MAY LOSE A LARGE AMOUNT OF PROGRAMMING IF A NETWORK TERMINATES ITS
AFFILIATION WITH US. WE ALSO CANNOT BE SURE THE NETWORKS WILL PROVIDE
ATTRACTIVE PROGRAMMING.
All but one of our television stations operate as affiliates of a network.
The vast majority of our prime time programming in network-affiliated stations
comes from their networks. Our Fox affiliates acquired in connection with the
Sullivan and Max Media acquisitions in 1998 (as further discussed in note 11 to
the
40
attached financial statements) and three of our ABC affiliates do not have
affiliation agreements with their respective network. The networks may terminate
the affiliation of stations that do have affiliation agreements, under certain
circumstances, with between 15 days and six months' notice. The relationship
between networks and station owners is currently undergoing significant change,
and the networks may seek reduced or no fees to owners and may seek increased
compensation in the form of additional advertising, cash payments or in other
forms. Networks may seek and receive terms that reduce our revenue or increase
our costs. If a network terminates or fails to renew our affiliation, we will
lose access to the programming offered by that network. We will need to find
alternative sources of programming, which may be less attractive or more
expensive.
COMPETITION FROM OTHER BROADCASTERS AND OTHER SOURCES MAY CAUSE OUR ADVERTISING
SALES TO GO DOWN OR OUR COSTS TO GO UP.
We face intense competition in our industry and markets from the following:
New Technology and the Subdivision of Markets. New technologies enable our
competitors to tailor their programming for specific segments of the listening
and viewing public to a degree not possible before. As a result, the overall
market share of broadcasters, such as us whose equipment may not permit such a
discriminating approach is under new pressures. The new technologies include:
o cable,
o satellite-to-home distribution,
o pay-per-view, and
o home video and entertainment systems.
Future Technology under Development. Cable providers and direct broadcast
satellite companies are developing new techniques that allow them to transmit
more channels on their existing equipment. These so-called "video compression
techniques" will reduce the cost of creating channels, and may lead to the
division of the television industry into ever more specialized niche markets.
Video compression is available to us as well, but competitors who target
programming to such sharply defined markets may gain an advantage over us for
television advertising revenues. Lowering the cost of creating channels may also
encourage new competitors to enter our markets and compete with us for
advertising revenue.
In-Market Competition. We also face more conventional competition from
rivals that may be larger and have greater resources than us. These include:
o other local free over-the-air radio and broadcast stations, and
o other media, such as newspapers and periodicals.
Deregulation. Recent changes in law have also increased competition. The
Telecommunications Act of 1996 (the 1996 Act) created greater flexibility and
removed some limits on station ownership. The prices for stations have risen as
a result. Telephone, cable, and some other companies are also free to provide
video services in competition with us. Other proposed legislation would relax
existing prohibitions on the simultaneous ownership of telephone and cable
businesses. As a result of these changes, new companies are able to enter our
markets and compete with us.
OUR RECENT INVESTMENTS IN INTERNET BUSINESSES MAY NOT DELIVER THE VALUE WE PAID
FOR THEM OR REACH OUR STRATEGIC OBJECTIVES.
Our strategy now includes investing in and working with Internet-related
businesses. In pursuit of this strategy, we made three equity investments in
Internet related businesses in 1999 and intend to make additional investments as
appropriate opportunities arise. The long term value of Internet related
businesses has yet to be determined, and we cannot assure you that these
investments will be worth the amount of our investment, or that we will be able
to develop services that are profitable for Sinclair or the businesses in which
we have invested. If the businesses in which we have invested fail to succeed,
we may lose as much as all of our investment in the businesses. We may also
spend additional funds and devote additional resources to these businesses, and
these additional investments may also be lost.
41
THE PHASED INTRODUCTION OF DIGITAL TELEVISION WILL INCREASE OUR OPERATING COSTS
AND MAY EXPOSE US TO INCREASED COMPETITION.
The FCC has mandated the phased introduction of digital television from
1999 to 2006, starting with the affiliates of ABC, CBS, Fox and NBC in the top
ten markets. These stations were required to commence broadcasting in digital
format by May 1, 1999. The affiliates of these networks in the next 20 markets
were required to commence digital broadcasting by November 1999. We had no
stations that needed to have digital operations by the May 1, 1999 deadline and
5 stations that needed to meet the November 1999 deadline. As of the date of
this 10-K, none of our stations are broadcasting in digital format. The FCC has
granted DTV construction permits and extensions to commence digital operations
until May 2000 with respect to two of these stations. We informed the FCC that
these stations, like many other stations, were unable to begin digital
operations by November 1999 due to delays in procuring and installing necessary
equipment. We have informed the FCC that we expect to construct our digital
facilities for these stations by the end of the second quarter of 2000. With
respect to the other three stations, we have applications pending for DTV
construction permits and the FCC has granted us special temporary authority for
two of these stations to begin digital operations prior to grant of the
construction permit. During the transition period, each existing analog
television station will be permitted to operate a second station that will
broadcast using the digital standard. After completion of the transition period,
the FCC will reclaim the non-digital channels.
There is considerable uncertainty about the final form of the FCC digital
regulations. Even so, we believe that these new developments may have the
following effects on us:
Signal Quality Issues. Our tests have indicated that the digital
standard mandated by the FCC, 8-level vestigial sideband (8-VSB), is
currently unable to provide for reliable reception of a DTV signal
through a simple indoor antenna. Absent improvements in DTV receivers,
or an FCC ruling allowing us to use an alternative standard, continued
reliance on the 8-VSB digital standard may not allow us to provide the
same reception coverage with our digital signals as we can with our
current analog signals. Additionally, because of this poor reception
quality and coverage, we may be forced to rely on cable television or
other alterative means of transmission to deliver our digital signals
to all of the viewers we are able to reach with our current analog
signals.
Reclamation of Analog Channels. Congress directed the FCC to begin
auctioning analog channels 60-69 this year and the remaining
non-digital channels by September 30, 2002, even though the FCC is not
to reclaim them until 2006. Congress further permitted broadcasters to
bid on the non-digital channels in cities with populations over
400,000. If the channels are owned by our competitors, they may exert
increased competitive pressure on our operations.
Capital and Operating Costs. We will incur costs to replace equipment
in our stations in order to provide digital television. Some of our
stations will also incur increased utilities costs as a result of
converting to digital operations. We cannot be certain we will be able
to increase revenues to offset these additional costs.
Subscription Fees and System Compatibility. The FCC has determined to
assess a fee in the amount of 5% of gross revenues on digital
television subscription services. If we are unable to pass this cost
through to our subscribers, this fee will reduce our earnings from the
digital television subscription services we are planning. The FCC also
is considering whether to require cable systems to carry digital
television signals. Under current regulations, cable systems are only
required to carry non-digital signals. Given this climate of market
uncertainty and regulatory change, we cannot be sure what impact the
FCC's actions might have on our plans and results in the area of
digital television.
FEDERAL REGULATION OF THE BROADCASTING INDUSTRY LIMITS OUR OPERATING
FLEXIBILITY.
The FCC regulates our business, just as it does all other companies in the
broadcasting industry. We must ask the FCC's approval whenever we need a new
license, seek to renew or assign a license, purchase
42
a new station, or transfer the control of one of our subsidiaries that holds a
license. Our FCC licenses and those of the stations we program pursuant to LMAs
are critical to our operations; we cannot operate without them. We cannot be
certain that the FCC will renew these licenses in the future, or approve new
acquisitions.
Federal legislation and FCC rules have changed significantly in recent
years. We anticipate further changes in the rules on digital television. We
discuss some of the possible effects of these changes elsewhere in this 10-K,
but we cannot predict all the effects that such changes may have on our
business.
THE FCC'S OWNERSHIP RESTRICTIONS LIMIT OUR ABILITY TO OPERATE MULTIPLE
TELEVISION STATIONS, AND FUTURE CHANGES IN THESE RULES MAY THREATEN OUR EXISTING
STRATEGIC APPROACH TO CERTAIN TELEVISION MARKETS.
General Limitations
The FCC's ownership rules limit us from having "attributable interests" in
television stations that reach more than 35% of all television households in the
U.S. Under the FCC's method for calculating this limit, our television stations
will reach approximately 15% of U.S. television households after we complete our
pending purchases and sales of stations.
Changes in the Rules on Television Ownership and Local Marketing Agreements
In 1999, the FCC revised its local television ownership and LMA attribution
rules. In the past, a licensee could not own two television stations in a market
but could own one station and program another station pursuant to an LMA because
LMAs were not considered attributable interests. The new television ownership
rules allow us to own more than one television station in a market: (1) if there
is no Grade B overlap between the stations; (2) if the stations are in two
different Nielsen Designated Market Areas; or (3) if the market containing both
the stations contains at least eight separately owned full-power television
stations, and not more than one is among the top-four rated stations in the
market. In addition, we may request a waiver of the rule to acquire a second
station in the market if the station to be acquired is economically distressed
or unbuilt and there is no party who does not own a local television station who
would purchase the station for a reasonable price. We currently program 26
television stations pursuant to LMAs. We have entered into agreements to acquire
16 of the stations that we program pursuant to an LMA. Once we acquire these
stations, the LMAs will terminate.
Under the new ownership rules, LMAs are now attributable where a licensee
owns a television station and programs a television station in the same market.
The new rules provide that LMAs entered into on or after November 5, 1996 have
until August 5, 2001 to come into compliance with the new ownership rules,
otherwise such LMAs will terminate. LMAs entered into before November 5, 1996
will be grandfathered until the conclusion of the FCC's 2004 biennial review. In
certain cases, parties with grandfathered LMAs, may be able to rely on the
circumstances at the time the LMA was entered into in advancing any proposal for
co-ownership of the station. Of the remaining 10 stations that we program
pursuant to an LMA and are not acquiring, 5 LMAs were entered into before
November 5, 1996, and 5 LMAs were entered into on or after November 5, 1996. As
a result of these changes, we may be forced to terminate or modify some of our
remaining LMAs.
Terminating or modifying our LMAs could affect our business in the
following ways:
Losses on Investments. As part of our LMA arrangements, we own the
non-license assets used by the stations with which we have LMAs. If
LMA arrangements are no longer permitted, we would be forced to sell
these assets, or find another use for them. If LMAs are prohibited,
the market for such assets may not be as good as when we purchased
them and we would need to sell the assets to the owner or a purchaser
of the related license assets. Therefore, we cannot be certain we will
recoup our investments.
Termination Penalties. If the FCC requires us to modify or terminate
existing LMAs before the terms of the LMAs expire, we may be forced to
pay termination penalties under the terms of some of our LMAs.
43
The FCC requires the owner/licensee of a station to maintain independent
control over the programming and operations of the station. As a result, the
owners/licensees of the stations with which we have LMAs can exert their control
in ways that may be counter to our interests, including the right to preempt
programming or terminate in certain instances.
These preemption and termination rights cause us some uncertainty that we
will be able to air all of the programming that we have purchased, and therefore
uncertainty about the advertising revenues we will receive from such
programming.
Failure of Owner/Licensee to Exercise Control. In addition, if the FCC
determines that the owner/licensee is not exercising sufficient control, it may
penalize the owner/licensee by a fine, revocation of the license for the station
or a denial of the renewal of the license.
Any one of these scenarios might affect our financial results, especially
the revocation of or denial of renewal of a license. In addition, penalties
might also affect our qualifications to hold FCC licenses, and thus place those
licenses at risk.
WE HAVE LOST MONEY IN THREE OF THE LAST FOUR YEARS, AND EXPECT TO CONTINUE TO DO
SO INDEFINITELY.
We have suffered net losses in three of the last five years. In 1999, we
reported earnings, but this was largely due to a gain on the sale of our radio
stations and recognition of an unrealized gain on a derivative instrument. Our
losses are due to the following significant cash and non-cash expenses:
o Cash Expenses: Interest
o Non-cash Expenses: Depreciation, amortization (primarily of
programming and intangibles), and deferred
compensation.
We expect our net losses to continue indefinitely for the same reasons.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. To manage our
exposure to changes in interest rates, we enter into interest rate derivative
hedging agreements. We have entered into an additional derivative instrument to
monetize the benefit of a call option on a portion of our outstanding
indebtedness at interest rates prevailing at the time we entered into the
instrument. This derivative instrument (the treasury option derivative
instrument) exposes us to market risk from a further decrease in interest rates,
but we believe that this risk is offset by the benefit to us from reduced
interest rate expense on a portion of our floating rate debt and the ability to
call some of our indebtedness and replace it with debt at the lower prevailing
interest rates.
Finally, we have entered put and call option derivative instruments
relating to our class A common stock in order to hedge against the possible
dilutive effects of employees exercising stock options pursuant to our stock
option plans.
We do not enter into derivative instruments for speculative trading
purposes. With the exception of our treasury option derivative instrument
(described below), we do not reflect the changes in fair market value related to
derivative instruments in the accompanying financial statements.
INTEREST RATE RISKS
We are exposed to market risk from changes in interest rates, which arises
from the floating rate debt. As of December 31, 1999, we were obligated on $1.0
billion of indebtedness carrying a floating interest rate. We enter into
interest rate derivative agreements to reduce the impact of changing interest
rates on our floating rate debt. The 1998 bank credit agreement, as amended and
restated, requires us to enter into interest rate protection agreements at rates
not to exceed 10% per annum as to a notional principal amount at least equal to
60% of the term loan, revolving credit facility and senior subordinated notes
scheduled to be outstanding from time to time.
As of December 31, 1999, we had several interest rate swap agreements which
expire from July 23, 2000 to July 15, 2007. The swap agreements effectively set
fixed rates on our floating rate debt in the range of 5.5% to 8.1%. Floating
interest rates are based upon the three month London Interbank Offered Rate
(LIBOR), and the measurement and settlement is performed quarterly.
Settlements of these agreements are recorded as adjustments to interest
expense in the relevant periods. The notional amounts related to these
agreements were $1.0 billion at December 31, 1999, and decrease to $200 million
through the expiration dates. In addition, we entered into floating rate
derivatives with notional amounts totaling $750 million. Based on our currently
hedged position, $1.8 billion or 96% of our outstanding indebtedness is hedged.
Based on our debt levels and the amount of floating rate debt not hedged as
of March 15, 2000, a 1% increase in the LIBOR rate would result in an increase
in annualized interest expense of approximately $14.0 million.
TREASURY OPTION DERIVATIVE INSTRUMENT
In August 1998, we entered into a treasury option derivative contract. 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, we 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 treasuries at September 30, 2000 were to equal the two year
forward five year treasury rate on December 31, 1999 for treasuries settled on
September 30, 2000, we would not be required to make payments.
Upon the execution of the option derivative contract, we received a cash
payment representing an option premium of $9.5 million which was recorded in
"Other long-term liabilities" in the accompanying consolidated balance sheets.
We are required to periodically adjust our liability to the present value of
45
the future payments of the settlement amounts based on the forward five year
treasury rate at the end of an accounting period. The fair market value
adjustment for 1999 resulted in an income statement benefit (unrealized gain) of
$15.7 million for the year ended December 31, 1999. If the yield on five year
treasuries at September 30, 2000 were to equal the two year forward five year
treasury rate on December 31, 1999 (6.4%), we would not be required to make
payments.
We have the ability to call our 10% senior subordinated notes due 2005 on
September 15, 2000. The value of this call is determined by new issuance yields
for senior subordinated debt at that time. The value of this call rises when
yields fall and falls when yields rise. New issuance yields are based on a
spread over treasury yields. If the yield on five-year treasuries remains below
6.14% until September 30, 2000, we expect to be able to call those notes and
refinance at the lower prevailing rates, thus offsetting the effect of the
payments required under the treasury option derivative. There can be no
assurance, however, that we would be able to refinance the 1995 Notes at such
time at favorable interest rates.
We are also exposed to risk from a change in interest rates to the extent
we are required to refinance existing fixed rate indebtedness at rates higher
than those prevailing at the time the existing indebtedness was incurred. As of
December 31, 1999, we have senior subordinated notes totaling $300 million and
$450 million expiring in the years 2005 and 2007, respectively. Based upon the
quoted market price, the fair value of the notes was $713.6 million as of
December 31, 1999. Generally, the fair market value of the notes will decrease
as interest rates rise and increase as interest rates fall. We estimate that a
1% increase from prevailing interest rates would result in a decrease in fair
value of the notes by approximately $33.6 million as of December 31, 1999.
EQUITY PUT OPTION DERIVATIVES
We are exposed to market risk relating to our equity put option derivative
instruments . The contract terms relating to these instruments provide for
settlement on the expiration date. The equity puts require us to make a
settlement payment to the counterparties to these contracts (payable in either
cash or shares of our class A common stock) in an amount that is approximately
equal to the put strike price minus the price of our class A common stock as of
the termination date. If the put strike price is less than the price of our
class A common stock as of the termination date, we would not be obligated to
make a settlement payment. In addition, certain of these contracts include terms
allowing the put option to become immediately exercisable upon our class A
common stock trading at certain levels. The following table summarizes our
position relating to the equity puts and illustrates the market risk associated
with these instruments.
DECEMBER 31, 1999
----------------------------------------------------
EQUITY PUT PUT TERMINATION TRIGGER SETTLEMENT SENSITIVITY-SETTLEMENT
OPTIONS OUTSTANDING STRIKE PRICE DATE PRICE (A) ASSUMING TERMINATION (B) ASSUMING TERMINATION (C)
- --------------------- -------------- ------------------ ----------- -------------------------- -------------------------
1,100,000 $ 12.89 January 13, 2000 $ 5.00 $ 4,141,500 $ 5,145,250
2,700,000(d) 28.93 July 2, 2001 5.00 7,811,370 7,811,370
1,700,000 9.45 June 28, 2000 5.00 552,500 2,103,750
500,000(e) 16.06 March 13, 2000 5.00 3,467,500 3,923,750
----------- -----------
$15,972,870 $18,984,120
=========== ===========
(a) If our class A common stock reaches a market price equal to "Trigger
Price," the equity put options will become immediately exercisable.
(b) This column represents the settlement costs that would be incurred (payable
in either cash or shares of our class A common stock) if equity put options
were terminated on December 31, 1999 and assuming a market price of $9.125
(the closing price on March 15, 2000).
(c) This column represents the settlement costs that would be incurred (payable
in either cash or shares of our class A common stock) if equity put options
were terminated on December 31, 1999 and assuming a market price of $8.2125
(the closing price on March 15, 2000 minus 10%).
(d) The settlement of these equity put options is limited to a maximum of
$2.893 per option outstanding, or $7,811,370.
(e) This equity put option agreement was subsequently amended. Effective March
13, 2000 there are 2.1 million equity put options outstanding at a put
strike price of $10.125 terminating June 28, 2000.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement and supplementary data required by this item are
filed as exhibits to this report, are listed under Item 14(a)(1) and (2), and
are incorporated by reference in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in our proxy
statement for the 2000 annual meeting of shareholders under the caption
"Directors and Executive Officers" which will be filed with the SEC no later
than 120 days after the close of the fiscal year ended December 31, 1999, and is
incorporated by reference in this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in our proxy
statement for the 2000 annual meeting of shareholders under the caption
"Executive Compensation" which will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 1999, and is incorporated
by reference in this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in our proxy
statement for the 2000 annual meeting of shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" which will be
filed with the SEC no later than 120 days after the close of the fiscal year
ended December 31, 1999, and is incorporated by reference in this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in our proxy
statement for the 2000 annual meeting of shareholders under the caption "Certain
Relationships and Related Transactions" which will be filed with the SEC no
later than 120 days after the close of the fiscal year ended December 31, 1999,
and is incorporated by reference in this report.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
PAGE
----
Report of Independent Public Accountants ...................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 .................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1998 and 1999 ................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1997, 1998 and 1999 ...................................................... F-5, F-6, F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998 and 1999 ................................................................ F-8, F-9
Notes to Consolidated Financial Statements .................................... F-10
(a) (2) Financial Statements Schedules
The following financial statements schedules required by this item are
submitted on pages S-1 through S-3 of this Report.
PAGE
----
Index to Schedules .......................................................... S-1
Report of Independent Public Accountants .................................... S-2
Schedule II -- Valuation and Qualifying Account ............................. S-3
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the accompanying
notes.
(a) (3) Exhibits
The exhibit index in Item 14(c) is incorporated by reference in this
report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the fourth
quarter of the fiscal year ended December 31, 1999.
(c) Exhibits
The following exhibits are filed with this report:
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws (2)
4.1 Indenture, dated as of December 9, 1993, among Sinclair Broadcast Group, Inc., its
wholly-owned subsidiaries and First Union National Bank of North Carolina, as trustee. (2)
4.2 Indenture, dated as of August 28, 1995, among Sinclair Broadcast Group, Inc., its wholly-owned
subsidiaries and the United States Trust Company of New York as trustee. (2)
4.3 Subordinated Indenture, dated as of December 17, 1997, among Sinclair Broadcast Group, Inc.
and First Union National Bank, as trustee (3)
49
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ---------- ----------------------------------------------------------------------------------------------
4.4 First Supplemental Indenture, dated as of December 17, 1997, among Sinclair Broadcast Group,
Inc., the Guarantors named therein and First Union National Bank, as trustee, including Form
of Note. (3)
10.1 Stock Option Agreement, dated April 10, 1996 by and between Sinclair Broadcast Group, Inc.
and Barry Baker. (4)
10.2 Employment Agreement, dated as of April 10, 1996, with Barry Baker. (5)
10.3 Indemnification Agreement, dated as of April 10, 1996, with Barry Baker. (5)
10.4 Termination Agreement by and between Sinclair Broadcast Group, Inc. and Barry Baker, dated
February 8, 1999. (6)
10.5 Time Brokerage Agreement, dated as of May 31, 1996 by and among Sinclair Broadcast Group,
Inc., River City Broadcasting, L.P. and River City License Partnership and Sinclair Broadcast
Group, Inc. (5)
10.6 Registration Rights Agreement, dated as of May 31, 1996, by and between Sinclair Broadcast
Group, Inc. and River City Broadcasting, L.P. (5)
10.7 Time Brokerage Agreement, dated as of August 3, 1995, by and between River City
Broadcasting, L.P. and KRRT, Inc. and Assignment and Assumption Agreement, dated as of
May 31, 1996 by and among KRRT, Inc., River City Broadcasting, L.P. and KABB, Inc. (as
Assignee of Sinclair Broadcast Group, Inc.). (5)
10.8 Letter Agreement, dated August 20, 1996, between Sinclair Broadcast Group, Inc., River City
Broadcasting, L.P. and Fox Broadcasting Company. (7)
10.9 Promissory Note, dated as of May 17, 1990, in the principal amount of $3,000,000 among David
D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith (as makers) and Sinclair
Broadcast Group, Inc., Channel 63, Inc., Commercial Radio Institute, Inc., WTTE, Channel 28,
Inc. and Chesapeake Television, Inc. (as holders). (8)
10.10 Term Note, dated as of September 30, 1990, in the principal amount of $7,515,000 between
Sinclair Broadcast Group, Inc. (as borrower) and Julian S. Smith (as lender). (9)
10.11 Replacement Term Note, dated as of September 30, 1990 in the principal amount of $6,700,000
between Sinclair Broadcast Group, Inc. (as borrower) and Carolyn C. Smith (as lender) (2)
10.12 Note, dated as of September 30, 1990 in the principal amount of $1,500,000 between Frederick
G. Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as borrowers) and Sinclair
Broadcast Group, Inc. (as lender) (8)
10.13 Amended and Restated Note, dated as of June 30, 1992 in the principal amount of $1,458,489
between Frederick G. Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as
borrowers) and Sinclair Broadcast Group, Inc. (as lender). (8)
10.14 Term Note, dated August 1, 1992 in the principal amount of $900,000 between Frederick G.
Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as borrowers) and Commercial
Radio Institute, Inc. (as lender) (8)
10.15 Promissory Note, dated as of December 28, 1986 in the principal amount of $6,421,483.53
between Sinclair Broadcast Group, Inc. (as maker) and Frederick H. Himes, B. Stanley Resnick
and Edward A. Johnston (as representatives for the holders). (8)
10.16 Term Note, dated as of March 1, 1993 in the principal amount of $6,559,000 between Julian S.
Smith and Carolyn C. Smith (as makers-borrowers) and Commercial Radio Institute, Inc. (as
holder-lender). (8)
10.17 Restatement of Stock Redemption Agreement by and among Sinclair Broadcast Group, Inc. and
Chesapeake Television, Inc., et al., dated June 19, 1990. (8)
50
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------------
10.18 Corporate Guaranty Agreement, dated as of September 30, 1990 by Chesapeake Television, Inc.,
Commercial Radio, Inc., Channel 63, Inc. and WTTE, Channel 28, Inc. (as guarantors) to Julian
S. Smith and Carolyn C. Smith (as lenders). (8)
10.19 Security Agreement, dated as of September 30, 1990 among Sinclair Broadcast Group, Inc.,
Chesapeake Television, Inc., Commercial Radio Institute, Inc., WTTE, Channel 28, Inc. and
Channel 63, Inc. (as borrowers and subsidiaries of the borrower) and Julian S. Smith and Carolyn
C. Smith (as lenders). (8).
10.20 Term Note, dated as of September 22, 1993, in the principal amount of $1,900,000 between
Gerstell Development Limited Partnership (as maker-borrower) and Sinclair Broadcast Group,
Inc. (as holder-lender). (8).
10.21 Credit Agreement, dated as of May 28, 1998, by and among Sinclair Broadcast Group, Inc.,
Certain Subsidiary Guarantors, Certain Lenders, the Chase Manhattan Bank as Administrative
Agent, Nations Bank of Texas, N.A. as Documentation Agent and Chase Securities Inc. as
Arranger. (1)
10.22 Incentive Stock Option Plan for Designated Participants. (2)
10.23 Incentive Stock Option Plan of Sinclair Broadcast Group, Inc. (2)
10.24 First Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc., adopted
April 10, 1996. (4)
10.25 Second Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc., adopted
May 31, 1996. (4)
10.26 1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc. (4)
10.27 First Amendment to 1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc. (10)
10.28 Amended and Restated Asset Purchase Agreement by and between River City Broadcasting,
L.P. and Sinclair Broadcast Group, Inc., dated as of April 10, 1996 and amended and restated as
of May 31, 1996 (11)
10.29 Group I Option Agreement by and among River City Broadcasting, L.P. and Sinclair Broadcast
Group, Inc., dated as of May 31, 1996 (11)
10.30 Primary Television Affiliation Agreement, dated as of March 24, 1997 by and between American
Broadcasting Companies, Inc., River City Broadcasting, L.P. and Chesapeake Television, Inc. (12)
10.31 Primary Television Affiliation Agreement, dated as of March 24, 1997 by and between American
Broadcasting Companies, Inc., River City Broadcasting, L.P. and WPGH, Inc. (12)
10.32 Assets Purchase Agreement by and among Entertainment Communications, Inc., Tuscaloosa
Broadcasting, Inc., Sinclair Radio of Portland Licensee, Inc. and Sinclair Radio of Rochester
Licensee, Inc., dated as of January 26, 1998. (12)
10.33 Time Brokerage Agreement by and among Entertainment Communications, Inc., Tuscaloosa
Broadcasting, Inc., Sinclair Radio of Portland Licensee, Inc. and Sinclair Radio or Rochester
Licensee, Inc., dated as of January 26, 1998. (12)
10.34 Stock Purchase Agreement by and among the sole stockholders of Montecito Broadcasting
Corporation, Montecito Broadcasting Corporation and Sinclair Communications, Inc., dated as
of February 3, 1998. (13)
10.35 Stock Purchase Agreement by and among Sinclair Communications, Inc., the stockholders of
Max Investors, Inc., Max Investors, Inc. and Max Media Properties LLC., dated as of December
2, 1997. (13)
10.36 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Management
LLC and Max Media Properties LLC., dated as of December 2, 1997. (12)
51
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------------ -------------------------------------------------------------------------------------------------
10.37 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Television
Company, Max Media Properties LLC and Max Media Properties II LLC., dated as of December
2, 1997. (12)
10.38 Asset Purchase Agreement by and among Sinclair Communications, Inc., Max Television
Company, Max Media Properties LLC and Max Media Properties II LLC., dated as of January
21, 1998. (12)
10.39 Asset Purchase Agreement by and among Tuscaloosa Broadcasting, Inc., WPTZ Licensee, Inc.,
WNNE Licensee, Inc., and STC Broadcasting of Vermont, Inc., dated as of February 3, 1998. (12)
10.40 Stock Purchase Agreement by and among Sinclair Communications, Inc. and the stockholders of
Lakeland Group Television, Inc., dated as of November 14, 1997. (12)
10.41 Stock Purchase Agreement by and among Sinclair Communications, Inc., the stockholders of
Max Radio, Inc., Max Radio Inc. and Max Media Properties LLC, dated as of December 2, 1997. (12)
10.42 Agreement and Plan of Merger among Sullivan Broadcasting Company II, Inc., Sinclair
Broadcast Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998. (12)
10.43 Agreement and Plan of Merger among Sullivan Broadcast Holdings, Inc., Sinclair Broadcast
Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998. (12)
10.44 Employment Agreement by and between Sinclair Broadcast Group, Inc. and Frederick G. Smith,
dated June 12, 1998. (13)
10.45 Employment Agreement by and between Sinclair Broadcast Group, Inc. and J. Duncan Smith,
dated June 12, 1998. (13)
10.46 Employment Agreement by and between Sinclair Broadcast Group, Inc. and David B. Amy,
dated September 15, 1998. (13)
10.47 Employment Agreement by and between Sinclair Communications, Inc. and Kerby Confer,
dated December 10, 1998. (6)
10.48 Employment Agreement by and between Sinclair Communications, Inc. and Barry Drake, dated
February 21, 1997. (6)
10.49 First Amendment to Employment Agreement, by and between Sinclair Broadcast Group, Inc.
and Barry Baker, dated May, 1998. (6)
10.50 Purchase Agreement by and between Sinclair Communications, Inc. and STC Broadcasting, Inc.
dated as of March 5, 1999. (6)
10.51 Purchase Agreement by and between Guy Gannett Communications and Sinclair
Communications, Inc., dated as of September 4, 1998. (13)
10.52 Purchase Agreement by and between Sinclair Communications, Inc., and the Ackerly Group,
Inc., dated as of September 25, 1998. (13)
11 Statement re computation of per share earnings (included in financial statements)
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant
23.1 Consent of Independent Public Accountants
25 Power of attorney (included in signature page)
27 Financial Data Schedule
- ----------
(1) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended June 30, 1998
(2) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-90682
52
(3) Incorporated by reference from Sinclair's Current Report on Form 8-K, dated
as of December 16, 1997.
(4) Incorporated by reference from Sinclair's Report on Form 10-K for the year
ended December 31, 1996.
(5) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended June 30, 1996.
(6) Incorporated by reference from Sinclair's Report on Form 10-K for the year
ended December 31, 1998.
(7) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended September 30, 1996.
(8) Incorporated by reference from Sinclair's Registration Statement on Form
S-1, No. 33-69482
(9) Incorporated by reference from Sinclair's Report on Form 10-K for the year
ended December 31, 1995.
(10) Incorporated by reference from Sinclair's Proxy Statement for the 1998
Annual Meeting filed on Schedule 14A.
(11) Incorporated by reference from Sinclair's Amended Current Report on Form
8-K/A, filed May 9, 1996.
(12) Incorporated by reference from Sinclair's Report on Form 10-K for the year
ended December 31, 1997
(13) Incorporated by reference from Sinclair's Report on Form 10-Q for the
quarter ended September 30, 1998.
(d) Financial Statements Schedules
The financial statement schedules required by this Item are listed under
Item 14 (a) (2).
53
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on this
30th day of March 2000.
SINCLAIR BROADCAST GROUP, INC.
By: /s/ David D. Smith
---------------------------------
David D. Smith
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints David B. Amy as his
or her true and lawful attorneys-in-fact each acting alone, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead in any and all capacities to sign any or all amendments to this 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the SEC, granting unto said attorneys-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------- ------------------------------ ---------------
/s/ David D. Smith Chairman of the Board and March 30, 2000
- ------------------------------- Chief Executive Officer
David D. Smith (principal executive officer)
/s/ Thomas E. Severson Chief Accounting Officer March 30, 2000
- -------------------------------
Thomas E. Severson
/s/ Frederick G. Smith Director March 30, 2000
- -------------------------------
Frederick G. Smith
/s/ J. Duncan Smith Director March 30, 2000
- -------------------------------
J. Duncan Smith
/s/ Robert E. Smith Director March 30, 2000
- -------------------------------
Robert E. Smith
Director March 30, 2000
- -------------------------------
Basil A. Thomas
/s/ Lawrence E. McCanna Director March 30, 2000
- -------------------------------
Lawrence E. McCanna
54
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ........................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 .................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1998 and 1999 ................................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1998 and 1999 ........................................................... F-5, F-6, F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998 and 1999 ................................................................. F-8, F-9
Notes to Consolidated Financial Statements ...................................... F-10
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited the accompanying consolidated balance sheets of Sinclair
Broadcast Group, Inc. (a Maryland corporation) and Subsidiaries as of December
31, 1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sinclair Broadcast Group,
Inc. and Subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 3, 2000 (except for Note 15, as to which
the date is March 24, 2000)
F-2
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
AS OF DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash .................................................................................... $ 3,268 $ 16,408
Accounts receivable, net of allowance for doubtful accounts of $5,169 and $5,016, 196,880 210,343
respectively.
Current portion of program contract costs ............................................... 60,795 74,138
Prepaid expenses and other current assets ............................................... 5,542 7,418
Deferred barter costs ................................................................... 5,282 1,823
Broadcast assets related to discontinued operations, net of liabilities ................. 499,786 172,983
Broadcast assets held for sale, current ................................................. 33,747 77,962
Deferred tax assets ..................................................................... 19,209 5,215
---------- ----------
Total current assets ................................................................... 824,509 566,290
PROGRAM CONTRACT COSTS, less current portion ............................................. 45,608 53,002
LOANS TO OFFICERS AND AFFILIATES ......................................................... 10,041 8,307
PROPERTY AND EQUIPMENT, net .............................................................. 243,684 251,783
BROADCAST ASSETS HELD FOR SALE, less current portion ..................................... -- 144,316
OTHER ASSETS ............................................................................. 82,544 108,848
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net of accumulated amortization of
$204,522 and $331,308, respectively...................................................... 2,646,366 2,486,964
---------- ----------
Total Assets ........................................................................... $3,852,752 $3,619,510
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................................ $ 18,065 $ 7,600
Accrued liabilities ..................................................................... 85,562 67,078
Income taxes payable .................................................................... 10,788 116,821
Notes payable and commercial bank financing ............................................. 50,007 75,008
Notes and capital leases payable to affiliates .......................................... 4,063 5,890
Current portion of program contracts payable ............................................ 94,780 111,992
Deferred barter revenues ................................................................ 5,625 3,244
---------- ----------
Total current liabilities .............................................................. 268,890 387,633
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing ............................................. 2,254,108 1,677,299
Notes and capital leases payable to affiliates .......................................... 19,043 34,142
Program contracts payable ............................................................... 74,152 87,220
Deferred tax liability .................................................................. 184,736 233,927
Other long-term liabilities ............................................................. 32,181 20,444
---------- ----------
Total liabilities ...................................................................... 2,833,110 2,440,665
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ........................................... 3,599 3,928
---------- ----------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES .................................. 200,000 200,000
---------- ----------
STOCKHOLDERS' EQUITY:
Series D Preferred Stock, $.01 par value, 3,450,000 shares authorized and 3,450,000
shares issued and outstanding .......................................................... 35 35
Class A Common Stock, $.01 par value, 500,000,000 shares authorized and 47,445,731 and
49,142,513 shares issued and outstanding, respectively ................................. 474 491
Class B Common Stock, $.01 par value, 140,000,000 shares authorized and 49,075,428 and
47,608,347 shares issued and outstanding, respectively ................................. 491 476
Additional paid-in capital .............................................................. 768,648 764,091
Additional paid-in capital - equity put options ......................................... 113,502 116,370
Additional paid-in capital - deferred compensation ...................................... (7,616) (4,489)
Accumulated deficit ..................................................................... (59,491) 97,943
---------- ----------
Total stockholders' equity ............................................................. 816,043 974,917
---------- ----------
Total Liabilities and Stockholders' Equity ............................................. $3,852,752 $3,619,510
========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-3
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1998 1999
------------- ------------- -------------
REVENUES:
Station broadcast revenues, net of agency commissions of $67,355,
$90,664 and $106,925, respectively..................................... $ 407,410 $ 564,727 $ 670,252
Revenues realized from station barter arrangements ...................... 42,468 59,697 63,387
--------- ---------- ----------
Total revenues ........................................................ 449,878 624,424 733,639
--------- ---------- ----------
OPERATING EXPENSES:
Program and production .................................................. 74,380 109,947 144,181
Selling, general and administrative ..................................... 79,555 110,591 139,153
Expenses realized from station barter arrangements ...................... 38,114 54,067 57,561
Amortization of program contract costs and net realizable value
adjustments ........................................................... 63,790 69,453 86,857
Stock-based compensation ................................................ 1,410 2,908 2,494
Depreciation and amortization of property and equipment ................. 15,599 25,216 32,042
Amortization of acquired intangible broadcasting assets, non-compete
and consulting agreements and other assets ............................ 57,897 82,555 105,654
--------- ---------- ----------
Total operating expenses .............................................. 330,745 454,737 567,942
--------- ---------- ----------
Broadcast operating income ............................................ 119,133 169,687 165,697
--------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense ...................... (98,393) (138,952) (178,281)
Subsidiary trust minority interest expense .............................. (18,600) (23,250) (23,250)
Net gain (loss) on sale of broadcast assets ............................. -- 1,232 (418)
Unrealized gain (loss) on derivative instrument ......................... -- (9,050) 15,747
Interest income ......................................................... 2,174 5,672 3,371
Other income ............................................................ 57 1,022 115
--------- ---------- ----------
Income (loss) before income taxes ..................................... 4,371 6,361 (17,019)
PROVISION FOR INCOME TAXES. .............................................. (13,201) (32,562) (25,107)
--------- ---------- ----------
Net loss from continuing operations ..................................... (8,830) (26,201) (42,126)
DISCONTINUED OPERATIONS:
Net income from discontinued operations, net of related income tax
provision of $2,877, $8,609, and $12,340 respectively.................. 4,466 14,102 17,538
Gain (loss) on sale of broadcast assets, net of related income tax
(benefit) provision of $(94), $4,487, and $137,431 respectively........ (132) 6,282 192,372
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of related income tax
benefit of $4,045 and $7,370, respectively............................. (6,070) (11,063) --
--------- ---------- ----------
NET INCOME (LOSS) ........................................................ $ (10,566) $ (16,880) $ 167,784
========= ========== ==========
NET INCOME (LOSS) AVAILABLE TO COMMON SHARE-
HOLDERS ................................................................. $ (13,329) $ (27,230) $ 157,434
========= ========== ==========
BASIC EARNINGS PER SHARE:
Loss per share from continuing operations ............................... $ (0.16) $ (0.39) $ (0.54)
========= ========== ==========
Income per share from discontinued operations ........................... $ 0.06 $ 0.22 $ 2.17
========= ========== ==========
Loss per share from extraordinary item .................................. $ (0.08) $ (0.12) $ --
========= ========== ==========
Income (loss) per common share .......................................... $ (0.19) $ (0.29) $ 1.63
========= ========== ==========
Weighted average common shares outstanding .............................. 71,902 94,321 96,615
========= ========== ==========
DILUTED EARNINGS PER SHARE:
Loss per share from continuing operations ............................... $ (0.16) $ (0.39) $ (0.54)
========= ========== ==========
Income per share from discontinued operations ........................... $ 0.06 $ 0.22 $ 2.17
========= ========== ==========
Loss per share from extraordinary item .................................. $ (0.08) $ (0.12) $ --
========= ========== ==========
Income (loss) per common share .......................................... $ (0.19) $ (0.29) $ 1.63
========= ========== ==========
Weighted average common and common equivalent shares
outstanding ........................................................... 80,156 95,692 96,635
========= ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-4
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
SERIES B SERIES D CLASS A CLASS B
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
----------- ----------- --------- ---------
BALANCE, December 31, 1996 ......................... $12 $-- $140 $ 557
Repurchase and retirement of 186,000 shares of
Class A Common Stock .............................. -- -- (4) --
Class B Common Stock converted into Class A
Common Stock ...................................... -- -- 48 (48)
Series B Preferred Stock converted into Class A
Common Stock ...................................... (1) -- 4 --
Issuance of Class A Common Stock, net of
related issuance costs of $7,572................... -- -- 86 --
Issuance of Series D Preferred Stock, net of
related issuance costs of $5,601................... -- 35 -- --
Dividends payable on Series D Preferred Stock...... -- -- -- --
Equity put options ................................ -- -- -- --
Equity put option premiums ........................ -- -- -- --
Stock option grants ............................... -- -- -- --
Stock options exercised ........................... -- -- -- --
Amortization of deferred compensation ............. -- -- -- --
Income tax benefit related to deferred
compensation ...................................... -- -- -- --
Net loss .......................................... -- -- -- --
----- --- ----- -----
BALANCE, December 31, 1997 ......................... $11 $35 $274 $ 509
----- --- ----- -----
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
ADDITIONAL CAPITAL - CAPITAL - TOTAL
PAID-IN EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDERS'
CAPITAL OPTIONS COMPENSATION DEFICIT EQUITY
-------------- ------------ -------------- ------------- --------------
BALANCE, December 31, 1996 ......................... $256,605 $ -- $ (1,129) $ (18,932) $ 237,253
Repurchase and retirement of 186,000 shares of
Class A Common Stock .............................. (4,595) -- -- -- (4,599)
Class B Common Stock converted into Class A
Common Stock ...................................... -- -- -- -- --
Series B Preferred Stock converted into Class A
Common Stock ...................................... (3) -- -- -- --
Issuance of Class A Common Stock, net of
related issuance costs of $7,572................... 150,935 -- -- -- 151,021
Issuance of Series D Preferred Stock, net of
related issuance costs of $5,601................... 166,864 -- -- -- 166,899
Dividends payable on Series D Preferred Stock...... -- -- -- (2,763) (2,763)
Equity put options ................................ (14,179) 23,117 -- -- 8,938
Equity put option premiums ........................ (3,365) -- -- -- (3,365)
Stock option grants ............................... 430 -- (430) -- --
Stock options exercised ........................... 105 -- -- -- 105
Amortization of deferred compensation ............. -- -- 605 -- 605
Income tax benefit related to deferred
compensation ...................................... (240) -- -- -- (240)
Net loss .......................................... -- -- -- (10,566) (10,566)
---------- ------- -------- --------- ---------
BALANCE, December 31, 1997 ......................... $552,557 $23,117 $ (954) $ (32,261) $ 543,288
---------- ------- -------- --------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-5
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
SERIES B SERIES D CLASS A CLASS B
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
----------- ----------- --------- ---------
BALANCE, December 31, 1997 .......................... $ 11 $35 $ 274 $ 509
Class B Common Stock converted into Class A
Common Stock ....................................... -- -- 18 (18)
Series B Preferred Stock converted into Class A
Common Stock ....................................... (11) -- 75 --
Dividends payable on Series D Preferred Stock....... -- -- -- --
Stock option grants ................................ -- -- -- --
Stock options exercised ............................ -- -- 1 --
Class A Common Stock issued pursuant to
employee benefit plans ............................. -- -- 1 --
Equity put options ................................. -- -- -- --
Repurchase and retirement of 1,505,000 shares of
Class A Common Stock ............................... -- -- (15) --
Equity put option premiums ......................... -- -- -- --
Issuance of Class A Common Stock ................... -- -- 120 --
Amortization of deferred compensation .............. -- -- -- --
Income tax benefit related to deferred
compensation ....................................... -- -- -- --
Net loss ........................................... -- -- -- --
------ --- ----- -----
BALANCE, December 31, 1998 .......................... $ -- $35 $ 474 $ 491
------ --- ----- -----
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
ADDITIONAL CAPITAL - CAPITAL - TOTAL
PAID-IN EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDERS'
CAPITAL OPTIONS COMPENSATION DEFICIT EQUITY
------------ ------------ -------------- ------------- --------------
BALANCE, December 31, 1997 .......................... $ 552,557 $ 23,117 $ (954) $ (32,261) $ 543,288
Class B Common Stock converted into Class A
Common Stock ....................................... -- -- -- -- --
Series B Preferred Stock converted into Class A
Common Stock ....................................... (64) -- -- -- --
Dividends payable on Series D Preferred Stock....... -- -- -- (10,350) (10,350)
Stock option grants ................................ 8,383 -- (8,383) -- --
Stock options exercised ............................ 1,143 -- -- -- 1,144
Class A Common Stock issued pursuant to
employee benefit plans ............................. 1,989 -- -- -- 1,990
Equity put options ................................. (90,385) 90,385 -- -- --
Repurchase and retirement of 1,505,000 shares of
Class A Common Stock ............................... (26,650) -- -- -- (26,665)
Equity put option premiums ......................... (12,938) -- -- -- (12,938)
Issuance of Class A Common Stock ................... 335,003 -- -- -- 335,123
Amortization of deferred compensation .............. -- -- 1,721 -- 1,721
Income tax benefit related to deferred
compensation ....................................... (390) -- -- -- (390)
Net loss ........................................... -- -- -- (16,880) (16,880)
--------- --------- -------- ---------- ---------
BALANCE, December 31, 1998 .......................... $ 768,648 $ 113,502 $ (7,616) $ (59,491) $ 816,043
--------- --------- -------- ---------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-6
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
SERIES B SERIES D CLASS A CLASS B
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
----------- ----------- ----------- ---------
BALANCE, December 31, 1998 ..................... $ -- $35 $474 $ 491
Class B Common Stock converted into Class A
Common Stock .................................. -- -- 15 (15)
Series B Preferred Stock converted to Class A
Common Stock .................................. (1) -- 8 --
Class A Common Stock converted to Series B
Preferred Stock ............................... 1 -- (6) --
Series B Preferred Stock redemptions .......... -- -- -- --
Repurchase and retirement of 320,000 shares of
Class A Common Stock .......................... -- -- (3) --
Dividends payable on Series D Preferred Stock.. -- -- -- --
Stock options exercised ....................... -- -- 1 --
Class A Common Stock issued pursuant to
employee benefit plans ........................ -- -- 2 --
Equity put options ............................ -- -- -- --
Net payments relating to equity put options ... -- -- -- --
Amortization of deferred compensation ......... -- -- -- --
Income tax benefit related to deferred
compensation .................................. -- -- -- --
Deferred compensation adjustment related to
forfeited stock options ....................... -- -- -- --
Net income .................................... -- -- -- --
----- --- ------ -----
BALANCE, December 31, 1999 ..................... $ -- $35 $ 491 $ 476
===== === ====== =====
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
ADDITIONAL CAPITAL - CAPITAL - TOTAL
PAID-IN EQUITY PUT DEFERRED ACCUMULATED STOCKHOLDERS'
CAPITAL OPTIONS COMPENSATION DEFICIT EQUITY
-------------- ------------ -------------- ------------- --------------
BALANCE, December 31, 1998 ..................... $768,648 $113,502 $ (7,616) $ (59,491) $ 816,043
Class B Common Stock converted into Class A
Common Stock .................................. -- -- -- -- --
Series B Preferred Stock converted to Class A
Common Stock .................................. (7) -- -- -- --
Class A Common Stock converted to Series B
Preferred Stock ............................... 5 -- -- -- --
Series B Preferred Stock redemptions .......... (1,498) -- -- -- (1,498)
Repurchase and retirement of 320,000 shares of
Class A Common Stock .......................... (3,491) -- -- -- (3,494)
Dividends payable on Series D Preferred Stock.. -- -- -- (10,350) (10,350)
Stock options exercised ....................... 1,779 -- -- -- 1,780
Class A Common Stock issued pursuant to
employee benefit plans ........................ 3,124 -- -- -- 3,126
Equity put options ............................ (2,868) 2,868 -- -- --
Net payments relating to equity put options ... 751 -- -- -- 751
Amortization of deferred compensation ......... -- -- 1,135 -- 1,135
Income tax benefit related to deferred
compensation .................................. (360) -- -- -- (360)
Deferred compensation adjustment related to
forfeited stock options ....................... (1,992) -- 1,992 -- --
Net income .................................... -- -- -- 167,784 167,784
--------- -------- -------- --------- ---------
BALANCE, December 31, 1999 ..................... $764,091 $116,370 $ (4,489) $ 97,943 $ 974,917
========= ======== ======== ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-7
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
1997 1998 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ (10,566) $ (16,880) $ 167,784
Adjustments to reconcile net income (loss) to net cash flows
from operating activities-
Extraordinary loss ............................................ 10,115 18,433 --
Loss (gain) on sale of broadcast assets ....................... -- (1,232) 418
(Gain) loss on sale of broadcast assets related to
discontinued operations ...................................... 226 (10,769) (329,803)
Loss (gain) on derivative instrument .......................... -- 9,050 (15,747)
Amortization of debt discount ................................. 4 98 98
Depreciation of property and equipment ........................ 18,040 29,153 36,419
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other
assets ....................................................... 67,840 98,372 123,273
Amortization of program contract costs and net realizable
value adjustments ............................................ 66,290 72,403 90,021
Amortization of deferred compensation ......................... 1,636 1,721 1,135
Deferred tax provision related to operations .................. 20,582 30,700 25,197
Deferred tax provision related to sale of broadcast assets
from discontinued operations ................................. -- -- 37,988
Net effect of change in deferred barter revenues and
deferred barter costs ........................................ 591 (624) (911)
(Decrease) increase in minority interest ...................... (183) (98) 316
Changes in assets and liabilities, net of effects of acquisitions
and dispositions-
Increase in accounts receivable, net .......................... (9,468) (68,207) (4,579)
Increase in prepaid expenses and other current assets ......... (591) (2,475) (6,154)
(Increase) decrease in refundable income taxes ................ (10,581) 10,581 --
(Decrease) increase in accounts payable and accrued
liabilities .................................................. (7,780) 40,878 80,550
(Decrease) increase in other long-term liabilities ............ (921) 483 3,629
Payments on program contracts payable ......................... (48,609) (61,107) (79,473)
--------- --------- ----------
Net cash flows from operating activities ..................... $ 96,625 $ 150,480 $ 130,161
--------- --------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-8
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
1997 1998 1999
------------ --------------- -------------
NET CASH FLOWS FROM OPERATING ACTIVITIES ......................... $ 96,625 $ 150,480 $ 130,161
---------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ........................... (19,425) (19,426) (30,861)
Payments for acquisitions of television and radio stations ...... (202,910) (2,068,258) (237,274)
Distributions from (investments in) joint ventures .............. 380 665 (340)
Equity investments .............................................. -- -- (14,172)
Proceeds from sale of broadcast assets .......................... 2,470 273,290 733,916
Loans to officers and affiliates ................................ (1,199) (2,073) (859)
Repayments of loans to officers and affiliates .................. 1,694 3,120 2,593
---------- ------------ ----------
Net cash flows (used in) from investing activities.. .......... (218,990) (1,812,682) 453,003
---------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and commercial bank financing. 126,500 1,822,677 357,500
Repayments of notes payable, commercial bank financing
and capital leases ............................................ (693,519) (578,285) (909,399)
Repayments of notes and capital leases to affiliates ............ (2,313) (1,798) (5,314)
Payments of costs related to bank financings .................... (5,181) (11,138) --
Prepayments of excess syndicated program contract liabilities (1,373) -- --
Repurchases of Class A Common Stock ............................. (4,599) (26,665) (3,494)
Payments relating to redemption of 1993 Notes ................... (106,508) -- --
Dividends paid on Series D Preferred Stock ...................... (2,357) (10,350) (10,350)
Proceeds from exercise of stock options ......................... 105 1,144 1,780
Payment received upon execution of derivative instrument......... -- 9,450 --
Net (premiums paid) proceeds related to equity put options. (507) (14,015) 751
Payments for redemption of Series B Preferred Stock ............. -- -- (1,498)
Net proceeds from issuances of Senior Subordinated Notes.. 438,427 -- --
Net proceeds from issuances of Class A Common Stock ............. 151,021 335,123 --
Net proceeds from issuance of Series D Preferred Stock .......... 166,899 -- --
Net proceeds from subsidiary trust securities offering .......... 192,756 -- --
---------- ------------ ----------
Net cash flows from (used in) financing activities ............ 259,351 1,526,143 (570,024)
---------- ------------ ----------
NET INCREASE (DECREASE) IN CASH .................................. 136,986 (136,059) 13,140
CASH, beginning of period ........................................ 2,341 139,327 3,268
---------- ------------ ----------
CASH, end of period .............................................. $ 139,327 $ 3,268 $ 16,408
========== ============ ==========
The accompanying notes are an integral part of these consolidated statements.
F-9
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sinclair Broadcast Group, Inc., Sinclair Communications, Inc. and all other
consolidated subsidiaries, which are collectively referred to hereafter as "the
Company, Companies or SBG." The Company owns and operates television and radio
stations throughout the United States. Additionally, included in the
accompanying consolidated financial statements are the results of operations of
certain television stations pursuant to local marketing agreements (LMAs) and
radio stations pursuant to joint sales agreements (JSAs).
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. Included in
the balance of "Broadcast assets related to discontinued operations net of
liabilities" as of December 31,1999 was property and programming assets of $13.8
million, intangible assets of $163.9 million, other long-term assets of $1.3
million, programming liabilities of $5.0 million and other long-term liabilities
of $1.0 million.
Discontinued operations have not been segregated in the Statement of
Consolidation Cash Flows and, therefore, amounts for certain captions will not
agree with the accompanying consolidated statements of operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all its wholly-owned and majority-owned subsidiaries. Minority interest
represents a minority owner's proportionate share of the equity in certain of
the Company's subsidiaries. In addition, the Company uses the equity method of
accounting for 20% to 50% ownership investments. All significant intercompany
transactions and account balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from those estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying consolidated financial statements.
PROGRAMMING
The Companies have agreements with distributors for the rights to television
programming over contract periods which generally run from one to seven years.
Contract payments are made in installments over terms that are generally shorter
than the contract period. Each contract is recorded as an asset and a
F-10
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
liability at an amount equal to its gross contractual commitment when the
license period begins and the program is available for its first showing. The
portion of program contracts which become payable within one year is reflected
as a current liability in the accompanying consolidated balance sheets.
The rights to program materials are reflected in the accompanying consolidated
balance sheets at the lower of unamortized cost or estimated net realizable
value. Estimated net realizable values are based upon management's expectation
of future advertising revenues net of sales commissions to be generated by the
program material. Amortization of program contract costs is generally computed
using either a four year accelerated method or based on usage, whichever yields
the greater amortization for each program. Program contract costs, estimated by
management to be amortized in the succeeding year, are classified as current
assets. Payments of program contract liabilities are typically paid on a
scheduled basis and are not affected by adjustments for amortization or
estimated net realizable value.
BARTER ARRANGEMENTS
Certain program contracts provide for the exchange of advertising air time in
lieu of cash payments for the rights to such programming. These contracts are
recorded as the programs are aired at the estimated fair value of the
advertising air time given in exchange for the program rights. Network
programming is excluded from these calculations.
The Company broadcasts certain customers' advertising in exchange for equipment,
merchandise and services. The estimated fair value of the equipment, merchandise
or services received is recorded as deferred barter costs and the corresponding
obligation to broadcast advertising is recorded as deferred barter revenues. The
deferred barter costs are expensed or capitalized as they are used, consumed or
received. Deferred barter revenues are recognized as the related advertising is
aired.
OTHER ASSETS
Other assets as of December 31, 1998 and 1999 consist of the following (in
thousands):
1998 1999
---------- ----------
Unamortized costs relating to securities issuances ................ $30,854 $ 27,236
Equity interest investments ....................................... 4,003 19,329
Notes and other accounts receivable ............................... 41,863 54,566
Deposits and other costs relating to future acquisitions .......... 5,753 7,195
Other ............................................................. 71 522
------- --------
$82,544 $108,848
======= ========
ACQUIRED INTANGIBLE BROADCASTING ASSETS
Acquired intangible broadcasting assets are being amortized on a straight-line
basis over periods of 1 to 40 years. These amounts result from the acquisition
of certain television and radio station license and non-license assets. The
Company monitors the individual financial performance of each of the stations
and continually evaluates the realizability of intangible and tangible assets
and the existence of any impairment to its recoverability based on the projected
undiscounted cash flows of the respective stations. As of December 31, 1999,
management believes that the carrying amounts of the Company's tangible and
intangible assets have not been impaired.
F-11
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Intangible assets as of December 31, 1998 and 1999, consist of the following (in
thousands):
AMORTIZATION
PERIOD 1998 1999
-------------- ------------- -------------
Goodwill ....................... 40 years $1,332,532 $1,539,151
Intangibles related to LMAs .... 15 years 454,181 463,067
Decaying advertiser base ....... 15 years 98,974 92,000
FCC licenses ................... 25 years 443,378 433,790
Network affiliations ........... 25 years 475,549 241,356
Other .......................... 1 - 40 years 46,274 48,908
---------- ----------
2,850,888 2,818,272
Less - Accumulated amortization (204,522) (331,308)
---------- ----------
$2,646,366 $2,486,964
========== ==========
ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31, 1998 and 1999
(in thousands):
1998 1999
---------- ----------
Compensation ....................... $19,108 $20,862
Interest ........................... 44,761 27,478
Other accruals relating to operating
expenses .......................... 21,693 18,738
------- -------
$85,562 $67,078
======= =======
SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS
During 1997, 1998 and 1999 the Company incurred the following transactions (in
thousands):
1997 1998 1999
---------- ----------- ----------
o Purchase accounting adjustments related to
deferred taxes ...................................... $ -- $113,950 $ --
======= ======== ========
o Capital lease obligations incurred .................. $10,927 $ 3,807 $ 22,208
======= ======== ========
o Income taxes paid ................................... $ 6,502 $ 3,588 $ 7,433
======= ======== ========
o Income tax refunds received ......................... $ 2,049 $ 10,486 $ 2,231
======= ======== ========
o Subsidiary trust minority interest payments ......... $17,631 $ 23,250 $ 23,250
======= ======== ========
o Interest paid ....................................... $98,521 $117,658 $203,976
======= ======== ========
LOCAL MARKETING AGREEMENTS
The Company generally enters into LMAs and similar arrangements with stations
located in markets in which the Company already owns and operates a station, and
in connection with acquisitions, pending regulatory approval of transfer of
License Assets. Under the terms of these agreements, the Company makes specified
periodic payments to the owner-operator in exchange for the grant to the Company
of the right to program and sell advertising on a specified portion of the
station's inventory of broadcast time. Nevertheless, as the holder of the
Federal Communications Commission (FCC) license, the owner-operator retains
control and responsibility for the operation of the station, including
responsibility over all programming broadcast on the station.
F-12
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Included in the accompanying consolidated statements of operations for the years
ended December 31, 1997, 1998 and 1999, are net revenues of $131.6 million,
$202.5 million and $263.0 million, respectively, that relate to LMAs.
BROADCAST ASSETS HELD FOR SALE
Broadcast assets held for sale are comprised of WICS/WICD-TV in the Springfield,
Illinois market and KGAN-TV in the Cedar Rapids, Iowa market in connection with
the STC Disposition (see note 11) and KDNL-TV in the St. Louis market in
connection with the pending St. Louis Purchase Option (see note 11). The Company
capitalized interest relating to the carrying cost associated with broadcast
assets held for sale of $2.7 million for the year ended December 31, 1999.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
2. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
Buildings and improvements ................................ 10--35 years
Station equipment ......................................... 5--10 years
Office furniture and equipment ............................ 5--10 years
Leasehold improvements .................................... 10--31 years
Automotive equipment ...................................... 3-- 5 years
Shorter of 10 years
Property and equipment and autos under capital leases ..... or the lease term
Property and equipment consisted of the following as of December 31, 1998 and
1999 (in thousands):
1998 1999
------------ ------------
Land and improvements .................... $ 12,550 $ 13,015
Buildings and improvements ............... 52,245 67,273
Station equipment ........................ 201,405 216,250
Office furniture and equipment ........... 22,577 27,060
Leasehold improvements ................... 10,207 10,441
Automotive equipment ..................... 7,599 7,760
--------- ---------
306,583 341,799
Less - Accumulated depreciation .......... (62,899) (90,016)
--------- ---------
$ 243,684 $ 251,783
========= =========
3. DERIVATIVE INSTRUMENTS:
The Company enters into derivative instruments primarily for the purpose of
reducing the impact of changing interest rates on its floating rate debt. In
addition, the Company has entered into put and call option derivative
instruments relating to the Company's Class A Common Stock in order to hedge the
possible dilutive effect of employees exercising stock options pursuant to the
Company's stock option plans. The Company does not enter into derivative
instruments for speculative trading purposes. With the exception of the
Company's Treasury Option Derivative Instrument (described below), the Company
does not reflect the changes in fair market value related to derivative
instruments in its financial statements.
F-13
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133 "Accounting for Derivative Instruments and for Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative investments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. SFAS 133 is effective for
the Company beginning January 1, 2001. The Company is evaluating its eventual
impact on its financial statements.
INTEREST RATE HEDGING DERIVATIVE INSTRUMENTS
The 1998 Bank Credit Agreement, as amended and restated, requires the Company to
enter into interest rate protection agreements at rates not to exceed 10% per
annum as to a notional principal amount at least equal to 60% of the Term Loan,
Revolving Credit Facility and Senior Subordinated Notes scheduled to be
outstanding from time to time.
As of December 31, 1999, the Company had several interest rate swap agreements
which expire from July 23, 2000 to July 15, 2007. The swap agreements set rates
in the range of 5.5% to 8.1%. Floating interest rates are based upon the three
month London Interbank Offered Rate (LIBOR), and the measurement and settlement
is performed quarterly. Settlements of these agreements are recorded as
adjustments to interest expense in the relevant periods. The notional amounts
related to these agreements were $1.0 billion at December 31, 1999, and decrease
to $200 million through the expiration dates. In addition, the Company has
entered into floating rate derivatives with notional amounts totaling $750
million. Based on the Company's currently hedged position, $1.8 billion or 96%
of the Company's outstanding indebtedness is hedged.
The Company has no intentions of terminating these instruments prior to their
expiration dates unless it were to prepay a portion of its bank debt. The
counter parties to these agreements are international financial institutions.
The Company estimates the fair value of these instruments at December 31, 1998
and 1999 to be $3.0 million and $4.5 million, respectively. The fair value of
the interest rate hedging derivative instruments is estimated by obtaining
quotations from the financial institutions which are a party to the Company's
derivative contracts (the "Banks"). The fair value is an estimate of the net
amount that the Company would pay at December 31, 1999 if the contracts were
transferred to other parties or canceled by the Banks.
TREASURY OPTION DERIVATIVE INSTRUMENT
In August 1998, the Company entered into a treasury option derivative contract
(the "Option Derivative"). The Option Derivative contract provides for 1) an
option exercise date of September 30, 2000, 2) a notional amount of $300 million
and 3) a five-year treasury strike rate of 6.14%. If the interest rate yield on
five year treasury securities is less than the strike rate on the option
exercise date, the Company would be obligated to pay five consecutive annual
payments in an amount equal to the strike rate less the five year treasury rate
multiplied by the notional amount beginning September 30, 2001 through September
30, 2006. If the interest rate yield on five year treasury securities is greater
than the strike rate on the option exercise date, the Company would not be
obligated to make any payments.
Upon the execution of the Option Derivative contract, the Company received a
cash payment representing an option premium of $9.5 million which was recorded
in "Other long-term liabilities" in the accompanying consolidated 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
F-14
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
treasury rate at the end of an accounting period, which was $2.7 million as of
December 31, 1999. The fair market value adjustment for 1999 resulted in an
income statement benefit (unrealized gain) of $15.7 million for the year ended
December 31, 1999.
EQUITY PUT AND CALL OPTION DERIVATIVE INSTRUMENTS:
1997 OPTIONS
In April 1997, the Company entered into additional put and call option contracts
related to its common stock for the purpose of hedging the dilution of the
common stock upon the exercise of stock options granted. The Company entered
into 1,100,000 European style (that is, exercisable on the expiration date only)
put options for common stock with a strike price of $12.89 per share which
provide for settlement in cash or in shares, at the election of the Company. The
Company entered into 1,100,000 American style (that is, exercisable any time on
or before the expiration date) call options for common stock with a strike price
of $12.89 per share which provide for settlement in cash or in shares, at the
election of the Company.
1998 OPTIONS
In July 1998, the Company entered into put and call option contracts related to
the Company's common stock (the "July Options"). In September 1998, the Company
entered into additional put and call option contracts related to the Company's
common stock (the "September Options"). These option contracts allow for
settlement in cash or net physically in shares, at the election of the Company.
The Company entered into these option contracts for the purpose of hedging the
dilution of the Company's common stock upon the exercise of stock options
granted. The July Options included 2,700,000 call options for common stock and
2,700,000 put options for common stock, with a strike price of $33.27 and $28.93
per common share, respectively. The September Options included 467,000 call
options for common stock and 700,000 put options for common stock, with a strike
price of $28.00 and $16.0625 per common share, respectively. For the year ended
December 31, 1998, option premium payments of $12.2 million and $0.7 million
were made relating to the July and September Options, respectively. The Company
recorded these premium payments as a reduction of additional paid-in capital. To
the extent that the Company entered into put options related to its common
stock, the additional paid-in capital amounts were reclassified accordingly and
reflected as Equity Put Options in the accompanying consolidated balance sheet
as of December 31, 1998. For the year ended December 31, 1999, the Company
recorded receipts of $1.25 million relating to the 1998 September Options as an
increase in additional paid-in capital. Additionally, 200,000 of the 1998
September Options were retired during 1999.
1999 OPTIONS
In September 1999, the Company entered into put and call option contracts
related to the Company's common stock. The Company entered into 1,700,000
European style put options for common stock with a strike price of $9.45 per
share which provide for settlement in cash or in shares, at the election of the
Company. In September 1999, the Company entered into 1,000,000 American style
call options for common stock with a strike price $10.45 per share which provide
for settlement in cash or in shares, at the election of the Company. For the
year ended December 31, 1999, option premium payments of $0.5 million were made
relating to the September call options. The Company recorded these premium
payments as a reduction of additional paid-in capital. To the extent that the
Company entered into put options related to its common stock, the additional
paid-in capital amounts were reclassified accordingly and reflected as Equity
Put Options in the accompanying consolidated balance sheet as of December 31,
1999.
F-15
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
4. NOTES PAYABLE AND COMMERCIAL BANK FINANCING:
1997 BANK CREDIT AGREEMENT
In order to expand its capacity and obtain more favorable terms with its
syndicate of banks, the Company amended and restated the 1996 Bank Credit
Agreement in May 1997 (the "1997 Bank Credit Agreement"). Contemporaneously with
the 1997 Preferred Stock Offering and the 1997 Common Stock Offering (see Note
12) consummated in September 1997, the Company amended its 1997 Bank Credit
Agreement. The 1997 Bank Credit Agreement, as amended, consisted of two classes:
Tranche A Term loan and a Revolving Credit Commitment.
The Tranche A Term Loan was a term loan in a principal amount not to exceed $325
million and was scheduled to be paid in quarterly installments through December
31, 2004. The Revolving Credit Commitment was a revolving credit facility in a
principal amount not to exceed $675 million and was scheduled to have reduced
availability quarterly through December 31, 2004. As of December 31, 1997,
outstanding indebtedness under the Tranche A Term Loan and the Revolving Credit
Commitment were $307.1 million and $-0- respectively.
The applicable interest rate for the Tranche A Term Loan and the Revolving
Credit Commitment was either LIBOR plus 0.5% to 1.875% or the alternative base
rate plus zero to 0.625%. The applicable interest rate for the Tranche A Term
Loan and the Revolving Credit Commitment was to be adjusted based on the ratio
of total debt to four quarters' trailing earnings before interest, taxes,
depreciation and amortization. The weighted average interest rates for
outstanding indebtedness relating to the 1997 Bank Credit Agreement during 1997
and as of December 31, 1997 were 7.4% and 8.5%, respectively. The interest
expense relating to the 1997 Bank Credit Agreement was $46.7 million for the
year ended December 31, 1997. The Company replaced the 1997 Bank Credit
Agreement with the 1998 Bank Credit Agreement in May 1998 as discussed below.
1998 BANK CREDIT AGREEMENT
In order to expand its borrowing capacity to fund acquisitions and obtain more
favorable terms with its syndicate of banks, the Company obtained a new $1.75
billion senior secured credit facility (the "1998 Bank Credit Agreement"). The
1998 Bank Credit Agreement was executed in May of 1998 and includes (i) a $750.0
million Term Loan Facility repayable in consecutive quarterly installments
commencing on March 31, 1999 and ending on September 15, 2005; and (ii) a $1.0
billion reducing Revolving Credit Facility. Availability under the Revolving
Credit Facility reduces quarterly, commencing March 31, 2001 and terminating on
September 15, 2005. Not more than $350.0 million of the Revolving Credit
Facility will be available for issuances of letters of credit. The 1998 Bank
Credit Agreement also includes a standby uncommitted multiple draw term loan
facility of $400.0 million. The Company is required to prepay the term loan
facility and reduce the revolving credit facility with (i) 100% of the net
proceeds of any casualty loss or condemnation; (ii) 100% of the net proceeds of
any sale or other disposition by the Company of any assets in excess of $100.0
million in the aggregate for any fiscal year, to the extent not used to acquire
new assets; and (iii) 50% of excess cash flow (as defined) if the Company's
ratio of debt to EBITDA (as defined) exceeds a certain threshold. The 1998 Bank
Credit Agreement contains representations and warranties, and affirmative and
negative covenants, including among other restrictions, limitations on
additional indebtedness, customary for credit facilities of this type. The 1998
Bank Credit Agreement is secured only by a pledge of the stock of each
subsidiary of the Company other than KDSM, Inc., KDSM Licensee, Inc., Cresap
Enterprises, Inc., Sinclair Capital and Sinclair Ventures, Inc. The Company is
required to maintain certain debt covenants in connection with the 1998 Bank
Credit Agreement. As of December 31, 1999, the Company was in compliance with
all debt covenants.
F-16
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
The applicable interest rate for the Term Loan Facility and the Revolving Credit
Facility is either LIBOR plus 0.5% to 1.875% or the alternative base rate plus
zero to 0.625%. The applicable interest rate for the Term Loan Facility and the
Revolving Credit Facility is adjusted based on the ratio of total debt to four
quarters' trailing earnings before interest, taxes, depreciation and
amortization. As of December 31, 1999, the Company's applicable interest rate
for borrowings under the 1998 Bank Credit Agreement is either LIBOR plus 1.5% or
the alternative base rate plus .25%.
As a result of entering into the Company's 1998 Bank Credit Agreement, the
Company incurred debt acquisition costs of $11.1 million and recognized an
extraordinary loss of $11.1 million net of a tax benefit of $7.4 million. The
extraordinary loss represents the write-off of debt acquisition costs associated
with indebtedness replaced by the new facility. The weighted average interest
rates for outstanding indebtedness relating to the 1998 Bank Credit Agreement
during 1999 and as of December 31, 1999 were 6.7% and 7.7%, respectively.
Combined interest expense relating to the 1997 and 1998 Bank Credit Agreements
was $66.1 million and $108.9 million for years ended December 31, 1998 and 1999,
respectively.
8 3/4% SENIOR SUBORDINATED NOTES DUE 2007:
In December 1997, the Company completed an issuance of $250 million aggregate
principal amount of 8 3/4% Senior Subordinated Notes due 2007 (the "8 3/4%
Notes") pursuant to a shelf registration statement and generated net proceeds to
the Company of $242.8 million. Of the net proceeds from the issuance, $106.2
million was utilized to tender the Company's 1993 Notes with the remainder
retained for general corporate purposes which may include payments relating to
future acquisitions.
Interest on the 8 3/4% Notes is payable semiannually on June 15 and December 15
of each year, commencing June 15, 1998. Interest expense was $0.9 million for
the year ended December 31,1997 and $21.9 million for both of the years ended
December 31, 1998 and 1999. The 8 3/4% Notes are issued under an Indenture among
SBG, its subsidiaries (the guarantors) and the trustee. Costs associated with
the offering totaled $5.8 million, including an underwriting discount of $5.0
million. These costs were capitalized and are being amortized over the life of
the debt.
Based upon the quoted market price, the fair value of the 8 3/4% Notes as of
December 31, 1998 and 1999 was $254.4 million and $231.3 million, respectively.
9% SENIOR SUBORDINATED NOTES DUE 2007:
In July 1997, the Company completed an issuance of $200 million aggregate
principal amount of 9% Senior Subordinated Notes due 2007 (the "9% Notes"). The
Company utilized $162.5 million of the approximately $195.6 million net proceeds
of the issuance to repay outstanding revolving credit indebtedness under the
1997 Bank Credit Agreement and utilized the remainder to fund acquisitions.
Interest on the 9% Notes is payable semiannually on January 15 and July 15 of
each year, commencing January 15, 1998. Interest expense was $9.0 million for
the year ended December 31, 1997 and $18.0 million for both of the years ended
December 31, 1998 and 1999. The 9% Notes are issued under an Indenture among
SBG, its subsidiaries (the guarantors) and the trustee. Costs associated with
the offering totaled $4.8 million, including an underwriting discount of $4.0
million. These costs were capitalized and are being amortized over the life of
the debt.
Based upon the quoted market price, the fair value of the 9% Notes as of
December 31, 1998 and 1999 was $205.3 million and $186.2 million, respectively.
10% SENIOR SUBORDINATED NOTES DUE 2005
In August 1995, the Company completed an issuance of $300 million aggregate
principal amount of 10% Senior Subordinated Notes (the "1995 Notes"), due 2005,
generating net proceeds to the Company of
F-17
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
$293.2 million. The net proceeds of this offering were utilized to repay
outstanding indebtedness under the then existing Bank Credit Agreement of $201.8
million with the remainder being retained and eventually utilized to make
payments related to certain acquisitions consummated during 1996.
Interest on the Notes is payable semiannually on March 30 and September 30 of
each year, commencing March 30, 1996. Interest expense was $30.0 million for
each of the three years ended December 31, 1997, 1998 and 1999. The notes are
issued under an indenture among SBG, its subsidiaries (the guarantors) and the
trustee. Costs associated with the offering totaled $6.8 million, including an
underwriting discount of $6.0 million and are being amortized over the life of
the debt.
Based upon the quoted market price, the fair value of the 1995 Notes as of
December 31, 1998 and 1999 was $319.8 million and $296.1 million, respectively.
10% SENIOR SUBORDINATED NOTES DUE 2003 AND 1997 TENDER OFFER
In December 1993, the Company completed an issuance of $200 million aggregate
principal amount of 10% Senior Subordinated Notes (the "1993 Notes"), due 2003.
Subsequently, the Company determined that a redemption of $100.0 million was
required. This redemption and a refund of $1.0 million of fees from the
underwriters took place in the first quarter of 1994.
In December 1997, the Company completed a tender offer of $98.1 million
aggregate principal amount of the 1993 Notes (the "Tender Offer"). Total
consideration per $1,000 principal amount note tendered was $1,082.08 resulting
in total consideration paid to consummate the Tender Offer of $106.2 million. In
conjunction with the Tender Offer, the Company recorded an extraordinary loss of
$6.1 million, net of a tax benefit of $4.0 million. In the second quarter of
1999, the Company redeemed the remaining 1993 notes for a total consideration of
$1.9 million. Interest expense for the years ended December 31, 1997, 1998 and
1999, was $9.6 million, $0.2 million, and $60,000, respectively. The Notes are
issued under an Indenture among SBG, its subsidiaries (the guarantors) and the
trustee.
SUMMARY
Notes payable and commercial bank financing consisted of the following as of
December 31, 1998 and 1999 (in thousands):
1998 1999
------------- -------------
Bank Credit Agreement, Term Loan .............................. $ 750,000 $ 700,000
Bank Credit Agreement, Revolving Credit Facility .............. 803,000 303,000
8 3/4% Senior Subordinated Notes, due 2007 .................... 250,000 250,000
9% Senior Subordinated Notes, due 2007 ........................ 200,000 200,000
10% Senior Subordinated Notes, due 2005 ....................... 300,000 300,000
10% Senior Subordinated Notes, due 2003 ....................... 1,899 --
Installment note for certain real estate interest at 8.0%...... 94 87
---------- ----------
2,304,993 1,753,087
Less: Discount on 8 3/4% Senior Subordinated Notes, due
2007 ....................................................... (878) (780)
Less: Current portion ......................................... (50,007) (75,008)
---------- ----------
$2,254,108 $1,677,299
========== ==========
F-18
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Indebtedness under the 1998 Bank Credit Agreement and notes payable as of
December 31, 1999, mature as follows (in thousands):
2000 .............................................................. $ 75,008
2001 .............................................................. 100,009
2002 .............................................................. 100,009
2003 .............................................................. 125,010
2004 .............................................................. 150,011
2005 and thereafter ............................................... 1,203,040
----------
1,753,087
Less: Discount on 8 3/4% Senior Subordinated Notes, due 2007 ...... (780)
----------
$1,752,307
==========
Substantially all of the Company's stock in its wholly owned subsidiaries has
been pledged as security for notes payable and commercial bank financing.
5. NOTES AND CAPITAL LEASES PAYABLE TO AFFILIATES:
Notes and capital leases payable to affiliates consisted of the following as of
December 31, 1998 and 1999 (in thousands):
1998 1999
----------- -----------
Subordinated installment notes payable to former majority owners,
interest at 8.75%, principal payments in varying amounts due annually beginning
October 1991, with a balloon payment due at maturity in May
2005 .................................................................... $ 8,636 $ 7,632
Capital lease for building, interest at 17.5% ............................ 972 676
Capital lease for building, interest at 6.62% ............................ -- 9,136
Capital leases for broadcasting tower facilities, interest rates averaging
10% ..................................................................... 3,566 3,310
Capitalization of time brokerage agreements, interest at 6.20% to 8.25%. 8,943 18,827
Capital leases for building and tower, interest at 8.25% ................. 989 451
-------- --------
23,106 40,032
Less: Current portion .................................................... (4,063) (5,890)
-------- --------
$ 19,043 $ 34,142
======== ========
Notes and capital leases payable to affiliates, as of December 31, 1999, mature
as follows (in thousands):
2000 ............................................................. $ 8,694
2001 ............................................................. 8,176
2002 ............................................................. 7,043
2003 ............................................................. 5,770
2004 ............................................................. 5,058
2005 and thereafter .............................................. 17,180
---------
Total minimum payments due ....................................... 51,921
Less: Amount representing interest ............................... (11,889)
---------
Present value of future notes and capital lease payments ......... $ 40,032
=========
F-19
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
6. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31, 1999
are as follows (in thousands):
2000 ................................................... $ 111,992
2001 ................................................... 50,830
2002 ................................................... 28,610
2003 ................................................... 6,755
2004 ................................................... 803
2005 and thereafter .................................... 222
----------
199,212
Less: Current portion .................................. (111,992)
----------
Long-term portion of program contracts payable ......... $ 87,220
==========
Included in the current portion amounts are payments due in arrears of $26.7
million. In addition, the Companies have entered into noncancelable commitments
for future program rights aggregating $176.1 million as of December 31, 1999.
The Company has estimated the fair value of its program contract payables and
noncancelable commitments at approximately $145.6 million and $126.3 million,
respectively, as of December 31, 1998, and $173.8 million and $145.3 million,
respectively, at December 31, 1999. These estimates are based on future cash
flows discounted at the Company's current borrowing rate.
7. RELATED PARTY TRANSACTIONS:
In connection with the start-up of an affiliate in 1990, certain SBG Class B
Stockholders issued a note allowing them to borrow up to $3.0 million from the
Company. This note was amended and restated June 1, 1994, to a term loan bearing
interest of 6.88% with quarterly principal payments beginning March 31, 1996
through December 31, 1999. As of December 31, 1998, the balance outstanding was
approximately $0.7 million. The note was paid in full as of December 31, 1999.
During the year ended December 31, 1993, the Company loaned Gerstell Development
Limited Partnership (a partnership owned by Class B Stockholders) $2.1 million.
The note bears interest at 6.18%, with principal payments beginning on November
1, 1994, and a final maturity date of October 1, 2013. As of December 31, 1998
and 1999, the balance outstanding was approximately $1.8 million and $1.7
million, respectively.
Concurrently with the Company's initial public offering, the Company acquired
options from certain stockholders of Glencairn, LTD (Glencairn) that will grant
the Company the right to acquire, subject to applicable FCC rules and
regulations, up to 97% of the capital stock of Glencairn. The Glencairn option
exercise price is based on a formula that provides a 10% annual return to
Glencairn. Glencairn is the owner-operator and FCC licensee of WNUV in
Baltimore, WVTV in Milwaukee, WRDC in Raleigh/Durham, WABM in Birmingham, KRRT
in Kerrville, WFBC in Asheville/Greenville /Spartanburg and WTTE in Columbus.
The Company has entered into five-year LMA agreements (with five-year renewal
terms at the Company's option) with Glencairn pursuant to which the Company
provides programming to Glencairn for airing on WNUV, WVTV, WRDC, WABM, KRRT,
WFBC and WTTE. During the years ended December 31, 1997, 1998 and 1999, the
Company made payments of $8.4 million, $9.8 million and $10.8 million,
respectively, to Glencairn under these LMA agreements.
During the years ended December 31, 1997, 1998 and 1999, the Company from time
to time entered into charter arrangements to lease aircraft owned by certain
Class B stockholders. During the years ended December 31, 1997, 1998 and 1999,
the Company incurred expenses of approximately $0.7 million, $0.6 million and
$0.4 million related to these arrangements, respectively.
F-20
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Certain assets used by the Company and it's operating subsidiaries are leased
from Cunningham, KIG, Gerstell, and Beaver Dam, LLC (entities owned by the Class
B Stockholders). Lease payments made to these entities were $1.4 million, $1.5
million, and $2.1 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
8. INCOME TAXES:
The Company files a consolidated federal income tax return and separate company
state tax returns. The provision (benefit) for income taxes consists of the
following as of December 31, 1997, 1998 and 1999 (in thousands):
1997 1998 1999
------------- ---------- ----------
Provision for income taxes -- continuing operations ............ $ 13,201 $ 32,562 $ 25,107
Provision for income taxes -- discontinued operations .......... 2,783 13,096 149,771
Benefit from income taxes -- extraordinary item ................ (4,045) (7,370) --
--------- -------- --------
$ 11,939 $ 38,288 $174,878
========= ======== ========
Current:
Federal ....................................................... $ (10,581) $ 3,953 $ 81,370
State ......................................................... 1,938 3,635 30,323
--------- -------- --------
(8,643) 7,588 111,693
--------- -------- --------
Deferred:
Federal ....................................................... 18,177 26,012 56,576
State ......................................................... 2,405 4,688 6,609
--------- -------- --------
20,582 30,700 63,185
--------- -------- --------
$ 11,939 $ 38,288 $174,878
========= ======== ========
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision:
1997 1998 1999
---------- ---------- -------------
Statutory federal income taxes ............................................ 35.0% 35.0% 35.0%
Adjustments-
State income and franchise taxes, net of federal effect .................. 62.7 68.9 (21.2)
Goodwill amortization .................................................... 44.6 106.8 (99.5)
Non-deductible expense items ............................................. 25.4 15.6 (9.6)
Tax liability related to dividends on Parent Preferred Stock (a) ......... 128.9 274.3 (47.8)
Other .................................................................... 5.4 11.3 (4.4)
----- ----- ------
Provision for income taxes ................................................ 302.0% 511.9% (147.5)%
===== ===== ======
- ----------
(a) In March 1997, the Company issued the HYTOPS securities. In connection with
this transaction, Sinclair Broadcast Group, Inc. (the "Parent") issued
$206.2 million of Series C Preferred Stock (the "Parent Preferred Stock")
to KDSM, Inc., a wholly owned subsidiary. Parent Preferred Stock dividends
paid to KDSM, Inc. are considered taxable income for Federal tax purposes
and not considered income for book purposes. Also for Federal tax purposes,
KDSM, Inc. is allowed a tax deduction for dividends received on the Parent
Preferred Stock in an amount equal to Parent Preferred Stock dividends
received in each taxable year limited to the extent that the Parent's
consolidated group has "earnings and profits." To the extent that dividends
received by KDSM, Inc. are in excess of the Parent's consolidated group
earnings and profits, the Parent will reduce its tax basis in the Parent
Preferred Stock which gives rise to a deferred tax liability (to be
recognized upon redemption) and KDSM, Inc.'s dividend income is treated as
a permanent difference between taxable income and book income. During the
years ended December 31, 1997 and 1998, the Parent did not generate
"earnings and profits" in an amount greater than or equal to dividends paid
on the Parent Preferred Stock. This resulted in a reduction in basis of the
Parent's Series C Preferred Stock and generated a related deferred tax
liability. During the year ended December 31,1999, the Parent generated
"earnings and profits" and avoided a reduction in basis of its Parent
Preferred Stock.
F-21
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Temporary differences between the financial reporting carrying amounts and the
tax basis of assets and liabilities give rise to deferred taxes. The Company had
a net deferred tax liability of $165.5 million and $228.7 million as of December
31, 1998 and 1999, respectively. The realization of deferred tax assets is
contingent upon the Company's ability to generate sufficient future taxable
income to realize the future tax benefits associated with the net deferred tax
asset. Management believes that deferred assets will be realized through future
operating results.
The Company's remaining Federal NOL's will expire during various years from 2008
to 2012, and are subject to annual limitations under Internal Revenue Code
Section 382 and similar state provisions. The tax effects of these NOL's are
recorded in the deferred tax accounts in the accompanying consolidated balance
sheets as of December 31, 1999.
Total deferred tax assets and deferred tax liabilities as of December 31, 1998
and 1999 are as follows (in thousands):
1998 1999
------------- -------------
Deferred Tax Assets:
Accruals and reserves ................................................. $ 7,238 $ 7,868
Net operating losses .................................................. 28,809 491
Program contracts ..................................................... 1,283 --
Treasury option derivative ............................................ 3,601 --
Tax credits ........................................................... 3,110 --
Investments in partnerships ........................................... -- 158
Other ................................................................. 2,433 1,909
---------- ----------
$ 46,474 $ 10,426
========== ==========
Deferred Tax Liabilities:
FCC license ........................................................... $ (23,394) $ (29,010)
Parent Preferred Stock deferred tax liability [see (a) above] ......... (25,833) (25,833)
Fixed assets and intangibles .......................................... (159,208) (168,995)
Program contracts ..................................................... -- (8,715)
Investments in partnerships ........................................... (734) --
Treasury option derivative ............................................ -- (2,679)
Capital lease accounting .............................................. (1,998) (2,513)
Other ................................................................. (834) (1,393)
---------- ----------
$ (212,001) $ (239,138)
========== ==========
During 1998, the Company acquired the stock of Sullivan Broadcast Holdings, Inc.
(Sullivan), Lakeland Group Television, Inc. (Lakeland) and the direct and
indirect interests of Max Media Properties LLC (Max Media). The Company recorded
net deferred tax liabilities resulting from these purchases of approximately
$114.0 million. These net deferred tax liabilities primarily relate to the
permanent differences between financial reporting carrying amounts and tax basis
amounts measured upon the purchase date.
9. EMPLOYEE BENEFIT PLAN:
The Sinclair Broadcast Group, Inc. 401(k) Profit Sharing Plan and Trust (the
"SBG Plan") covers eligible employees of the Company. Contributions made to the
SBG Plan include an employee elected salary reduction amount, company matching
contributions and a discretionary amount determined each year by the Board of
Directors. The Company's 401(k) expense for the years ended December 31, 1997,
1998 and 1999, was $0.8 million, $1.2 million and $1.4 million, respectively.
There were no discretionary
F-22
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
contributions during these periods. During December 1997, the Company registered
800,000 shares of its Class "A" Common Stock with the Securities and Exchange
Commission (the "Commission") to be issued as a matching contribution for the
1997 plan year and subsequent plan years.
10. CONTINGENCIES AND OTHER COMMITMENTS:
LITIGATION
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages,
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company's financial position, results of operations or cash flows. The
Company is currently involved in litigation related to the St. Louis option
(see Note 11).
COMMITMENT FOR ADVERTISING
During 1999, the Company entered into an option agreement with
BeautyBuys.com (Beauty Buys) to provide radio and television advertising,
promotional support and other services (in-kind services) over a five year
period ending December 31, 2004 in exchange for options to acquire an equity
interest. Advertising and promotional support will be provided to BeautyBuys
from the Company's unutilized inventory, valued as if each spot was being sold
at the then-current street rates at the time of the airing. The Company will
recognize no revenue related to its advertising, promotion or other services and
will recognize revenue as the Company's options vest in an amount equal to the
fair value of the options.
OPERATING LEASES
The Company has entered into operating leases for certain property and equipment
under terms ranging from three to ten years. The rent expense under these
leases, as well as certain leases under month-to-month arrangements, for the
years ended December 31, 1997, 1998 and 1999, aggregated approximately $2.6
million, $4.0 million and $5.9 million, respectively.
Future minimum payments under the leases are as follows (in thousands):
2000 ................................................ $ 5,094
2001 ................................................ 3,544
2002 ................................................ 3,141
2003 ................................................ 2,682
2004 ................................................ 2,452
2005 and thereafter ................................. 14,948
-------
$31,861
=======
11. ACQUISITIONS AND DISPOSITIONS
1997 ACQUISITION
KUPN ACQUISITION. In January 1997, the Company entered into a purchase agreement
to acquire the license and non-license assets of KUPN-TV, the UPN affiliate in
Las Vegas, Nevada, for a purchase price of $87.5 million. Under the terms of
this agreement, the Company made cash deposit payments of $9.0 million and in
May 1997, the Company closed on the acquisition making cash payments of $78.5
million for the remaining balance of the purchase price and other related
closing costs. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and programming
assets,
F-23
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
acquired intangible broadcasting assets and other intangible assets for $1.6
million, $17.9 million and $68.0 million, respectively, based upon an
independent appraisal. The Company financed the transaction by utilizing
proceeds from the HYTOPS offering combined with indebtedness under the 1997 Bank
Credit Agreement.
1998 ACQUISITIONS AND DISPOSITIONS
HERITAGE ACQUISITION. In July 1997, the Company entered into a purchase
agreement to acquire certain assets of the radio and television stations of
Heritage for approximately $630 million (the "Heritage Acquisition"). Pursuant
to the Heritage Acquisition, and after giving effect to the STC Disposition,
Entercom Disposition and Centennial Disposition and a third party's exercise of
its option to acquire radio station KCAZ in Kansas City, Missouri, the Company
has acquired or provided programming services to three television stations in
two separate markets and 13 radio stations in four separate markets. In July
1998, the Company acquired three radio stations in the New Orleans, Louisiana
market and simultaneously disposed of two of those stations (see the Centennial
Disposition below). The acquisition was accounted for under the purchase method
of accounting whereby the net purchase price for stations not sold was allocated
to property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $22.6 million, $222.8 million and $102.6 million,
respectively, based on an independent appraisal.
1998 STC DISPOSITION. In February 1998, the Company entered into agreements to
sell to STC Broadcasting of Vermont, Inc. ("STC") two television stations and
the Non-License Assets and rights to program a third television station, all of
which were acquired in the Heritage Acquisition. In April 1998, the Company
closed on the sale of the non-license assets of the three television stations in
the Burlington, Vermont and Plattsburgh, New York market for aggregate
consideration of approximately $70.0 million. During the third quarter of 1998,
the Company sold the license assets for a sales price of $2.0 million.
MONTECITO ACQUISITION. In February 1998, the Company entered into an agreement
to acquire all of the capital stock of Montecito Broadcasting Corporation
("Montecito") for approximately $33.0 million (the "Montecito Acquisition").
Montecito owns all of the issued and outstanding stock of Channel 33, Inc. which
owns and operates KFBT-TV in Las Vegas, Nevada. In April 1998 the Company began
programming KFBT-TV through an LMA upon expiration of the applicable HSR Act
waiting period. Currently, the Company is a Guarantor of Montecito indebtedness
of approximately $33.0 million. The Company intends to acquire the outstanding
capital stock of Monticeto upon receiving approval from the FCC.
WSYX ACQUISITION AND SALE OF WTTE LICENSE ASSETS. In April 1998, the Company
exercised its option to acquire the non-license assets of WSYX-TV in Columbus,
Ohio from River City Broadcasting, LP ("River City") for an option exercise
price and other costs of approximately $228.6 million. In August 1998, the
Company exercised its option to acquire the WSYX License Assets for an option
exercise price of $2.0 million. The acquisition was accounted for under the
purchase method of accounting whereby the purchase price was allocated to
property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $14.6 million, $179.3 million and $61.4 million,
respectively based on an independent appraisal. Simultaneously with the WSYX
Acquisition, the Company sold the WTTE license assets to Glencairn for a sales
price of $2.3 million. In connection with the sale of the WTTE license assets,
the Company recognized a $2.3 million gain.
SFX DISPOSITION. In May 1998, the Company completed the sale of three radio
stations to SFX Broadcasting, Inc. for aggregate consideration of approximately
$35.0 million ("the SFX Disposition"). The radio stations sold are located in
the Nashville, Tennessee market. In connection with the disposition, the Company
recognized a $5.2 million gain on the sale.
LAKELAND ACQUISITION. In May 1998, the Company acquired 100% of the stock of
Lakeland Group Television, Inc. ("Lakeland") for cash payments of approximately
$53.0 million (the "Lakeland Acquisition"). In connection with the Lakeland
Acquisition, the Company now owns television station KLGT-TV in Minneapolis/St.
Paul, Minnesota. The acquisition was accounted for under the purchase
F-24
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
method of accounting whereby the purchase price was allocated to property and
programming assets, acquired intangible broadcasting assets and other intangible
assets for $5.1 million, $35.1 million and $29.4 million, respectively, based on
an independent appraisal.
ENTERCOM DISPOSITION. In June 1998, the Company completed the sale of seven
radio stations acquired in the Heritage acquisition. The seven stations are
located in the Portland, Oregon and Rochester, New York markets and were sold
for aggregate consideration of approximately $126.9 million.
SULLIVAN ACQUISITION. In July 1998, the Company acquired 100% of the stock of
Sullivan Broadcast Holdings, Inc. and Sullivan Broadcasting Company II, Inc. for
cash payments of approximately $951.0 million (the "Sullivan Acquisition"). The
Company financed the acquisition by utilizing indebtedness under the 1998 Bank
Credit Agreement. In connection with the acquisition, the Company has acquired
the right to program 12 additional television stations in 10 separate markets.
During 2000, the Company intends to acquire the license assets of one station
and the stock of a company that owns the license assets of six additional
stations. In addition, the Company expects to enter into new LMA agreements with
respect to three of the stations and will continue to program two of the
television stations pursuant to existing LMA agreements. The acquisition was
accounted for under the purchase method of accounting whereby the purchase price
was allocated to property and programming assets, acquired intangible
broadcasting assets and other intangible assets for $58.2 million, $336.8
million and $637.6 million, respectively, based on an independent appraisal.
MAX MEDIA ACQUISITION. In July 1998, the Company directly or indirectly acquired
all of the equity interests of Max Media Properties LLC, for $252.2 million (the
"Max Media Acquisition"). The Company financed the acquisition by utilizing
existing cash balances and indebtedness under the 1998 Bank Credit Agreement. In
connection with the transaction, the Company acquired or provided programming
services to nine television stations in six separate markets and eight radio
stations in two separate markets. The acquisition was accounted for under the
purchase method of accounting whereby the purchase price was allocated to
property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $37.1 million, $144.3 million and $89.6 million,
respectively, based on an independent appraisal.
CENTENNIAL DISPOSITION. In July 1998, the Company completed the sale of the
assets of radio stations WRNO-FM, KMEZ-FM and WBYU-AM in New Orleans, Louisiana
to Centennial Broadcasting for $16.1 million in cash and recognized a loss on
the sale of $2.9 million. The Company acquired KMEZ-FM in connection with the
River City Acquisition in May of 1996 and acquired WRNO-FM and WBYU-AM in New
Orleans from Heritage Media Group, Inc. ("Heritage") in July 1998. The Company
was required to divest WRNO-FM, KMEZ-FM and WBYU-AM to meet certain regulatory
ownership guidelines.
GREENVILLE ACQUISITION. In July 1998, the Company acquired three radio stations
in the Greenville/Spartansburg market from Keymarket Radio of South Carolina,
Inc. for a purchase price consideration involving the forgiveness of
approximately $8.0 million of indebtedness to Sinclair. Concurrently with the
acquisition, the Company acquired an additional two radio stations in the same
market from Spartan Broadcasting for a purchase price of approximately $5.2
million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and acquired
intangible broadcasting assets for $5.0 million and $10.1 million, respectively,
based on an independent appraisal.
RADIO UNICA DISPOSITION. In July 1998, the Company completed the sale of
KBLA-AM in Los Angeles, California to Radio Unica, Corp. for approximately
$21.0 million in cash. In connection with the disposition, the Company
recognized a $8.4 million gain.
F-25
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
1999 ACQUISITIONS AND DISPOSITIONS
GUY GANNETT ACQUISITION. In September 1998, the Company agreed to acquire from
Guy Gannett Communications its television broadcasting assets for a purchase
price of $317 million in cash (the "Guy Gannett Acquisition"). As a result of
this transaction and after the completion of related dispositions, the Company
acquired five television stations in five separate markets. In April 1999, the
Company completed the purchase of WTWC-TV, WGME-TV and WGGB-TV for a purchase
price of $111.0 million. The acquisition was accounted for under the purchase
method of accounting whereby the purchase price was allocated to property and
programming assets, acquired intangible broadcasting assets and other intangible
assets for $20.9 million, $ 45.7 million, and $51.4 million, respectively, based
on an independent appraisal. In July 1999, the Company completed the purchase of
WICS/WICD-TV, and KGAN-TV for a purchase price of $81.0 million. In March 1999,
the Company entered into an agreement to sell these assets to STC pending
Department of Justice approval and as a result these assets were accounted for
as Assets Hold for Sale. The sale of these stations was still pending as of
December 31, 1999. The Company financed these acquisitions by utilizing
indebtedness under the 1998 Bank Credit Agreement.
ACKERLEY DISPOSITION. In September 1998, the Company agreed to sell the Guy
Gannett television station WOKR-TV in Rochester, New York to the Ackerley Group,
Inc. for a sales price of $125 million (the "Ackerley Disposition"). In April
1999, the Company closed on the purchase of WOKR-TV and simultaneously completed
the sale of WOKR-TV to Ackerly.
CCA DISPOSITION. In April 1999, the Company completed the sale of the
non-license assets of KETK-TV and KLSB-TV in Tyler-Longview, Texas to
Communications Corporation of America ("CCA") for a sales price of $36 million
(the "CCA Disposition"). In addition, CCA has an option to acquire the license
assets of KETK-TV for an option purchase price of $2 million.
ST. LOUIS RADIO ACQUISITION. In August 1999, the Company completed the purchase
of radio station KXOK-FM in St. Louis, Missouri for a purchase price of $14.1
million in cash. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and acquired
intangible broadcasting assets for $0.6 million and $15.2 million, respectively,
based on an independent appraisal.
BARNSTABLE DISPOSITION. In August 1999, the Company completed the sale of the
radio stations WFOG-FM and WGH-AM/FM serving the Norfolk, Virginia market to
Barnstable Broadcasting, Inc. ("Barnstable") (the "Barnstable Disposition").
The stations were sold to Barnstable for a sales price of $23.7 million.
ENTERCOM DISPOSITION. In July 1999, the Company entered into an agreement to
sell 46 radio stations in nine markets to Entercom Communications Corporation
("Entercom") for $824.5 million in cash. The transaction does not include the
Company's radio stations in the St. Louis market which are subject to the St.
Louis Purchase Option noted below in "Pending Dispositions". In December 1999,
the Company closed on the sale of 41 radio stations in eight markets for a
purchase price of $700.4 million. The Company expects to close on the remaining
$124.1 million during 2000 which represents the Kansas City radio stations and
WKRF-FM in Wilkes-Barre. The completion of this transaction is subject to FCC
and Department of Justice approval.
PENDING ACQUISITIONS AND DISPOSITIONS
ST. LOUIS PURCHASE OPTION. In connection with the 1996 acquisition of River
City, we entered into a five year agreement (the Baker Agreement) with Barry
Baker, the Chief Executive Officer of River City, pursuant to which Mr. Baker
served as a consultant to us. As of February 8, 1999, the conditions to Mr.
Baker becoming an officer of Sinclair had not been satisfied, and on that date
we entered into an amendment to the Baker Agreement which terminated Mr. Baker's
services effective March 8, 1999. Mr.
F-26
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Baker had certain rights as a consequence of termination of the Baker Agreement,
including Mr. Baker's right to purchase at fair market value our television and
radio stations that serve the St. Louis, Missouri market (the St. Louis purchase
option).
In June 1999, we received a letter from Mr. Baker stating that he elected to
exercise his St. Louis purchase option. In his letter, Mr. Baker names Emmis
Communications Corporation (Emmis) as his designee to exercise the St. Louis
purchase option. Notwithstanding our belief that Emmis was not an appropriate
designee of Mr. Baker, we negotiated in good faith with Emmis regarding the
potential sale of the St. Louis properties. Following unsuccessful negotiations,
however, on January 18, 2000, we filed suit 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 us by
refusing to negotiate the acquisition agreement in good faith. We have requested
that the court grant us 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 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. We believe we have valid defenses to the Emmis
counterclaims and intend to vigorously contest the claims, although there can be
no assurances regarding the outcome of this litigation.
In light of this ongoing lawsuit, we do not expect the transaction contemplated
by the St. Louis purchase option to be consummated. We do intend, however, to
sell our remaining six radio stations serving the St. Louis market which were,
in part, the subject of the St. Louis purchase option.
GLENCAIRN/WPTT, INC. ACQUISITION. On November 15, 1999, we entered into an
agreement to purchase substantially all of the assets of television station
WCWB-TV, Channel 22, Pittsburgh, Pennsylvania, with the owner of that
television station WPTT, Inc. for a purchase price of $17,808,000. The waiting
period under the Hart-Scott-Rodino Antitrust Act of 1976 has expired and
closing on this transaction is subject to FCC approval.
On November 15, 1999, we entered into five separate plans and agreements of
merger, pursuant to which we would acquire through merger with subsidiaries of
Glencairn, Ltd., television broadcast stations WABM-TV, Birmingham, Alabama,
KRRT-TV, San Antonio, Texas, WVTV-TV, Milwaukee, Wisconsin, WRDC-TV, Raleigh,
North Carolina, and WBSC-TV (formerly WFBC-TV), Andersen, South Carolina. The
consideration for these mergers is the issuance to Glencairn shares of class A
common voting stock of the Company. The total value of the shares to be issued
in consideration for all the mergers is $8.0 million.
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 issued and outstanding stock of Montecito
which owns the FCC License for television broadcast station KFBT-TV. The FCC has
granted initial approval to the transaction, which shall become final in April
2000. The Company anticipates acquiring the stock of Montecito in the second
quarter of 2000.
MISSION OPTION. Pursuant to our merger with Sullivan Broadcast Holdings, Inc.,
which was effective July 1, 1998, the Company acquired options to acquire
television broadcast station WUXP-TV in Nashville, Tennessee from Mission
Broadcasting I, Inc. and television broadcast station WUPN-TV in Greensboro,
North Carolina from Mission Broadcasting II, Inc. On November 15, 1999, the
Company exercised its option to acquire both of the foregoing stations. This
acquisition is subject to approval.
F-27
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
12. SECURITIES ISSUANCES AND COMMON STOCK SPLIT:
COMMON STOCK SPLIT
On April 30, 1998, the Company's Board of Directors approved a two-for-one stock
split of its Class A and Class B Common Stock to be distributed in the form of a
stock dividend. As a result of this action, 23,963,013 and 24,984,432 shares of
Class A and Class B Common Stock, respectively, were issued to shareholders of
record as of May 14, 1998. The stock split has been retroactively reflected in
the accompanying consolidated financial statements and related notes thereto.
1997 COMMON STOCK OFFERING
In September 1997, the Company and certain stockholders of the Company completed
a public offering of 8,690,000 and 3,500,000 shares, respectively of Class A
Common Stock (the "1997 Common Stock Offering"). The shares were sold pursuant
to the Shelf Registration for an offering price of $18.25 per share and
generated proceeds to the Company of $151.0 million, net of underwriters'
discount and other offering costs of $7.6 million. The Company utilized a
significant portion of the 1997 Common Stock Offering proceeds to repay
indebtedness under the 1997 Bank Credit Agreement.
1997 PREFERRED STOCK OFFERING
Concurrent with the 1997 Common Stock Offering, the Company completed a public
offering of 3,450,000 shares of Series D Convertible Exchangeable Preferred
Stock (the "1997 Preferred Stock Offering"). The shares were sold pursuant to
the Shelf Registration at an offering price of $50 per share and generated
proceeds to the Company of $166.9 million, net of underwriters' discount and
other offering costs of $5.0 million.
The Convertible Exchangeable Preferred Stock have a liquidation preference of
$50 per share and a stated annual dividend of $3.00 per share payable quarterly
out of legally available funds and are convertible into shares of Class A Common
Stock at the option of the holders thereof at a conversion price of $22.813 per
share, subject to adjustment. The shares of Convertible Exchangeable Preferred
Stock are exchangeable at the option of the Company, for 6% Convertible
Subordinated Debentures of the Company, due 2012, and are redeemable at the
option of the Company on or after September 20, 2000 at specified prices plus
accrued dividends.
The Company received total net proceeds of $317.9 million from the 1997
Preferred Stock Offering and the 1997 Common Stock Offering. The Company
utilized $285.7 million of the net proceeds from the 1997 Preferred Stock
Offering and the 1997 Common Stock Offering to repay outstanding borrowings
under the revolving credit facility, $8.9 million to repay outstanding amounts
under the Tranche A term loan of the 1997 Bank Credit Agreement and retained the
remaining net proceeds of approximately $23.3 million for general corporate
purposes.
1997 OFFERING OF COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST
In March 1997, the Company completed a private placement of $200 million
aggregate liquidation value of 11 5/8% High Yield Trust Offered Preferred
Securities (the "HYTOPS") of Sinclair Capital, a subsidiary trust of the
Company. The HYTOPS were issued March 12, 1997, mature March 15, 2009, and
provide for quarterly distributions to be paid in arrears beginning June 15,
1997. The HYTOPS were sold to "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act of 1933, as amended) and a limited number of
institutional "accredited investors" and the offering was exempt from
registration under the Securities Act of 1933, as amended ("the Securities
Act"), pursuant to Section 4(2) of the Securities Act and Rule 144A thereunder.
The Company utilized $135.0 million of the approximately $192.8 million net
proceeds of the private placement to repay outstanding debt and retained the
remainder for general corporate purposes.
F-28
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the HYTOPS, the Company offered holders of the HYTOPS the
right to exchange the HYTOPS for new HYTOPS having the same terms as the
existing securities, except that the exchange of the new HYTOPS for the existing
HYTOPS has been registered under the Securities Act. On May 2, 1997, the Company
filed a registration statement on Form S-4 with the Commission for the purpose
of registering the new HYTOPS to be offered in exchange for the aforementioned
existing HYTOPS issued by the Company in March 1997 (the "Exchange Offer"). The
Company's Exchange Offer was closed and became effective August 11, 1997, at
which time all of the existing HYTOPS were exchanged for new HYTOPS.
Amounts payable to the holders of HYTOPS are recorded as "Subsidiary trust
minority interest expense" in the accompanying financial statements and were
$18.6 million, 23.3 million, and $23.3 million for the years ended December 31,
1997, 1998, and 1999, respectively.
1998 COMMON STOCK OFFERING
On April 14, 1998, the Company and certain stockholders of the Company completed
a public offering of 12,000,000 and 4,060,374 shares, respectively, of Class A
Common Stock (the "1998 Common Stock Offering"). The shares were sold for an
offering price of $29.125 per share and generated proceeds to the Company of
$335.1 million, net of underwriters' discount and other offering costs of
approximately $14.4 million. The Company utilized the proceeds to repay
indebtedness under the 1997 Bank Credit Agreement.
13. STOCK-BASED COMPENSATION PLANS:
STOCK OPTION PLANS
DESIGNATED PARTICIPANTS STOCK OPTION PLAN - In connection with the Company's
initial public offering in June 1995 (the "IPO"), the Board of Directors of the
Company adopted an Incentive Stock Option Plan for Designated Participants (the
Designated Participants Stock Option Plan) pursuant to which options for shares
of Class A common stock were granted to certain key employees of the Company.
The Designated Participants Stock Option Plan provides that the number of shares
of Class A Common Stock reserved for issuance under the Designated Participants
Stock Option Plan is 136,000. Options granted pursuant to the Designated
Participants Stock Option Plan must be exercised within 10 years following the
grant date. As of December 31, 1999, all 136,000 available options have been
granted.
LONG-TERM INCENTIVE PLAN - In June 1996, the Board of Directors adopted, upon
approval of the stockholders by proxy, the 1996 Long-Term Incentive Plan of the
Company (the "LTIP"). The purpose of the LTIP is to reward key individuals for
making major contributions to the success of the Company and its subsidiaries
and to attract and retain the services of qualified and capable employees.
Options granted pursuant to the LTIP must be exercised within 10 years following
the grant date. A total of 14,000,000 shares of Class A Common Stock are
reserved for awards under the plan. As of December 31, 1999, 9,635,670 shares
have been granted under the LTIP and 6,449,580 shares are available for future
grants.
INCENTIVE STOCK OPTION PLAN - In June 1996, the Board of Directors adopted, upon
approval of the stockholders by proxy, an amendment to the Company's Incentive
Stock Option Plan. The purpose of the amendment was (i) to increase the number
of shares of Class A Common Stock approved for issuance under the plan from
800,000 to 1,000,000, (ii) to lengthen the period after date of grant before
options become exercisable from two years to three and (iii) to provide
immediate termination and three-year ratable vesting of options in certain
circumstances. Options granted pursuant to the ISOP must be exercised within 10
years following the grant date. As of December 31, 1999, 714,200 shares have
been granted under the ISOP and 557,500 shares are available for future grants.
F-29
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
A summary of changes in outstanding stock options is as follows:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
--------------- ----------- ------------- ----------
Outstanding at end of 1996 ......... 3,938,070 $ 15.58 1,472,436 $ 15.06
1997 Activity:
Granted ........................... 548,900 16.87 -- --
Exercised ......................... (10,000) 10.50 -- --
Forfeited ......................... (252,400) 17.85 -- --
--------- -------- --------- --------
Outstanding at end of 1997 ......... 4,224,570 17.10 2,428,152 14.91
--------- -------- --------- --------
1998 Activity:
Granted ........................... 5,352,500 25.08
Exercised ......................... (86,666) 12.96
Forfeited ......................... (820,284) 23.19
--------- --------
Outstanding at end of 1998 ......... 8,670,120 20.76 3,245,120 15.01
--------- -------- --------- --------
1999 Activity:
Granted ........................... 881,300 24.16 -- --
Exercised ......................... (117,500) 19.77 -- --
Forfeited ......................... (1,382,500) 22.53 -- --
---------- -------- --------- --------
Outstanding at end of 1999 ......... 8,051,420 $ 20.45 3,640,020 $ 15.41
========== ======== ========= ========
Additional information regarding stock options outstanding at December 31, 1999,
is as follows:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-
REMAINING REMAINING AVERAGE
EXERCISE VESTING PERIOD CONTRACTUAL LIFE EXERCISE
OUTSTANDING PRICE (IN YEARS) (IN YEARS) EXERCISABLE PRICE
- ------------- --------------- ------------------ ------------------ ------------- ----------
58,500 $ 10.50 -- 5.44 58,500 $ 10.50
3,252,870 15.06 0.09 6.51 3,157,870 15.06
456,300 17.81-18.88 0.44 6.71 382,650 18.78
33,000 20.94 0.96 7.97 -- --
4,000 22.88-24.18 1.31 8.32 -- --
3,346,250 24.20 5.76 8.30 41,000 24.20
357,500 24.25-27.73 2.94 8.57 -- --
543,000 28.08-28.42 3.44 9.30 -- --
--------- ------------- ---- ---- --------- --------
8,051,420 $ 20.45 2.82 7.54 3,640,020 $ 15.41
========= ============= ==== ==== ========= ========
PRO FORMA INFORMATION RELATED TO STOCK-BASED COMPENSATION
As permitted under SFAS 1 3, "Accounting for Stock-Based Compensation," the
Company measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro
forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
F-30
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
Had compensation cost for the Company's 1997, 1998, and 1999 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income, net income applicable to common share before extraordinary
items, and net income per common share for these years would approximate the pro
forma amounts below (in thousands except per share data):
1997 1998 1999
------------------------ -------------------------- ---------------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
---------- ------------- ------------ ------------- ------------- -------------
Net income (loss) before extraordinary
item .................................... $ 4,496 $ (5,871) $ (5,817) $ (13,629) $ 167,784 $ 161,982
======= ========= ========= ========= ========= =========
Net income (loss) ........................ $10,566 $ (11,941) $ (16,880) $ (24,692) $ 167,784 $ 161,982
======= ========= ========= ========= ========= =========
Net income (loss) available to common
shareholders ............................ $13,329 $ (14,704) $ (27,230) $ (35,042) $ 157,434 $ 151,632
======= ========= ========= ========= ========= =========
Basic net income per share before
extraordinary items ..................... $ (0.10) $ (0.12) $ (0.17) $ (0.25) $ 1.63 $ 1.57
======= ========= ========= ========= ========= =========
Basic net income per share after
extraordinary items ..................... $ (0.19) $ (0.20) $ (0.29) $ (0.37) $ 1.63 $ 1.57
======= ========= ========= ========= ========= =========
Diluted net income per share before
extraordinary items ..................... $ (0.10) $ (0.12) $ (0.17) $ (0.25) $ 1.63 $ 1.57
======= ========= ========= ========= ========= =========
Diluted net income per share after
extraordinary items ..................... $ (0.19) $ (0.20) $ (0.29) $ (0.37) $ 1.63 $ 1.57
======= ========= ========= ========= ========= =========
The Company has computed for pro forma disclosure purposes the value of all
options granted during 1997, 1998, and 1999 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
-------------- -------------- -------------
Risk-free interest rate ......... 5.66 - 6.35% 4.54 - 5.68% 4.80 - 5.97%
Expected lives .................. 5 years 6 years 6 years
Expected volatility ............. 35% 41% 61%
Adjustments are made for options forfeited prior to vesting.
F-31
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
14. EARNINGS PER SHARE:
The Company adopted SFAS 128 "Earnings per Share" which requires the restatement
of prior periods and disclosure of basic and diluted earnings per share and
related computations.
THE YEARS ENDED
--------------------------------------------
1997 1998 1999
------------ ------------- -------------
Weighted-average number of common shares ................................ 71,902 94,321 96,615
Dilutive effect of outstanding stock options ............................ 238 1,083 20
Dilutive effect of conversion of preferred shares ....................... 8,016 288 --
--------- --------- ---------
Weighted-average number of common equivalent shares outstanding ......... 80,156 95,692 96,635
========= ========= =========
Net loss from continuing operations ..................................... $ (8,830) $ (26,201) $ (42,126)
========= ========= =========
Net income from discontinued operations, including gain on sale of
broadcast assets related to discontinued operations .................... $ 4,334 $ 20,384 $ 209,910
========= ========= =========
Net loss from extraordinary item ........................................ $ (6,070) $ (11,063) $ --
========= ========= =========
Net income (loss) ....................................................... $ (10,566) $ (16,880) $ 167,784
Preferred stock dividends payable ....................................... (2,763) (10,350) (10,350)
--------- --------- ---------
Net income (loss) available to common shareholders ...................... $ (13,329) $ (27,230) $ 157,434
========= ========= =========
BASIC EARNINGS PER SHARE:
Net loss per share from continuing operations ........................... $ (0.16) $ (0.39) $ (0.54)
========= ========= =========
Net income per share from discontinued operations ....................... $ 0.06 $ 0.22 $ 2.17
========= ========= =========
Net loss per share from extraordinary item .............................. $ (0.08) $ (0.12) $ --
========= ========= =========
Net income (loss) per share ............................................. $ (0.19) $ (0.29) $ 1.63
========= ========= =========
DILUTED EARNINGS PER SHARE:
Net loss per share from continuing operations ........................... $ (0.16) $ (0.39) $ (0.54)
========= ========= =========
Net income per share from discontinued operations ....................... $ 0.06 $ 0.22 $ 2.17
========= ========= =========
Net loss per share form extraordinary item .............................. $ (0.08) $ (0.12) $ --
========= ========= =========
Net income (loss) per share ............................................. $ (0.19) $ (0.29) $ 1.63
========= ========= =========
15. SUBSEQUENT EVENT:
2000 STC DISPOSITION. In March 1999, the Company entered into an agreement to
sell to 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
addition, the Company agreed to sell the Non-License Assets and rights to
program WICD in the Springfield, Illinois market. The stations were being sold
to STC for a sales price of $81.0 million and were acquired by the Company in
connection with the Guy Gannett Acquisition. In April 1999, the Justice
Department requested additional information in response to STC's filing under
the Hart-Scott-Rodino Antitrust Improvements Act. According to the agreement, if
the transaction did not close by March 16, 2000 either STC or the Company may
terminate the 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 will record a cumulative accounting adjustment during
the first quarter of 2000.
F-32
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
REPURCHASE OF CLASS A COMMON STOCK. In October 1999, the Company's Board of
Directors approved a share repurchase program authorizing the repurchase of up
to $300 million of the Company's Class A Common Stock. The amount of shares
repurchased as well as the timing of such repurchases are subject to market
conditions, general business conditions, and financial covenants and incurrence
tests outlined in the 1998 Bank Credit Agreement. The amount available for share
repurchases could increase or decrease depending on future operating results or
net borrowings for other purposes. During 2000 and as of March 24, 2000, the
Company repurchased and retired 3,460,066 shares of Class A Common Stock for
approximately $32.7 million.
ST. LOUIS PURPOSE OPTION LITIGATION. The Company is currently involved in
litigation related to the St. Louis Purchase Option (see Note 11).
F-33
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
Report of Independent Public Accountants ................................. S-2
Schedule II -- Valuation and Qualifying Accounts ......................... S-3
All schedules except those listed above are omitted as not applicable or not
required or the required information is included in the consolidated financial
statements or in the notes thereto.
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of Sinclair Broadcast Group, Inc.
and Subsidiaries included in this Form 10-K and have issued our report thereon
dated February 3, 2000. Our audit was made for the purpose of forming an opinion
on those statements taken as a whole. The schedule listed in the accompanying
index is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN, LLP
Baltimore, Maryland,
February 3, 2000 (except for Note 15, as to which
the date is March 24, 2000)
S-2
SCHEDULE II
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------ ------------ ------------ ---------------- ------------ ----------
1997
Allowance for doubtful accounts ......... $2,472 $2,655 $ -- $2,207 $2,920
1998
Allowance for doubtful accounts ......... 2,920 3,234 1,279 (1) 2,264 5,169
1999
Allowance for doubtful accounts ......... 5,169 2,560 458 3,171 5,016
- ----------
(1) Amount represents allowance for doubtful account balances related to the
acquisition of certain television stations during 1998.
S-3